Eastern Europe and Russia on fast track to further develop frozen food economy: a rising middle class has a growing appetite for frozen convenience products--and it's not just ice cream! From fish and chips to pizza and pelmini, frozens are hot.

Just-Food, an information agency that covers the food industry, having recently conducted a survey among ten East European countries, reports that the market for frozen food grew at an average annual rate of 7.2% between 2000 and 2005. While suppliers from the region still dominate the scene, Western companies are moving in fast.

The leading company in the market in 2005 was identified as Hortex Holding SA, whose brand name is practically synonymous with frozen fruits and vegetables among consumers in Eastern Europe and Russia. A survey in the Ural city of Ektarinburg showed Hortex had a whopping 78.9% of sales in that category. The second-largest player was Hortino, with Delamaris in third place."

Hortex and Hortino are both Polish firms that specialize in frozen fruits and vegetables, a very important sector in Russia. Analysts report that the market for them, including berries and mushrooms, goes up by 30% each year on average. The main frozen product offered by Izola, Slovenia-based Delamaris is processed fish, also a very important market, along with ice cream.

Hortex, an association of leading Polish food producers, was a state cooperative in Communist times and is now privatized. Hortino was formerly a Hortex subsidiary, hence the similarity of names. All three of the leading companies are very active in Russia, where the opportunities for foreign companies are great. Valerie Yelkhov of the Association of Russian Producers of Ice Cream and Other Frozen Foods, reports that current production within Russia can satisfy only 60% of the demand.

Hortex has announced plans to build its first plant in Russia. Its exact location hasn't yet been determined, but the Krasnodar region looks good, since it produces a large quantity of high quality vegetables. Company President Tomasz Kurpicz says the market for frozen foods in Russia is expected to grow 10-25% annually, compared to only 3-5% in Western Europe.

Western companies continue to look eastwards with great expectations. Both Nestle and Unilever have moved into the promising ice cream market, and are already number one and two, respectively. And the fact that Western-style fast food restaurants are springing up like dandelions in June has had its influence. Aviko, Farm Frites and McCain Foods are there with their french fries, while Dr. Oetker and Freiberger are offering pizza.

Ice Cream Dreams

"No visitor to Russia can fail to notice the Russian fascination for ice cream in any weather. Even with temperatures as low as -20[degrees]C, with streets buried deep in snow, you can still see queues of Russians waiting for their favorite snack!"

So wrote a breathless visitor a few years ago. For obvious reasons, ice cream plays an important role in the evolving Russian frozen foods market. But its production has been highly fragmented, with an estimated 300 companies in the business. Products from one growing domestic producer, Moscow-headquartered Russky Kholod, are covered on page 24 of this issue.

Changes are in the works. Consolidation is inevitable and these typically small players now have giants from the west with which to compete. Trailing Nestle and Unilever, third place is held by Inmarko, a Russian company based in Novosibirsk that employs 2,700 persons.

Happy Birthday Zielona Budka!

Another player in the East European ice cream market is Osnabrtick, Germany-headquartered Roncadin. Last year it purchased Poland's third-biggest ice cream producer, Zielona Budka, which operates a factory in Mielec. The venerable Polish firm is observing its 60th anniversary in 2007, and has put out a special flavor for the occasion.

According to Roncadin Chairman Achim Schon, the company believes in tuning its product precisely to the market. "While the East Europeans like particularly full-bodied ice cream," he said, "the English love mint recipes. The Dutch prefer the creamy types and the Poles like it quite sweet. We know exactly what our customers want."

The Poles, it would seem, are less likely to eat ice cream when the streets are buried deep in snow.

"By our estimates, Poles consume just three to four liters of ice cream a year, while the European average is twice as much," said Olivier Goudineau, head of Nestle's Polish ice cream branch.

"That is why," he continued, "we have been expanding our range and are seeking to convince Poles to take to ice cream consumption throughout the year, not just in the summer."

ACNielsen estimated the value of the Polish ice cream market in 2006 at 1 billion zlotys (263.7 million euros), an increase of 12% over the previous year. Impulse items, it says, accounted for 67% of the market, compared to 33% for take-home products.

