Ice-Fili

Ice-Fili â€Å"A storied market leader facing competitive pressures† To: Senior Management, Ice-Fili February 12, 2012 Current Situation Ice-Fili was able to maintain its leading position in the Russian ice cream industry during volatile times. However, it now faces even tougher challenges that threaten its future prospects: reduction in ice-cream consumption, emergence of cost-efficient regional players, and the lack of a quality distribution system. After analyzing the situation, we recommend a strategy that aims to grow sales through the earning of market share, and improving the distribution network.Porter’s Five Forces’ Model Industry Rivalry Industry rivalry is high. The ice-cream industry is fragmented; 300 producers compete in the market. Ice-Fili is an industry leader with 5% market share. Regional producers threaten Ice-Fili with their significant cost advantage and flexible production system. In addition, foreign companies such as Baskin-Robbins and Ne stle are expanding through relatively untouched segments such as cafes and restaurants. Threat of Entry Threat of entry is high.Numerous frozen imports companies have emerged as regional ice-cream producers with their cold-storage and production capabilities in pursuance of relatively high profitability in the ice cream industry. Economies of scale are not required for those small regional players. In addition, new entrants can enjoy significant cost advantages over Ice-Fili through more cost efficient equipment. Threat of Substitute Products or Services Threat of substitute is high. Ice-cream is not perceived as a family product that people can enjoy at home as a dessert.Impulsive purchasing consists of a large portion of ice cream sales in Russia, mainly through kiosks or street stalls. In 2000, ice cream consumption declined 3. 5 % from the previous year; in contrast, its substitutes such as beer, soft drink and confectionery products experienced strong market demand growth indic ating a change in consumer behaviour on the back of strong advertising. Bargaining Power of Buyers Bargaining power of buyers is high. Since Ice-Fili contracted with dozens of small distribution companies, no single firm has a significant bargaining power.However, there is a potential downside risk due to the absence of exclusive contracts. For example, Service Fili, an independent affiliate, can carry its competitors’ products without restriction. No binding provision exists to enforce Service Fili to carry Ice-Fili’s products. A potential risk arises when competition becomes severe. Ice-Fili could lose distribution volumes if competitors offer more favourable deals to its distributors. Lastly, when thinking about the end consumer as a consumer of ice-cream, we see low switching costs. Bargaining Power of Suppliers Bargaining power of suppliers is low.For each of its major ingredients, Ice-Fili has 3~ 4 different suppliers and it is not hard to find new one. Thus, swi tching costs are low. Internal Environment Ice-Fili highly value employees, as shown by its financial director quoting Stalin’s â€Å"Human resource capital decides everything†. Ice-Fili understands its struggle in establishing itself in the open-market economy, so it actively seeks young and talented managers to help revive the company. Strategy & Key Success Factors Ice-Fili employs somewhat of a focus strategy as a few products make up a significant portion of revenues.However, they do have a very large product offering even though some products make up a very small portion of revenue. Thefore, Ice-Fili does not fully employ a focus strategy. Most of Ice-Fili’s ice cream products are priced at 6 rubles per portion, making it more expensive than products of regional producers and Nestle and at the same time a lot less than premium products which could be as much as 15 rubles per portion. Ice-Fili’s commitment to only using high-quality natural ingredien ts and eliminating the use of any artificial preservatives or colorants makes it clear its strategy is not low cost.Ice-Fili also does not directly compete with premium brands such as Baskin-Robbins and Haagen-Dazs which have twice the price and compete intensively in restaurants and cafes. To succeed in this strategy, Ice-Fili needs to do two things. First, it needs to broadcast its commitment to follow the legacy of the traditional Russian ice cream makers and inspire consumers to cherish and value traditional Russian ice cream making method, thus creating stronger brand equity. Second, Ice-Fili needs to restructure its current distribution system. Nestle already has its products twice as available as Ice-Fili. Summation of Key Problems ) Competition: Baskin & Robbins and Haagen-Dazs have already become incumbents in the premium ice cream space. Regional players have a big cost advantage so a price war or a move into a low cost strategy would be difficult. 2) Distribution: Ice-Fil i’s products have fairly limited availability. Distribution was also highlighted as a factor for the failure of other players in the Russian ice-cream market Reccomendation Possible Strategies The main goal of our recommendation is to stop the decline of Ice-Fili’s return on equity which has fallen from 27. 3% in 1996 to 14. 4% in 2001 (Figure 1, Appendix).We will look to do this through a combination of sales growth and margin expansion. We outline several possible options, and choose one which looks to be the most optimal: 1) Focus on a low cost approach to grow sales 2) Focus on restaurants and cafe’s to improve margins 3) Focus on a few key products and improved distribution system to grow sales Analysis of alternatives and final recommendation 1) Ice-Fili currently still has 25% of their products produced with old machinery which results in higher costs in relation to regional players who have recently emerged and structured their operations around more eff icient machinery.Ice-Fili could firstly invest in their equipment to modernize the rest of their machinery and improve the cost structure of their whole operation. They would then need to lower their pricing from the current 6 rubles closer to 1. 5 rubles to improve volumes. This could potentially be a lucrative strategy. However, the main problem we see with this is the possible reduction in margins that could emanate from this (although it could be made up through increased volumes and lowering of costs). Also, since almost 80% of sales come through Gastronoms and Kiosks with limited space, sacrificing price for volume may not be optimal. ) If Ice-Fili focus or even just expand into restaurants and cafes, they could potentially improve margins due to the higher price points seen in this space. Ice-fili is a market leader with the number one market share in the industry as a whole, and they have also been around for much longer than both regional players and foreign competitors. Th is bodes well for their ability to still sell significant volumes at higher prices. The downside to this strategy that we foresee is the fact that Ice-Fili is not the incumbent in this high end space with foreign competitors like Baskin-Robbins already fairly established.Secondly, we see that Baskin-Robbins’ factory utilization for 2001 was very low at 7%-12%. Although this may not be representative of the high end industry as a whole, it is still a concerning sign. 3) Our final alternative, and the one we recommend is the focus on a few key products, and the improvement of Ice-Fili’s distribution chain. Ice-Fili’s Lakomka was one of the three most recognized brands of ice-cream in Russia, but Ice-Fili was not able to trademark it. However, the industry has not historically spent much on advertising, and Ice-Fili is still a market share leader.This means there is still time to brand Lakomka as Ice-Fili’s product, just like how people think about Coke when thinking about Cola drinks or â€Å"Googling† something when thinking about doing an internet search. By focusing on a few key products, Ice-Fili can capitalize on their storied tradition, and take advantage of the limited space in their main distribution channel (kiosks). Along with this strategy to grow sales through taking of market share, we also recommend growing sales through improving availability.There are heavy capital requirements for building a strong distribution channel alone, but a joint venture with Baskin Robbins would be an efficient way to achieve this since these companies compete in different parts of the market, and a partnership with an international company will make foreign debt and equity investors more open to financing Ice-Fili. Appendix Figure 1. Financial Calculation (in thousands of U. S. dollars) Figure 2. Ice-Fili’s Current Market Position Price Price Brand Equity Brand Equity