Market U.S. Dairy

Export Council® Research RUSSIA Cheese Market

May 2007

Copyright ©2007. USDEC. All rights reserved. Russian Cheese Market

CONTENTS

Introduction 3

1. Main Indicators of Domestic Cheese Industry 6 1.1. Market Capacity 6 1.2. Domestic Production: Key Trends 7 1.3. Foreign Trade: General Indicators 10 1.4. Exports 10

2. Foreign Trade Operations 11 2.1. Import Duties 11 2.2. Exporters to Russia 11 2.2.1. CIS countries 12 2.2.2. Baltic States 12 2.2.3. Non-CIS countries 12 2.3. Import Structure by Types and Varieties 16 2.3.1. Natural cheeses 16 2.3.2. Process cheeses 18 2.4. Leading Imported Cheeses 19

3. Distribution System 21 3.1. Leading Regional Cheese Markets: Main Product Trade & Distribution Flows 21 3.2. Main Operators 21 3.2.1. Domestic manufacturers 21 3.2.2. Foreign manufacturers 22 3.2.3. Foreign trade branches 23 3.2.4. Wholesalers 24 3.2.5. Role of retail chains: 20 largest domestic food chains. 25 3.3. Major Wholesalers/Distributors 26

4. Consumption 30 4.1. Industrial Consumption 30 4.2. Horeca 31

5. Forecast of Domestic Cheese Market Development 33

June 2007 U.S Dairy Export Council Russian Cheese Market

Introduction

Since the year 2000, consumption of cheese continues to rise along with the growth of disposable income of the Russian population. Even in 2004-05, despite a slow down, the growth of market capacity remained at double digits. In 2006 domestic consumption remained steady due to a combination of two factors: first and foremost, the imposition of administrative import barriers against the Ukraine, a leading exporter and; second, the introduction of new, higher import tariffs. In the near future, Russia expects further increase in its physical market capacity. As a result, the per capita consumption is expected to reach 6.6 kg by 2010 (2006: 4.6 kg).

Domestic production is increasing by about 5-10% per annum, mainly at the expense of process cheese. The share of process cheese in total domestic production reached 40%, due to some extent to the launching of production in Russia by multinational companies, such as Hochland and Lactalis.

In the 90s, production of hard and semi-hard cheeses diminished and only recently resumed growth. Due to increased demand of cheese, imported cheese will continue to saturate the market. In 2004 imports amounted to 254,500 mt while in 2005 it amounted to 306,000 mt. The decrease in 2006 should be overcome in 2007.

Domestic cheese manufacturers face numerous problems ranging from low quality to high seasonality. Another growing problem is consolidation at wholesale and retail companies, which prefer to cooperate with foreign manufacturers that are able to bypass both quality and seasonality problems.

More than half of all imported cheeses are being delivered from two CIS countries: the Ukraine and Belarus. They supply the same type of cheeses as Russian manufacturers, but are more price competitive. The decrease of imports from the Ukraine from 110,000 mt in 2005 to 37,000 mt in 2006 was partly substituted with cheeses from Belarusian and Baltic States.

Among non-CIS countries, Germany plays a major role. Its physical volume import share amounts to 15%. Semi-hard cheeses are its most important category. Poland (7%), Argentina (4%), France (2.5%) and Finland (6.1%) are all leading exporters to Russia in the process cheese category. All together Russia imports cheese from more than 40 countries.

The most popular variety is Rossiyskiy, which is manufactured by Russian, Ukrainian and Belarus cheese makers. Other popular domestic varieties include Gollandskiy, Kostromskoy, Poshekhonskiy. Most recently, Lamber has started to gain in popularity. It is manufactured by WBD, the region’s largest domestic dairy company.

Among imported cheeses, Gouda, Edam, Maasdam, Tilsiter and Rokishkio lead. Process cheeses are also gaining in popularity including domestic “sausage cheese”, Hochland varieties, the famous domestic Druzhba (“Friendship”) and Viola.

Ten major wholesalers dominate the domestic imported cheese pipelines. They control the main parts of the distribution system, both in terms of institutional and regional channels.

Exporting Countries

According to the Russian Customs Service, Russia has imported cheese from more than 40 countries, including 7 countries of the FSU. In 2006 the number of exporters consisted of 36 countries.

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Table 1 Dynamics of cheese imports from CIS and non-CIS countries (000 mt)

2006 2005 2004 Total 273 300 256 Non - CIS 164 120 111 inc. Baltic countries 48 30 29 CIS 109 180 145 inc. Ukraine 37 111 90 Belarus 70 65 53

In 2006 a noticeable shift in the import structure took place, mainly because of the “Ukrainian ban”. As the result, the market share for CIS countries decreased, while non-CIS countries increased their market share to 60% of total imports.

Diagram 1 Distribution of imported cheeses among the main group of countries in 2006 (% of imports)

other CIS* 0.7% Baltic countries 17.6%

non - CIS* 42.5%

Belarus 25.6%

Ukraine 13.6%

*CIS – 12 countries Source: IKAR based on Rosstat, Belarus Stat service and industry information

Role of CIS Countries

Two CIS countries play a leading role in domestic cheese supply: Ukraine and Belarus In 2005 combined total imports amounted to 57%. The cheese quality is comparable to Russian cheese, but is more price competitive. In 2006 Belarusian cheeses were offered at wholesale prices 15-20% lower than domestic ones, while Ukrainian prices were comparable to Russian. Belarus has gained momentum and has increased its amount of cheese deliveries to Russia to 70,000 mt.

Imports from other CIS countries have been negligible. Armenia, Kazakhstan and Kyrgyz export nonfat cheese for further processing. Lactalis exports cheddar from Moldova (250 mt). Some small amounts of mozzarella are delivered from Azerbaijan (manufactured with support of Italian partners).

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Baltic States

Lithuania plays a very important role in the Russian cheese import market, with physical volume share at about 15% of total imports. However, re-export plays a dominant role in Lithuanian exports, amounting to almost 30%. German cheese also plays a significant role. Latvia and Estonia’s shares are insignificant.

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1. Main Indicators of Domestic Cheese Industry

1.1. Market Capacity

Since 2000 cheese consumption has increased along with growth of disposable incomes. In 2004 and 2005 growth rates decreased, but were still in the double digits category. In 2006 physical market capacity remained about the same because of regulatory barriers on cheese imports from the Ukraine and an increase on import tariffs from non-CIS countries.

Diagram 1.1.1 Physical market capacity in 2000-2006 (000 mt)

2006г. 668

2005г. 671

2004г. 595

2003г. 540

2002г. 430

2001г. 353

2000г. 253

0 100 200 300 400 500 600 700 800

Source: IKAR based on Rosstat, Russian customs and Belarus statistical service Note: the letter “r”, which precedes the date (represented in the y-axis) represents the word “year”.

Up until 2006, domestic market growth took place mainly due to an increase in imports. Domestic production is also growing, but at a slower pace.

