Food Industry 2000-2004
The Russian food industry has shown steady growth in recent years. Production has increased 4-6% annually. Last year, total production volumes in the food sector amounted to 987 billion rubles (more than $32 billion). Experts predict a continuation of the growth trend: the Russian food industry will probably reach 1 trillion rubles. However, future trends are less optimistic: many experts are saying that the industry's growth potential, which took off in the first years after the crisis, is virtually exhausted. Last year, Russians spent $4 billion and $5.9 billion on alcohol and tobacco products, respectively. But in quantitative terms, output of the tobacco and distilling industries has actually remained almost unchanged. It is simply that as incomes increased, Russians gradually switched to more expensive products, which increased sales volumes in monetary terms by 5-7% annually.
History: 2000-2004
The last four years have witnessed a large number of share wars in the domestic food and distilling industry. This is not surprising, since large financial and industrial groups have divided up the food industry among themselves. The state disturbed the peace in the distilling industry when it decided to bring together all the most liquid assets.
Agriculture
At the beginning of 2000, after finally dividing up the oil fields, mining companies, the banking sector, and groups of Russian oligarchs proceeded to take over the most unpredictable Russian business sector – agriculture and the food-processing industry. Several new players that were somehow or other related to large financial and industrial groups appeared one after another on the market, each trying to find its own market niche.
For example the company Planeta, set up on the direct instructions of Roman Abramovich, began buying up dairies and meat-processing plants. Agros (a member of Vladimir Potanin's Interros Holding) concentrated on storage and grain-processing facilities, as well as meatpacking plants and poultry factories. The Stoilenskaya Niva Agroindustrial Complex (APK Stoilenskaya niva) formed by the owners of Stoilensk Mining and Processing Company (Stoilensky GOK) became involved in grain growing and the retail trade. The only omnivore was Rusagrocapital [founded by the owners of the Russian Funds Investment Company (IK Russkie fondy)], which bought up everything that came to hand, whether it was an oil-extraction plant, an elevator, or a meatpacking plant.
At the same time, the old players (Rusagro, Rasgulyai, and Buket) only grew stronger after the crisis, and the consequences of companies with virtually unlimited financial resources entering the market were quite predictable. First, the value of agricultural assets increased drastically; and second, a full-blown share war broke out around the most interesting companies.
The leader in both number of conflicts and spectacular failures was Agros, which first fought with Rusagrocapital for Smolmyaso (Rusagrocapital won) and then tried to take the Tanganka Meat-Processing Plant (Tangansky myasopererabatyvayushchy zavod) away from the company's administration (the administration won). Planeta was the calmest, which in a way became a source of pride for its managers: see how many companies we've bought – and not a single conflict.
However, despite giant ambitions (Planeta was intent on pushing Wimm-Bill-Dann out of first place) and financial resources (according to some reports, the four new players spent a total of more than $200 million), there were no further declarations of intentions. Rusagricapital is now on the verge of bankruptcy. Planeta has essentially split into two parts. The company's managers bought out the dairy line, and the meat business remained under the control of Millhouse Capital (the company manages Roman Abramovich's assets). Agros lost its management team responsible for the grain business: they went to Glencore.
However, none of the oligarchs showed any particular regret (what is more, they made no attempt to save their agricultural business). This partly confirms the theory that the oligarchs' mass campaign into the countryside was not made for objective reasons, but on orders from the Kremlin, which had demanded investments in Russia's most troubled industry.
Candy
If the food industry were to hold a contest to name the best asset consolidator, the winner would undoubtedly be Guta Group. Starting with nothing in 2000, the group managed to get control of nearly half of Russia's confectionery industry. Today, United Confectioners (Obedinennye konditory), a holding with a total turnover of more than $600 million set up by Guta, includes three large Moscow confectionery factories (Babaevsky, Krasny Oktyabr, and Rot Front) and 15 regional companies.
