Ben and Jerry's Expansion into Russia
Ben & Jerry's Homemade, Inc., the Vermont-based manufacturer of ice cream, frozen yogurt and sorbet, was founded in 1978 by Ben Cohen and Jerry Greenfield. Their first shop was in a renovated gas station in Burlington, Vermont, with a $12,000 investment ($4,000 of which was borrowed). Within a short time, they became popular for their innovative flavors, made from fresh Vermont milk and cream. The main products of Ben & Jerry’s are ice cream, low fat ice cream, frozen yogurt, sorbet and novelty products and are produced in pints, quarts, and 2.5-gallon tubs. Their products are distributed nationwide as well as in selected foreign countries in supermarkets, grocery stores, convenience stores, franchised Ben & Jerry's scoop shops, restaurants and other venues.
Ben & Jerry's franchises scoop shops in both the U.S. and Canada. The company also has wholly-owned operations in France, Japan and the United Kingdom, and licensees in the Benelux countries, Israel, Canada, Peru and Lebanon. In 1999, Ben & Jerry's employed 814 people worldwide, primarily covering only the manufacturing, central and distribution facilities in Vermont.
Economy Overview in Russia:
After the implosion of the Soviet Union in 1991, Russia was struggling to establish a modern market economy and achieve strong economic growth. Russia heavily depended on exports of commodities, particularly oil, natural gas, metals, and timber, which accounted for over 80% of exports. Russia's agricultural sector beset by uncertainty over land ownership rights, which had discouraged needed investment and restructuring. Another threat was negative demographic trends, fueled by low birth rates and a deteriorating health situation - including an alarming rise in AIDS cases. Russia's industrial base was dilapidated. Other problems included widespread corruption, capital flight, and brain drain.
Ice Cream Industry in Russia:
Russia has always been known for its tasty ice cream—eaten all year-round. Ice cream is one of the few quality food products and so popular that is available even when supermarket shelves were otherwise bare. Russians in Moscow consume 170 tons of ice cream per year, 98 percent of which is Vanilla. Since Russia was the third largest market in the world in the late 1980’s, the ice cream business represented enormous potential.
While one can still purchase the Soviet-era standard, the vanilla waffle cone, now Russians can choose from a dizzying array of flavors and ice-cream products. The Russian ice cream industry has also become much more diverse, accommodating not just the major producers but also proving hospitable to small business development and franchising.
Ben & Jerry’s in Russia:
Between 1992 and early 1997, Ben & Jerry's was part of a joint venture called Iceverk in the Russian republic of Karelia.
Back to 1988, when Ben Cohen, president and cofounder of Ben & Jerry’s, took a trip to Karelia, Russia (Vermount’s Russian sister state), he thought of opening up a Ben & Jerry’s scoop shop in Russia and bringing the United States and Russia together through ice cream diplomacy. Right after Mr. Cohen returned from Russia, Ben & Jerry made a joint venture proposal, called Iceverks(Which stands for Ice Cream of Vermont and Karelia). Ben & Jerry's contributed equipment and ice cream making know-how to the venture, and their local partners provided facilities for a small production operation and two Scoop Shops, which opened for business in July of 1992. Ben & Jerry’s initial investment into the joint venture was approximately 50 percent of the total startup fee and the rest of the capital was invested by their Russian partners. Over the next four years, they worked with their local partners to open several more scoop shops and to start selling pints in grocery stores, first in Karelia and eventually in Moscow, St. Petersburg, and other cities.
As the Soviet Union fell apart and Russia started the transition to democracy and a market economy, their goals in Iceverk changed. They began to focus less on cultural understanding and more on transferring our business skills and experience to their local partners to complement the ice cream making skills they had already acquired.
By 1996, the business climate in Russia was changing so rapidly that they felt their management of Iceverk was becoming less effective even as we devoted more time and resources to it. They began to understand that their local partners had become better equipped to manage Iceverk than they were. So they decided to donate the manufacturing equipment they still owned to Iceverk, and donate their equity in Iceverk to their local partners.