Table 1.1.1 Structure of market capacity: domestic vs. imported cheese*

Production Import Export Total Total (000 mt) (000 mt) (000 mt) (000 mt) ($ million) 2004 351.6 254.5 2.3 595 1,720 2005 378 306 3.5 671 2,350 2006 400 273 5.5 668 2,490

*wholesale prices Note: total numbers for 2004 and 2005 do not equal the sum of production, imports and exports. Some quantity, whether produced or imported, of natural cheeses were used as raw materials to manufacture process cheeses. Hence, total figure was adjusted to avoid double counting. However, for 2006 preliminary import and production figures were used. Since FINAL figures are always higher (final annual figures appear in July), the data need not be adjusted for double counting, as it would elicit lower figures than actual TOTAL MARKET SIZE. Source: IKAR based on Rosstat, Russian customs and Belarus statistical service

In 2006 market capacity slightly decreased in terms of physical volume, but increased by about 6% in terms of price to US $2,490 million.

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Diagram 1.1.2 Physical and dollar cheese market capacity in 2002 –2006 (000 mt, US$ mil)

700 3000 671 668 650 595 600 2500 540 2 490 550 2 350 500 2000 430 450 1720 400 1500 1500 350

300 TM T $ mlllion 1000 1020 250 200 500 2002г. 2003г. 2004г. 2005г. 2006г.

Note: the letter “r”, which precedes the date (represented in the x-axis) represents the word “year”. Source: IKAR based on Rosstat, Russian customs and Belarus statistical service

1.2. Domestic Production: Key Trends

According to the Russian Ministry of Agriculture, currently 600 plants manufacture cheese with half of these facilities producing less than 100 mt. Among the total number of plants, 150 are specialized cheese making facilities.

Despite recent growth, Russia has still not reached its maximum historic production level of 1990, when the total country output was 458,000 mt.

Diagram 1.2.1 Fat cheese output (including cheese in salted solution) in Russia (000 mt)

500 458 450 407 394 400 400 378 349 352 332 299 350 313 316 299 285 300 262 218 253 250 222 193 200 174 185 150 100 50 0 1970 1975 1980 1985 1990 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: IKAR based on Rosstat

Recent growth in domestic production is mainly attributed to process cheeses, manufactured by both domestic and newly established affiliates of multinational companies, such as Hochland Group (Germany) and Lactalis (France).

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Table 1.2.1 Cheese production by main types, 2004 – 2006 (mt, %) Types 2004 2005 2006* Share in volume Share in volume Share in volume Total: 351,564 (%) 378,293 (%) 400,000 (%)

Process 151,000 43% 157,674 41.7% 174,000 43.5% Natural, incl. 200,564 57% 220,619 58.3% 226,000 56.5% Hard and semi- hard 177,100 50.4% 191,500 50.6% 196,000 49% Soft 11,170 3.2% 13,080 3.5% 14,000 3.5% Pickled 12,294 3.5% 16,040 4.2% 16,000 4% * - IKAR estimate Source: IKAR based on Rosstat

As indicated above, process cheese represents a major part of domestic cheese output, or 43.5%.

Diagram 1.2.2 Share of process (melted) cheese in total fat cheese production (including pickled cheese %)

2006 43.2%

2005 41.7% 2004 42.9%

2003 40.3% 2002 38.1% Total melted cheese 2001 34.3% 2000 35.2%

1998 34.5%

1990 34.9%

0 100 200 300 400 500 600 700

Source: IKAR based on Rosstat

Rating of major process cheese manufacturers (2006, IKAR estimate) 1 AOZT Yantar Voronezh region 37,500 mt 2 Hochland Russland Moscow region 22,000 mt 3 Ryazan process cheese plant Ryazan 15,000 mt 4 Karat Moscow 11,000 mt 5 Omsk process cheese plant Omsk 6,000 mt 6 Orbita Tambov Oblast 8,000 mt 7 VAMIN Tatarstan Tatarstan Republic 7,500 mt 8 Porkhovskiy butter and cheese plant Pskov Oblast 5,200 mt 9 Zavod upakovochnogo oborudovania Ivanovo Pblast 5,000 mt 10 Laktalis Istra Moscow Oblast 3,100 mt

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Natural cheese is mainly represented by hard and semi-hard varieties, which amount to about half of domestic production.

Rating of major hard and semi-hard cheese manufacturers (according to results of 2005) Name of Factory Region Production (mt) 1. Rubtsovskiy MZ” Altai Krai 9,000 2. Cheese Starodubskiy Bryansk Oblast 7,000 3. Mozhlasir Udmurt Republic 5,600 4. Kazan MK (branch of Vamin Tatarstan Republic 5,200 Tatarstan) 5. Sirodel Krasnodar Krai 4,200

6. Mamandishskiy cheese and butter Tatarstan Republic 4,100 plant (branch of Vamin Tatarstan) 7. Baltasinskiy butter and milk plant Tatarstan Republic 3,900 (branch of Vamin Tatarstan)

8. Belebeevskiy MKT Bashkortostan 3,800 Republic 9. Kalininskiy cheese plant Krasnodar Krai 3,500 10. Kezskiy cheese plant Udmurt Republic 3,400 Until recently, cheese production was highly fragmented. Maximum volume of output per plant did not exceed 6-7 mt per annum. The dairy industry leaders have been more interested in fluid milk products and have not participated in cheese production. The situation has recently changed due to WBD’s (major domestic dairy processor) invasion of the cheese sector. In 2006 the company became the leading semi-hard cheese manufacturer, producing 13,000 mt of Lamber at its Rubtsovsk plant. The most popular domestic variety is Rossiyskiy. It is manufactured by 70 plants. In 2005, its volume share was at 15% of all domestic output (30,000 mt). Other important domestic varieties are Gollandskiy (Dutch), Poshekhonskiy, Lamber, Bukovinskiy and Vityaz.

Upscale (specialty) cheeses are categorized under hard cheeses (cheeses with a high temperature of second heating). These include Swiss, Soviet, Gorniy, Stepnoy and some others. These cheeses are mainly produced in small volumes in the region of Altay.

Pickled cheese represents 3.5 to 4% of all domestic cheeses.

About two thirds of soft cheeses are represented by one variety called Adygeyskiy.

Recent trends and features: • Lack of quality raw material, combined with budget constraints of most plants. • Unstable quality. • Slow pace of modernization of equipment. • High cost of production in comparison with imported cheese. • High seasonality of cheese production. • Lack of modern distribution channels and marketing strategies. • Gradual increase of in-plant packaging.

Despite (or possibly due to) the above mentioned problems, there is a growing interest by dairy industry leaders in cheese manufacturing. It is expected that new market players will enter the industry in the near future. They will possess modern European equipment and start sizable cheese manufacturing projects. These companies will develop close relationships with growing supermarket chains.

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1.3. Foreign Trade: General Indicators

Import plays a very important role in the dynamics of domestic cheese consumption. In 2005 total imports, including deliveries from Belarus Republic, exceeded 300,000 mt. Imported cheeses comprise more than two fifths of domestic consumption.

