Today we present you the Meso Analysis that describes micro-market overview. In order to understand all peculiarities of the ice cream industry Porter’s Five Forces Analysis will be used.

The five forces to analyze are:

·                     The Threats of New Entrants

·                     The Threats of Substitute Products

·                     The Rivalry between Competitors

·                     The Power of Buyers

·                     The Power of Suppliers

The Threats of New Entrants:

As mentioned before, Russia is the 6^th world’s largest market to import dairy products. This means that the ice cream industry is seen as an attractive and profitable sector to Russian’s economy, where Dippin’ Dots could have high opportunity to succeed. There are a lot of competitors in the ice cream industry, but the ice cream industry in Russia is still not saturated. That leads to the possibility of entering the market by newcomers from Russia or any foreign country. Also it is possible way of diversification for milk producers dealing in Russia: Wimm – Bill – Dan, Danone- Unimilk and the others.  Moreover, the tariffs and regulations have changed and become more beneficial for foreign new entrants.

That is why the threat of new entrants is relatively high in this industry. However, since we are considered as a new foreign entrants we can easily penetrate the market.

The Threats of Substitute Products:

To understand what products are considered as substitutes for ice cream, we have identified several factors. First, ice cream is a fun, second, delicious treat where it satisfies customers who are in need of something sweet, cold and tasty. So we can define sorbets, gelato, frozen juice and yogurts as substitutes. Companies of this segment face tough competition because of the number of competitors. But talking about switching cost we can say that they are quite high in terms of satisfaction of the needs because of the purchasing behavior and customer loyalty.

So, the threat of Substitute Products is relatively low in this industry.

Competitors:

In contrast to European countries, where share of some companies in total consumption volume comes up to 80%, Russian ice cream market is considered to be weakly consolidated; we can even conclude that it is highly fragmented, as well as market of St. Petersburg. Ice cream production is currently divided among around 300 producers, including approximately 70 branded producers, but 60% of old producers from the Soviet times, and the rest representing insignificant in size, no-name, low margin product manufacturers. Total share of seven key ice cream producers in the country comes to only 40%. There is only one company having the share more than 10%, while four ones overcome the level of 5%. Up to 70% of the market is under the control of 20 producers. Residual 30% are divided among 250—300 producers. In the future, market will be shared among the companies taking at the moment first 10—15 positions in the rating.

So there are many companies on the ice cream marketing and following companies are considered to be the leaders at Russian ice cream market:

·    Inmarco (Unilever)

·    Talosto (Metelytsya)

·     Iceberry,

·     Russian Cold

·      Nestle

·      Showy Borough (Snizhne Mistechko)

·      AlterWest.

 In the current moment there five companies that controles over 50% of the market:  Inmarco (Unilever) –19,8%, Talosto (Metelytsya),  Iceberry, Russian Cold and Nestle. 80% of the market is under control of TOP -10 competitors, the other 30% belongs to small and medium size local producers.  All companies have the same brand profile that shows that the product differentiation is low

As the result, the number of competitors and product differentiation defines that the rivalry between competitors is also high in that industry.

Bargaining power of customers:

Consumer profile:

The common profile of the consumers are 60,2% of female and 39,8% male. As for the income groups of consumers they are mostly people with moderate income. Older consumers aged above 55 had the highest share among all the age groups at 26%, with the older young adults aged 25-34 years holding the second position with 17%. Tweens & early teens, between 10-15 years, held the least share at 7.4%.

Target audience:

·     Adults /Families

·     Youngsters

·     Children

Adults tend to prefer classic ice cream, domestic manufacturers and organic ingredients. Families are the most frequent buyers of Family Packs, organic ice cream, so they are target group of the take-home segment. More than one third of active ice-cream consumers in Russia are younger than 25 years yet. Children are the group of consumers only few companies are targeted at. Many researches claim that there are opportunities for those who produce ice cream for kids and youngsters and differentiate the brand according to this in marketing campaigns. Youngsters in general buy individually fancy packed ice cream; they are inclined to impulse purchases, they are the category the Doppin’ Dots should be targeted at the most.

Consumer behavior:

The peculiarity of Russian ice cream market lies in its consumer culture.

Although climatic conditions in Russia are rather severe it doesn't much influence the consumers' behavior of purchasing an ice cream. As we already mentioned – ice cream mostly is an impulse-driven purchase in Russia. One of the reasons of ice cream's popularity is of course a Soviet tradition when practically everyone was buying one ice cream every day as the price was very low. Moreover in comparison with American ice cream market the tendencies on the Russian one can be explained by the main products that are consumed. People prefer to have an ice cream while walking rather than at home. So compact and individually packed products that can be bought right in the street are more popular than those in the big packs.

