Russian Broiler Chicken Market 2007

Figure 1.

2 000,0

SHARE OF IMPORT IN CONSUMPTION (%). DOMESTIC PRODUCTION OF POULTRY (thousand tons). DYNAMICS IN 2003-2007 54%

60%

1800

1 800,0

1380

1 400,0 1 200,0

50%

1550

1 600,0

1044

45%

39% 40%

1186

30%

1 000,0 800,0

20% 600,0 400,0

share of import in consumption, %

48%

49%

10% 200,0 0,0

0% 2003

2004 domestic production, thousand tons

1 2 3 4

2005

2006

2007

share of import in consumption, %

abroad PBP is more often used to refuse/accept investment projects on the first stage of application. cities are ranked in descending order of population. regions are ranked in descending order of population. wholesale price as a rule corresponds to manufacturer price.

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According to Institute of Agrarian Market (IKAR), broiler poultry accounts for about 90% of Russian poultry market in volume. Russian sales of poultry in 2006 IKAR estimated at 2.2 million tons or about USD$6 billion in wholesale prices4. Russian Meat Union made more optimistic estimations of market capacity in 2006 – about USD$7-8 billion in wholesale prices.

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PRODUCTION

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Poultry market demonstrates better dynamics than pork and beef markets. According to “Rosptitsesoyuz”, in the period from 1990 to 2006 share of poultry in all-Russia consumption of meat with import included increased by 2 times in volume – from 18 to 36%. Shares of other meat kinds – import also included – demonstrated significant reduction during the same period. For instance, beef reduced from 43 to 31%, and pork – from 35 to 29% in volume. Such dynamics is logical if we consider that investment decisions in our country are very often based upon simple static methods of evaluation of investment efficiency – not the least because of complexity and low reliability of longterm economic forecasts. In this context shorter PBP (Pay-Back Period)1 in poultry farming which may account for several months makes it preferential as compared to cattle farming where PBP accounts for years. However some drop of poultry consumption driven in 2005 by bird flue bustle, gradual saturation of this segment, and also introduction of five-year state program of agriculture development in 2006 contributed to some improvement of dynamics in pork and beef segments of Russian meat market. The research company “Alliance Major” executes complex investigation of broiler poultry market in South Federal District since June 2007; waves of research are repeated every three months. Investigation is held in large cities of the review region – Rostov-on-Don, Volgograd, Krasnodar, Astrakhan and Stavropol2, and also Krasnodar, Rostov, Stavropol, Volgograd, and Astrakhan regions3. The project comprises retail audit, purchase registry, interviews with industry experts and analysis of open sources. In this article research results are enlarged with data of Institute of Agrarian Marketing (IAM) and information provided by Rostov Association “Donptitsevod”.

domestic production (thousand tons)

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ALMOST NO SIGHT OF BIRD FLUE Review of Broiler Poultry Market in South Federal District

Figure 2. PRODUCTION OF POULTRY BY REGIONS, volume terms, % (October 2007)

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After introduction of quotas on poultry import in 2003, share of foreign product in allRussia consumption had been steadily reducing on the background of increasing domestic production. According to “Rosptitsesoyuz”, in 2003 import accounted for 53.5% of poultry consumption, and in 2007 it reduced by 14.5% and constituted 39% (fig. 1). Meanwhile domestic production accounted in 2003 for 1044 thousand tons, in four years it increased by 72% and in 2007 reached 1800 thousand tons. In general, during the said period domestic production was growing by 12-16% annually.

Urals FD 11% Far East FD 2%

Lion’s share of domestic poultry production falls on Central FD – according to IAM, in October 2007 this FD provided 40% of domestic output in volume (fig. 2). More than half of production in this region was provided by three regions – Belgorod, Moscow and Lipetsk – which aggregately accounted for 68% of FD output in October 2007. Other Federal Districts are far behind Central FD in production volume. In the rating of consumption satisfaction with domestic production (output of production facilities located on territory of consumption) Federal Districts ranked some other way. The leader was again Central FD where 85% of estimated consumption volume – calculated crude with consumption rate of 20.8 kg of broiler poultry of domestic origin per person annually5 – was satisfied by domestic production (fig. 3). The leader was followed by South and Urals FD with respective indices of 67 and 61%. The least satisfaction of estimated consumption with domestic production – 17% – is registered in Far East FD. Figure 3. SATISFACTION OF ESTIMATED POULTRY CONSUMPTION WITH DOMESTIC PRODUCTION IN FEDERAL DISTRICTS, % (2007) 85%

Central FD

67%

South FD

61%

Urals FD

Povolzhskiy FD

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Siberian FD 11%

North-West FD 7%

52% 49%

North-West FD

46%

Siberian FD

17%

Far East FD

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Thus, Central and Povolzhskiy FDs are most saturated areas of Russian poultry market – both in terms of consumption satisfaction and concentration of production facilities. Bulk 5

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South FD 13%

forecast of “Rosptitsesoyuz” for 2007. Single per capita consumption rate – 20.8 kg – was applied to all regions, thus hereafter we use the term “estimated consumption value”. However according to industry experts, per capita consumption rate may vary significantly depending on area.