Diagram 1.3.1 Import vs. Domestic cheese consumption, 1997 – 2006 (000 mt) 450 import production 400 400 378 349 352 350 316 309 300 280 256 222 253 250 222 206 193 174 185 200 153 150 132 100 87 25 49 50 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006: IKAR preliminary estimate. Source: IKAR based on Rosstat, Russian customs, Belarus Stat service and industry information

1.4. Exports

Russian cheese exports have been negligible and have not exceeded 1% of total production.

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2. Foreign Trade Operations

2.1. Import Duties

Russian tariff barriers have shifted from nonexistent status in the beginning of the 90s to consecutively higher protectionist levels in recent years. To confront the artificial lowering of official customs prices, in addition to ad-valorem, the specific duty was introduced so that the country transferred to a combined tariff system. Below are the main steps in Russian cheese import tariffs.

Table 2.1.1 Main changes in import tariffs for cheeses and curd (Code of foreign trade register 0406) from 1994 to current № of Code of Government Date of Period of foreign trade Decree introduction introduction register Customs duty 196 01.07.1994 Not specified 0406 15% Not specified 15%, but not less than US$ 0.40 per 1 kilo 1608 01.02.1998 0406 Not specified 15%, but not less than US$ 0.40 per 1 kilo 148 01.04.2000 0406 Depending on the official Russian border price: US$ 2.22 and less per 1 kilo of net 0406.90. weight: Up until 0101 456 28.09.2006 US$ 0.94 per kilo, 30.07.2007 0406.90. More than US$ 2.22, but less than 9909 US $2.69 per kilo: US $0.87 per kilo, other cheeses: US $0.40 per kilo

Source: IKAR based on Russian Customs Service

Russia has a free economic zone with CIS countries and customs duties have not been applied to dairy products (code 04), including cheese imported from these countries. There are also preferences applied to developing and underdeveloped countries.

2.2. Exporters to Russia

According to Russian Customs Service, Russia has imported cheese from more than 40 countries, including 7 countries of FSU. In 2006 the number of exporting countries amounted to 36.

Table 2.2.1 Dynamics of cheese import from CIS and non-CIS countries (000 mt)

2006 2005 2004 Total 273 300 256 Non - CIS 164 120 111 inc. Baltic countries 48 30 29 CIS 109 180 145 inc. Ukraine 37 111 90 Belarus 70 65 53

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In 2006 a noticeable shift in the import structure took place, mainly because of the “Ukrainian ban”. As the result, the market share for CIS countries decreased, while non-CIS countries increased its share to 60% of total imports.

Diagram 2.2.1 Distribution of imported cheeses among the main group of countries in 2006 (% of imports) other CIS* 0.7% Baltic countries 17.6%

non - CIS* 42.5%

Belarus 25.6%

Ukraine 13.6% *CIS – 12 countries Source: IKAR based on Rosstat, Belarus Stat service and industry information

2.2.1. CIS countries More than half of all imported cheeses are being delivered from two CIS countries: Ukraine and Belarus. They supply the same type of cheeses as Russian manufacturers, but are more price competitive. The decrease in cheese imports from the Ukraine from 110,000 mt in 2005 to 37,000 mt in 2006 was partially substituted with cheese from Belarus and Baltic States.

Imports from other CIS countries have been negligible. Armenia, Kazakhstan, Kyrgyz export nonfat cheese for further processing. Lactalis exports cheddar (250 mt) from Moldova. Some small amounts of Mozzarella are delivered from Azerbaijan (manufactured with support of Italian partners).

2.2.2. Baltic states Lithuania plays a very important role in the Russian cheese import market with physical volume share at about 15% of total imports, although re-export plays a significant role in Lithuanian export amounting to almost 30%. German cheese also plays a significant role. Latvia and Estonia’s shares are insignificant.

2.2.3. Non-CIS countries General situation: • 20 out of 35 countries have annually exported less than 500 mt of cheese to Russia. • Germany, Denmark and France export a broad line of varieties. • In contrast, such countries like the Netherlands, Argentina and Uruguay have concentrated on a narrow product line. New Zealand exports only one variety (cheddar) to Russia. • Some re-export takes plays in many countries, but key re-exporting countries to Russia are Lithuania, Poland and Latvia. • More expensive, upscale (specialty) cheeses are exported in small quantities from France, Italy and Spain.

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Germany plays a leading role among non-CIS exporting nations to Russia. Up until 2004, it had been the second greatest exporter after the Ukraine, but Belarus has since pushed it down to the third position.

Diagram 2.2.3.1 Share and dynamics of German export to Russia, (000 mt)

2006 41

2005 46.5

2004 44 total Germany 2003 50

2002 42.4

2001 38.3

0 50 100 150 200 250 300 350 400

Source: IKAR based on Russian Customs Stat service of Belarus and industry information

In 2006, direct imports from Germany decreased to 41,000 mt, but at the same time re-exports of German cheeses have increased from other countries (via Lithuania, about 9,000 mt, and Poland - almost 12,000 mt). Therefore, real German cheese exports amounted to about 54,400 mt. Poland has also played an important role in Russian imports. In 2006, it exported about 19,000 mt to Russia, including 12,600 mt of re-exports (mainly German cheeses).

Leading cheese exporters to Russia

Exporter 2006 (MT) 2005 (rank) 2004 (rank) 2003 (rank) 1 Belarus 70,000 2 1 1 2 Lithuania 45,600 4 2 3 3 Germany 40,900 3 3 2 4 Ukraine 37,500 1 4 5 5 Poland 19,000 8 5 4 6 Finland 16,600 5 6 6 7 Netherlands 11,900 6 7 14 8 Argentina 10,900 7 10 7 9 France 5,600 9 8 8 10 Estonia 3,200 14 9 10 Source: Ikar based on Russian customs

Finland remains the most important process cheese exporter to Russia. Of the 16,600 mt of Finnish cheese imported to Russia, process cheese comprised about half. Valio is the dominant exporter. Against the background of the sharp decrease in Ukrainian exports to Russia, Estonia managed to enter into the Russian market with dozens of major exporters. These were mainly Estonian cheeses, not re-export.

