Actuality February 11, 2008

   Consumers, retail sellers, producers of juices, canned fruits and baby food lack apples of the Russian production.

Russia would provide for itself fresh fruits almost the whole year round, if there were businessmen, ready to invest in expansion of orchards and construction of storages. The Volgograd Company OJSC Sady Pridonia declared about intention to increase the production of apples five times. But market participants doubt the possibilities of such project, as orcharding is considered the very expensive business in Russia.

   Apple is the most popular fruit in Russia, occupies more than third part of fruit ration.

According to the data of Tochka Rosta research company, 42,3% Muscovites prefer to buy domestic fruit in winter. "Our fruits are fresher and seem more delicious. It is considered that in fruits, grown in consumer's country, there are specific substances, necessary for a human body", says Tatyana Kutuzova, business manager of Business Partner distributive company. The Russian fruits are considered

ecologically pure, while the quality of import causes doubts for many. "I was in France and saw how process apples with the special solution that promotes their storage. I do not know, what chemical is used there, but it smells so much. Frenchmen assured me, that chemistry does not spoil a product. But I think that preparation still penetrates through the skin of fruit. In Russia such technologies of procession are not used", says Valeriy Litvinenko, owner of the Central Chernozemic Fruit Company.

   However, to buy local apples without problems is possible only in the harvest season, i.e. summer and autumn. In winter the Russian products disappear, and Russians eat Polish, Chinese, American, Canadian and even Japanese apples. Nobody can estimate the consumption and production volumes of apples in Russia. According to the estimations of physicians, each habitant of the country annually eats 15 – 20 kg, it means that are sold about 2 – 3 million tons altogether. Obviously, that part falls on products, grown in own vegetable garden. Alma Group Company estimates all Russian market of apples at 2 million tons, and share of import – approximately at 50%. Valeriy Litvinenko considers that in Russia grow 1,2 – 1,5 million tons. There are quite pessimistic opinions according to which Russia produces only 300 000 – 400 000 tons of apples, i.e. 15 – 20% from the general volume of sales.

   Analysts name the Volgograd National Food Group Sady Pridonia, known as the producer of juices, the most ambitious player on the apple market. Last year the company grew about 30 000 tons of apples and by 2010 intends to increase volumes five times. Today the company owners process the greater part of crop. However, in the near time Sady Pridonia intends to increase the sale of fresh apples which they plan to pack and brand.

   The Food Group Sady Pridonia was established on the basis of the soviet fruit state farm May Day that grew apples, cherries and plums. "At the beginning of the 90th the state farm was in the hard condition", recollects Andrey Samokhin, former head of the state farm, and now president of the Food Group Sady Pridonia.

"On the settlement territory there was no a single meter of asphalt, neither gas nor plumbing. Orcharding became ineffective direction. All processing enterprises that we traditionally supplied with apples stopped working. And fresh fruits were in small demand, as the purchasing power reduced in Russia". The problem, probably, was hidden not only in purchasing power. Fruit-growers could not agree deliveries to shops. Besides, Russian fruits did not meet competitions with imported ones that outwardly looked far more attractive. To the change of soviet juices in three-liter jars quickly came drinks in pasteboard packages, they were produced from the imported raw material.

   At the beginning of the 90th May Day was privatized. To survive, the former state farm had to agree the own processing. "In 1995 we concluded the contract with the western company for supplies of equipment for processing of fruits and production of the packed juices. Then we began to produce products under the Sady Pridonia brand (the company was also named so). The first workshop processed only up to 100 tons of fruit a day", recollects Andrey Samokhin. Firstly, the company produced only apple juice out of own raw material, but later began to buy in the imported concentrates for various drinks. Today Sady Pridonia do no less than 50% juices from the own raw material.

   In the 90th the market of juices grew by tenth percents a year, therefore strategy of former state fit well into the general state of affairs. In 2002 to the trademark Sady Pridonia presented in a middle price category was added the more cheap one – My. In 2003 the company produced a premium line Zolotaya Rus (Gold Russia). At the beginning of the 2000th the producer took interest in the market of baby food. Sady Pridonia juices in one liter packages began to position as a product for children. In addition, the enterprise produced juices in 200 ml packages under the brand "Spelenok". In 2006 Sady Pridonia became engaged in the production of fruit sauce yet.