MEMRB Retail Tracking Services reports that the prominent market players in Poland in 2006 were Unilever's Algida with 32.2%; Poland's Koral with 21%, and Nestle with 9.4%. Unilever has an ice cream plant at Banino, near Gdansk, which serves the Polish market and also exports to Western Europe.

Nestle expects its market share to increase to 15% because of modernization of its existing plant at Namyslow in southeast Poland. Its product range in the Polish market falls into three main categories:

* Impulses items, including Cortina Tiramisu, Frubetto Owoce and the wavy Gibek Lod, all on sticks, plus the Extreme Strawberry cone.

* Take-home tubs, such as Nesquik, Familijny and Smietankowy

* Ice cream treats for children, such as Blumagician.

Nestle is also important in Poland's foodservice ice cream market, holding a 35% share with its Nestle and Platinum ranges. Some flavors have such intriguing names as Sex on the Beach and Crazy Lemon, while others are more familiar, like Cherry Chocolate, Cheesecake and Apple Pie.

These all come from Nestle's modern plant at Namyslow. From there the company exports to 14 countries, including Germany, Denmark, Spain, Portugal, the Czech Republic, Lithuania, Latvia, Hungary, Slovakia and Slovenia.

Nestle also has two plants in Russia, at Zhukovski near Moscow and at Timoshevsk. Ice cream is the only frozen product it sells in Russia, but the company has managed to achieve first place in the market.

"One interesting thing that has happened recently is that we have entered the super premium segment," said Marina Zibareva, media and public affairs manager for Nestle Rossiya, which now imports Movenpick products from Switzerland.

Second place Unllever markets its ice cream products under its Algida brand, which are imported from Western Europe. Rumors surface from time to time that it is seeking to buy out a Russian firm, but there is nothing concrete to report as yet.

A sign that Russia has not yet entirely shed its communist heritage: the firm Hlado-kombinat has brought out an ice cream on a stick with the brand name Che Guevara. But then, the highly publicized Latin American revolutionary poster boy is more of a fashion icon today. One just has to wonder if Stalin's Cold War Sickles or Mao's Red Star Bars could be next?

Seafood Tide Rising

Another category with big potential for further development is frozen fish and seafood. Russia is one of the world's major seafood resources, harvesting three million metric tons of marine products a year of the most marketable types. The catch ranges from salmon and pollock to plaice, cod, mussels, crab and shrimp.

But for the most part all they have done with finfish until recently is harvest and sell the landings for further processing abroad, often to value-adding packing houses in China and Korea.

That is changing to a degree. Annual growth for domestic frozen seafood consumption has been estimated at 17% generally, and 35% for delicacies such as octopus, mussels, shrimp and squid.

Russian brands dominate the market for frozen seafood delicacies. Ledovo has a 30% market share of the peeled items and a 90% share of the preserved delicacies. Another Russian brand, Severnaya Kompania, has an 18% share of the squid market--an achievement it accomplished with help from the brewers. Russians love squid with beer.

As for foreign brands, Germany's Albatross and Denmark's Agama are the biggest players in the mussels segment, with 48% and 34% respectively.

And Germany's FRoSTA also plans to play a larger role. Speaking two years ago at a Russian fisheries forum in Vladivostok, Jurgen Marggraf, the company's board member for production and technology, promised: "It goes without saying that one wants in the coming years to support a production facility in Russia for consumers. Partners with Western know-how are being sought here."

Marggraf added that his company intends to make the FRoSTA name well known in "Poland, the other new European Union member countries, and Russia, as a seller of an innovative premium product."

FRoSTA also plans to use Russia as a source for the salmon, pollock and Pacific cod it needs as raw material for the frozen fillets and fish sticks that are so popular in Germany.

The Bremerhaven-headquartered firm is already well represented in Eastern Europe. It has a plant at Bydgoszcz, Poland, which supplies 31% of that country's frozen fish and seafood. It also supplies Poland's frozen ready meals and vegetables markets, and sends 14% of its exports to Russia.