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Central FD 40%

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Povolzhskiy FD 16%

Recent trend on the majority of food markets is shift of consumer preferences to premium or high-price segments on the one hand, and to convenient products on the other hand. This shift driven by growing affluence of population, spin-up of life pace, and retail boom is also traced on poultry market. According to different researches, on the review market this trend is reflected in increase of demand for chilled products, carved chicken (pieces) and ready-to-cook products on the background of decreasing popularity of whole chicken and by-products. In general, this change of consumer preferences plays into the hands of manufacturers: for instance, production of chilled poultry provides higher margin as compared to production of deep-frozen products; besides, in chilled poultry segment manufacturers are eased of competitive pressure of import. Decreasing production of whole chicken in favor of chicken pieces also means additional profit, however in this segment manufacturers can face a new strong competitor – retail chains. For instance, monitoring of product mix in several outlets of retail chain “Perekrestok (Crossroads)” revealed absence of branded products in the category of chilled chicken pieces: it is obvious that “Perekrestok” buys non-branded whole chilled chickens for further in-house carving and processing thus earning on a kind of private label product. If we consider that the majority of large retail chains have in-house meat carving facilities it looks quite logical to use them for poultry carving. According to the research data of “Alliance Major”, in June-July 2007 in South FD chicken pieces accounted for about a half of retail product range7. Whole chicken constituted about a quarter of retail product range; by-products and ready-to-cook products – respectively about 20 and 6%. Sales in volume terms8 look very similar to product mix structure: 55% of sales volume was provided by chicken pieces, 29% – by whole chicken, 6 7 8

manufacturers are ranked in descending order of production capacities they had in the beginning of 2007. share in total number of SKU registered during retail audit, aka “share of shelf”. means sales in kg; data collected from interviews with retailers.

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MARKET STRUCTURE

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importers of poultry are North-West and Central FDs – they provide delivery of imported product to other regions of Russian Federation. In October 2007 the said two regions accounted respectively for 56 and 39% of aggregate Russian poultry import volume. Central FD is the main source of inter-regional intervention of poultry manufacturers – driven mainly by Belgorod and Lipetsk regions where production exceeds estimated consumption volume respectively by 7.2 and 2.9 times. These two regions are location points of such large market operators as “Prioskolye” CJSC, “Belgrankorm” LLC, “Kochetkov” CJSC, and “Kurinoe Tsarstvo (Chicken Kingdom)” OJSC (“Cherkizovo” group)6. Most probable directions of manufacturers’ intervention from Central FD are North-West, Povolzhskiy, Urals and South FDs. This trend is backed by distribution routes of imported poultry. According to estimation of “Alliance Major”, development/enlargement and start of new production facilities can be again anticipated in such Federal Districts as Povolzhskiy, South, Urals and Siberian. In October 2007 about 90% of broiler poultry production in South FD was provided by 4 regions: Stavropol region (29%), Krasnodar region (25%), Republic of Adygea (19%), and Rostov region (18%). In the rating of consumption satisfaction with domestic production the leader was Republic of Adygea with 135%. This impressive index is related to expansion of production facilities by “Resurs (Resource)” LLC GAP exactly in this region; another contribution to this index is sparse population – less than 500 thousand people. Other regions of South FD with high level of consumption satisfaction with domestic production are Stavropol and Krasnodar regions respectively with 86 and 56%. Here we find production facilities of such manufacturers as “Resurs” GAP, “Stavropolskiy Broiler” CJSC, “Kubanskiy Broiler” OJSC, “Krasnodonskoe” CJSC, and “Baisad” CJSC. (Manufacturers are ranked in descending order of production capacities they had in the beginning of 2007.) In Rostov region 33% of estimated consumption is satisfied with domestic production; facilities of “Optifood” LLC PK (poultry plants “Nadezhda (Hope)”, “Starostanichnaya”, “Zadonskaya”, and processing facility “Kalitvenskiy Myasopererabatyvayushiy Kombinat (Kalitva Meat Processing Facility)”) and “Prodo” group (“Priazovskaya” OJSC AF) are located in Rostov region. According to estimations of “Alliance Major”, in the nearest future Rostov, Volgograd, Krasnodar and Stavropol regions will remain the most attractive areas for distribution of poultry and development/expansion of production – aggregately about 68% of population live in these regions; the largest cities of FD are also located there.

