Q1. How structurally attractive is the Russian ice cream market? Discuss how its industry structure can be made more attractive? (663 words)
The political and financial instability had greatly impacted Russian ice cream industry. The financial crisis in 1998 and the devaluation of the ruble had greatly reduced Russian market’s consumption ability. It also increased the production cost of Russian ice cream producers who relied on external market for raw materials. The shrinkage of frozen import market heavily impacted by the financial crisis forced the wholesales entered the ice cream market, which intensified the competition in the market. Russian government’s value-added tax further decreased the profit of ice cream producers. Beside this, the market growth had stagnated or even shrank. All these make Russian ice cream market less attractive.
Due to historical reason, Russian managers had little knowledge and experience on channels. Therefore they had to heavily depend on distributors to reach the end customers. Together with distributor’s strong ability to integrate upward, this endowed the distributor strong bargaining power. Since the whole market’s revenue generated from spontaneous, impulsive purchases, the end consumer had little switching cost between different brands. As substitutes to ice cream, beer, soft drink and confectionary product was grabbing ice cream’s market by heavily investing on advertisement. Their success lied on the continuous shrinking of the ice cream market. The raw materials of ice creams are commodities. Therefore the suppliers had a weak position in the profit pool. Since there was almost no entry barriers, new regional producers rushed into the industry. With strong ambition to gain market share, the regional producers leveraged their cost advantage to compete with low price. In 2001, the producing capacity already exceeded the market demand, which further intensified the competition. Besides these, the strong seasonality of ice cream market further increased the cost of the producers. Through the five forces analysis, the attractiveness of Russian ice market was quite low.
However, Russian ice cream market had a quite high potential. Compared with 16 Kg consumed in the United States, 17Kg in France, and 18 Kg in Canada, Russian consumed only 2.5 kilograms of ice cream per capita. If Russian could consume 10kg per capita, the market would three times larger. Besides this, 10 to 20% profit margins still make the market quite lucrative. In 2001, Russian ice cream’s price was lowest in the world. Therefore if producers could differentiated their selves and increased the ice cream’s price level, the market size would increases substantially since the Russian consumer was not so price sensitive on ice cream.
Currently, Due to relative slow growth of the market size, the whole industry invested little in advertising comparing with beers Soda producers, which in turn further offset the demand. To break this negative feedback loop, the producers need to increase the investment on advertisement. By adapting pull strategy, the producers could also weaken the bargaining power of distributors and increase the switching cost of end consumers. The pull strategy could also educate the market and reduce the seasonality of the market demand. Investing on new distribution like Café and restaurants would attract more customers and reduce their dependency on the existing channels, which would further weaken distributors’ position in the profit pool. The high investments on promotion and distribution could also heighten the financial barrier, which would frighten the potential entrees away. To stimulate the demand, producers could offer more flavours according to the taste of customers. Compared to US market, the costumers in Russian had quite few choices of flavour, which limited the growth of market. To develop the almost untapped family ice cream market, producers should bring out new packages...
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