The history of the holding's formation is intricate and involved. Companies affiliated with Inkombank originally owned the controlling blocks of shares in Babaevsky and Rot Front. Inkombank collapsed after the crisis of 1998, and after a time Guta bought out part of its debt obligations. The war for the legacy of one of Russia's oldest banks (the other participants besides Guta were Rosbank and a pool of German creditors) went on for more than two years. Some of its episodes [like the assault on Rot Front's management office by Guta representatives right in the center of Moscow, or a scuffle involving the OMON (special police force) at a meeting of Babaevsky shareholders] could be written in gold letters in the history of Russian share wars. Be that as it may, Guta finally won and took control over both Rot Front and Babaevsky. Guta also bought 30% of the shares of OAO Krasny Ortyabr from the investment funds that owned them. After that, the factory's administration headed by Anatoly Daursky sold its shareholdings to Guta, and the group became the owner of a controlling interest in Russia's best known confectionery factory.
On the other hand, Guta's attempt to strengthen United Confectioners with a number of companies owned by the Moscow government did not end very successfully. The project was as follows. The Moscow government would transfer its shareholdings in the capital's food companies to the holding (blocking share parcels in Krasny Oktyabr and Rot Front, as well as shares in another ten companies and factories) and in exchange would receive 25% plus one share in United Confectioners. The city authorities at first agreed with Guta's proposal and transferred the shares. But this spring, they changed their minds and demanded their property back. So far, Guta is in no hurry to give back the shares. The Moscow government is not pressing the group either; government officials have announced that toward the end of the summer, Moscow will still be included in the confectionery holding's charter capital, although the conditions under which this will take place are still unknown.
Tobacco
The redistribution of property in the tobacco industry ended back in 1995 when the Western companies that currently control more than half of this market in Russia bought up all assets of any interest. As it turned out, however, neither the absence of disputes over property nor the Western mentality has prevented tobacco company representatives from taking large-scale actions against one another.
In 2000, the tobacco market was divided into two hostile camps: on one side were Philip Morris and Japan Tobacco (JTI); and on the other, were British American Tobacco (BAT) and three Russian factories without the participation of foreign capital [Donskoi Tabak, Balkan Star (Balkanskaya zvezda), and Nevo-Tabak]. The first camp insisted on preserving the tobacco industry's existing specific excise tax system (every thousand cigarettes were excised at a fixed rate). Members of the second camp were demanding a change. In their opinion, it was necessary to introduce a mixed excise tax rate (a percentage of the selling price would be collected in addition to the fixed rate).
Both sides talked about the ability to fill the budget and expressed concern about the poor sections of the population. They cited developed countries and a forecast of the trend in tobacco product production as an example. They made lengthy presentations to State Duma representatives and the government. It sometimes seemed as though Russia's economic situation and the existence of smokers in the population worried Philip Morris or BAT officials far more than benefits for tobacco company shareholders.
Of course, in reality nothing was what it seemed. Russia is a key market for all tobacco companies (the country is in fourth place in sales of tobacco products after China, the United State, and Japan). Russia has also set a fantastically low excise tax on cigarettes. The government makes no secret of the fact that sooner or later the excise rate will be increased – by several times. The present struggle among tobacco companies is an attempt to drive the competition into the most uncomfortable tax position possible.
Philip Morris and Japan Tobacco have the strongest positions in the upper and middle price ranges. These companies have the advantage when all tobacco product manufacturers pay the same excise rate. In this case, the proportion of excise tax on a pack of Marlboros will be lower than, for example, on a pack of Yavas, since there is a twofold difference in the price of these cigarettes but production costs are approximately the same. Obviously, British American Tobacco and Russian factories, which dominate in the lower price range, are absolutely opposed to this state of affairs. An excise tax varying with the selling price of cigarettes is more advantageous for them. For example, at a rate of 10% of the selling price, Philip Morris would have to pay much more for Marlboros than BAT would for Yavas. However, at BAT they realized that the government would not allow the introduction of a conventional ad valorem excise rate (i.e., a percentage of the selling price), since it had already talked more than once about abolishing ad valorem rates. Therefore, the company proposed the mixed option.
The bureaucrats sided with BAT – a mixed excise rate on tobacco products that exists to this day was introduced on January 1, 2003 (60 rubles per thousand cigarettes plus 5% of the selling price). However, Philip Morris and Japan Tobacco never tire of reiterating the need to return to the former specific system. This means that the brawls in the tobacco industry will continue.
