PROCESSED CHEESE MARKET: TRENDS AND CONSUMPTION

25.05.2016 | Raul Lönnström, Valio Russia CEO

RAUL LÖNNSTRÖM

• Education: M.Sc. (Chem. Eng.), executive MBA

• 14 years of experience in developing the Valio’s Russian business:

Valio Russia strategic developments since 2002

Establishment of Valio Center Odintsovo 2006 and start of the operations in 2009

Coordination and managing of the major developments over the last 10 years

Outsourcing development: Galaktika, Polar Spring and Ehrmann

KEY FACTORS OF PROCESSED CHEESE

CONSUMPTION IN EUROPE

CONSUMPTION OF PROCESSED CHEESE IN EU, KILOS

Source: ZMB Zentrale Milchmarkt Berichterstattung GmbH, Credinform

1.2 1.2 1.2 1.1 1.2 1.2

0

2

4

6

8

10

2009 2010 2011 2012 2013 2014

1

Average consumption

1,2 per year

Processed cheese is one of the most sustainable and conservative categories in EU according to its consumption rate.

Source: ZMB Zentrale Milchmarkt Berichterstattung GmbH

0%

5%

10%

15%

20%

25%

30%

35%

EU-EXPORT OF PROCESSED CHEESE, 2014

EU-EXPORT OF PROCESSED CHEESE, FIRSTHALF OF 2015

2 EU EXPORT OF PROCESSED CHEESE IN 2014 VS. 2015 Export of PC is more concentrated in Middle East. Till 2014 Russia was number two in the list. In 2015 with Russia leaving the list the volumes were redistributed to other countries.

R&D CHALLENGES 3 Experiments with the package and different tastes are among the ways to preserve the level of consumption. Novelties

compensate conservativeness.

KEY WAYS TO DEVELOP THE CATEGORY IN EU

1. Added value for wellbeing

2. Guaranteeing the premium quality

3. Combining

4. Transparency

5. Compactness

The rising trends in the European cheese market are as follows: low content of/lack of lactose, low content of/lack of gluten, and premium quality.

INGREDIENT FOR COOKING OR READY COOKING INSPIRATION

4

Traditional Finnish cream soup with salmon is cooked with processed cheese adding.

VIOLA BY VALIO The unique Viola processed cheese recipe was

created in 1934 in Finland.

HISTORY OF VIOLA IN RUSSIA

• 1956 – Starting export of Viola processed cheese to USSR Viola is the first imported to the USSR processed cheese. • 1980 – Valio is the official suppler of diary products for the Olympic Games

in Moscow • 2006 – Valio own plant and distribution center manufacturing is started in

Ershovo, Moscow region • 2009 – The first batch of Viola processed cheese is produced in Ershovo • 2014 – Project Viola in Russia started • Today Viola is a processed cheese brand with the highest consumer

confidence index in Russian capitals

VALIO in Russia is 100 % Finnish quality and best Russian plants, best raw materials available in Russia

VALIO IN RUSSIA NOWADAYS: INVESTMENT PROJECT

Valio logistics center and production plant in Moscow region

The first stage of investments was fulfilled in 2014. The second stage of investments ended in March, 2016.

The amount of investments into the factory is 63 million euro by now .

2014

04/ 2016

63 million

Today the total production capacity of the Valio factory in Ershovo is 10 thousand tons per year.

10 tons

The third stage will be fulfilled in August, 2016: equipment for slicing.

08/ 2016

VIOLA EXPORT- MAP OF DELIVERIES • Armenia • Azerbaijan • Belarus • Georgia • Kazakhstan • Kyrgyzstan • Moldova • Mongolia • Tajikistan • Turkmenistan • Ukraine • Uzbekistan

AND WHAT ABOUT RUSSIA…?

REAL INCOME SHOWED A NEGATIVE TREND IN 2015.

THIS TREND REMAINS IN 2016.

Source: www.gks.ru, http://www.iep.ru/files/RePEc/gai/monreo/12-2015-sep.pdf

-10

-5

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012 2013 2014 2015

Nominalincome

Inflation rate

Real income

HOW DO RUSSIANS SAVE MONEY ON FOOD?

