By John Helmer, Moscow
If Russia’s Agriculture Minister, Elena Skrynnik, went to the trouble last week of decrying adulteration of Russia’s milk, then one thing is certain – the Franco-American syndicate which sells most of Russia’s milk and dominates the market is having trouble pricing down or buying up milk producers in the regions where they claim adulteration is “unfair competition”. That’s because “unfair competition” is what Danone of France and Pepsico of the US have been hoping would be more effective in the Russian milk market than it is proving to be. Naturally, what is unfair depends on who controls the milk production chain, and who doesn’t.
According to the milk sops in the Moscow media, Skrynnik recently sent a letter to the governors of regions specializing in milk production, urging them to halt sales of sub-standard milk. The adulterators are being accused of adding cheap palm oil imported from Southeast Asia instead of the more costly butterfat required by Russia’s product standards. “The use of tropical oils is unacceptable. The ministry will regularly monitor the situation,” Skrynnik is reported to have said.
Rubbing it in, Marina Balabanova, the spokesman for Danone, has announced: “We sometimes face unfair competition from the smaller players.” Last June, Danone bought out Unimilk, Russia’s second largest producer of dairy products after Wimm Bill Dann. The previous December 2010, Wimm Bill Dann (WBD) sold itself to Pepsico. The oligopolistic sequence, approved by the Federal Antimonopoly Service (FAS) and by President Dmitry Medvedev, resulted in about 60% of the Russian milk market passing into just two pairs of hands – Danone’s and Pepsico’s .At least that’s the percentage market share which was reported at the time.
Today the market share of the Danone and Pepsico groups is reported to be 45%, suggesting that they have been losing market share to the smaller, region-based Russian competition. According to Balabanova, the Danone combination with Unimilk currently has a market share of 21.6% in milk volume, and 26.9% in value terms. A year ago, the peak market share estimate for the two was 30.8%.
Balabanova was reluctant to concede that her group has lost significant market share in the interval, but she admits that there was a contraction last year. “The reason is the increase in raw material prices in late 2010 and early 2011. Accordingly, product prices grew slightly. Consumers responded to this with a decline in consumption. This time round, the market share of regional producers, which produce very cheap products, has increased. Their low prices mean that their products cannot be natural, and they use vegetable oil. All the major players are affected by it.”
According to Vladimir Labinov, executive director of the Russian Union of Dairy Enterprises, there is no doubt “the market shares of both companies have really fallen. This is according to the figures published in the latest Nielsen reports.”
In Vologda — the Russian region traditionally associated with milk production, like Wisconsin state in the US — the sentiment is hostile towards Danone and Pepsico for using their commercial weight to drive raw milk prices below the levels at which the smaller producers can compete. Lyubov Malek is the head of department of market monitoring for the meat and dairy industry in the Vologda regional government’s agriculture ministry. She says “the big companies create problems because they bring down prices for raw materials. From this [tactic] the producers of raw materials for dairy products suffer.”
But according to Malek, “on the market of the Vologda region they [Danone and Pepsico] are not competitors. The people there are very choosy in dairy products, as Vologda region is famous for its dairy products, and they’re absolutely natural. As for [regulation of] competition, it is necessary that the FAS should work better, but it is toothless.” For the future, she adds, “local manufacturers can get help only by themselves – with improving production efficiency, quality and technology. They cannot hope for the state help.”
Vologda Oblast is the oldest region for dairy farming in Russia. According to a 2005 study of competition in the Russian dairy sector by Polina Moshkina, “dairy production traditionally takes a key role in the agri-food sector of the region. Dairy industry accounts for 70% of commodity output of Vologda Oblast. Our study allows asserting that this region has the largest competitive potential in the European part of Russia.”
Based on data from the period between 1999 to 2001, Moshkina reported the top 20 regions in the country for raw milk and milk production:
Index of comparative advantage (ICA) for the top 20 regions, average 1999-2001, %.
More recent studies and data on regional advantage and concentration of ownership are difficult to come by. The anecdotal picture from commercial milk producers indicates that Danone and Pepsico have been intensifying the pressure on smaller producers. But at the same time, the pressure isn’t saving Danone and Pepsico from the erosion of consumer favour and the contraction of their market shares.
Dmitry Shepelev, chief executive of the Ladon company, believes the official attempt to crack down on adulteration is partly linked to the efforts by the giant producers to oust smaller ones from the market. “These companies dominate. So it is not surprising, they are lobbying for their interests.” Alexei Garnov, sales director for the Ryazan Agro Industrial Complex, said: “it is difficult to say what the adulteration campaign is aimed at — the displacement of small producers or forcing them to produce quality products. As for competition, consumers will choose products for their quality, and many are willing to overpay a little for a natural product. This is a normal desire – to be sure of the product’s quality which you eat and drink.”
Andrei Danilenko is the chairman of the industry lobby, the National Milk Producers Union (Soyuzmoloko). He believes the Agriculture Minister has a limited objective in attacking adulteration. “There are standards of care, technical regulations in which it is specified what can and what can not be used in certain products. The point is that if someone would use vegetable oil of tropical origin, it is necessary to specify it on the product’s package. All that was said recently by Minister Skrynnik is aimed to prevent consumers being misled by the product name. So all products will remain the same, but on the package label what it contains will be indicated. The consumer himself can decide what to buy. Too many people think they are buying 100% natural products, but in reality it is not so”.
Labinov of the Union of Dairy Enterprises believes there is no connection between Skrynnik’s statement against adulteration and the Danone and Pepsico market tactics. So what is unfair competition? “There is no connection”, argues Labinov. “The regionals are violating in their use of non-dairy fats. The giants are doing it differently, more civilized. For example, they are turning out products which deplete [milk content] by physical-chemical composition, with the minimization of the share of dairy ingredients in the recipe; they concentrate more on marketing [new products] like Actimel, Imunel, Rastishka [curds]. Our cheese is easier to spread, and so on.” According to Labinov, the only way the regional producers will survive is by “focusing on the production of traditional recipes, lifting their demand for [higher] quality of raw milk.”
Output and trading conditions this year are likely to work to the small and regional producers’ advantage, suggest several industry sources. Andrei Yarovoi, chairman of the Meleuzovsky Dairy Plant, predicts that Russian milk production this year will grow by one million tonnes, or about 3%over the 2011 total. Growth in imports from the European Union — a very likely development, according to Pawel Redzisz, country head for Singapore’s Olam which is investing in Russian dairy production — the greater supply will put downward pressure on prices, and butterfat will become more inexpensive along with milk.
Mikhail Fedorenko is responsible for agribusiness at FAS; he was the official in charge of the reviews of the competitive impact of the Pepsico and Danone acquisitions. Asked about the current market shares of Danone and Pepsico, and the impact on the smaller producers of their price-cutting tactics of the larger producers, he referred questions to the FAS press centre. It has replied that FAS has followed up the Danone takeover and found “no violations”. It has not assessed Pepsico and WBD. Also, the FAS says it does not have market share data for the milk sector.