Finally Ben&Jerry’s left Russia in 1997. Iceverk no longer uses the Ben & Jerry's brand name, but it continues to make great ice cream in Petrozavodsk, Karelia's capital.
We will try to explain business environment in Russia between 1992-1997 that Ben&Jerry’s was part of a joint venture called Iceverk in Russia at this period.
Since 1991, Russia has struggled in its efforts to build a democratic political system and market economy to replace the strict social, political, and economic controls of the communist period.
Political Instability : With the collapse of the Soviet Union political uncertainty for potential foreign investors in the newly democratic Russia. The country had to be rebuilt, and it was questionable what laws would be enacted and what laws would be discarded. That’s why, all foreign business operating in Russia were doing so under risk.
Management Problems: As a result of former communist work ideology, skilled managers were in short supply for the Karelia facilities. Managers, as well as subordinates, needed to be trained both in work habits and in Western capitalist philosophy. Consequently, managers had to be flown in from the United States until the Russians could learn the intricacies of free market as well as the production of high-quality ice cream.
Corruption and Mafia: With the fall of the USSR, the Russian Mafia has gained enormous power. The underworld is thought to control some 40 percent of the Russian economy. US businesses pay as much as 30 percent of their monthly profit for Mafia protection. This was a major concern for Ben&Jerry’s since their company philosophy for doing business in the East is to not give into extortion or bribery.
Economic Condition: After the implosion of the Soviet Union in 1991, Russia struggled to establish a modern market economy and achieve strong economic growth. In Russia 40 % of population is below poverty line. Distribution of Income is deteriorated. Purchasing power of Russian people is very low. That’s why firms can not increase their product price easily, otherwise they will use market.
Inflation: Inflation in Russia after the collapse of Soviet Union was serious problem. In 1992 inflation rate was %2000. Products and raw material prices were changing every day. That’s why making long-term decision was impossible.
High Interest Rate: In 1992 Interest Rate was very high. Thus, Investment in Russia borrowing from local banks had very high cost.
Currency Problem: All Ben Jerry’s stores were selling ice cream for rubles. Because of currency flactuation and inconvertibility they faced hard currency costs.
Black Market: In Russia, where most firms play down success for fear of paying taxes, poor output figures often hide a booming black market economy. Official figures, reassessed after the World Bank complaints that Russian statisticians were ignoring the black market economy, indicate that it accounts for 22 percent of GDP. But even Prime Minister admits that the size of the untaxed shadow economy might be as high as 50 percent of GDP.
Bureaucracy: The idea to open a store in Russia gained momentum about five years ago, when cold war tensions were starting to ease. The company first explored opening in Georgia or in Moscow. Bu the bureaucracy in both places scared them off. The company eventually settled in Petrozavodsk due mainly to the sister-state relationship between Vermont and Karelia. But obtaining permission from Soviet authorities to start operations and renovating the facility also took time.
As average 480,000 tons ice cream was produced annually in Russia in 1990’s.The industry had 120 companies and 18,000 employees.
In 1990’s there were two main competitors for Ben&Jerry in Ice Cream Market: Foreign Companies and Local Firms.
Foreign Ice Cream Companies: Almost all famous ice cream companies had investment or franchising agreement in Russia, because Russia was good market for ice cream industry.
Buskin Robins had franchising agreement until 1996. After that it went to joint venture. Buskin Robins had ice-cream shops almost every Russian City.
The most powerful foreign company in Russia was Nestle. It was domain of ice cream market in Russia because of its mass production capacity and relatively cheaper prices.
Haagen-Dazs and some Finland and Czech Companies were other important competitors of Ben&Jerry’s.