Distilling
The state has always tried to keep a close eye on vodka production in Russia. However none of the bureaucrats' attempts to regulate the market, whether in the form of minimum prices for alcoholic beverages, quotas on alcohol purchases, or any other restrictive measure, have had any appreciable results: every second bottle of vodka was, and still is, illegal.
In March 2000, the bureaucrats resorted to extreme measures: the president issued a decree setting up FGUP Rosspirtprom. Eighteen state-owned alcohol factories were transferred to it, as well as state share packages in more than 120 distilleries in the country, including 4 of the industry's largest companies – Kristall (Moscow), Rodnik (Samara), Tulaspirt (Tula), and Bryanskspirtprom (Bryansk). By setting up a large-scale alcoholic beverage producer, the government was hoping to force illegal products off the shelves by market methods.
Rosspirtprom's management got down to business with enthusiasm. In order to get control over distilleries, they had to convene a shareholders' meeting at each company and elect a new general manager and board of directors. The state company coped extremely well with the task: people loyal to Rosspirtprom's management became the general managers at most factories after and long and difficult battles (as in similar situations, bailiffs, mutually exclusive court rulings, and forced “visits” were a sine qua non). But in mid-2002, after a change of leadership at Rosspirtprom (Petr Myasoedov replaced Sergey Zivenko), the situation at the “ministry of alcohol” began to deteriorate. For example, production at Kristall decreased 20% in 2003; and things were no better at other Rosspirtprom companies.
Nevertheless, another state enterprise – Soyuzplodoimport – was set up in 2002 after a fierce struggle between the Ministry of Agriculture and Yury Shefler's company, SPI, which in the mid-1990s had become the owner of the most famous vodka trademarks (Stolychnaya, Moskovskaya, and others). Experts are talking about a future merger of Soyuzplodoimport and Rosspirtprom, but this will probably not happen. Vladimir Loginov, for one, opposes the merger; he left a deputy minister's position to become general manager of Soyuzplodoimport and is currently one of the vodka market's most powerful lobbyists.
Beer
In early April 2002, Europe's largest brewer, the Dutch company Heineken, announced the purchase of Bravo International Brewery in St. Petersburg (Bokcharev trademark). The deal had been expected for a long time. Rumors that Heineken was planning to set up its own production in Russia first appeared at the beginning of 1999, when Western brewers were entering the domestic market one after another. By that time, all the major beer market operators were present in Russia, i.e., the American company Miller, Belgian Interbrew, and South African Breweries. But time passed and Heineken never appeared. It seemed that the Dutch had decided not to get involved in Russia at all. However, in fall 2001, reports appeared in a number of Western media that Bravo's owners were looking for a buyer for their company. The reports named Interbrew, SAB, and Heineken as contenders. Heineken turned out to be the winner.
Despite the fact that the market was expecting the deal, its size initially surprised observers. The Dutch were prepared to pay nearly $400 million for the new (several Icelandic businessmen founded the brewery in 1993) but relatively small business. By the time the deal was concluded, this figure had been adjusted to $330 million; but even this amount affected the mood of other proprietors. The owners of domestic breweries instantly revalued their assets. It later became clear that the Dutch had paid the right amount. They were the last to enter the market, and for $300 million they bought not only a company, but also 5% of the market, which was Bokcharev's share at that time.
It's true that once in Russia, Heineken was not very consistent. The logic of beer market development required the presence of at least three breweries uniformly located across Russia – in the center, the Urals, and the Far East. As a comparison, market leader Baltika built five breweries. Heineken might have been expected to start actively investing in production. Nearly all “free” breweries”, from Ochakovo to Krasny Vostok, were said to be objects for purchase. However, Heineken limited itself to the St. Petersburg facility and a 5% market share until 2004. It was learned in the spring that Heineken had decided to build a brewery in Ekaterinburg; but competitors generally agree that this will not save the Dutch. The market has been divided once and for all, and Heineken no longer has any chances of filling an adequate niche.
