The Market for Food Processing and Packaging Equipment in Yekaterinburg

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1 TITLE: The Market for Food Processing and Packaging Equipment in Yekaterinburg COUNTRY: POST OF ORIGIN: Yekaterinburg DATE OF REPORT: June 5, 2001 AUTHOR: Yelena Zheberlyaeva Summary: This report focuses on the market for food processing and packaging equipment. This report will outline trends and describe recent changes in the sector. The report will also highlight opportunities for U.S. companies in these sectors and draw attention to those market segments that seem to be developing more rapidly than others and have high potential for future growth. Sverdlovsk Oblast and its capital, Yekaterinburg presents a market of over 4.5 million citizens. The majority of foods processing enterprises lack the working capital, technology and equipment to upgrade their facilities and be competitive in the local market. The Ministry of Trade of Yekaterinburg reports that over 150 food-processing enterprises are operational in Yekaterinburg as of March, Over 50 local companies manufacture and sell packaging, food processing equipment, as well as fixtures for retail trade but only half of them truly influence the development of the local market. Historical Overview of the Market The market for food processing equipment began its rapid development in the early 1990s and was dominated by imports distributed by a number of local companies. The major share of the equipment used by food processing companies was outdated and totally obsolete. Food processing companies were unable to compete. The majority of local companies started purchasing imported equipment in Moscow, already customs cleared, and brought it to Yekaterinburg. The most popular equipment was imported from Turkey, Finland, Italy and Poland. Italian, German and Korean equipment was imported in the mid -90s to meet the increasing demand of food processing, packaging and restaurant enterprises. It was reasonably priced, but of medium quality. As result of devaluation of the n ruble in 1998 and the subsequent drop in imports, domestic manufacturers became more competitive and received an opportunity to capture additional market share. At that time the majority of end user companies lacked working capital to invest in new technology and equipment. Those companies preferred to purchase locally manufactured or less expensive used imported equipment to upgrade manufacturing facilities. Current situation in the market Food processing enterprises manufacture only 60% of the food products required in Sverdlovsk oblast. The remainder of food goods sold in the area are either imported or brought from other regions of. Sverdlovsk Oblast statistics state that the average income of the population remains one of the highest in the Urals. Yekaterinburg s citizens continue to spend over 60% of their income on food items. Local food processing enterprises will need to update their manufacturing facilities, to be competitive in the market. (Food processing enterprises located in Moscow and central have already installed imported equipment and use the latest technologies to manufacture long shelf life products which are the major competitors for local food processing companies which still utilize obsolete equipment).

2 Local food processing companies still need to update their out of date obsolete equipment, usually installed over 30 years ago. The equipment most in demand is: vacuum and thermal packaging machines, bottling machines; slicers; soy bean processing equipment; yogurt processing equipment; printing equipment for packaging; equipment to prepare convenience foods. Still, the majority of local companies lack the working capital to make long-term investments in equipment and fixtures. Andrey Krupenin, Deputy Director of the Center for Trade Technologies, said lack of capital, and the inability of local entrepreneurs to take large long term credits led to creation of leasing companies which are rapidly gaining popularity in the Urals. Local companies specialized in this sector have begun to work together in creating leasing companies to enable local customers to upgrade equipment and technology. The majority of small and medium sized food processing enterprises prefer to purchase used imported equipment over domestically produced equipment. Chain grocery stores, like Kirovskiy and Kupets, are also showing a tendency towards producing pre-fabricated meat and poultry products in house, in addition to baked goods to supply needs of their own supermarket chains. There are several grocery chains in the Urals, like Kirovskiy and Kupets, each of which own over 20 subsidiaries in Yekaterinburg and its suburbs. Both of these chains prefer to purchase attractive, reliable and generally imported equipment. For the most part, price is not a major factor in purchasing decisions, as they are looking for quality and reliability. These chains have also started developing fast food facilities in their supermarkets offering customers tea, coffee and various pastries. Kirovskiy also owns a small meat-processing facility and supplies its shops with pre-fabricated meat products. Igor Kovpak, of Kirovskiy, has already applied to BISNIS seeking slicing machines, vacuum packaging machines, and refrigerators. Companies specializing in sales and manufacturing of equipment for shops, cafes and restaurants, define the following types of clients: smaller companies such as shops which prefer buying locally manufactured, inexpensive equipment, furniture and accessories; larger food processing enterprises which can afford to buy the latest technologies, equipment, and accessories, but they are still few in number. The major buyers of professional equipment for food enterprises are (Source: Tovarniy Rynok, January 15, 2001): Food processing enterprises-40% Bars and restaurants-30% Cafes-30% Industry Structure Overview Packaging still remains the hottest issue for food processing enterprises. As it has been mentioned above, food-processing enterprises are actively developing in the local market and continue to invest large shares of their profits into updating facilities.