Pizza Heats Up

The East European market for pizza has a long way to go. Surveys put annual per capita consumption at .5 kilograms for Russia and .35 for Poland. But these figures for the country as a whole conceal a significant fact. Pizza consumption in the large Russian cities is placed at 1.9 kilograms, which approaches the consumption rate in such Western countries as Britain and Germany.

East Europeans prefer their pizza with a somewhat thicker crust than is normal in the West. In Russia the average pizza also has a bit less topping.

The market, which is growing 20% to 30% a year in Russia, clearly has huge potential and Western companies are moving in eagerly. Germany's Dr. Oetker, with a plant at Lebcz, is a major force in Poland, with a 40% value share. The rapid growth of the East European market is illustrated by the big investment Oetker recently made in the plant, which now has the potential for producing 30 million pizzas a year.

The Lebcz facility features a 1,000-square-meter production hall, leading to increases of 25% in production space and 40% in capacity. Employment has increased by 25%. This plant serves not only Poland but also a range of other East European countries, to which it mainly exports its Ristorante Edizione Speciale range. These go to the Czech Republic, Slovakia, Hungary, Romania, Ukraine, Bulgaria, Croatia, Slovenia, Bosnia, Serbia and Lithuania.

Russia is conspicuously absent from this list. The Polish plant used to send its products there, but now, recognizing the huge potential--not only for pizza but also for its big range of other food products--Oetker has set up a separate operation in Russia. Its Ristorante pizza (imported from Germany) was in fourth place in the first quarter of 2004.

On the Polish market, Oetker offers two ranges. One is Rigga, an existing brand that it purchased, and which now has a 25.5% value share, according to figures from ACNielsen.

It also offers the premium Ristorante Edizione Speciale, which claims a share of 15%. Both brands are promoted extensively, mainly on TV but also by outdoor, Internet and cinema advertising. The company promises that these efforts will continue.

In Russia, interestingly, the field is still dominated by domestic pizzamakers. A survey by the Food for Thought market research organization (www.fft.com) shows that the five leading producers collectively have 68% of the market. Only one of them, Oetker, in fourth place, is a foreign firm.

It is hardly surprising that the remaining four of the big five all are located in Moscow. A survey by the Gallup Mindex agency shows that while 13% of the people in cities greater than 250,000 are pizza eaters, this number climbs to 27% in the capital.

The market leader is Zvezdnyj, whose brand is interestingly named Cosa Nostra. Among others in the top five are Solim Garant (Fantasia), Schto nado (Schto nado) and PHF Pizza Fojnd (Romantica).

Another German firm, Berlin-headquartered Freiberger, is also active in the East European market. Marketing Director Christine Winter reported: "Demand for frozen pizza in Poland and Russia is increasing. We continue to serve these markets and further build our position."

Potato Business Buoyant

The retail frozen potato market in Poland is strongly polarized between brand name producers and private labels. The two major players, McCain Foods and Farm Frites, have a 43% market share, while private labels claim 40% of the action. The so called "in between" segment is not very significant.

The main product of most potato producers is the french fry, something that was of little significance in Poland during the Cold War. Perhaps the fact that there now are more than 200 McDonald's restaurants in the country has a lot to do with the fact that it is a growing market, both in foodservice and at retail. Sales of frozen potato products in 2006 were estimated at 23,000 tons.

Farm Frites Poland S.A. is a major supplier to fast food outlets. In a joint venture with another Dutch concern, Aviko BV (a business rival in markets outside of Poland), the company operates a factory in Lebork, near the Baltic in an important potato-growing area. Finished products, made from raw material sourced from strictly controlled fields, are sent to a number of East European countries as well as Russia, Sweden and Brazil.

McCain Foods first entered the Polish market in earnest in 1993, establishing an in-country sales presence. Things went so well that six years later a factory in Strzelin (near Wroclaw) was built to keep up with steadily growing demand. It now produces for much of Eastern Europe, including Russia, where it is the french fry leader. Retail products offered range from the popular 1.2.3 Frytki crinkle-cut french fries in 750-gram bags, to Star Julienne and Super Julienne 3/8 A grade cuts, Steak Fries and Wedges.