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Diagram 2.2.3.2 Total list of cheese exporters to Russia in 2006 (% of import)

6 country 0.01%

Luxemburg 0.01%

Ireland 0.01%

Kirghizia 0.01%

Norway 0.01%

Greece 0.02%

Spain 0.02% Chile 0.02%

Austria 0.02%

Switzerland 0.1%

Romania 0.1%

Belgium 0.1%

Bolgaria 0.1%

Italy 0.3%

Armenia 0.3%

Denmark 0.3%

Sweden 0.4%

New Zealand 0.5%

Kazakhstan 0.5%

Uruguay 0.6% Latvia 0.9% Estonia 1.2% France 2.1%

Argentina 4% Netherlands 4.4% Finland 6.1% Poland 7% Ukraine 13.7%

Germany 15% Lithuania 16.7% Belarus 25.7%

0% 3% 6% 9% 12% 15% 18% 21% 24% 27%

Source: IKAR based on Russian customs and industry information

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Complete list of cheese exporters to Russia in 2006 (mt of physical import)

Exporting country 2006 2005 2004 2003 1 Argentina 10,900 7,141 4,570 507 2 Armenia 900 2,002 828 930 3 Australia 10 361 68 101 4 Austria 55 667 526 543 5 Azerbaijan 2 16 1.1 0 6 Belarus 70,160 65,900 53,440 37,400 7 Belgium 285 378 131 10 8 Bulgaria 360 427 432 320 9 Chile 50 0 0 0 10 Czech 0 0 20 103 11 Denmark 940 1,075 793 2,429 12 Estonia 3,200 1,496 1,224 116 13 Finland 16,650 14,479 12,092 15,823 14 France 5,600 4,636 3,833 3,094 15 Germany 40,855 46,468 44,127 49,882 16 Great Britain 12 89 0 20 17 Greece 43 27 19 0 18 Iceland 4 50 0 0 19 Ireland 25 3 0 0 20 Italy 840 445 332 400 21 Kazakhstan 1,270 1,178 935 1,493 22 Kyrgyz 36 244 6 205 23 Korea 0 0.1 1 0 24 Latvia 2,450 1,934 2,193 51 25 Lithuania 45,580 27,008 25,780 12,661 26 Luxemburg 24 0 0 19 27 Moldova 0 243 18 236 28 Netherlands 11,900 9,894 7,510 7,184 29 New Zealand 1,270 2,067 3,478 2,011 30 Norway 40 9 0 0 31 Poland 19,000 7,063 2,926 6,202 32 Rumania 270 228 0 0 33 Spain 49 34 1.5 2 34 Sweden 1020 480 454 419 35 Switzerland 150 109 81 200 36 Turkey 3 2 21 23 37 Ukraine 37,500 110,641 89,980 55,564 38 U.S. 3 15 23 84 39 Uruguay 1,630 3,067 300 150 Source: IKAR based on Russian customs and industry information

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2.3. Import Structure by Types and Varieties

Natural cheeses represent the main share of imported cheeses. In 2004-06 their share amounted to about 95% of total imports.

Table 2.3.1 Structure of imported cheese by main types (000 mt, %)

2004 2005 2006 Total 256 310 274 Natural 242 294 261 Share, % 94.5 95.0 95.3 Process 12 12.6 12 Share, % 4.7 4.0 4.3 For processing 1.6 3.2 1.0 Source: IKAR based on Russian customs and Stat service of Belarus

Share of process cheeses had amounted to 14% of total import in the past, but in recent years its share has decreased significantly due to the advent of domestic manufacturing by multinational companies. Even traditional Finnish deliveries are decreasing. In 2006 the Finns exported 500 mt less than the previous year.

Diagram 2.3.1 Structure of imported cheeses (%)

Process Cheese For 4.3% Processing 0.4%

Natural 95.3%

2.3.1. Natural cheeses The imported product range is quite wide. The number of hard and semi-hard cheeses amounts to about 20 varieties, which include almost all well-known European varieties. Some elite restaurants are interested in very small deliveries of high premium (specialty) varieties. However, the main volume is represented by hard and semi-hard cheeses (with low and medium temperature at second heating). In 2006 their share amounted to 90%.

Table 2.3.1.1 Dynamics of imports of super-hard, hard, and semi-hard cheeses (000 mt)

2004 2005 2006 233 282 250

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Variety structure of imports of natural cheeses in 2006 (mt) (simplified version) Super-hard, Hard, and Semi-hard cheeses 250,000 Ground 450 Young 5,600 Pickled (in salted water) 15 Feta, Bryndza type 3,200 Soft 870 Camembert 160 Brie 76 Blue 1,780

The main countries exporting mass-demand cheeses have traditionally remained Belarus, the Ukraine, Germany, Lithuania and Poland. Their volume market share amounts to 78% of total imports.

Natural cheeses represent imports from Germany. Germany supplies a wide variety, including young, ground, brie, and blue cheeses. It maintains an 80% market share in blue cheese exports to Russia. German deliveries are not exposed to seasonal variations, like Ukrainian and Belarusian, which experience the same type of seasonal raw material supply problems as Russia. During “big milk” processing in CIS, exports from Germany and other non-CIS countries decreases.

Structure of German cheese export to Russia in 2006 (mt): Young 3,544 Soft 34 Ground 20 Hard and semi-hard, 46,071 Including* - Berkhase, appenzeller 0.6 - Cheddar 525 - Edam 9,635 - Tilsiter 10,598 - Jarlsberg 0.7 - Gouda 15,370 Type of Feta 3,042 Camembert 117 Brie 31 Blue cheeses 1,497 Incl. Gorgonzola 1 *translation from Russian

Almost one third of German young cheeses are represented by Almette variety (Hochland).

About four fifths of the Netherlands cheeses are represented by Maasdam, which is very popular among middle class Russians, especially Moscovites. Among other types Gouda (360 mt) and Edam (350 mt) should be noted.

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One should note Argentina’s and Uruguay’s growing export capacity to Russia. Both countries’ exports are dominated by Gouda and Edam (Edamer). France is represented by the widest product variety. Mostly these are upscale (specialty) cheeses, which are imported in small amounts. About nine tenths of Roquefort is imported from France, while other varieties include non-origin cheeses (e.g. “Parmesan”, imported from Lithuania, etc.).

2.3.2. Process cheeses The number of countries exporting process cheese to Russia varies between 15 and 18. Non- CIS countries dominate this import product category, with market share ranging between 70 to 97%. In 2006 Russia imported 12,000 mt of process cheese.

Shares of leading countries - process cheese exporters to Russia Country 2005 2006 Finland 67.6% 65.2% France 15.7% 13.8% Ukraine 8% 11.3% Belgium 2.1% 2.1% Rumania 2.5% 2.2%

Total list of countries – process cheese exporters to Russia, 2002-2005 (mt) No. Country 2006 2005г. 2004г. 2003г. 2002г. 1 Armenia 0 0 0.5 0 0 2 Australia 1 2.2 0 0 0 3 Austria 40 1.6 4.8 4.9 50.5 4 Belarus 174 537 850 1,100 5 Belgium 243 260.8 0 0 0 6 Denmark 2 5.7 5.2 1.9 0.3 7 Diverse countries 2 0 0 335.9 0 8 Estonia 4 2.1 3.4 0.3 16.2 9 Finland 7,700 8,536 7,369 9,411 9,581 10 France 2,038 1,969 693 11 Germany 143 183 185 1,956 4,898 12 Great Britain 0 0 0 0.4 1 13 Italy 25 2.4 3.4 3.8 2.1 14 Kazakhstan 0 0 3.3 17 21 15 Latvia 24 1.5 5 0.7 0 16 Lithuania 125 75.4 122.6 97 300.4 17 Netherlands 59 1.7 0.3 0 4.1 18 Poland 165 236 897 2,707 1,159 19 Rumania 258 310 0 0 0 20 Sweden 3 0 10 21 Switzerland 8 5 0 22 Turkey 1 1 3 0 0 23 Ukraine 1,342 1,015 1,410 932 505 24 U.S. 35 2.2 0.3 0 19.2

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Besides process cheese, Russia imports cheese meant for processing, or cheese pastes:

2002 2003 2004 2005 2006 1,200 mt 2,500 mt 1,600 mt 3,200 mt 1,000 mt

The main countries exporting fat-free cheeses are CIS countries such as Armenia, Kazakhstan, Kyrgyz.