3 Food processing enterprises having recovered from the 1998 financial crisis now successfully compete in the local market and still continue to upgrade their equipment and facilities. Meat and fish processing enterprises usually prefer to purchase imported slicers and cutters, and also order imported packaging technology and equipment, especially to manufacture long shelf life products. Milk processing enterprises usually purchase technology and equipment to produce long shelf life processed milk and milk products. These milk-processing enterprises also would like to compete in the market for reasonably priced yogurts of western quality. There is a number of regional small milk processing companies, which have purchased special equipment for packaging, but still lack technology to make their yogurts taste like western ones and retain a long shelf life (locally manufactured yogurts usually do not last longer than 5-7 days). Compared to imports, local yogurts at the current time cannot compete. There is a whole market segment for soy products, which has just started to develop. It has made gains in popularity and government support very rapidly due to several reasons: soy products are perceived and widely written about as having nutritional benefit; soy products are usually cheaper than the same products containing animal albumen. Another rapidly developing food product group in is for convenience foods, such as instant soups, noodles and mashed potatoes. Equipment to make such types of foods is in great demand, particularly in s Northern territories, where it is difficult to deliver food products year round. Companies located in the far northern territories have expressed interest in these types of equipment. Competitive Analysis U.S. companies have to compete with European, Asian and local manufacturers of foodprocessing equipment. European countries have long been considered to be culturally and geographically closer to the Urals. That is why the majority of purchases are from Germany and Italy, and the equipment is considered to be reliable and reasonably priced, compared to cheaper Asian products. Finnish, French and Swiss equipment is also thought of highly, and is purchased, but only if priced reasonably. Italian companies lead in sales of food related equipment such as convection ovens, grills and packaging machines. U.S. companies which specialize in manufacturing and sales of equipment for food processing enterprises and retail companies, hold second place in the market in terms of sales volume, primarily in sales of refrigerating, deep freezing, packaging equipment and soy bean processing equipment. While U.S. equipment is considered of good quality, the pricing is often considered high and the cost of shipping and issues of communication and post-sales servicing can make purchasing US equipment a difficult proposition for a local company. Equipment from Poland and the Czech Republic also plays a major role in the local market, though this equipment is considered unreliable and outdated in terms of technology. Despite lower prices on this equipment, the sales are lower, as companies prefer to invest in quality. Table below displays market shares of imported equipment: - 25% Italy, U.S. and Germany-25% France, Switzerland and Finland-20% Czech Republic, Poland-15% Turkey-10% Belgium-5% Best Sales Prospects

