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Entering the markets of former Soviet Republics

Challenge

The Company is an East European manufacturer of plastic household products. The task is to enter the markets of the former Soviet republics: Russia, Belarus, Ukraine, Kazakhstan.

The products in question were already represented in these markets through distributors, but the Company was not satisfied with the results. The hired sales representative in Russia could not meet expectations. Total supplies decreased from year to year.

Analysis

The situation analysis helped reveal the following:

    1. After the local currency crisis in 2014, local dealers and distributors began to consider the Company’s products “too expensive” and switched to local products that were of poor quality but cheaper.
    2. Total sales volumes of these dealers, however, still decreased because of the overall situation in the market. First, more chain stores have entered into direct contracts with manufacturers. Secondly, local manufacturers began to interact more actively not only with chain stores, but also with non-network retail stores, as well as with large corporate customers. Therefore, the role of dealers in the supply chain became insignificant, nevertheless our customer was accustomed to rely on them.
    3. The Company’s products actually became expensive for the general population, as the purchasing power declined.

The situation developed in such a way that the Company had to take drastic measures or forever forget about the markets of the former Soviet republics.

 

But the results of the analysis also brought good news. It turned out that the only advantage of local manufacturers was associated with Russian raw materials—basic chemicals (polymers). Local manufacturers bought raw materials for local currency, which made finished products cheaper than European and even Chinese competitors. However, according to all other indicators, local manufacturers were extremely inefficient. They most often used obsolete equipment that required more manual labor and did not allow them to operate less expensively. Obsolete equipment consumed a lot of electricity, the cost of which grew at least 10% each year, and already exceeded the cost of electricity in the US. The cost of labor also grew steadily, while local companies did not have the resources to invest in the automation of manufacturing and other processes. Local companies experienced an acute shortage in competent production technologists who could develop cost-effective and high-quality formulations.

 

Meanwhile, high-quality and inexpensive products were still in demand by consumers. Consumers abandoned the luxury segment, but the mid-price segment almost did not suffer from the crisis, as people still needed durable and quality household goods, provided that the price was reasonable.

solution

The Company made a strategic decision to launch production of basic and most popular products in Russia. The choice of a particular country was due to the availability of local raw materials. Finished products could be shipped duty-free not only within Russia, but also to Kazakhstan and Belarus, as they are members of the Customs Union.

 

The Company built a plant in a small city, because modern and automated equipment eliminated the dependency on availability of qualified professional in the local labor market. In that small city the Company managed to find very cheap premises, and the cost of electricity (this is a very important part of the cost of production) was relatively low.

 

The Company took into account the experience of local manufacturers and immediately began to establish direct relationships with chain stores, large corporate customers and retail stores. Of course, the Company continued its cooperation with the dealer network, but subjected it to a significant revision (from now on only those companies and entrepreneurs who agreed to strictly abide by the terms of the Company could become part of the dealer network). Today, the sales department of the Company consists of 18 employees who constantly travel to target countries and meet with customers in order to promote the brand and products of the Company. Finally, end-consumers purchase products from local distributors. Direct deliveries from Europe remained only in Ukraine, since it is almost impossible to ship goods from Russia for political reasons.

 

The Company also actively interacts with end-consumers, developing its website and actively using the opportunities provided by social networks to promote the brand.

 

So far, the plant in Russia produces only a limited product line, as the Company develops new markets with reasonable care. Some of the products are still supplied from Europe. Nevertheless, the steady growth of volumes by 25–30% annually inspires the Company, and its managers are already working out a business plan for expanding local production.

 

During two years of our customer’s operation in Russia, two local competitors went bankrupt. One of them got too many credits in good times, and could not pay off debts when the crisis came. Another competitor suffered because of poor quality products and too low prices—he hoped for sales growth and offered too much discounts to dealers, which eventually led to complete devastation.

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