2.4. Leading Imported Cheeses

Rossiyskiy (“Russian”), the most popular (in terms of volume of consumption) cheese, is a type of traditional Soviet “generic brand” (specified quality; however, it is manufactured by any cheese processor). It is both manufactured by Russian cheese makers and imported from the Ukraine, Belarus and Lithuania. Rossiyskiy occupies about 20% of volume share among hard cheeses. Most recently some non-CIS countries (e.g., Czech Republic) started to manufacture Rossiyskiy or close by quality cheeses, meant for the FSU.

Second in popularity, both the domestic and the imported variety, is Gollandskiy (“Dutch”). Other popular, traditional generic brands are Kostromskoy and Poshekhonskiy. Also popular, but much less important brands are Rokishkio, Natura, Svalya and other Baltic–origin varieties.

Less expensive mass market imported cheeses, such as Gouda, Edam, Tilsiter and Maasdam are secondary in popularity, but quickly growing in terms of both volume and value market segments.

Expensive, higher quality, imported cheeses (totaling less than 3.5% of total volume share) are marketed via upscale supermarkets, gastronomic boutiques, and restaurants mainly in Moscow and St. Petersburg. French and Italian cheeses (70-80%) make up this category. Less expensive, higher quality cheeses are imported from Germany and Spain. Fresh cheeses with a 25-28 day shelf life represent a tiny fraction.

The marketing of expensive cheeses is associated with specific problems. The consumption culture is just emerging, and there is no guarantee that expensive cheeses will be sold in a timely manner. Retarded cheese sales are most associated with the most expensive categories. In some cases, the retarded cheese moves from Moscow to Russian provinces for sale there.

Rating of the most popular cheeses is comprised based on volume of production and imports during the last 3 years.

Rating of most popular cheese in Russia, (according to volume) 1 Rossiyskiy 2 Gollandskiy 3 Kolbasniy (process) 4 Poshekhonskiy 5 Kostromskoy 6 Gouda 7 Edam (Edamer) 8 Hochland process cheeses 9 Maasdam 10 Tilzit (Tilsiter) 11 Lambert 12 Viola process cheese 13 Rokishkio

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14 Bukovinskiy 15 Druzhba (process)

Elite imported varieties (with high temperature of second heating), such as Gruyère, Troufier, Gerard Buch, Parmesan, etc. are practically unknown to mass consumers, although Moscovites are discovering it quickly with great enthusiasm.

Imported hard cheeses play a key role of domestic shelves consisting of numerous categories. In 2006 most important imported categories were:

Cheese Type Total imports (000 mt) Gouda 28.7 Edam 22.0 Tilsiter 12.0 Maasdam 8.9 Cheddar 3.4 Emmental 1.2 Radamer 1.1

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3. Distribution System

3.1. Leading Regional Cheese Markets: Main Product Trade & Distribution Flows

Big Moscow (Moscow city and Moscow region) is the largest domestic cheese market, attributing to about 48% of all cheeses sold at wholesale in Russia (320,000 mt). Of this number, more than 70% is comprised of imports and is customs cleared there, and 27% is domestically manufactured. About 140,000 mt are sold in Big Moscow, while the other 180,000 mt are distributed to other regions.

Due to its geographic location, Big Leningrad (St. Petersburg and Leningrad region) is the second largest market for cheese. St. Petersburg’s cheese market capacity is estimated at 85,900 mt and about 34,000 mt are sold to other regions.

Other important “cheese cities” are cities with one million inhabitants or higher. Ecaterinburg consumes about 18,000 mt, while another 40,000 mt is further sold at medium wholesale to Eastern regions. Novosibirsk attracts many wholesalers from the Eastern part of Russia. Many wholesalers have their own branches there. Novosibirsk is featured with high market share of Altay, one of the key traditional domestic cheese making regions. The internal Novosibirsk market is about 11,500 mt, while another 40,000 mt is sold outside of the region.

Other big wholesale markets include: 1. Nizhni Novgorod 2. Samara 3. Vladivostok 4. Omsk 5. Krasnodar 6. Saratov 7. Krasnoyarsk 8. Chelyabinsk 9. Kazan 10. Ufa 11. Volgograd 12. Perm

Kazan and Ufa are quite sizable markets, but most of the cheese is distributed from there to other regions. Volgigrad and Perm are important end-using markets, which do not have local production. Thus, cheese is delivered there from outside. Krasnodar and Rostov are very seasonal: high consumption in the summer and low in the winter.

3.2. Main Operators

Four groups of operators can be distinguished in Russia: domestic manufacturers, foreign (rooted in Russia) manufacturers, trade affiliates of leading foreign manufacturers and domestic wholesalers.

3.2.1. Domestic manufacturers Beginning in the early 90s, the inception of market transformation, domestic manufacturers began to develop internal distribution systems and channels. However, many could not adapt to new market conditions and went out of production.

According to IKAR, about 15% of domestic cheese output (or 8% of the country’s entire cheese disappearance) is sold directly from plant to the retail market. Both plants, whether big and efficient or small and outdated, are included in this category.

For marketing of cheeses manufactured in small quantities by fluid milk processors, they deploy existing fluid milk channels to the retail and eating places.

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Big manufacturers dominate direct sales by volume. Among them are industry leaders WBD, Petmol, Vamin-Tatarstan and Karat. These companies possess developed networks of affiliates, which are capable of distributing their products regularly and directly to retail and retail chains. For example, WBD has affiliates in all major Russian cities.

A fraction of the industry is part of a vertically integrated chain, from raw milk production to retail. For example, Edelveis-M (part of Krasniy Vostok-Agro holding company), a large cheese manufacturer in Tatarstan, consists of industrial dairy farms, processing plants and Edelveis retail chains and totals 160 retail outlets.

Nevskie Siry company (St. Petersburg) specializes in retail cutting and packaging and is, at the same time, acting as cheese distributor for two plants located in Ivanovo and Pskov Oblasts, which are the part of the holding company.

About half of the domestic cheese is sold via longer and more complicated supply chains, which include two or even more distributors.

In general, both the product and the distribution capacity for domestic cheeses are inefficient and insufficient. It was more or less suitable for primitive traditional retail, represented by traditional food stores. Today, the main modern challenge is associated with the growing importance of domestic and international retail chains, which in many cases refuse to work with domestic cheese manufacturers prefer working with foreign cheese makers. Difficulties of domestic cheese makers include: • Low and unstable quality of cheeses • Modest output • High seasonality of production, manufacturer is willing to deliver big volumes in the summer, but decreases supply during the winter time • Narrow production line • Relatively high price in comparison with Ukrainian and Belarus analogs with the same quality • Pre-payment requirements • Generic character and primitive nature of product line, lack of branding and modern retail packaging

3.2.2. Foreign manufacturers At present, there are two foreign companies with established production in Russia: German Hochland and French Lactalis. Both are manufacturing process cheeses and at the same time continue to import a small volume of their products. Valio constructed a new distribution and packaging center near Moscow. It is expected to open its Russian manufacturing plant soon.

