December 1995 the factory was working three shifts to meet demand. These were tough times. Ukraine’s GDP dropped by 70% by the end of 1996. However, with an estimated half of the economy in the unreported grey market, Ukraine was a very resilient economy, and by 1997 there was the first sign of economic growth.
This ‘undergraduate team’, some of whom
are still on the board of management today, learned the principles of business without pre- conceptions. “We were all equals, we made an analysis of the situation and made decisions by consensus,” explains Dr Logush.”
The company went on to look at what
additional product categories it could enter to become a major player.
“In 1998, a crisis year, we launched into
coffee, in a market where our competitor had been in the market since 1991 and had a 68% market share. We saw that our competitor didn’t have roast and ground coffee and so we launched ground (natural) coffee against local and import companies who bought very cheap coffee and marked up their prices. By launching with an excellent quality coffee, Jacobs, with a great brand and world class advertising, our share grew dramatically and quickly. Having established ourselves as the leader in natural coffee sector we decided to launch in soluble coffee (there are three soluble market segments: powder – value; agglomerate-mainstream, and freeze dried-premium) in the premium segment using our now-established Jacobs brand. We exploited the weakness of our competitors who sought to straddle all segments with one brand.” When we launched into the super- premium segment, we avoided stretching our Jacobs brand by launching Carte Noire.
“It was also around 1998 that we realised
that we needed to develop our own sales force. And, it was the coffee market that provided the scale to allow this – starting with a team of 50. This has grown to the current sales force of 1,500.
“Also during crisis, in 1999 we entered
the potato chips (crisps) market and acquired a production facility and the Lyuks brand in Ukraine. Part of the thinking was that chocolate does not sell in summer, whereas potato chips do. The key was growing the right variety of potatoes for potato chips – with low moisture and high dry matter.”
After going to Holland and acquiring
rights to appropriate varieties, it was necessary to register and test the varieties in Ukraine for a three-year period – or to import the potatoes. While growing cost was $125 per tonne, the import duty at the time was $200 per tonne in off-season, $400 per tonne in season, which meant imports were not economically viable. At this point many others would have decided that they had chosen a wrong track would have given up in the face of such bureaucracy. Dr Logush persisted with his view that people are reasonable if confronted with evidence, and chose six farms to work with on an experimental seed potato programme, growing for research and testing the results in cooperation with the Academy of Sciences. Yields from the new varieties were 35 tonnes per hectare compared to prevailing 10 tonnes per hectare and the authorities were convinced and dropped the three-year investigation period; yields are now up to 50 tonnes per hectare.
Kraft picked the six of the more progressive
collective farms where the heads were more innovative, and in return for the use of tractors, seeding machines, herbicides, and plant protection, they were willing to be advised when to plant, which fertilisers to use, and to ensure that the potatoes were harvested when they were the right size. These farms were in locations with the right soil – sandy and well draining in north western Ukraine - not the traditional black earth.
But then in December 1999 the collective
farms were abruptly abolished by presidential decree and the farmland redistributed. Again, Dr Logush simply says that by treating people reasonably, it was possible to overcome this huge and unexpected complication: new deals were struck with the same heads of the farms. Kraft helped them to reorganise as private enterprises and ensure it was a reliable partner and customer for their produce.
Kraft then built a huge 11,500 tonne
warehouse using state-of-the art technology, and then a second warehouse as the business grew larger and larger.
“To summarise, just as we started our
business in a crisis in 1995, both the potato crisps and coffee products were launched in the crisis of 1998-1999. The company went on to expand into biscuits, sugar-based confectionary, and chewing gum in the next crisis of 2008-2010.
18 UkraineBusiness insight October/November 2010
Dr George Logush “In the period between crises, in 2005 while
we were not adding categories, we began looking at geographical expansion. The first territory was Moldova, where we exported our Ukrainian business model – strong branding, effective advertising, appropriate marketing with an on-the-ground sales force. And all went well. So we said, “Why not try Belarus”? and did so. Further expansion followed into Georgia, Armenia, and Azerbaijan, though the last two were in a state of war.”
Dr Logush went on to explain that the
model developed for Ukraine was found to work in all the states of the former USSR, and, unlike for most international companies, the Ukraine office became the headquarters for further expansion throughout Eastern Europe and then into Central Asia and Mongolia. Twelve countries are now covered. For international fast moving consumer goods companies it is the more usual practice for operations in the former USSR to be based in Moscow, often very much to the detriment of business results outside of Russia.
The current economic crisis initially
caused many businesses to change their practises: credit cuts and a move to cash, headcount slashing, A and C cuts, and sharp devaluation pricing.
But Dr Logush says business for Kraft
has been especially good when times were tough as it presented the opportunity to
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