The Russian consumers see the product differently. In western cultures it's more a part of everyday meal and in Russian mentality it's seen like a dessert. People usually buy ice cream on the holidays, when something significant happens or they just want to make their day better.

There is an interest according some researchers that consumers are tend to accept everything interesting, unusual, ice cream in fancy packs or new forms. So called “Premiumization”, health and wellness consciousness, and curiosity regarding novel products have become important for Russians again, probably due to increased consumer confidence, and the economic growth. We will discuss consumer power in more detail later in Porter’s analysis.

How we can see from the analysis of the consumer profile, Russian market is far reaching and there is a wide variety of consumers to focus on. As the market power of consumers is really low and the only aim of the company is to make their product as attractive as they can to increase their profits.

Bargaining power of suppliers:

The main suppliers of the ice cream industry are the manufacturers of dairy products. The companies that produce ice cream cannot survive without their main component. However inspite of such close relations between two industries, the market power of suppliers is low. That is because Russia is one of the largest producers of dairy products in the world and there are large national and regional producers that supply all the dependent industries.

In fact, the sector as a whole is relatively dependent on import of ingredients. Unia and Multifrost are two of Russia’s major distributors of ice cream and frozen foods. They believe that imported chemicals and freezing equipment are of better quality than locally produced components. 

So we can say that there is a large number of the suppliers give us the possibility to say that their market power is low as the Dippin' Dots can easily change their supplier without high switching costs.

To conclude, it is advantageous to penetrate Russian ice cream industry since the benefits from low bargaining power of suppliers, low bargaining power of customers and almost no threat of substitutes can be gained.

Dippin Dots is a very successful company in the USA. Entering Russian market it’s important to understand that there is a huge difference in the consumption patter of the Russian consumers.

Here is an interesting article about main trends in Russian ice cream markets:

The study is made by holding group Romir based on the survey of 1600 respondents represents the following results:

Current capacity of Russian ice-cream market accounts for about 400 thousand tons of manufactured and consumed product annually. Considering 150 million population every person in the country eats three servings of ice-cream per month. If we consider that only half of population consumes ice-cream, then we have over 5 kg or 76 servings of ice-cream per one consumer annually. Sounds impressive, but other economically developed countries demonstrate higher consumption level – 6 to 12 kg per person. So, has Russian ice-cream market any growth potential?

Any market has a relatively small group of active consumers providing major share of consumption volume. In case of ice-cream market share of active consumers constitutes 10% of population or 20% of consumer base; consumers of this group like ice-cream so much that purchase it quite often – 3-5 times a week or even every day.

 Consumption frequency group

The review product is believed to have young consumers base – kids, adolescents and the youth. This is partially true. Almost one third of active ice-cream consumers are younger than 25 years yet we’d like to highlight the fact that practically 30% of those consuming ice-cream at least 3 times a week are older than 45 years.

Thus, consumption can grow on quantitative increase of active consumers – especially in middle and middle-up age groups. For instance, increase of this group by 15-20% (which equals 2-3 million people) is quite possible and can provide another 30-40 thousand tons of ice-cream consumption annually.

 Next consumption frequency group accounts for 14 million people: they eat ice-cream twice a week and this makes 100 servings or 7 kg annually per person. This consumption rate is close to average consumption in European countries. Increase of consumption frequency in this group to three times a week can give additional 50 thousand tons to the market annually, and quantitative increase of the group by 15-20% may account for another 15-20 thousand tons of market volume per year.

Third consumption frequency group is constituted by those eating ice-cream once a week on the average; the group accounts for over 20 million people with consumption rate of 3.5 kg annually.

Finally we come to the group of inactive consumers – people eating ice-cream 1-2 times per month which corresponds to average 1.25 kg per person annually. This group is over 40% of consumer base.

Good news

The research results brought some good news for ice-cream manufacturers. First, the great majority of consumers – 80% – think that prices for ice-cream are reasonable and affordable, and 7% even said the prices are low. Only 11% of consumers think that prices for ice-cream are high. Important to mention, 70% of consumers with relatively low income – under Rb 6 thousand monthly per family member – also find prices affordable. This means that actual consumers have no price limits in their consciousness.