9

“Prodo” group owns production facilities countrywide, but in South Federal District the group distributes only “Priazovskaya” AF products. 10 manufacturers are ranked alphabetically.

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Key operators of poultry market of South FD can be classified into two groups: manufacturers with production facilities located outside South FD and manufacturers with production facilities located inside South FD. The first group comprises “Kochetkov” CJSC (Belgorod region, TM “Belaya Ptitsa (White Bird)”), “Prioskolye” CJSC (Belgorod region, cognominal brand), and “Produkti Pitaniya Kombinat (Food Products Facility)” LLC (Kaliningrad region, TM “Zolotoy Petushok (The Golden Cockerel)”). The second group includes “Baisad” CJSC (cognominal TM), “Krasnodonskoe” CJSC (TM “Lavla”), “Kubanskiy Broiler” OJSC (TM “Kubanskiy Broiler”, “Zharkov”), “Optifood” LLC PK (TM “Kuroedov”), “Prodo” PK (“Priazovskaya” AF with cognominal TM)9, “Resurs” LLC GAP (TM “Zolotaya Dolina (Golden Vale)”, “Nezhnino”), and “Stavropolskiy Broiler” CJSC (TM “Stavropolskie Zori (Stavropol Dawns)”, “Blagoyar”)10. Expectedly, during the review period – June-July 2007 – regional manufacturers were better presented in retail of South FD as compared to federal operators. For instance, products of “Stavropolskiy Broiler” were offered in 50% of monitored retail outlets. Products of such manufacturers as “Resurs” GAP, “Kochetkov”, “Priazovskaya” AF and “Optifood” were registered respectively in 28, 16, 15 and 10% of monitored retail outlets. Thus, group of manufacturers with distribution index equal or exceeding 10% mainly included regional manufacturers with “Kochetkov” being the only exclusion. Regarding share of manufacturers in product range: only three manufacturers accounted for 10% and more of aggregate product range – “Stavropolskiy Broiler” (31%), “Resurs” GAP (14%) and “Priazovskaya” AF (10%). Interestingly, at the time of monitoring “Resurs” GAP had higher production capacity in comparison to “Stavropolskiy Broiler” yet had significantly lower distribution index in retail of South FD. This is most probably related to distribution strategy of the majority of regional manufacturers: they are capital-oriented being attracted by high capacity of Moscow market. This is especially true for the companies with head office in Moscow – for instance, “Resurs” GAP and “Optifood”. Head offices of “Priazovskaya” AF and “Baisad” are also located in Moscow but these two manufacturers are region-oriented. In case of “Priazovskaya” AF this is determined by general policy of “Prodo” group which owns production facilities countrywide and thus regional productions distribute their poultry mainly in the area of location. Speaking about “Baisad” we should consider that poultry farming is not the main activity of this company, thus production facility is not too capacious and distributes its product in the region of location. In general, wish of manufacturers of South FD to win a proper part of the markets of Central and North-West FDs is logical. Poultry market is not saturated yet: according to IAM, in September-October 2007 coefficient of market saturation constituted 1.09 points which was the evidence of market stability and insufficient saturation. Besides, monthly

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MAIN OPERATORS

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by-products accounted for 14% and ready-to-cook products – for 2%. It should be mentioned that in the research of “Alliance Major” product category “ready-to-cook products” comprised only chilled/frozen semi-finished chicken products in breadcrumbs and minced poultry. Such products of deep processing as sausage, pate and canned poultry were excluded. Distribution of product range and sales volume between chilled and frozen products shows certain difference: chilled products accounted for about 16% in product mix and for 27% in sales volume. Such impressive dissimilarity is most probably driven by higher demand for chilled products which respectively might have higher index OOS (out of stock). Demand for chilled products grows very fast. Meanwhile offer is a little behind the growing demand, thus in chilled poultry segment demand is less satisfied than in segment of frozen poultry. Interestingly, the largest share of chilled products – 40-55% in volume – was registered in super-/hypermarkets, large independent food stores and discounters, the smallest – 15% – in small and medium-sized stores. The reason might be both larger product range of chains and independent large stores in comparison to small stores and better opportunities of the former to provide optimum storage and sales conditions for chilled products. For instance, according to data of retail audit, maximum quantity of refrigerators and chilling bins were registered exactly in sales rooms of large self-service stores.