Hochland (Germany) is manufacturing in Moscow Oblast. It has quickly become the number 2 manufacturer of process cheese, as well as the biggest advertiser of cheese in Russia. There is also a sales department near the plant. All sales are conducted via distributors. In Moscow, the plant works with 10 distributors, such as Intermilk, Optitreid, RichArtFood, Molochniy Mir, and Yogurt, etc. In regional markets the plant cooperates with 30 distributors in 20 regions. In St. Petersburg, Hochland has 3 distributors, in other major cities it has 1 to 2 distributors. The company tries to work very closely with its distributors and routinely holds training workshops and seminars in key domestic distribution centers.

Lactalis (France) also has a manufacturing plant in Moscow Oblast. Currently, it manufactures and sells a wide range of cheese products, while continuing to import about 60% of its total Russian sales.

Up until 2005, Lactalis worked via distributors located mainly in Moscow. In 2005, the company carried out a painful restructuring, cutting off relationships with many inefficient distributors. The company then established relationships with a number of new distributors who had direct relationships with retailers. As the result, their number of distributors increased. Among new

June 2007 21 U.S Dairy Export Council Russian Cheese Market distributors, the most notable include Syrobogatov and Intercom (Ecaterinburg), and Petrovich (Cheliabinsk), etc.

Additionally, Lactalis owns a warehouse and logistical system. Three wholesale companies serve Moscow including Gurt, Pir and Gek, while 200 chain stores are supplied directly from the plant.

3.2.3. Foreign trade branches There are not many branches of foreign cheese manufacturers in Russia. Besides Hochland and Lactalis (which have domestic manufacturing), Valio, Kraft Foods and New Zealand Milk should also be mentioned.

Arla Foods Arla Foods was established in Russia in 1992. Its most well known product lines are Natura and Home-Made. Its dairy products, including cheese, are distributed via two exclusive distributors: RichArt (Moscow) and Artis-Distribution (St. Petersburg).

Valio St. Petersburg Valio St. Petersburg is a trade branch of Valio. Since January 2002, Valio abandoned sales via Russian distributors. Valio St. Petersburg is the only exclusive distributor of Valio products in Russia. Valio’s positioning has traditionally been strongest among process cheese in Russia, but has been partially undermined by Hochland and other aggressive manufacturers in recent times.

The company has 200 clients in St. Petersburg, Moscow and Vyborg city. Currently, it does not have a warehouse, so product goes directly from its Finnish plants to trade centers. Four domestic distributors handle domestic operations for Valio (Foodline, Nevskie Berega, Sevco and Nercom). The products meant for St. Petersburg are often distributed from plants in Finland directly to retail stores. There are 30 distributors in 25 other Russian cities.

Kraft Foods Russia Russia was the first Eastern European country in which Kraft Foods started selling its process cheese. The company’s intentions were rooted in the Moscow market with plans to then move forward into the other regions. Currently, the company sells only in Moscow and the Moscow region. Kraft’s process cheese is available in chain stores as well as in independent food stores.

Initially, the company planned to sell only one product – creamy process cheese. In future, the assortment would be widened. Currently, the creamy process cheese is imported from Belgium (plant in Namur). Besides process cheese, the company also supplies young cheese.

New Zealand Milk (Moscow) In 2000 during the restructuring of the New Zealand Dairy Council, New Zealand Milk was created. The main goal of the company is to promote and sell New Zealand’s butter. Cheese is supplied in limited quantities. In 2006 they only exported Cheddar for Hochland in Russia for further processing. The company works via distributors. The only cheese distributor for the company in Russia is Foodline.

Belarus dairies representative offices Against the backdrop of growing business in Russia, the Belarus dairy enterprises have established their own product pipelines, in addition to a network of representative offices. Belarusians have become more aggressive in the Russian market.

Currently, they maintain 4 trade houses (2 in Moscow and 2 in Smolensk) and 3 representative offices (Moscow, Smolensk and Nizhniy Novgorod). Also, 4 distribution centers for Belarusian enterprises exist.

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The Belarusian government has signed a trade agreement with the Moscow city government, placing quotes on Belarusian plants under so called “city order” (fixed amount of product supplied under preferential terms of finance via Moscow distribution networks and retail outlets). In Murmansk, the enterprise has opened a wholesale center for distributing Belarusian food products. In St.Petersburg, Belarus plans to promote sales of food products via the Belagroproduct trade house.

According to Belarus Ministry of Agriculture, its cheese distribution share in Russia amounts to 8%, while they have a target to elevate it to 25%.

3.2.4. Wholesalers Independent wholesalers are the key part of a vertical chain in cheese distribution. To function efficiently, the modern wholesaler must move large amounts of stable, quality product without noticeable seasonal breaks. This is why leading Russian companies prefer to have foreign partners. All big domestic wholesalers are involved in customs clearance operations. They work with domestic and CIS companies as important, but secondary partners.

There are not many big cheese wholesalers. They function primarily in the Moscow and St. Petersburg markets, which are key cheese distribution centers in Russia. Trade matrix of these companies typically consists of more than 250 items. The main Moscow-based companies include Foodland, Optitrade, RichArt Food, Vikeyt, Lotsman (Vigo Group) and others. Typical monthly turnover is between 1,000 - 2,000 mt.

Among the leading St. Petersburg-based companies are Argo, Foodline, Boris and Pavel, Nevskie Syri, VTK Egorov. They handle about 800 to 1,200 mt per month. To increase turnover they have also opened affiliates in Moscow.

Other large regional wholesalers include Syrobogatov (Ecaterinburg), Maslosyrodel (Novosibirsk), Intercom (Ecaterinburg), Petrovich (Cheliabinsk), Lencom (Krasnoyarsk) and others.

There are about 100 companies with varying backgrounds that make up the mid-sized wholesalers. They represent the cheese that is being imported from CIS countries, Baltic states and Poland. The “biggest of the middle” are Abator, Kasta Diva, BreenStone, Belaya Reka, PiR and Initiativa (all of which are Moscow-based).

The highest number of companies represent second, third and even fourth mid-level operations on the cheese market. Cheese plays secondary role for these companies. There are about 1000 of such companies.

The wholesale companies can be divided into those who import cheese and sell it in big lots; distributors, which are working with retail chains; and middle/small wholesalers working with small and independent retail outlets. Of course, such a division is highly conditional, as there often occurs an integration and combination of above-given functions. For example, all major domestic importers are at the same time suppliers to one or another retail chain.

Big companies have the modern equipment for cheese retail cutting and packaging, and supply retailers with ready-to-shelve cuts with manufacturers’ stickers. However, in most cases cheese reaches retail shelves in bulk and vendors divide it according to consumer requests.