   Presence of own processing powers – is the absolute plus for any fruit-grower. For example, the Central Chernozemic Fruit Company established production of fresh juices under the brand "Newton". "In a fruitful year it is possible to retail maximum 60 – 70% apples, in fact shops require beautiful fruits without damages", Litvinenko explains. "The non-standard apples fit only for processing. One has to sell them cheaper to the strange buyers". The apples processed into the fresh juices yield producer a 100% profit from raw material cost.

   "The own processing allows to increase turnover of capital. In fact apples ripen once in a season. What is the sense to receive money from the sale of crop and sit doing nothing?" says Samokhin. Today Sady Pridonia increased capacities up to 1000 tons of juices a day. According to the data of research group Business Analytica, in 2005 to the stake of company products fell 0,7% market of juices in money terms, in 2006 – 1%, and for 10 months 2007 – 1,5%. On preliminary estimations, in 2007 its turnover totaled RUR 4,2 bln ($168 mln).

   According to the estimations of Alma Group company, the sales of fresh apples in Russia increase annually by 15%. Demand for the Russian fruits grows from the part of processors also, as leading producers of juices and baby food are rarely managing in the own source of raw materials. "Till 2008 the Russian market of juices was characterized as actively growing, and its participants preferred first of all to invest in production capacities and development of distribution", says Andrey Yanovskiy, director general of OJSC Nidan Juices.

"At least till the present moment it was unprofitable to invest into the production of own concentrates, and moreover into orcharding. In fact, it is a very long-term investment, no less than 5 – 7 years".

   It would seem, the Russian fruit-growers could occupy their niche. "At the moment the considerable growth of apples' production is not observed in Russia. The amount of orchards does not practically increase", Litvinenko marks. Orcharding is considered the industry with high risks. Climate is capricious in Russia; therefore very serious investments are required. "Investments are repaid more than for 10 years", asserts Samokhin. There are few technologies of orcharding. The so-called traditional one, when trees that root in the ground deeper than 1.5 meters are planted. Such trees are more frost-hardy, but begin to fruit only in 5-6 years. The more modern is considered the technology of intensive orchards that is used in Europe.

Dwarf trees are planted, they begin to fruit in 3-4 years after planting. Thus, a dwarf tree occupies little place, therefore it is possible to plant much more on the hectare of such sapling.

   However, there is almost no own selection and mass production of saplings for sale in Russia. "There are institutes that should be engaged in such work. However, their employees live quite in another world, academic degrees and budgetary financing are important for them. I've never received offers from the Russian scientists", complains Samokhin. "I would not recommend to buy saplings abroad for our climatic zone. Risks, related to trees' persistence to diseases and weather conditions, are too high.

Even if trees take roots, they require too serious expenses for agricultural technologies". According to him, today all selection work lies on the shoulders of agricultural producers who have to create own nurseries for saplings growing.

As a result for "pre-preparation" of tree to planting fall five years. Establishing of orchard is the expensive pleasure also. "1 hectare of intensive orchard for 1500 trees costs RUR 500 000 ($20 000). 100 ha is already RUR 50 mln!" says Samokhin. According to Litvinenko, 1 ha of traditional orchard costs RUR 1,2 mln ($48 000). No less serious investments requires the equipment for storage and sorting of apples. According to Litvinenko, one has to spend €1 mln for one refrigerator

for storage of 1000 tons apples.

   "Apple-trees were blossoming and at night started frosts and all crop was lost", says Samokhin. Too drought and too rainy summer can turn no less serious problems for fruit-growers. A severe winter can result in failure of not only future crop but also trees, and then one has to forget about the return of investments at all. "Thus not a single Russian insurance company insures orcharding", complains Samokhin. For example, in frosty winter 2005 – 2006 orchards of Sady Pridonia suffered seriously. If in 2005 the company has grown 17 500 tons, in 2006 – only 7500. According to the market participants, there are cases when all orchard frosts in winter. "In 2005 a hail destroyed the half of our future crop. "You invest half a year, and then lose a product", Litvinenko says. As agricultural producers joke, one should invest in orcharding only when there is nothing else left. "Today in Russia there are wide opportunities for investments in less risky industries, where projects are repaid far quicker", says Samokhin.