Local Companies: In 1988, most home refrigerators in Russia had very small freezers. Thus, ice cream was a dessert commonly sold by street vendors and restaurants for immediate consumption. At this time, street vendors were Ben&Jerry’s most substantial competition, selling tons of good-tasting ice cream every day for as little as 35 rubles per unit. However, variety was a weak spot in Russian ice cream-it vas vanilla or nothing. Thus, Ben&Jerry’s relied on variety and novelty a competitive advantage.
Local vendors were hostile toward the new Ben&jerry’s facility. Almost all ice cream sold in Petrozavodks was supplied by a local ice cream monopoly that had ties to the Mafia. Upon hearing of Ben&Jerry’s arrival, the local monopoly pressured the dairy not to supply the outsider with any cream, forcing them to find a new source of dairy nearly a day’s drive away. In addition, they arranged for frequent sanitation inspection visits in an afford to slow Ben&jerry’s operation down and keep them out of ice cream business in Petrozadovks.
Russians’ love for ice cream is legendary, even during their long, cold winters. Maybe that’s what makes them so strong. Or as Winston Churchill once put in: “You cannot defeat a nation ice cream at minus-40 Celsius.” Russia also has always been known for its tasty ice cream. But local Russian ice cream companies has e few variety such as vanilla(98 percent of ice cream production in Russia was vanilla). These companies generally have small factories whit 30-100 employees. But Foreign companies sell more than 600 different kind ice creams. Local producers use all natural ingredients, but foreign companies sometimes use artificial ingredients in their products.
STRATEGY AND VALUE CHAIN
The Value Chain is composed of two main group activities, the support activities and the primary activities. Within the support activities we find the firm’s infrastructure, human resource management, technological development, and procurement. In other words, the support activities are the within company activities. On the other hand, the primary activities group is composed of the supply chain, marketing and sales, and services. The supply chain sub-group contains the inbound logistics, the operations and the outbound logistics. As is expected, the primary activities are the outside/connection company activities. According to this concept, at the end of the Value Chain we find little room for margin, which at all possible time is trying to be increased.
Inbound Logistic: At the first point of the supply chain within the primary activities is the inbound logistic. The system to link suppliers’ products with the firm’s production process was not the most efficient, but nevertheless a good one. Because of the hostile environment caused by the local monopoly who pressured the dairy not to supply Ben & Jerry with any cream in Petrozavodsk, the company had to find another suitable supplier for their ingredients almost 24 hours away by car within the same region. Nevertheless, the new supplier’s milk had to be reformed to meet Ben & Jerry’s requirements, and high grade eggs and sugar had to be located. However, at times managers were faced with the fact that some ingredients could not be found at all in that region, and needed to be replaced by another local ingredient. For example, the khalua was replaced by the vodka, which altered the flavor of the product. In addition, not only scarce skilled inspectors needed to be recruited, but also Ben & Jerry had to heighten their sanitation system since Russia’s dairy industries are not as strict as the United States’.
Operations: The second point of this chain is the operations of the corporation. Ben & Jerry had to train all of the managers and employees in work habits and in the philosophy of the capitalist nation. As a result, managers from the United States had to be brought in to train these new employees not only about the market system, but also about the importance of producing a high quality ice cream. In addition, there was a lack of refrigerators in Russian stores which prompted Ben & Jerry to import their own refrigerators. They would either sale them, rent them or even give them away to the owners of these stores so as to avoid the ice cream to melt and refreeze again, reducing the quality of their products. In addition with all the technological difficulties encountered, there were a lot of communication problems between the partners; One of which was when the Russian partners considered it was time for expansion and the American decline because they considered more important that the level of demand reach at least 75% of their capacity.
Outbound Logistic: The third point of the supply chain is the outbound logistics. At this first level of distribution of their product from one place to the other within the same region, Ben & Jerry encountered a problem with the lack of refrigerated trucks in Russia, as a result they had to import such assets. Other unexpected and more serious distribution problem encountered was at the time when Ben & Jerry’s wanted to expand into other cities in Russia. At that point, they found out that distributing product around the different cities of Russia, via the railroads system for example, was very expensive. This would have prompted them to increase the price of their product unreasonably. However, distribution networks were established through the close friendly relationship between the Russian partner and the distributor’s company, which favored business relationship.