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3.2.5. Role of retail chains: 20 largest Russian food retail chains Russia has occupied the top rank in retail industry investment attractiveness and speed of development. Since the year 2000 retail chains are booming all over Russia and display double- digit growth. Originally, retail chains started in Moscow and St. Petersburg.

In 2001 the first foreign retail chain store, Metro, opened in Moscow. By mid 2006, six foreign retail chains established in Russia including Metro, Auchan, Marktkauf, Spar, Real and Billa. In the foreseeable future, Attac, Elea and Costco stores plan to open. According to industry experts, the share of foreign retail chains amounts to 19% of total turnover for retail chains in Russia.

Russian companies have to gradually transform to western standards of doing business. They have to confront these trends or risk being marginalized by competitors. Surprisingly, their speed of development has been quite impressive.

Retail chains – leaders on presentation in Russian regions (mid 2006) Retail chains Number of regions (out of 89) Magnit 44 Paterson 19 Perekriostok* 17 Pyaterochka* 17 Metro 14

According to RBC, Perekriostok and Pyaterochka have recently merged, creating the biggest domestic retail network.

Additionally, retail outlets located in more than two regions should be noted. They include Ramstore, Spar, MDM-Victoria, Dixi, Grossmart, Holiday Classic, Bistronom, Kopeyka, Matrix, Ok, Palladagroup and Samohval.

20 largest Russian food retail chains in 2005 Number of Retail turnover Retailer Name of retail chain Regions shops ($mil) Moscow, St. Petersburg, Holding company Pyaterochka 239 MoscowRegion, 1200.0 "Pyaterochka" Leningrad Region ZAO Tander Magnit 1019 More than 30 regions 1025.0

Perekriostok, Spar Firm Perekriostok 95 13 regions 766.0 Middle Volga, 365

Moscow, Moscow The Seventh Continent The Seventh Continent 77 594.0 Region Moscow, Moscow Auchan Auchan 6 525* Region

Dixi-centre Dixi, Grocer's Econom 160 7 regions 500*

Lenta Lenta 6 Northwest region 483.0

Kopeyka, Kopeyka Moscow, Moscow Firm Kopeyka 51 416.0 Super Region

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Number of Retail turnover Retailer Name of retail chain Regions shops ($mil)

Victoria (Group of Victoria, Kvartal, 104 6 regions 392.0 companies) Deshevo

Ramenka Ramstore 32 7 regions 375* Firm "Omega-97 Paterson 45 12 regions 259.0

Moscow, Moscow Marta (Holding company) Billa, Grossmart 27 198.0 Region, Tula, Kazan

Moscow, Moscow Samohval Samohval 54 174.5 Region Kaluga Region Ekaterinburg, Superstore Kirovskiy Kirovskiy 42 140* Sverdlovsk Region. Ekaterinburg, Trading network Kupetz Kupetz 37 123.0 Sverdlovsk Region Trading company Edelveis 154 Tatarstan Republic 111.5 Edelveis Semia Semia 25 Perm, Perm Region 109.0 Moscow, Moscow 12 months 12 months 16 109.0 Region, Kaluga Region Mosmart Masmart 3 Moscow 100.0 Moscow, Moscow Aromatnii Mir UK Aromatnii Mir 74 63.7 Region, St Petersburg Source: “Kommersant”

Trade markup of retail outlets of different format: Format Minimum Maximum Average Discounter 10 23 19 Superstore 15 50 25 Mart 10 22 14 Convenient store 25 60 30 Cash & Carry 4 30 10

3.3. Major Wholesalers/Distributors

Largest wholesale companies of cheese market

PiR Company Andrey Viktorovich Kozlov, General Manager Andrey Andreevich Akupzhanov, Head of Procurement Department 27 Nizhnie polya, Moscow, 109382 Tel/fax: (495) 901-99-16 (multi-channel) www.tdpir.ru

Optitrade Pavel Dmitrievich Frolov, General Manager 10A Kostyakova St., Moscow, 125422 Tel/fax: (495) 976-45-62, 976-06-41, 976-07-69, 979-30-83 www.optitrade.ru

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RichArtFood 9 Khoroshevskoe shosse, Moscow, 123007 Tel/fax: (495) 970-16-25 www.richart.ru

Foodland Andrey Alexandrovich Dahnovich, Commercial Manager Tel.: (095) 424-20-70 Fax: (095) 424-20-91 www.foodland.ru

Belaya Reka Alexandor Vladimirovich Vedehin, General Manager (Distributors: Frico, Campina, etc.) 6 building 7 Danilovskaya naberezhnaya, Moscow, 115114 Tel/fax: (495) 363-63-83 (multi-channel) www.belayareka.ru

Vikeit Gennadiy Federovich Kashin, General Manager 4 Vashutinskoe shosse, Moscow, 141400 Tel/fax: (495) 786-69-10 http://www.vikeit.ru

Argo Oleg Baturin-Vinogradov, Head of Procurement Department 76/3 Kubinskaya St., St Petersburg, 196240 Tel: (812) 718-69-33; 718-62-36 Branch of Argo in Moscow: Tatiana Lukicheva, General Manager Tel.: (495) 642-88-90 www.ar-go.spb.ru

Artis Distribution 10 building 1 Barochnaja St., St Petersburg, 197110 Tel: (812) 346 60 06, (495) 916-92-28, (495) 916-94-17 Fax: (812) 346 60 06, (495) 916-92-28 Branch of Artis Distribution in Moscow 55 Ryabinovaja St, Moscow, 119530 Tel: (495) 916-92-28, (495) 916-94-17 Fax: (495) 916-92-28 www.artisgroup.ru/

Boris and Pavel Albert Grigorievich Agadzhanjan 34 Viborgskoe shosse, St. Petersburg, 194356 Tel/fax: (812) 554-47-46, 554-49-22 Commercial Direction: Tel: (812) 327-86-30 – Regional Department Tel: (812) 554-30-65 – City’s Department Procurement Department Tel/fax: (812) 327-86-31 (812) 554-83-33 Fax: (812) 554-89-34 www.boris-i-pavel.spb.ru

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Foodline, ZAO VTF Maxim Valentinovich Ivanov, General Manager Olesia Gerankova, Head of Procurement Department 24 Zagorodniy proezd, St. Petersburg, 191002 Tel: (812) 334-40-50

HK Nevskie Cheese Rustam Kuramshin 23 A Alexandrovskie Fermi St, 192174 Tel: (812) 380-67-70 Fax: (812) 380-67-71 www.nevcheeses.com

VTK Egorov Rostislav Golodovich, Commercial Manager Dmitry Miheev Tel/fax: (812) 703-08-71 703-08-72, 703-08-73

Medium wholesale companies of cheese market

Kasta Diva Arthur 11 Proizvodstvennaya St., Moscow Tel.: (495)439-45-48 Cell: 8-4997277303 www.best-cheese.ru