Figure 4.

production facility located in South FD

current capacity (early 2007) short-term plans (late 2007) middle-term plans (2008-2010)

production facility located in Central FD 207

200

150

120 100

100

100

14

22

72 55

8

12

0 Resurs GAP

Stavropolskiy Broiler

Optifood

Priazovskaya AF (Prodo)

Prioskolye

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80

year 2008

54

year 2008

45

year 2010

50

60

year 2009

80 60

year 2008

120

Kochetkov

Let’s look into plans of large manufacturers of South FD. The company “Optifood” is going to reach annual production capacity of 100 thousand tons in 2008; “Resurs” GAP plans to produce 120 thousand tons annually since 2009; and “Stavropolskiy Broiler” announced that in 2010 the company will be producing 80 thousand tons annually (fig. 4). Plans of

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250

EXPANSION OF PRODUCTION FACILITIES BY KEY MARKET OPERATORS IN SOUTH FEDERAL DISTRICT, thousand tons

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In 2005, when bird flue was a hot issue discussed everywhere by everyone, many analysts and market experts were forecasting increase of M&A activity after cease of bustle – it was anticipated that small manufacturers would be displaced or would have to merge with larger companies. Meanwhile practice showed that market operators were more interested to increase production capacities via enlargement/expansion of existing facilities than via merges and acquisitions. It is very possible that 2014 Olympics planned to be held in Sochi had not the least influence on such choice of development strategy. In fact, the only M&A deals of last two years worth of mentioning are acquisitions of “Kurinoe Tsarstvo” by “Cherkizovo” groups and of “Priazovskaya” AF by “Prodo” group. On this background announced investments into development and plans of production expansion look much more impressive.

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FUTURE PERFORMANCE

production (thousand tons)

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per capita consumption rate demonstrated in July-September 2007 significant growth potential of the market. According to IAM, per capita consumption of poultry accounted in July 2007 for 2.2 kg with the increase by 10% in comparison to June 2007. In August this index reached 2.5 kg having grown by almost 14% in comparison to the previous month. In September 2007 per capita consumption decreased by 2% and accounted for 2.45 kg; in October consumption restored July level – 2.2 kg per person monthly. Such jump of consumption in summer was not observed during the previous two years: fluctuations of monthly per capita consumption of poultry during the said months stayed in the range of +/-5.5%. On the one hand, such situation can be related to higher activity of poultry importers – in July-August of 2007 import demonstrated significant increase on the background of steady growth of domestic production. On the other hand, growth of poultry consumption could have been driven by general price increase on food which stimulated part of beef and pork consumers switch to cheaper broiler poultry: for instance, in October 2007 price advantage of chicken to beef constituted 29%, and chicken to pork – 27.5%. In any case, consumption jump showed that the review market has enough of space to grow, and increased offer can accelerate competition but would hardly lead to overproduction. However it makes sense for regional manufacturers not to pass off their own territories while trying to conquer Central and North-West FDs, otherwise they may be displaced from their domestic markets. Large federal operators are anxious to get shares of regions – for instance, “Kochetkov” and “Prioskolye” increase their production facilities and would need new distribution markets.

MEDIUM-TERM INVESTMENTS ANNOUNCED BY KEY MARKET OPERATORS IN SOUTH FEDERAL DISTRICT, USD million (2008-2010)

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federal operators are also very ambitious: “Prioskolye” announced production increase to 207 thousand tons in 2008, and “Kochetkov” is going to produce 80 thousand tons annually since 2008. We shouldn’t forget about impressive dynamics of turkey market. For instance, the company “Evrodon” (Rostov region, TM “Indolina”) announced production of 63 thousand tons annually which is to be reached in 2007-2008. This will certainly lead away some consumers of broiler chicken in South FD; first of all premium and high-price segments will be affected. Figure 5.