4 Local traders of professional equipment specify the following items as their best sellers: raw materials and equipment to manufacture packaging materials packaging and printing machines; PET-bottles; small capacity machines to bottle and package milk and milk products; different packaging films, to provide long shelf life of products; industrial ovens and smoking machines, multi level gas and electric ovens, grills, convection ovens, manufactured by n, Italian, Czech, Turkey companies; peeling and mincing machines manufactured in, Belorussia, Turkey and Italy; refrigerators, cooling display units, deep freezing equipment, deep freeze storage for industrial usage manufactured by n, Polish, French and Finnish companies. Specific Opportunities for U.S. companies Good bets for U.S. companies exporting to the Urals include: uniquely designed display shelves, refrigerated display units, industrial refrigerators; bottling machines equipment and technology to manufacture long shelf life meat and milk products; equipment and technology to process soy beans as well as soy beans themselves equipment, technology and raw materials to manufacture packaging for long shelf life products; bar coding equipment U.S. exporters are advised to provide information on the equipment and technology ready for export to to local leasing companies, trading companies, food processing companies, and fast food companies. Special attention should be paid to the rapidly developing market for soybean products and instant food products. There is almost no equipment sold locally to manufacture these products. For example, Arkadiy Chernetskiy, the Mayor of Yekaterinburg, issued a special decree to support such enterprises having recognized the importance of soybean processing enterprises. Tips for selling imported equipment in the Urals All imported equipment should have a Conformity Certificate, obtained at the Center for Standardization and Metrology, and a Hygienic Certificate, obtained in Sanitary-Epidemiological Department. Both of these certificates are valid throughout. Local companies specializing in sales of equipment for retail as well as food processing companies, appreciate post sales services as well as training for personnel. Local companies will rely on the opinions of their colleagues when choosing equipment for their businesses. That is why it s important to make the first sales of new brands successful and provide additional services if necessary to generate good word of mouth advertising. Moreover, the Committee for Market Development of Yekaterinburg initiated quarterly meetings of Top Managers/ Directors of food processing companies to share business experience, discuss legal changes and get the latest news in a particular market segment. There are several magazines issued specially for retailers companies, supermarkets, cafes and restaurants. U.S. suppliers of equipment are advised to advertise their products or services in these sources.

5 Hotel, Shop, Restaurant is a monthly publication, distributed to over 3,000 companies in Yekaterinburg, Sverdlovsk, Chelyabinsk and Tyumen Oblast. Tovarniy Rynok is a weekly newspaper, supported by the city government and received by almost all local food processing, trading and fast food companies, due to important information, new decrees, changes in tax and customs laws which is published there. Yekaterinburgskiy Magazine (Shop of Yekaterinburg) is a monthly magazine received by a great number of local companies, which highlights latest technology, changes in tax and custom laws, announcements of exhibitions and etc. Contact List Committee for Market Development of Yekaterinburg 8 B, Ul. 8-th March, office 19 Yekaterinburg Tel: 7 (3432) Fax: 7 (3432) Ovimeks 7, Ul Tsvilinga , Yekaterinburg Tel: 7 (3432) , Fax: 7 (3432) [email protected] Ovimeks Company was set up in 1992 and currently owns a number of subsidiaries in Yekaterinburg and branch offices in Perm, Chelyabinsk, Tyumen and Nizhniy Tagil, the largest regional centers in the Urals. It sells equipment and machinery for food processing enterprises, the fast food sector and also manufactures display shelves. It also sells electronic goods, refrigerators and refrigerator display units, as well as disposable plastic kitchenware. The company designs interiors for shops, cafes and restaurants and supplies them with locally manufactured and imported equipment and accessories. Ovimeks issues Yekaterinburgskiy Magazine (Yekaterinburg Shop) monthly magazine, which is popular with owners of shops and supermarkets. Uralkomplekt-E 50-A, Ul. Lenina, office 514 Yekaterinburg Tel: 7 (3432) Fax: 7 (3432) komp.jump.ru Uralcomplect-E is another large local company, which offers vending machines, equipment to manufacture macaroni, dumplings, to process meat, fish and milk. It also offers packaging equipment and different accessories for supermarkets. Uralkomplekt -E seeks equipment to manufacture sugar cubes. It is also interested in vending machines to sell chewing gum, cigarettes, chocolate buns, pies and etc. Orgtekhnika-Tsentr 33-A/2 Ul Malysheva , Yekaterinburg Tel/Fax: 7 (3432) ,

6 The company specializes in security systems for shops, restaurants and supermarkets. It also sells locally manufactured and imported cash registers, bar code systems, scanners, and security gates. Orgtekhnika-Tsentr issues a monthly magazine Hotel, Shop, Restaurant and distributes it to over 3,000 companies in Sverdlovsk, Chelyabinsk and Tyumen oblasts. It covers issues of trade, changes in local legislation, presents the innovations in trade and food processing sectors and is a good source for advertising. Tovarniy Rynok, weekly edition. 24/8, Prospekt Lenina, , Yekaterinburg Tel/Fax: 7 (3432) , [email protected]