Source: http://romir.ru/studies/780_1461618000/

31 %

21 %

26 %

28 %

buy cheaper products of cheaper brands

don’t buy expensive products

always look for promo

choose shops, where one can find more promo and discounts

29%

16%

22%

try to make a list for shopping beforehand

buy for the future use

go shopping more seldom and control expenses carefully

WHAT IS MORE IMPORTANT TO CONSUMERS IN FOOD SELECTION?

0

10

20

30

40

50

60

70

80

90

100

Main criteria for product selection, %, fourth quarter 2015.

Source: www.nielsen.com

20-35 % OF PROCESSED CHEESE SOLD WITH PROMO

THE STRUCTURE OF PROCESSED CHEESE SALES IN RUSSIA, %, BY SEGMENTS

47 43 41 39 31

16 16 17 16 31

37 41 42 45 38

0

20

40

60

80

100

120

2011 2012 2013 2014 2015

Economy & PL Mainstream Premium

For the first time in 5-6 years the premium segment of processed cheese shows a negative trend. The mainstream segment’s share is growing.

Source: own data

SHARE OF PROCESSED CHEESE SALES COMPARING TO YELLOW CHEESE SALES OVER THE LAST YEAR

76% 70%

24% 30%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

2015_I 2016_I

PROCESSED CHEESE

YELLOW CHEESE

Source: own data

January-February, 2016 VS. January-February, 2015

Moscow Saint-Petersburg

+15% (+350 tons) +11% (+94 tons)

Consumers are switching from yellow cheese to processed cheese mostly in order to save money. This is the reason why the category is growing in total.

‘DO NOT RAISE THE PRICE!’

Downsizing in packages

Changing the Ingredients formulation: produce slightly lower quality product but keep price the same

New unusual taste – assortment development

Changing the recipe and product type: cheese product instead of natural processed cheese

All companies operating on the market have to search for ways to optimization. There are four basic of them:

WHAT TRENDS OF PRODUCTION DO CUSTOMERS NOTICE?

Source: http://romir.ru/studies/752_1454533200/

(%) Quality hasn’t

changed

Quality

improvement

Diminution of

quality

Butter and dairy

food 66 15 11

Milk 68 17 8

Meat products 56 18 12

Meat 60 20 8

Vegetables 52 23 16

Fish and seafood 51 12 19

Dried fruits 56 8 9

Cheese 42 13 33

Fruits 53 18 20

Consumers save on purchases – manufacturers save on quality. And consumers see this saving. Cheese category itself is number one in the list of products became worse over the last couple of years.

HOW MUCH HIGH-QUALITY NATURAL PROCESSED CHEESE SHOULD COST?

Recipe (Cheeses/butter/dry powers): 215 Rub/kg

Production costs: + 30% in avarage

Corporate income: 7-10%

Retail mark-up

(direct/indirect)

30%

Processed cheese shelf-price

MINIMUM!!!

350-390 Rub/kg

Let us imagine the example of cost accounting for HIGH-QUALITY natural processed cheese. We’ve taken more or less typical recipe of processed cheese made of mixture of yellow cheese, butter and milk powder.

* The calculation doesn’t include marketing budget or expenses for entering the market or aggressive competition.

HEALTHY TREND IS STILL POPULAR IN RUSSIA

Source: http://www.nielsen.com/ru/ru/insights/reports/2014/we-are-what-we-eat-russia-2015.html

Main features of products, for which consumers are ready to pay more (opinion poll in 2015):

0% 20% 40% 60% 80% 100%

Without gluten

Low fat

Low in calories

Whole-wheat

Without artificial flavor

Without artificial colours

Without GMO

All natural product

High-Protein Food

Low in salt

Without sugar/ low in sugar

Calcium-Rich

Russian consumers, whoare ready to pay more forthe feature

So main question for everyone is whether the market takes a route to cost saving which is a road to nowhere or develops?

CAN PROCESSED CHEESE BECOME A PART OF “HEALTHY FOOD”-TREND?

Added: Calcium/ Vitamins A &

B6/ Protein

NO: artificial flavors/

E-codes/preservatives

Low/No/Reduced: Fat/Calories

Low/No/Reduced:

Lactose/ Cholesterol/Allergen

Gluten-Free

I wish you all success and the best ideas in product development!

THANK YOU! www.valio.ru