Essay About Ice-Fili And Ice Cream Consumption

Ice-Fili – Porter’s Five Competitive Forces
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Ice-FiliQuestion 1.When compared to other developed markets such as the US, France and Canada – where ice cream consumption is over 6 times the amount in Russia – the Russian market for ice-cream consumption would appear to have substantial upside for participants.  There is however severe competition that limits the profitability of the industry.Below is an analysis of those competitive factors using Porter’s Five Competitive Forces.Threat of New EntrantsRussia’s open-market economy in the early 1990’s encouraged many new entrants into the Russian market.  The financial collapse in 1998 and devaluation of the ruble means that importing goods into Russia was and is too expensive.  This would mean that there is a barrier to entry for new entrants.  In order to be price competitive, companies would likely need to manufacture locally in Russia, using Russian sourced ingredients.  This would mean new entrants may have less or unequal access to suppliers compared to the incumbents.While foreign entrants would get more for their invested capital in Russia, any repatriation of profits may have little impact to the point that expansion efforts in Russia may not be worth the effort.When the open-market occurred, Russian companies have already sunk capital into upgrading production technology; they have developed dealer and distribution networks and channels.  Some distribution companies are even part-shareholders in the ice cream manufacturers giving them a vested interest in the success of those manufacturers in which they are invested.  These capital requirements and unequal access to distribution channels are large barriers to entry for new entrants.Russian incumbents appear to be inexperienced and cash strapped at it relates to marketing.  This opens up opportunities for new entrants to come into the market and capture share through superior marketing efforts in both quality and quantity (frequency and dollars spent).Bargaining Power of SuppliersThe devaluation of the Russian ruble and the riskiness of the market, reduced the reliance on imported materials.  This in turn increased demand on locally produced materials, now putting more pricing power in the hands of the suppliers.  This however is counter to statements made by Kabuzenko from Ice-Fili who suggested that they have no problems finding new suppliers.The Russian ice cream manufacturers also maintain consistently high quality ingredients making them more subjected to the pricing of those suppliers.  Their inflexibility to use substitutes places more power in the hands of those they are buying from.The equipment used by the Russian manufacturers was typically imported from Denmark and the US, due to Russian equipment being of low quality.  This would give suppliers of equipment a stronger hand at pricing their equipment thus forcing up the capital cost to Russian manufacturers.  This would be an added fixed cost to the local production of ice cream in Russia.Bargaining Power of BuyersThere appears to be very little price elasticity allowed from consumers.  “A 10% change wouldn’t make much of a difference, but a 50% change would.”  This really impacts the ice cream manufacturer’s ability to increase price to generate more profit.Ice cream is a discretionary product with many other products that compete for these consumer dollars. Consumers are not obliged to spend on this product at all thus placing downward pressure on pricing to keep the product attractive enough to buy.Ice cream products are also standardized and undifferentiated, meaning that buyers can move from one supplier to another without issue.A distribution method that predominantly relies on kiosks limits the amount of product due to storage that the industry can move.  With its focus on impulse buying, buyers also have more power being able to easily switch after only having purchased small quantities of product.Threat of Substitute Products of ServicesIce cream is an inexpensive snack in Russia, meaning it competed heavily with other substitutes such as soda, yogurts, chocolate and candies.  Buyers can readily switch between these products meaning that there is substantial pressure to keep prices down and competitive.After the lifting of the Gorbachov imposed “anti-alcohol campaign” the number of breweries increased as did the level of beer production, with it growing 20%-25% annually from 1997.  Considering the “students prefer beer to ice cream” statement, this keeps downward pressure on the sales price of ice cream in order to remain attractive to purchase.The limited varieties of ice cream products in Russia (240) opens the industry up to many other substitutes – both additional ice cream varieties (e.g. Baskin and Robbins 650 varieties in the US) or other snacks as indicated above. This competitive pressure keeps prices down.The inability to register trademarks further reduces the barriers to substitute products entering the market.Rivalry among Existing CompetitorsWhere Russian ice cream competes against so many other substitute products, existing competitors in this space spend substantially more on advertising than ice cream producers.  This means the cost to Russian ice cream manufactures could go up, and profitability down if they attempt to compete at the same level of advertising. There are a substantial number of existing ice cream producers in the industry – up to 300 in 2002.  This would bring about price sensitivity between competitors.Price competition and pressure is exaggerated between the Russian producers using not preservatives and those that do.  The Russian producers need to price their product attractively enough that they can clear it before it perishes and still has value.  It also increases storage and transportation costs therefore reducing profits for those local companies not using preservatives.Pricing pressure existing between older and newly established regional players that are using more updated technology, and have lower rents and labor costs.Question 2.In drawing some conclusions regarding the steps that Ice-Fili should take to improve their industry position I am going to focus my attention on areas the will improve the financial performance as would be indicated by their income statement.