Russian capitalism is as unorthodox as Russian communism was doctrinaire. Yet while the colorful oligarchs in the oil and raw-materials industries dominate the headlines, it is businesspeople like Sergei Plastinin, founder and CEO of juice and dairy producer Wimm-Bill-Dann Foods, who are quietly shaping the post-Soviet economy.
Headquartered in Moscow (and, yes, named for the tennis championship), Wimm-Bill-Dann is the market leader in Russian packaged dairy products. It had a 37 percent share of sales in 11 big cities across Russia as of March 2004, according to New Yorkbased market research firm ACNielsen. The company’s grip on the Russian juice market translates into a 27 percent share, estimates Business Analytica, the Moscow-based market research outfit.
Wimm-Bill-Dann’s sales last year totaled $1.2 billion, a 27 percent increase over 2003’s numbers. Gross profits rose nearly 20 percent, to $327.6 million. The company employs 18,000 people and has manufacturing facilities in 21 locations across Russia and the Commonwealth of Independent States.
Plastinin, 37, is what Lenin abhorred: a true entrepreneur. In 1991, when he was 23, the future CEO quit his postgraduate studies at the Institute of Electrical Engineering in Moscow to take part in Russia’s great capitalist experiment. He and two partners, Gavril Yushvaev and David Iakobachvili, flitted from one notion to another in pursuit of profit.
In 1992 they saw great potential in selling fruit juice, which was a coveted luxury good in Russian cities at the time. So they rented an idle production line in Moscow from the Lianozovo Dairy Plant. With a $50,000 loan from Sberbank, they secured packaging from Tetra Pak, based in Lund, Sweden, and juice concentrate from U.S. food products giant Cargill and began bottling. Today its J7 is Russia’s biggest juice brand.
The colorful packaging and rather bizarre Wimm-Bill-Dann logo -- a mouse with elephantine ears and a yellow bow tie -- were designed to suggest that J7 was a foreign product. Having put up for so long with drab, Soviet-style goods, Russia’s consumers were primed to buy foreign (or foreign-seeming) brands rather than domestic ones.
With its juice business taking off, Wimm-Bill-Dann turned to dairy products. In 1996 it bought the Lianozovo plant and began producing such now-well-known brands as Chudo (translation: wonder) yogurt.
Ten years after its founding, Wimm-Bill-Dann listed Level III American depositary receipts on the New York Stock Exchange, raising $238 million. The prospectus acknowledged that co-founder Yushvaev had served in a Soviet penal colony for “violent crime” and that co-founder Iakobachvili had an interest in Trinity, a holding company that, the prospectus said, had “been the subject of speculation in the Russian press, including with respect to possible links with organized crime.” The IPO was five times oversubscribed.
Wimm-Bill-Dann’s standards of disclosure and corporate governance make it stand out among Russian companies. Plastinin even welcomes the tougher regulatory requirements of the U.S.'s Sarbanes-Oxley Act, contending that “we have always strived for the highest standards of corporate governance.” Wimm-Bill-Dann is also one of the few Russian companies to hire senior Western managers. Last summer Plastinin appointed as deputy CEO Jacques Ioffe, formerly the head of Russian operations for Groupe Danone, the French producer of dairy products and bottled water.
Plastinin met with Institutional Investor Senior Editor Andrew Capon in London in April.
Institutional Investor: Your profits aren’t growing as quickly as your revenues. Why?
Plastinin: The profits last year were not as good as we had hoped. But there has been a positive dynamic over the past few quarters. Last year there was a very difficult situation with the price of raw milk. It rose by more than 16 percent. The price has been erratic. When it is low, the farmers kill the cows and sell the meat because they aren’t thinking about the future. All they are thinking about is how to survive. So there are fewer cows, and the price of raw milk goes up. Then the farmers buy new cows, and the price goes down again.
What other factors influence the price of milk?
In 2003 there was a poor grain harvest, which pushed the price of cattle feed up. That translated into a higher price for raw milk, and that in turn had an impact on our profits and margins. The price of raw milk has now stabilized, and we believe it will start to fall. We think our margins will steadily improve because of that. We are also simplifying the recipes of our products to cut costs.
Where will your growth come from -- juice or dairy products?
From milk and dairy, no doubt. Four main players divide the juice market among themselves, and the dynamic of the market is pretty fixed. There is scope for growth of perhaps 10 percent a year over the next few years. In contrast, the market for milk and dairy products is still developing in Russia, and there is huge potential to grow revenues and market share. Baby food in particular -- although it is only 10 percent of the milk market -- is an area we want to grow.
Your capital expenditure has been high. When will there be a payback?
Over the past two years, we have invested a lot of money in modernizing acquired plants. Those investments are now bearing fruit. We won’t be making acquisitions in the future that demand significant outlay. We will be looking for a quicker payback to our bottom line.
You set out to consolidate the dairy industry. How far have you gotten?
A little way, but there is still much farther to go. At one level Russia is a very developed market. It is the third-biggest milk producer in the world after India and the U.S. Milk consumption is 200 liters per person per year, which equates to 32 billion liters. But only 40 percent of this milk is in any way processed. All the rest is produced and consumed at home. The home production of butter and cheese is common. Milk that is processed goes, moreover, to some 3,000 independent processing plants. Most are small and primitive; the product is poorly packed. The market, then, is very fragmented, and there are lots of producers. We are trying to consolidate the sector.
What about foreign competition?
The milk market is developing at a very fast pace -- not in terms of consumption but redistribution. People now are tending to buy products in shops rather than produce them at home. Also, people want to buy more complex processed products, such as yogurts and desserts. That is the market in which foreign companies like Campina and Danone are choosing to compete. But Danone has processing plants only in Moscow and at Tolyatti, 500 miles southeast of Moscow. We are the only company that has plants all over Russia and in the Commonwealth of Independent States.
Why not become vertically integrated and own your own herds?
We have considered this often over the years. Recently, we have begun to build up our own agricultural holdings in the south -- Russia’s most attractive agricultural region -- and we’re moving at a good clip. We first started investing in grain. Owning cattle is a bit more difficult because it doesn’t give you the immediate profit that grain production does. We are not going to invest a huge amount of money -- probably between $10 million and $12 million, perhaps up to a maximum of $20 million.
How did you come up with the name Wimm-Bill-Dann?
In 1992 the borders of Russia were open for the first time since the revolution, and foreign products were flooding Russian shops. Consumers fell in love with these products, and what set them apart was their packaging and brands. Domestic products were dull by comparison. We decided to go for attractive, bright packaging and use the name Wimm-Bill-Dann, which sounds English. We even used English lettering. We deliberately created a product that looked and sounded different from the usual Russian fare. Times have changed, though. Foreign companies that operate in Russia now do so under Russian-sounding brand names. We too use Russian names, like Chudo for yogurt. Now the public is buying based on price and quality, as is the case in most markets.