Second, for the majority of consumers ice-cream is rather an everyday than festive product. The fact that 73% of consumers purchase the review product in small “round the corner” food stores proves this statement. Considering the above, manufacturers should provide regular presence of their products in habitual for consumers purchase places to have good sales.

Third good news is that today about 10% of consumers buy family-size ice-cream. Thus a new growth opportunity can be found in increasing weight of one-time purchase

HoReCa channel (Hotel, Restaurant, Cafe/Catering) also provides growth opportunities for the review market. Today on-trade channel accounts for no more than 1% in volume and 3% in value (retail prices) of total ice-cream sales.

Bad news

However, half of consumers said they do not care for product brand and would choose an unknown brand of ice-cream to save several rubles. This trend is indirectly proved by very low awareness indices of the largest manufacturers – even of market leaders and their brands.

A quarter of consumers understand importance of the brand though would not pay extra for it; 15% of consumers would pay some extra for the well-known brand and guaranteed quality and only 3% of consumers are loyal to certain trademarks and would pay extra money for the brand.

 Summary

 It is obvious that the largest manufacturers should think not only about consolidation but also about development of the industry. Consumers of ice-cream – just like consumers of any other “optional” product – need to be permanently reminded about this product; they always need new reasons to buy it.

Some “educative” job should also be done to explain importance of ice-cream brands and advantages of branded products. This looks quite important if we think about consumers with middle and middle-up incomes who as a rule opt to pay more for their favorite brands.

Certain attention should be paid to the group of non-consumers of ice-cream which accounts for about 40 million people not eating ice-cream due to various reasons: they do not like sweets, or they are concerned about weight control and thus avoid high-calorie and fat-rich products; or maybe they dislike dairy products, etc. Such people can be involved into consumption of fruit ice and/or frozen yoghurt, or of low-calorie ice-cream.

 Igorr Berezin Review of Russian Ice-Cream Market. Research of the holding Romir

http://www.foodmarket.spb.ru/eng/archive.php?year=20&article=606&section=4

A small newspaper article about challenges that faced Dippin Dots. Just to have a broader knowledge about the company!

Ice cream treat hit could lead to 'fresh-brewed' coffee version

(c) USA TODAY, 2009

http://web.a.ebscohost.com.ezproxy.gsom.spbu.ru:2048/ehost/detail?vid=13&sid=65192efd-344f-4e7b-b739-d9d83089ff7c%40sessionmgr4001&hid=4209&bdata=Jmxhbmc9cnUmc2l0ZT1laG9zdC1saXZl#db=a9h&AN=J0E368876066409

More than two decades ago, microbiologist Curt Jones devised a way to flash-freeze ice cream into colorful pellets about the size of BB's. Now in a tough economy, the outside-the-box company he founded, Dippin' Dots, is searching for a new concoction to take it beyond the quirky-but-costly ice cream's seasonal popularity in amusement parks and stadiums. "We changed the way folks eat ice cream," Jones, 49, half-boasts. "Now, we've got to change our business model."

Summer is the season when Dippin' Dots rise to the top of every kid's must-eat list. The company does 60% of its business in summer. But in this coming summer-of-the-recession, all bets are off for a sweet treat that at $5, $6 or even $7 a pop can cost cash-strapped parents as much as they're used to plopping down for a burger.

The dots, cryogenically frozen with liquid nitrogen at 320 degrees below zero, are so tongue-tinglingly cold and flavor-packed that it's hard for most kids to resist. The question is: Do Dippin' Dots have legs?

"You've probably made up your mind that you're going into poverty when you step inside an amusement park," jokes Howard Waxman, publisher of Ice Cream Reporter, a trade magazine. "But something this pricey is an especially tough sell at retail outside the amusement park."

Which is precisely where Jones hopes to go with the brand this summer via upcoming rollouts of Dots 'n Cream ice cream blends and ice cream cakes. Yet that may be the least of Jones' challenges. Dippin' Dots is several million dollars in debt after years of lawsuits and countersuits. Jones says although his company has millions of dollars in assets, the bank can foreclose on it at any time. Rivals have successfully sued Jones for filing an invalid patent. After stepping aside and letting someone else run the company for several years, founder Jones recently returned as president in a recession.

It hasn't been easy. With sales tanking, he found himself laying off nearly a quarter of the company's payroll -- including the president and operations chief. And desperate for cash, he came within a whisker of selling the company.

So why is Jones still smiling?

Because Jones -- whose company has regularly ranked high atop Inc. magazine's list of fastest-growing privately held companies and Entrepreneur magazine's fastest-growing franchises -- has got another big idea.