Nonalcoholic Beverages
In 2002, Wimm-Bill-Dann, the largest player on the Russian dairy and juice market, broke the monopoly of telecommunications companies, and right on the heels of Vympelcom and Mobile TeleSystems (MTS), placed third-level American Depositary Shares (ADS) on the New York Stock Exchange. Investor interest in this fast-growing sector of the Russian food industry exceeded all expectations. The volume of preliminary share purchase applications exceeded supply by five times. As a result, total earnings from the placement of 24% of charter capital came to more than $207 million. In other words, the dairy and juice company was valued at nearly $1 billion, which ranked it in the second group of ten largest Russian companies. Investors were not troubled by either difficult relations within the country, initial problems with marketing juice products (this later took the form of a loss of market leadership), or the criminal past of Gavriil Yushvaev, Wimm-Bill-Dann's largest shareholder, known as Garik Makhachkala in his youth.
A year later, rumors appeared about the impending sale of a controlling interest in Wimm-Bill-Dann to the French company Danone. The company itself added fuel to the fire when its shareholders endorsed negotiations. Analysts all said there would be a deal. It was becoming more and more difficult for Wimm-Bill-Dann's management to control the huge company, and its sale would be extremely profitable for the shareholders. Danone was just as interested in the deal: the French company would immediately acquire a third of the Russian dairy market.
However, a deal that would have been unique for the food sector never happened. Wimm-Bill-Dann shareholders withdrew from the negotiations on their own initiative. There were rumors that they were not satisfied with the price the French were offering.
by Dmitry Dobrov
&
People Who Have Left the Scene
Anatoly Daursky
The head of the Krasny Oktyabr confectionery factory since 1981, good friend of Moscow's mayor, and a leading specialist in the field of confectionery had no intentions of leaving. It is true that in recent years, Anatoly Daursky had not taken an active part in managing Krasny Oktyabr, and things were not going well at the factory. The company did not have a clear sales and marketing policy, and the lion's share of payments to suppliers of raw materials were through barter. In March 2002, three of the company's major shareholders – Templeton Investment Fund, Invesco, and Pioneer First (Pioner pervy), which together owned nearly 30% of the shares – openly expressed their dissatisfaction with the policy of Krasny Oktyabr's management by selling their shares to Guta structures. After that, Daursky was faced with a difficult choice: to fight with Guta or allow it into the enterprise. The patriarch of the domestic confectionery industry chose the second. As a result, Guta gained control over Krasny Oktyabr. Daursky remains on the board of directors as before but is not involved in management.
Ivan Savvidi
Ivan Savvidi was elected to the State Duma on the United Russia (Edinaya Rossiya) regional list at the end of 2003 and stepped down as general manager of Donskoi Tabak in Rostov. However, Savvidi maintains a lively interest in the tobacco market and gives a lot of attention to the excise question, a key issue for all tobacco companies. You can understand the former head of Donskoi Tabak: it is increasingly difficult for Russian tobacco companies to compete with the “big four” of the international tobacco business (Philip Morris, JTI, Gallaher, and BAT). Last year, Donskoi Tabak was forced to halt cigarette production for a month because of an overproduction crisis. Savvidi believes that the situation can be improved by making major taxation changes in the industry. This would result in a sharp increase in the excise payments of Western giants, which mainly produce expensive cigarettes. The price for cigarettes like Parliament and Camel will correspondingly increase. Then Russian factories will breathe easily.
Anatoly Shamanov
The fate of Anatoly Shamanov, the largest shareholder and president of OAO Ice-Fili, the country's oldest ice-cream manufacturer, is similar in many respects to the fate of Anatoly Daursky. In 2001, he successfully fended off an attack by his former partner Viktor Lutovinov, who had bought up 30% of Ice-Fili's shares and tried to gain control over the company. At the end of 2002, Lutovinov sold his shareholdings to Guta, which immediately launched an attack on Ice-Fili. After some resistance, Shamanov had to sell his share block, although the buyer was not Guta but Russian General Bank and NIKoil (now Uralsib). Last year, Guta tried by various means to take control of the ice cream manufacturer, but the new owners fought to the bitter end. At the end of June, the parties signed a memorandum to end the corporate dispute. However, the events at Ice-Fili no longer concerned Shamanov. Company employees confirmed that after selling his shares, the former head of the refrigeration complex showed up at the premises only a few times.