   The state renders support to orcharding, but, in opinion of producers, it is too insignificant. "Last year allocated RUR 15 000 to establishing of traditional garden up to 1500 trees on 1 ha. And RUR 80 000 on establishing of intensive garden from 1500 trees on 1 ha", says Samokhin. Market participants were not able to name not a single acting fruit-grower project that arose from scratch. The majority of the largest farms were established on the basis of state farms. Today many are approximately at the same level of development than in soviet times. "In our shops the Russian apples appeared only last year, when one succeeded to find a good supplier from the Voronezh region. Many Russian producers do not have quality standards", says Irina Doroshenko, the category manager of Azbuka Vkusa network. "There are many apples without market style not assorted in size. In Russia large problems are with storage of fruit, good storages are lacking". In their turn, the Russian producers have difficulties with realization. But it is not only about the low quality of fruits. "Fruit-growers often can not organize own logistic. If an orchard is far from a railway, the problem of delivery becomes unsettled. Therefore, a producer sits and waits, when a dealer will arrive and will buy a commodity at a half price", Litvinenko says.

   In Russia there is no a ten of producers, able to provide any serious crop of apples. Large volumes gathers only the Krasnodar company Sad-Gigant that, according to the estimations of market participants, in 2007 has grown 70 000 tons. The Voronezh Central Chernozemic Fruit Company gathered 32 000 tons of apples. Sady Pridonia is approximately on the third place on production volumes. The company owns 2850 ha of orchards, where grows cherry, plum, cherry-plum.

However, 90% of crop make apples that are not only more demanded by a buyer than other fruits, but are also less sensible to the caprices of the Russian nature than drupaceous fruits. "By 2010 we plan to produce about 150 000 tons of apples, thus the company strategy is revised now. Possibly, such results will already dissatisfy us, and plans will be adjusted toward an increase", Andrey Samokhin says. In Sady Pridonia promise to establish more than 500 ha of new orchards annually. In addition, at the end of 2007 the company concluded the agreement for acquisition of another fruit-growing enterprise in the Mikhaylovsk district of the Volgograd region. The variants of assets' acquisitions in other regions are considered.

   As assert in Sady Pridonia, the company develops mainly on the personal facilities. Market participants doubt the plans reality; as such serious increase of volumes requires very high expenses.

"Maybe, such statements are done for commercial aims", Valeriy Litvinenko supposes. Today Sady Pridonia realizes more than 20% fruits fresh.

   By 2009 – 2010 Sady Pridonia plans to sell apples to retail networks the whole year round. The company intends even to brand and to pack fruits. Experts consider the development of fruit brand a very interesting direction. Russian importers of bananas, for example, created strong brands. "However, to promote apples under the own brand one should in reliance on distributors. Advertising of brand, targeted at the final customer, can appear too ineffective. It would be hard a producer to explain the buyer what are distinctive features and competitive advantage of this product", considers Aleksey Goncharenko, director general of brand agency Minale Masterbrand.

   At the end of the last year it became known about new projects in the field of orcharding. The former president of Baltika brewing company Taymuraz Bolloev in 2006 acquired the farm "Yasenskie zori" in the Krasnodar Territory and 10 000 ha of adjoining earths. And in 2007 established the apple-tree orchard on a 40 ha area. The businessman plans to get the first crop in 2009, and then the orchard area can be extended on 100 ha more. Direct Group Company (leader of catalogue trade) decided to invest into orchards. "€ 66 mln will be invested in growing of apples and creation of processing production", said Paskal Kleman, director general of Direct Group. The specially established Alma Group that belongs to Direct Group and some French investors will be engaged in the project.

It is planned to grow apples on the 130 ha area in Abinskiy region of Krasnodar Territory, near Sad-Gigant. Maybe, due to the planting of the imported planting material it is planned to gather the first crop already in 2010. By 2014 the investor intends to repay the project. Market participants skeptically regard the declared terms. "It will not turn out to return the investments so quickly.

At least because of weather risks", Litvinenko says. As analysts consider, the company can face the number of problems: from nonestablished saplings to the deficit of personnel.

   Meantime, according to the opinion of Samokhin, the Russian fruit-growers could have grown about 3 million tons of apples. Allegedly retail buyers and processing enterprises are able to digest such volume.

Maybe, orcharding will become the following after the poultry farming, pig breeding, plant-grower agrarian direction in which investors will take interest. Price for the Russian apples can grow already next year, and it means that the terms of return will reduce. "One of the most serious competitors of the Russian producers is Poland (third on the size player on the world market of apples after China and the USA.). In the past fruitful year this country dumpinged", Litvinenko says. "Poland could offer such price, because as EC member received subsidies for many years that for 100% covered the product cost. Subsidies are abolished now, and the Polish apples should grow in price that will entail the price growth for domestic products".