Marketing and Sales: The other point within the primary activities is marketing and sales. Iceverks wanted to produce a premium ice cream that Russians could afford. As a result, they used local suppliers to reduce cost significantly. Although, more then 98% of the ice cream consumed in Russia is vanilla, Ben & Jerry’s relied on their varieties and novelty ice cream as their “advantage” in the competitive market. However, as a clear result of a lack of marketing, customers thought that the product was spoiled whenever they saw chunks of ingredients in the Ben & Jerry’s ice cream. In addition to all of these conflicts, as a result of the political and economic instabilities in Russia, and the inconvertibility of the ruble, the company could not repatriate their profits. Although most of their product were sold in Rubles and their cost covered by these products sold, some distributors paid Ben & Jerry’s in dollars. However, by 1993 Ben & Jerry’s was no longer allowed to sale any of its product in US$ as long as they were produced in Russia. As a result of this new limited space for marketing and the increasing uncertainty on the value of the ruble, Ben & Jerry’s distributors quit, resulting in their products inability to reach some cities like Moscow.
Services: The last point of the primary activities in the Value Chain is the services. In order to provide a good and frozen ice cream to their costumers, Ben & Jerry’s had to make sure that some of their distributors were well equipped. As a result, they went to the point of providing them with a refrigerator that would keep their product in a good condition until consumption. Additionally, Ben & Jerry’s employees were trained to keep refrigerators clean and store in good sanitary condition. The company went as far as to teach and require their employee to greet their customers as part of their work ethics.
EVALUATION AND CONCLUSION
When Ben Cohen took a trip to Russia in 1988, he was actually a very intuit businessman. He decided to open up business right away there and generally speaking it seemed a right decision, considering the abundant natural resources there, cheap land, cheap and highly educated workforce, and a huge market.
But the big risk followed the big opportunity closely. He was an idealist in some degree, not a real businessman. Neither motivated by the industry structure or attractiveness of the external environment out there, nor by the resource-based characteristics inside the company, the only motivation was excited by the ice cream diplomacy and social responsibility. It is very nice for a businessman to have such a big idea, but this is business, it is in some degree a scientific thing which thousands and thousands professors and students are researching it everyday. You have to be very serious about it, otherwise you couldn’t achieve profit from it and you will lose a lot of money there, a lot of people will lose jobs, maybe some serious social problems follow it, even turmoil because of it, let alone to fulfill any big diplomatic or social goals.
If Ben&Jerry company have done enough homework to investigate and assess the environment in 1988 and 1999 in Russia, they would not have encountered with such meltdown in Russia. First, the political instability was obvious even in 1988 and 1989 when they decided to do business there, different political groups started to pursue their target in the form of so called “new thoughts” or “new system” in Kremlin, the news about someone was planning a coup in 1988 was street gossip everywhere; Second, the economy and financial risk was very high, due to the inflation, the huge drop in the value of ruble, the payment in the form of ruble, the inability to repatriate profits because of inconvertibility of the ruble; Third, the specific enter strategy was joint venture, generally it was a right decision because of the huge political risk , but the wrong thing they did about that was the 50: 50 control right over that joint venture, that means that they didn’t get the absolute control right over the joint venture, it would be some trouble in the near future for them to see over the joint venture’s development direction; Fourth, the big culture difference between the two countries reflected in the development direction over the joint venture, the inflexibility both sides were using to deal with the culture difference was easy to result in business failure. It seems that Culture difference is not as important as a sound strategy for some businessman, it is sometimes the exactly root for business failure. When dealing with culture difference, patient and flexibility are needed in some countries. It takes some time or some little changes somewhere to get the aim.
Article name: Ben and Jerry's Expansion into Russia essay, research paper, dissertation