Attractiveness of the Five Forces Framework in the Russian Ice Cream Market Although the Russian ice cream market may initially look attractive due to its consistent growth in ice cream production/demand in recent years, after evaluating the market through the five forces framework, it becomes clear that the market far from attractive. Since the open market economy was first introduced to Russia in 1991, ice cream producer competition has more than tripled in sized to 300 firms by 2002. Significant funding would be required for ice cream manufacturing/distribution and a new entrant would also need to consider the market’s pre-existing loyalty to domestic brands. There is also a luxury tax associated with ice cream production, which negatively affects the potential for current and future profit. While many foreign competitors exited the market during the economic crisis of 1998, the companies that remained presented significant competitive pressure and prowess. For instance, Nestlé leveraged their international brands and large advertising budget to “push” their products into distribution channels for the Russian consumer. Without Nestlé’s scale, a significantly smaller company would have difficulties competing in on the same advertising caliber. There are various ice cream substitutes available to the Russian consumer including beer, soda, yogurts, chocolates, and other confectionery candies. Demand for these substitutes is also higher than demand for ice cream because they have chosen to adopt aggressive and expensive advertising and branding strategies. Although one can argue that the increased demand is due to the larger advertising spend, the change in consumer preferences may also be a critical factor, further pointing to the unattractiveness of the ice cream market. Ice cream production requires supply from equipment vendors and raw material retailers. However, data shows that neither equipment vendors nor raw material suppliers have much bargaining power in this industry. The number of local equipment vendors increased due to contracts and joint financing from ice cream producers. Due to this, the supply constraint has been drastically reduced for the procurement of raw materials. As an ice cream producer, buyer decision is largely influenced by the distribution channel. Since three of five channels (kiosks, minimarts, gastronoms) cover 95% of industry production, this is where the bargaining power of buyers lies. Considering that these three channels are extremely limited by physical space, they have the ability to pick and choose the ice cream producers and brands they wish to carry. Because of this, it is imperative for an ice cream producer to work jointly with kiosk distributors to sell their products and to maintain an amiable business relationship.
Future Effects of Competitiveness on Price and Profits in the Russian Ice Cream Market Price and profit competition will evolve depending on the drivers of current market price. By analyzing the factors outlined below, we can determine how pricing is determined in the near future. Branding is a significant factor in determining a product’s price point. For instance, Nestlé, Ice-Fili’s largest competitor, charges a high price because they have been able to generate brand loyalty and trust with their consumers. The focus of domestic ice cream producers was not developing a brand, which is a main factor on why their prices and profit margins are not competitive against foreign competitors who have relied on branding and advertising to drive their pricing decisions. Another reason that branding has been “pushed” so effectively is due to the raw power of advertising dollars spent. Foreign competitors like Nestlé and Baskin Robbins are able to bring in deeper pockets of advertising dollars due to their scale outside of Russia and are reapplying advertising strategies that have worked in other markets. At this point, profits were being affected by the advertising...
Please join StudyMode to read the full document