Yury Shefler
Yury Shefler, the principal owner of the SPI group, became the first victim of the government's struggle with the oligarchs for the vodka market. In 1997, ZAO Soyuzplodoimport, a member of the SPI group, acquired the rights to the best known vodka trademarks (Stolychnaya, Moskovskaya, Limonnaya, and others) from Foreign Trade Organization (VAO) Soyuzplodoimport (originally a state organization). The state company received about $300 000 for the trademarks. Shefler subsequently brought sales of Stolychnaya on world markets under his control. SPI made vodka at SPI-RVVK in Kaliningrad Region and exported it to Europe and the United States. By 2000, the company's turnover had reached nearly $800 million. That was when Shefler's troubles started. First, Audit Chamber officials claimed that the sale of the trademarks had been made to the detriment of the state, since the value of the Stolychnaya and Moskovskaya trademarks alone was at least $400 million. Next, the Ministry of Agriculture challenged the results of the privatization of Soyuzplodoimport and Rospatent reregistered the vodka trademarks to the Russian Federation. Shefler's problems did not end there: he was accused of threatening to murder Deputy Minister of Agriculture Vladimir Loginov. As a result, Shefler was forced to flee to Great Britain.
&
People Who Have Arrived on the Scene
Sergey Zivenko
At the time of Sergey Zivenko's appointment, no industry producer knew anything about the first head of the “ministry of alcohol” (as Rosspirtprom was sometimes called). Zivenko himself preferred not to give out the details of his career, which gave rise to a spate of rumors about his “Chekist” (i.e., KGB) and “St. Petersburg” past. However, it was later learned that the Krasnodar native had nothing to do with “the organs” (i.e., of State security), but owed his rise to Vladimir Putin's judo coach, Arkady Rottenberg, who had recommended him for the job of head of Rosspirtprom. And it was Rottenberg who got him fired in summer 2002, although Zivenko did not leave the company empty-handed. For a long time, he retained control over the sales division of the Kristall Distillery in Moscow (Rosspirtprom's largest company). In addition, structures owned by Zivenko bought the rights to the Gzhelka trademark from Kristall. Today, this brand is produced at Zivenko's Kristall Distillery in Kaluga. Zivenko himself heads Kristall Business Group (TPG Kristall), which has a turnover of $500 million and is currently one of the largest operators on the vodka market.
Vladimir Loginov
The appointment of former deputy minister of agriculture Vladimir Loginov to the position of general manager of the federal state company Soyuzplodoimport seemed logical. After all, he had led the fight to return the Stolychnaya and Moskovskaya trademarks to the state. After it was all over, the former deputy minister became the new owner of Stolychnaya – this trademark, along with 16 others, was transferred to the control of Soyuzplodoimport. However, Loginov did not stop there. At present, he is contesting the registration of the Cristall trademark (better known as Kristall – Black Label) and is involved in the struggle for Gzhelka (both belong to the former head of Rosspirtprom, Sergey Zivenko). In addition, this spring Loginov managed to register the Sovetskoe trademark, after which champagne producers were ordered to pay the state 80 kopecks in royalties for each output bottle. The producers disagreed and promised to challenge the registration. But their chances of gaining a victory over Loginov are minimal. As the director of one of the largest sparkling wine enterprises remarked gloomily: “Shefler already fought with him. And where is Shefler now?”
Petr Myasoedov
Major General of the Tax Police Petr Myasoedov was appointed general manager of Rosspirtprom in July 2002 after Sergey Zivenko was dismissed from the job. It is believed that Arkady Rottenberg recommended Myasoedov, just as he recommended Zivenko. Unlike Zivenko, the new head of the alcohol agency shuns publicity. In all his time as general manager, he has never appeared at a single official function and never given a single interview – with one exception. A year ago, Rosspirtprom's press secretary called Kommersant's editorial office with an invitation to the Airborne Troop Day celebrations (Petr Myasoedov served in airborne units) in Tushino. When asked whether we could talk to Myasoedov, the press secretary replied curtly: “You can ask him about his army service.” And whereas Zivenko controlled everything at Rosspirtprom, today Myasoedov's first deputy, Vadim Zolotarev, actually performs the general manager's main duties. He makes key decisions on all questions and conducts negotiations with other alcohol market operators.
&
All the Article in Russian as of July 12, 2004
|
