Distribution in the meat market
— 2005-09-07 —
Produkty Pitania Company Vice-President
FOOD: Mr. Imamovic, Produkty Pitania Company operates three logistics centers (LCs). Why did you select this method to develop your distribution system, instead of renting existing warehousing facilities?
Imamovic: Within the last 10 years, we have greatly expanded our distribution area and no other method would work as well for us. Even well-developed regions of Russia lack the service and infrastructure we need, a situation we took into account when we launched our production facility in Kaliningrad back in 1998. That is why our first distribution center was built six months before the plant.
Currently companies like to reduce the number of intermediaries, instead of outsourcing distribution, as such. So there is not enough money for everyone. I think that distribution companies working directly with manufacturers will always be in demand. This is the way we operate today and it brings tangible results.
FOOD: The impressive growth of frozen convenience foods consumption naturally boosts commodity turnover among processing companies. In what way will your distribution policy evolve in the short term?
Imamovic: Of course we will enhance the capacity of our storage facilities in Moscow, Kaliningrad and Krasnodar. The new LCs we are building in Novosibirsk and Yekaterinburg will support our five-year development plan, which calls for each LC to process 4.5 tons of products a month. And if we did not have such a wide range of products, our LC capacity would practically double.
FOOD: What territory will the new LCs cover?
Imamovic: Each will cover a territory that is at least 1500 kilometers in diameter. As for our southern facility, half of it will be serviced by the Krasnodar LC and the other half covered by the Moscow-based LC. This will actually lower prices since there are a lot of shipments between Krasnodar and Moscow.
FOOD: In what other regions will you locate your LCs?
Imamovic: After we get our Yekaterinburg LC up and running, we will consider building another LC either in Saint-Petersburg or Nizhny Novgorod. Given our current distribution strategy, I would predict Saint-Petersburg. We will then replicate this efficient business model in the regions after we have tested it in the larger cities.
FOOD: Does owning a city-based LC mean that you have to develop your own distribution there?
Imamovic: Precisely. In any city where we operate an LC, we will always set up distribution.
FOOD: What is your ratio of external to internal distribution?
Imamovic: We only do about 10% of our own distribution. But I think we will increase that slightly in time – maybe as much as 15%, which is optimal. As I said, distribution serves other purposes, as well: providing market feedback, streamlining distribution standards (including merchandising) to be used later in working with our partners, and pinpointing how well we have penetrated our most important sales locations.
FOOD: How will you work with your regional distributors?
Imamovic: Even though we have our own distribution facilities, we will not forget about third party distributors because we cannot compete with them. We will merely select relevant activity sectors, and as our brand becomes more and more popular, these third party distributors will benefit us in terms of overall sales. But if we did not have our own LCs, it would be much more difficult for us to independently distribute our products.
FOOD: What other goals do you plan to achieve by introducing your distribution centers?
Imamovic: We are building our distribution centers to remove wholesale intermediaries from within our distribution channels. Large wholesalers buy our product and store it at their own premises. Later they sell the product to smaller wholesalers and distributors. Our goal is to remove the large wholesaler from the chain in order to cut costs and pass the savings on to our consumers.
FOOD: Do you predict that as time goes by, companies like yours will no longer need large wholesalers?
Imamovic: Yes, I think that the Russian market will follow the general worldwide trend. Today there are only a handful of distributors working in the Russian frozen convenience foods market that are capable of expanding their operations into other regions.
FOOD: What roles do retailers, independent stores, and fast food operators play in product sales?
Imamovic: Today the fast food industry in Russia and CIS is still very small. So retail networks enjoy a much greater share of the business – and that share is steadily growing. Other sales outlets such as wholesalers and independent stores play an even larger role.
Big cities offer excellent opportunities for retail networks. However, we also work in smaller cities of 300,000 to 500,000 residents; and they do not have retail networks and fast food service for the most part. However, we expect that these outlets will grow rapidly as well, particularly fast food, which will double or triple in size. And as they expand, other outlets will begin to play a smaller role in moving products.
FOOD: To what extent?
Imamovic: It is the matter of time. But at current development rates, food service and retail networks will more than double their national market share within five years.
FOOD: What are your partner networks?
Imamovic: Let’s say we do business directly with any retail chain that includes five or more stores. The larger ones include Pyaterochka, Kopeika, Metro, Auchan, Perekrestok, and Lenta. Distributors take care of product delivery because just as in any other market, retailers are apt to deal directly with manufacturers. So distributors act as logistics partners.
FOOD: Mr. Imamovic, at what stage of development is your distribution presently?
Imamovic: I would say that as Produkty Pitania grows, so does our distribution. What’s more, as we evolve as a strong market leader, we are setting goals that are far more complex and aggressive.