Russian ice cream market has become increasingly challenging with relatively stagnant growth and aggravating competition. Due to these challenges, Ice Fili, the top ice cream producer in Russia, has experienced 40% decrease in the production volume and 50% decrease in its market share for past 5 years. However, Ice Fili has been capitalizing neither the market potentials nor its competencies.
Russian ice cream market is highly profitable with over twice the profit margins than the comparable markets, such as confectionary.Over 20% growths in beer and soft drinks, which are substitutes of ice cream, indicate similar growth potentials for the ice cream industry. Despite the deterioration of some financial indicators, Ice Fili has successfully leveraged its assets to maintain its ROA around 15% and its top market share for the past five years. It is also positioned in the most lucrative value chain within the industry. Thus, the key question for Ice Fili is how to leverage its core competencies to achieve profitable growth within the ice cream industry despite the stagnant demand and growing competition.Strategic Options Ice Fili can think of its growth strategy in two dimensions: domestic expansion and global expansion.
The ice cream consumption level in Russia is merely one seventh of those in the global markets. This may be an indicator of the high potential demands in the domestic market or an indicator of relative attractiveness of the global markets. In the domestic market, Ice Fili is challenged to increase the market demand while withstanding the competitors. In the global markets, Ice Fili may have some advantages, such as manufacturing competencies.
However, it is challenged to develop new products suited to Western consumers and also to build its brand as well as distribution networks. Considering these opportunities and challenges, Ice Fili can deploy four distinct growth strategies; Market Share Reclaim (Grow without Expanding Markets): Despite having the most number of products in the market, Ice Fili lacks the product lineup to compete against regional producers’ products priced at 3 to 4 rubles and foreign producers’ premium products priced at 10 rubles.Ice Fili can compete more efficiently by introducing low cost products that use artificial ingredients and preservatives while positioning some of its natural-flavored products as premium products. Furthermore, Ice Fili needs to shift its focus from manufacturing to distribution and marketing.
Nestle achieved second largest market share with merely one-fourth the production capacity of Ice Fili and positioned as a premium brand with inferior products by leveraging its own distribution and marketing networks.Ice Fili’s $0. M annual marketing spend on its 160 products is trivial considering Unilever’s $6. 2M spend to promote one brand.
Thus, by rationalizing product portfolio and increasing investments on distribution and marketing, Ice Fili will be able to compete more efficiently against its competitors and reclaim its market share. Demand Uplift (Expand Domestic Market): Over 60% of ice cream purchases in Russia occur at kiosks on the street whereas most consumers buy ice creams at indoor markets in the U. S. This explains the relatively high seasonality in the ice cream demand of Russian consumers.
Thus, by introducing new products suitable for distribution over the fast-growing supermarket channels, and investing heavily on the aligned marketing programs, Ice Fili can create seasonality-proof demand while having the first-mover advantages in introducing supermarket ice cream products, e. g. partnership with the supermarkets. Manufacturing Service (Expand Global Market): Ice Fili’s core competency, in the context of the global markets, is low-cost production of high-quality ice cream. With the increasing awareness on healthy diet, Ice Fili’s manufacturing competency can certainly add value to the global ice cream industry.Without the distribution network and brand, Ice Fili can supply white-label premium ice creams to consumer food companies without ice cream products or premium supermarket chains, such as Wholefoods.
Global Brand Launch (Expand Both Markets): With enough resources, Ice Fili can endeavor to launch a global brand to expand both the domestic and global markets. Ice Fili’s addressable market will be several times bigger. Also, if Ice Fili can successfully penetrate both markets with the same product line, Ice Fili can maximize its profitability by reducing R&D and other costs related to developing multiple products.Assessment of Strategic Options To prioritize the strategic options, Ice Fili should first consider two dimensions of growth options. If neither domestic nor the global markets have attractive revenue potentials and high feasibility of materializing those potentials, Ice Fili cannot but focus on defending and increasing its market share within the current market landscape. However, even with 10% share, Ice Fili’s annual net income will not exceed $5M.
On the other hand, if Ice Fili successfully reduces seasonality and increases per capita consumption to 6. kg, about half of the U. S. consumption, the market size almost doubles.Furthermore, with the first-mover’s advantages, Ice Fili will be able to take most of the supermarket shares. Of course, increasing the ice cream demand will require marketing investments.
Assuming that the annual marketing cost increases up to 6% of revenue and one time investment of $5M to launch new products incurs while its market share reaches 10%, Ice Fili can achieve net income of $8M. Considering how marketing drove beer industries grow 20%, these metrics are certainly feasible.In terms of the global market, considering the U. S. market, the total addressable market is about four times larger.
However, given the limits of new entrants, Ice Fili is not likely to achieve over 3% market share in the short term even if it successfully develops the right product and find the right business partners. In such a case, considering $5M investments to launch new products and 5% increase in COGs due to supply chain costs, Ice Fili’s net income of the global operation will be merely about $2M.If Ice Fili successfully launches a global brand and penetrates both the U. S and Russian markets with the same products, Ice Fili may earn net income of over $10M with as little as $5M~$7M investments.
However, there is a clear risk in not being able to develop a successful product that suits the taste of both the Russian and the U. S. consumers. Also, if Ice Fili chooses to launch different products, it will require more investments and thereby give less return on investment. Thus, Ice Fili should prioritize the Demand Uplift strategy.
The strategy will enable Ice Fili to achieve profitable growth while gaining competitive advantages. With any surplus resources, Ice Fili should constantly reorganize its portfolio and shift operational focus to compete more efficiently against the competitors. Launching the global brand is not advisable due to the high risk. Should Ice Fili choose to expand the global markets, it will be better to seek partnership in order to hedge risks even though the returns are relatively small.