250

year 2008, renovation of production facilities

115 93

100

80 year 2007, breeding stock

50

10

am ounts of investm ents not announced

0 Stavropolskiy Broiler

Resurs GAP

Optifood

Priazovskaya AF (Prodo)

Prioskolye

Kochetkov

Apparently, all the said factors inevitably lead to acceleration of competition and redistribution of market between the leading operators. It makes sense to analyze advantages able to influence market redistribution: major part of such advantages can be created on stages of production, processing and distribution/marketing. On production stage significant competitive advantages can be provided by factors reducing production costs: in-house breeding stock – egg cost may account for as much as 20% of cost of 1 kg of poultry, in-house production of feed-stuff which may account for 50% of final cost; lower prices on power and fuel, new equipment and technologies. As soon as the majority of leading operators of poultry market in South FD have all the said advantages, then status of highest importance shifts to such factor as possibility of a manufacturer to significantly increase production capacity and to renovate it in short time – we mean financial and other resources of the company, their liquidity and lower cost in comparison to competitors. In this respect such manufacturers as “Prioskolye”, “Kochetkov”, “Belgrankorm”, “Optifood” and “Prodo” (“Priazovskaya” AF) are in most advantageous position. On stage of processing all key operators of poultry market in South FD are in equal position because they follow the same trace: they make both deep-frozen and chilled products – share of the latter demonstrates steady growth trend; product lines include whole chicken, pieces, by-products and ready-to-cook meals. There is no specialization on chilled/frozen products or on any product category – the only exclusion is “Produkti Pitaniya Kombinat” which specializes in deep-frozen ready-to-cook chicken products. “Resurs” GAP plans to penetrate the segment of ready-to-cook products but this would hardly provide any special advantage to this manufacturer – this segment already has strong federal operator; besides, this segment is a desirable target for retail chains with their private label products. In general we can assume that on processing stage just like in production most important advantages are flexible production process, level of engaged technologies and equipment, and possibilities to renovate production. Stage of distribution/marketing opens the widest horizons in creation of competitive advantages. Poultry market is almost unbranded in consumer mind – as a rule advertising messages lack information on product benefits in comparison to rivals; thus consumers

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year 2009, capacity increase + deep processing

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USD million

150

year 2010, renovation of production facilities, capacity increase

year 2008, new poultry plants in Siberian FD, Povolzhskiy FD, and Urals FD

200 200

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production facility located in South FD production facility located in Central FD

Nina Krympenko Alexandra Romashova First published in Russian Food & Drinks Market magazine in February and March 2008

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see no serious difference between offered brands. Moreover, the review market should rather be called “retailer market”: success of this or that brand/manufacturer depends less on consumer choice and much more – on efficient cooperation of sales departments with wholesalers and large retail chains; failures in this job may have drastic consequences. To understand importance of a contract with just one retail chain let’s take one of the largest chains – “Magnet” – as an example. This chain owns more than 2000 stores in 630 locations; according to various estimations, poultry sales in this chain account for several thousand tons annually per one manufacturer. Break of such contract can be very painful for any manufacturing company. Practically all key operators of poultry market in South FD have incorporated trade houses, logistics services and cold-store facilities; in this context distribution strategies and special advantages become highly important. Among special advantages we should mention distribution networks of such companies as “Optifood”, “Produkti Pitaniya Kombinat”, “Baisad” and “Priazovskaya” AF. In case of the first two operators poultry production integrated into existing distribution chains – “Produkti Pitaniya Kombinat” started as meat importer and “Optifood” is still an importer. “Baisad” uses distribution network of company’s main products – pasta and mayonnaise, and “Priazovskaya” AF achieved the access to well-developed distribution chain of larger company after acquisition by “Prodo” group. Poultry farming is not the main activity of “Krasnodonskoe” but it has access to distribution chains of other departments of the company: dairy farms, swine raising, processing of meat and manufacturing of ready-to-serve and ready-to-cook meat products. Success of companies integrating production into existing distribution network with its long-term contacts with retailers allows suggestion that this can be a trend and poultry market will keep on attracting large operators of adjacent markets like importers of meat and other kinds of food, agricultural holdings engaged in grain or meat farming and trade. For instance, large holding “Miratorg” APH already announced its intension to build a poultry farm in Central FD. Interesting distribution strategy is used by “Monetka (Coin)” LLC (Belgorod). This trade company represents interests both of large manufacturers (“Kochetkov”, “Belgorodskiy Broiler”) and small poultry farms of Belgorod region. “Monetka” operates as a single wholesaler for the said manufacturers; on the one hand, this provides higher flexibility and prompt response to demands both of large and small retailers, on the other hand this excludes wholesaler margin and guarantees lower price. So, poultry market of Russia in general and of South FD in particular is up and about after bird flue – mass media still reports on recrudescence of this infection here and there, however this doesn’t seriously affect consumption. The market verges “large redistribution” both between the largest operators and market segments – in this respect we can forecast further increase of chilled product segment and growing consumption of “convenient foods” like chicken pieces and ready-to-cook products.

Russia Rostov-on-Don

www.allianc.ru [email protected]

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market research company