Ektarinburg Study

The Russian market research firm Sozium has done an in-depth study of frozen food sales in the city of Ektarinburg. The people there purchase on average about one frozen product a week, and seldom buy more than one or two packages at a time. However, the market is rapidly growing.

It queried 700 households in the Ural metropolis of 1.3 million as to their consumption habits within three frozen product groups: pelmini, semi-finished meat, and fruits and vegetables.

Pelmini, a national dish in the Urals, consists of a spiced, minced meat filling wrapped in a thin dough of flour, eggs and milk or water, and served with butter and/or sour cream. Of all respondents, 67% ate pelmini at least once a month, and it was 74.8% among those aged 18-34.

The pelmini market was very fragmented, and competition was tough. Only three firms had market shares of greater than 10%, namely: Russkij Chit, based near Moscow (17.6%); Darja of St. Petersburg (14%) and Sibirskie of Ektarinburg (13%).

The percentage of persons who bought frozen semi-finished meat (chicken, ready meals, meal components, etc.) at least once a month was 27.8% of the entire market and 32.8% of the 18 to 34-year-olds. A local firm, Fleischkombinat Ektarinburg, had 45.5% of the market for semi-finished meat.

The frozen fruit and vegetable sales were dominated by Hortex, with 78.9% of the market. The only other significant brand, with 13.5%, was Zapadnyj of Moscow. Bonduelle of France and Ardooie, Belgium-headquartered Ardo had market shares of one to two percent. Twenty-one percent of the population bought frozen fruits and vegetables, compared to 26.8% of the 18 to 34-year-olds.

Growing Middle Class

Russians continue to enjoy a petro-dollar fueled economic boom that has long since eclipsed the 1998 financial crisis that melted down the economy. Members of the nation's expanding middle class are now thought to number about 30 million, which is almost 20% of the total population of 140 million.

According to a report published by Hong Kong-based TDC Trade: "Given higher incomes along with robust economic growth and a stable political environment, Russians are willing to spend more money to improve their living standards. The average monthly wage has more than tripled to over US $300 from 2001."

The report continues: "However, such official figures have understated the actual income level, as a considerable portion of business activities and incomes of the private sector are not recorded by official statistics. It is estimated that actual incomes, including the unreported earnings of most residents in Moscow and St. Petersburg, the two largest and richest cities in Russia, now amount to about US $700 to $1,000 per month."

A New Generation of Taste in Poland

FRoSTA Poland has introduced a new category of ready meals--Bistro products.

"They're a new generation of taste for micowaveable meals that can be prepared within a few minutes," said Magdalena Belter, marketing specialist with the Bydgoszcz-based company.

The new items are:

* Chicken Fillet in Garlic Sauce, featuring breast meat, basmati rice, vegetables and cheese in sauce with a garnish of wild garlic leaves.

* Tilapia Fillet in Cheese Sauce. Along with baked potatoes and spinach leaves, it is accented with gorgonzola and Edamer cheese-based sauce.

Both are packaged on a special plate, covered with protective foil that traps the air during the preparation, just as in steam cooking, to maximize rich nutritional values, special flavor and cooking aroma.

Look for further growth, and consolidation in now fragmented Polish grocery market

Following a slowdown in 2005, the Polish grocery retail market is on the move again, with sales for 2006 projected to have reached 201.8 million PLN-zlotys (52.7 billion euros, $69.8 billion), and a further increase to 211.4 billion PLN (55.5 billion euros, $73.1 billion) forecast for this year.

That's the assessment of PMR, a publishing, consulting and market research company providing information, advice and services to international businesses interested in Central and Eastern Europe. According to PMR's Grocery Retail in Poland 2006, published at the end of last November, the market increased by six percent last year. This came after a soft 2005, when total sales of grocery stores in Poland amounted to 190 billion PLN.

"One of the factors that determined non-foodstuffs' lower sales value in 2005 was the significant reduction of their prices with the concurrent, though slight, increase in prices of food, beverages and tobacco," commented Malgorzata Machnicka, PMR's senior retail analyst and co-author of the report.

