The hot topic in the business sphere in Armenia now – is the opportunities of the +180m market opened up by the signing of EEU agreement. Russia, a 4-trillion$ economy, that only for the last couple of years has stagnant growth rates, has the potential to reshape Armenia’s businesses and the economy as a whole.
Text : Sona Grigoryan
While some local companies have turned Russia into their single largest source of profits and growth, others, especially smaller scale companies in other sectors, have had daunting challenges to capture higher revenues from the market.
Russia had a ~ -0.6 growth last year and is expected to grow by 1.5% in 2017. The commodity prices still remain the major force shaping the economy. And since no sign of increasing oil prices are noticed in the horizon, the economy is still expected to have hard times. The sanctions on major European imports are yet another force shaping the economic trends. Russia’s retail shelves were hardly filled due to the sanctions. Thus, the major supermarkets have been going the extra mile to find potential suppliers for basic food products. This has had a major impact on the strict policies that supermarket chains used to execute. The strict barriers to entry are now milder and more opportunities of entering the major supermarket chains are available.
Russian rouble is weak (with a slight trend of getting stronger recently), making local products less competitive cost wise. This issue is still part of the scale game, as the large-scale business can survive on low margins, whereas for local businesses most of the time, the profits will be too low. Thus, Moscow is achievable only for businesses with significant opportunities and abilities to scale up.
Time has come for Armenian companies to utilize the advantage of being close to the huge market of Russia. However, Armenian companies can only do that through well thought and accurately carved strategic moves. Our thinking is that only by recognizing the key strategic challenges of the Russian market, the Armenian companies can go forward. Below we identify the strategic challenges.
Scale is everything
This is no secret. It is self-evident that getting into retail chains in Russia, or other distribution/sales points for that matter, requires large scale operations. Scale gives the advantage of efficiency, ability to negotiate with the retail chains, ability to distribute the minimum quantities required by the chains (which in Armenian standards are huge and sometimes impossible). Only a few Armenian companies can achieve the scale sufficient enough to be a supplier of Russian retail chains. A very successful example is well known company Spayka. It emerged from being a distribution company, to one of the largest agro-product exporters to Russia from Armenia. The emergence was due to the accurate recognition of opportunities and leveraging the scale of the company. Now Spayka collects agro products from numerous local small scale producers, calibrates the quality and distributes the Russian market – utilizing its scale, negotiating power and the distribution network.
This is a classic success case and in case being smart, the government could use the same logic, for helping small scale producers to unite in a large scale supplier branded under the same umbrella and negotiating on the same terms. However, this is a complex task that the government of Armenia has so far been unable to realize.
The Wines of Armenia – is another success case, that Ameria Russ and its affiliates – a Russia based group of companies (predominantly owned by Armenians) is utilizing. The mainly small scale Armenian wine producers are united under one brand to market their entry to Russia successfully. Earlier, EV Consulting suggested this approach under its Industrial Policy, developed in 2010, for the government to form an association and help brand the wine makers. However, the private player did it, proving the idea was feasible.
Efficiency is everything
Since scale is something that only a few Armenian companies can achieve, the alternative to bit the Russian market – is through robust efficiency. By achieving high efficiency levels Armenian companies can achieve the price advantage in comparison to other products available in Russian markets. For now, most local companies are not price competitive. An additional issue is the weak rouble, which makes things even more difficult.
Local companies have high unutilized potential to increase their operational and management efficiency levels, which will translate into lower costs and thus lower price levels. Our observation in the Russian companies (EV Consulting’s Moscow office has been operating in Russian market and actively working with Russian companies since 2014) shows that management wise Armenian and Russian comparable companies have about the “same” level of management efficiency. It is time to have a quality leap forward in our management capacities. Armenia has the potential to become the management powerhouse in the region, which will make the local, even small scale companies efficient in comparison to others in the region.
Thus, local companies need to focus on utilizing management and operational efficiencies to achieve competitively priced production, which is yet another strategy to enter the Russian market.
What the government can do to foster the management quality increase in the country – is to improve the higher education in management, bringing the businesses and educational centres closer together, and investing in other areas of management education.
Strategy is everything
Choosing the right strategy and entering the high value niche segments is the ultimate path that Armenian companies should try to achieve. Of course not all segments and sectors of the economy have this opportunity. However, studying the market and carefully choosing the right segments to target will give a better understanding and perhaps the opportunity. Since low scale disadvantage is something that not all companies can bit, then producing low volume high value products/services can be the answer.
One popular example is in the cheese production. The Russian market is hungry for cheese. But the cheese market is very multi layered. And the local mass producers of average Lori or other relatively cheap cheese products – have serious difficulties in entering the market. Whereas, blue cheese or other types that have high margins and are the absolute favourites in Russian market – have considerable opportunities.
Again, having said this – several factors are important to consider. Even in high value products, efficiency can serve as a vital advantage. Since price, even if not of first importance in this case, still plays a role in negotiating with distribution companies. Also, another factor is that even if the company produces an extraordinary quality product, selling is ever more important. Thus, distribution companies in Russian market earn very high margins in some cases. Unfortunately, there have been failure cases in Armenian reality very recently, when the local producers, having a high value quality product, have not been able to negotiate the desired price, due to not accepting the necessity to share the margin with distribution companies. As a result, the company did not enter the Russian market, and is in liquidation process now.
More abundant opportunities of high value products are available in technology segment. Armenian IT sector can be quite competitive in the Russian market. One of the key contributors to this is that the problem of high transportation costs and periodic land accessibility issues are not a bottleneck for this sector, meanwhile being strong headaches for other sectors. One successful example is National Instruments, the branch of the international engineering company that successfully utilizes its sales abilities in Russian markets both for itself and for its affiliate companies.
Armenian companies have all the potential to be competitive in the Russian market. However, this can come true only in case of accurate business strategy. Often in Russia, the fundamental barrier to success is less about identifying the opportunity and more about choosing and executing the right strategy.