Vivat-V 23A Rustavely St., Moscow, 127254 Tel: (495) 789-6537 (multi-channel) (495) 789-6538 www.vivat-v.ru

Yo-gurt 38A Varshavskoe shosse, Moscow Tel: (095) 937-97-71 (multi-channel) 112 51 45, 112 53 71 www.yo-gurt.ru

Intermilk 12 Kolskaya St., Moscow, 129344 (095)180-9831

Gorta-Tranzit Vyacheslav Nikolaevich, Executive Manager 25 Trofimova St., Moscow, 115430 Tel: (495) 211-07-57 Vyacheslav Makarich Antonenko, Director Tel: (626) 264-13-92

Fricko 61 Kantemirovskaya St., Moscow Tel: (495) 320-18-00, 320-20-11, 320-17-77

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SlavTradeMilk 2 Businovskaya gorka, Moscow Tel.: (495) 105-56-54, 509-91-90 www.slavmilk.ru

Landgraf 31 Skolkovskoe shosse, Moscow, 121353 Tel.: (495) 101-44-72 www.landgraf.ru

Abator Tel: 787-28-81(82/83/84) www.abator.ru

Gek Company 9 institutskiy pereulok, Dolgoprudniy city, 141700 Tel.: 408-58-88, 408-84-18, 258-00-55 Fax: 408-49-36, 408-39-46 www.gek.ru

AVIS-SPB 69 Krasnoputilovskaya St., St. Petersburg, 198152 Tel: (812) 784-27-98. (812) 184-27-98 Fax: (812) 332-19-18

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4. Consumption

About 95% of total cheeses are marketed and consumed via direct channel: retail. This figure includes consumption of imported industrial cheeses. About 3% are consumed via industrial consumption (including domestic process cheeses) and another 2% is consumed via horeca. In general, Russia has a highly underdeveloped level of both industrial and foodservice consumption.

Diagram 4.1 Main channels of cheese consumption in Russia in 2006

Industrial Consumption, Ho-Re-Ca, 3.2% 1.8%

Direct Consumption, 95%

4.1. Industrial Consumption

Process cheese manufacturers play the main customers for industrial consumption, which include two affiliates of multinational companies:

Hochland Group (Germany) Ulrich Marschner, Managing Director Hochland Russland 140126, RAOS, Bldg. 16 Ramensky reg., Moscow Tel./Fax: (495) 777-09-05

In 2006, Hochland manufactured about 23,000 mt of industrial cheese. In order to do so, it used about 11,500 mt of cheese, including 10,000 mt of domestic cheeses. The rest (cheddar) was imported from New Zealand.

Lactalis (France) Evgeniy Grebnev, Managing Director Thomas Deconstanza, Procurement Department Tel.: (495) 787-02-22 Fax.: (495) 787-02-20

In 2006 they manufactured about 3,000 mt of process cheeses and consumed about 1,500 mt of natural cheese.

Total amount of natural cheese consumption by all other industrial plants is estimated at 18,500 mt (this figure was already counted in total domestic supply, but was subtracted from the consumption figures to avoid double counting). The rest of raw material to produce process cheese comes from the natural cheese industry’s waste, domestic and CIS fat free cheeses, whole milk product waste, etc.

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Another quickly growing direction of industrial consumption is frozen pizza production. In recent years, industry growth rates have been estimated at more than 100%. In 2006 frozen pizza output was estimated at 13,000 mt of which 1,800 mt of cheese were used. Cheaper varieties and products were mostly used. Mozzarella amounts for not more than 10% of total consumption. As of beginning of 2007 industrial customers purchased cheese at priced ranging from US $3.52 to $3.78 per kg.

Largest domestic pizza manufacturers:

Talosto Company Irina Kozhukhova, Purchasing Manager 196105, St.Petersburg, Tel: (812) 327-66-11 www.talosto.ru Total amount of cheese consumption in 2006 was about 300 mt.

Zvezdniy confectionery combinat (Moscow) (Owned by the Finnish company Fazer) Tel: (495) 215-22-02, Fax: (495) 215-60-29 Purchase Department: Tel: (495) 215-76-51, Fax: (495) 215-97-44 In 2006 cheese consumption amounted to 120 -150 mt.

ZAO (Moscow) Tel: (495) 178-32-09; 177-77-11. Fax: (495) 178-32-09 In 2006 cheese consumption amounted to 100 mt.

Kampomos (Affiliate of Spanish Campofrio, which is part of the US Smithfield) Tel./fax (495), 448-6704 Biggest chilled pizza processor in Russia. In addition, uses cheese for frankfurter production. Estimated amount of cheese consumption is between 80-90 mt.

4.2. Horeca

Total estimated amount of cheese consumption in domestic horeca is 12,000 mt, growing rapidly from low start-up levels. Primary customers are various pizzerias, McDonald’s and some other fast food chains. Moscow accounts for about 60% of all domestic pizza consumption.

McDonald’s purchases cheese from Hochland Russland. Estimated annual amount is about 5,000 mt.

Other foodservice establishments include:

RosInter Restaurants Holding www.rosinter.ru (select English)

Sbarro Elena Philippova, Chief of Purchasing Department www.sbarro.ru

Pizza-Nord (St. Petersburg) 38 outlets in Moscow, St. Petersburg, Kazan Tel: (812) 315-77-05, (812) 327-49-21, 327-49-80

June 2007 30 U.S Dairy Export Council Russian Cheese Market

5. Forecast of Domestic Cheese Market Development

All other things being equal, consumption of cheese in Russia is predicted to grow in the mid- term. However, weak raw material supply (in terms of raw milk supply in quality and seasonality) will continue to limit domestic production capabilities. In any case, one can expect growth of domestic investments and an industry shift from its current fragmented state to a more concentrated and capitalized organizational structure.

The structure of commodity supply will highly depend on the domestic market protection level, specifically federal government regulations against low and middle quality imported cheeses. The administrative ban on imports of dairy products from the Ukraine, as well as the increase in customs duties led to the market stagnation in 2006 in terms of import volumes. However, it is believed that mid-term import volumes will continue to grow.

Table 5.1 Forecast of average per capita consumption of cheese in Russia up to 2010г. (kg)

2006 2007 2008 2009 2010 4.6 5.1 5.7 6.2 6.7 Source: calculation of IKAR

Diagram 5.1 The dynamics of average per capita consumption of cheese in Russia and its forecast up to 2010 (kg)

7 6.6 6 6.2 5.7 5 5.1 4.6 4.6 4.1 4 3.8 3 3.2 2.6 2.8 2 2.2

1

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: calculation of IKAR

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Although dependent upon the market situation, growth of cheese market capacity is expected within 5-11%.

Diagram 5.2 Two variants of forecast of capacity of cheese market in Russia up to 2010г. (000 mt)

1000 940 900 870 800 816 730 700 664 661 600 589 548 500

400 2003 2004 2005 2006 2007 2008 2009 2010

Source: calculation of IKAR

Table 5.2 Total cheese market capacity in Russia up to 2010г. (000 mt)

2006 2007 2008 2009 2010 661 730 816 870 940

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