This one, Jones hopes, will finally take Dippin' Dots outside the arena of seasonal treats. He's about to take a similar colder-than-cold instant-freezing process that makes Dippin' Dots so delectable and redirect that technology to fresh brewed coffee. That's right, coffee dots. Add hot water and presto, "fresh-brewed" coffee without brewing. Just as he dubbed Dippin' Dots the "ice cream of the future" two decades ago, he says the new coffee dots will adopt the slogan "coffee of the future." It's still early, but he's thinking about naming the new coffee dots Smokin' Joe. He will roll it out next month in Las Vegas when the specialty coffee world gathers for its trade show, Coffee Fest. His once-kid-targeted dots will get a very adult twist. "I hesitate to tell you about this," admits the microbiologist, entrepreneur and go-to idea guy. "I'm afraid someone will steal it."

He's got good reason. After spending more than $10 million the past decade in court battles, the company was stripped of what may be its most important franchise: the Dippin' Dots patent. After a rival's lawsuit, a court ruled in 2003 that Dippin' Dots did not supply all the required information for its original patent. So now, anyone and his brother -- with access to liquid nitrogen -- can make 'em using the process that Jones devised.

Lots of competition

Several companies are making similar versions. There's IttiBitz. There's Mollicoolz. And there's Mini Melts, which is the company that successfully challenged the Dippin' Dots patent. More competition is likely on tap. Dippin' Dots is so wildly popular at family attractions including Hershey Park and the Santa Cruz Beach Boardwalk, that it outsells all other desserts by more than 2-to-1 at both locations.

"It's become the benchmark in our industry," says Ken Whiting, CEO of Whiting's Foods, food and beverage operator on the Santa Cruz Beach Boardwalk. "Everyone wonders: What's going to be the next Dippin' Dots?" Jones isn't sure what will be his next hit. "It's hard to create a product that people really like." Which is why he's got several new products in the hopper.

For one, there's Dots 'n Cream, an ice cream with Dippin' Dots mix-ins that can be sold at supermarkets and kept in conventional freezers. He's also working on ice cream cakes that he thinks can compete with those from Carvel and Baskin-Robbins.

He's close to coming out with low-cal, low-fat Dippin' Dots that could be sold at schools. He's considering "frappe dots" that, when mixed with milk, would mimic the taste of Frappuccinos. And he's working on Fridgets, which are Dippin' Dots clustered with candy or cookie pieces.

Then there are the coffee dots on tap next month. "I've always been a big thinker," says Jones. "A part of me still thinks anything is possible." That's been his motto since he was a twentysomething in 1987, when Jones and a neighbor were making ice cream. The two were trying to figure out a way to freeze homemade ice cream faster so it wouldn't taste so icy. Jones, a microbiologist, realized a project at his work related directly to the ice cream he wanted to make. He took the ice cream mix to his lab at work and ultimately concocted a way to cryogenically freeze ice cream into tiny beads. The instant freezing means the ice crystals are one-thirtieth the size of ice crystals in conventional ice cream, so the product tastes much creamier -- and much less icy.

People who tried it liked it. So, less than a year later, Jones left his day job to produce Dippin' Dots out of the garage at his parents' farm in Grand Chain, Ill. Within two years -- with amusement parks starting to nibble at the kid-friendly junk food -- he moved the operation into a former liquor store in Paducah.

Things took off from there. By 1995, it moved into a giant facility in Paducah, then nearly doubled its size a year later. Its popularity grew so fast that by 2002, hundreds of McDonald's on the West Coast started to sell it. Celebs caught on, too. Basketball star Shaquille O'Neal is a big fan. Even A-lister Lindsay Lohan has been spotted with them.

The Oprah effect

Then, the big break: Oprah Winfrey had Jones as a guest on a show about quirky ways people get rich. Sales surged, says Jones, after the often-dieting Winfrey nibbled some Dippin' Dots on the show -- and gave them a thumbs-up.

Of course, Oprah's blessing can only take you so far. If the costly lawsuits weren't enough to rock the financial stability of the $40 million company, along came the recession, which resulted in Dippin' Dots' sales slipping 11% in 2008. Even before the recession, the company suffered its first loss in 2007.

"We went from being a company whose product everyone loves -- and a company that makes money every year -- to one that couldn't even get financing," Jones says. But with the new product rollouts, Jones hopes Dippin' Dots will stop losing money in 2009 .