Additionally, the drop resulted from a high comparison base (generated by the intensified buying of non-foodstuffs in 2004, in particular, directly preceding Poland's accession to the European Union).

As for the forecast of a 48% increase this year, Machnicka said, "Market growth will be powered by dynamic increases in store counts, in particular in the supermarket and discount segments which are actively seeking to penetrate less populated areas, and by higher value of sales of non-food-stuffs in grocery stores."

Purchasing Power Improves

According to the report's authors, sales will rise also as a result of better conditions on the Polish labor market--growing employment and wages--which will improve Poles' purchasing power.

The Polish retail market is highly fragmented; no retail operator or chain holds more than a three percent share. According to PMR's data, the ten top grocery store operators accounted for close to 20% of the market in 2005, whereas a year earlier they had represented about 18%. This means that the market is becoming more concentrated, but fairly slowly thus far.

Among Polish retailers and chains, Jeronimo Martins Dystrybucja (JMD) was the largest player in terms of sales. In 2005 JMD, as operator of the largest discount store chain in Poland (Biedronka), generated 2.83% of aggregate market sales. Its good semi-annual results and dynamic expansion (approximately 100 new stores a year) make it highly likely that JMD would remain on top into 2007, though number two Tesco (with outlets under the Tesco and Savia banners) still had a chance to catch up.

Battle Intensifies this Year

The fight for the winner's crown became even tougher in 2007. Tesco, which at the end of last year had 108 stores in Poland (hyper- and supermarkets), won approval from the Office for Competition and Consumer Protection to acquire a network of 142 outlets from the French Casino group, which is withdrawing from the Polish market. According to PMR's estimates, the target stores, operating under the Leader Price banner, generated 600 million PLN last year--a real shot in the arm for Tesco.

Similarly, the sale of the stores of the Dutch Ahold Group to the French Carrefour group, which was announced in December, will fortify the latter's market position and fuel further market consolidation. In 2005 Ahold stores' sales revenue gave the company only 1.1% share in the Polish retail grocery market, yet with them in hand Carrefour will be able to effectively battle for the top spot.

Given the fierce competition, consolidation in the retail grocery market has markedly intensified over the past year. Foreign players like Ahold that have failed to secure a good slice are pulling out. But the acquisitions finalized relatively recently did not involve only the largest players, as with the purchase of the Julius Meinl and Leader Price chains by Tesco, or Geant stores by Real, or Carrefour's take over of Ahold's premises.

The dynamically developing Polomarket network took over the Krakow-based ABC chain, while Eldorado merged with the BOS group. In addition to wholesaling, both manage company-owned and franchise-operated retail networks. Eurocash, another retail and wholesale market player, acquired Carment, a company operating in the same segment together with its network of Delikatesy Centrum supermarkets.

Over the next few years, further market consolidation seems unavoidable. In comparison to West European and other Central and East European markets, in Poland the three largest players have a significantly smaller market share. This means that more foreign firms are likely to depart, while existing chains will be taken over by stronger competitors.

By TED SHOEMAKER

QFFI Correspondent

Market Shares of Largest Food Retailers in Poland: 2005

Jeronimo Martins                2.8%
  (Biedronka)
Tesco                           2.8%
   (Tesco, Savia)
Carrefour                       2.5%
  (Carrefour, Champion/Globi,
    Carrefour Express)
Auchan                          2.4%
  (Auchan, Elea)
ZKiP Lewiatan '94 Holding *     1.7%
  (Lewiatan)
Casino Groupe                   1.6%
  (Geant, Leade Price)
Schwarz Gruppe                  1.6%
  (Lidl, Kaufland)
Metro AG                        1.5%
  (Real)
Rabat Pomorze *                 1.3%
  (Siec 34)
Eurocash *                      1.3%
  (abc)
Ahold                           1.1%
(Albert, Hyperrnova)

* franchise store integrator

Source: PMR report "Grocery retail in Poland 2006"

Note: Table made from bar graph.