One possible path to profitability: retail sales. The company has 200 franchisees that sell Dippin' Dots at everything from stand-alone storefronts to mall kiosks. Its biggest store sits off the town square in Metropolis, Ill., also known as the adopted home of Superman. It's where Cathe Glass of Metropolis hosted son Jacob's college graduation bash this month. "Dippin' Dots were the big draw," she says, as more than 125 guests showed up. At a mall store in nearby Paducah, 6-year-old Paige Pope makes the twice-a-month trek with her mom for the same reason. She goes for the rainbow Dippin' Dots. But, says her mom, Alisha, "She asks for them more than she gets them."

(c) USA TODAY, 2009

PESTEL analysis of DD

Political factors:

1       1)    Bureaucracy and bribery. Russia is famous for its bureaucratic structure, before opening the business in Russia the firm should learn in prior about the details of entering the market. It is also normal to give bribes despite the fact that it is unethical and illegal, however the business may have a chance not to be opened due to bureaucratic structure and to make the process faster bribes are welcomed by the governmental workers.

2)    Changes in the tax regulations. The law of tax regulation is developing and new changes may be implemented which will seriously affect the business profit. Especially it concerns foreign companies for which may be special tax conditions.

3)    Trade restrictions and tariffs (WTO). Due to the fact that Russia entered WTO recently the system of restrictions and tariffs is constantly changing and becoming more advantageous for foreign business.  

4)    Openness to foreign investments. Since entering WTO Russian government changed its politics in the way of being open for the foreign investment. So for foreign business there may be special benefits which Russian companies do not get.

5)    Political stability. Despite some riots in the middle of the previous year Russia is positioned as a politically stable country since there is a previous president for the next 6 years who will not radically change his policies and who is supported by the major of Russians.

Economic factors:

1)    Market growth. Russian market is developing market and there is much room for growth since its GDP is significantly growing every year. Moreover, the consumption of ice cream in the industry is growing and the market is not saturated so there are a lot of opportunities to increase ice cream supply.

2)    Level of disposable income. Income for every family is growing every year and now people can afford more than they could earlier, that is why they are ready to pay for the pleasure.

3)    Global economic instability. Despite the above economic benefits, the global financial markets are instable and that could affect Russian market as well. There could be problems with dealing with the banks, people will stop spending their money on such things as premium ice cream and will start saving money.

Social factors:

1)    Attitudes towards the American culture. With the spread of American TV shows, movies, language and culture Russians are interested in every think that America invents and consumes so people are ready to buy things that are popular in America.

2)    More independent children. Children nowadays have more opportunities, rights and money; they make their own decisions how to spend pocket money which can be spent on the Dippin’ Dots.

3)    Health consciousness. With the popularity of health life style people started thinking of better way to replace tasty unhealthy snacks and ice cream which is based on natural components could be the best replacement.

4)    Elder generation looks for new tastes. With the development of Russia people get used to everything that they found new and interesting after USSR disintegration so our product will be popular since it offers an opportunity to try something new and tasty.

Technological factors:

1)    Product technology innovation. With new technologies there possibility that our potential Russian competitors will invent some new attractive products is high. That is why we should enter the market as early as possible to have first mover advantage with such a unique product.

2)    Efficient transportation. There is a possibility to decrease transportation costs due to logistics innovations.

3)    New distribution channels. This factor allows using a big variety of distribution channels in order to increase the sales.

4)    Internet as a way to increase brand awareness. Internet is one of the new marketing channels which should be considered in marketing plan.

Environmental factors:

1)   Weather conditions. Ice cream is a season product and it is important to consider all weather conditions which affect the consumers desire to purchase the product.

2)    Climate change. It concerns changing of the weather conditions: late winter and so on. Since sales of the products are connected to the weather conditions.

3)    Recycling issues. As a seller of the ice cream the company should find out about environmental concerns of the society and find out the ways (if needed) to recycle used packages of the ice cream.

 Legal factors:

1)   New labeling and packaging requirements. Russia is a specific country with its own rules and regulations which should be studied in prior. The management of the business should know how to label and pack the product in order to fit the requirements.

2)    Quality control. The same is here. In order to pass the Russian quality control ice cream should be produced in exactly specified by the Russian government way.

3)    Consumer law. Not knowing this kind of law may cause a consumer right violation what will become the cause of the lawsuits.

4)    Franchise/Patent regulations. If the company chooses this method of market penetration it should learn about Russian regulations in order to meet all conditions.