Perishable economy: how to make money on milk processing

Economist Ruslan Sagitov

“Get rid of headaches”

Economist Ruslan Sagitov in 2007 he graduated from the Orenburg state agrarian University, and then defended a PhD thesis on systemic risks in the Russian banking sector and continued to work at the University. To move from theory to practice Sagitova had in 2012. His father Ravil, Director of agricultural cooperative “Dawn”, the former collective farm with 600 cows, was asked to help with the management of the economy.

“For many years the father was faced with non-payment of dairies in the spring and summer when you need the money for spring sowing, forage,” says Sagitov. He worked with different processors, in the end, one company went bankrupt and paid off cars, the other company caused the loss of 5 million rubles, with the third plant was also a big problem. In the end, we decided to do everything yourself to get rid of this headache”.

In 2013 Sagitova rented “Dawn” (farm owned on shares the members of the cooperative) land in the village of Kubankino saraktashsky district of the Orenburg region and decided to build from scratch a milk processing plant. To erect a building began on may 9, 2013. In total at the time of launch and start of sales in April 2014 Sagitova invested in the plant 39.3 million RUB over the Investor was the father of Ruslan. According to SPARK, 50% of shares of OOO “Steppe” belongs Sagitova Jr. and his sister Elmira.

Trademark “White lake”, which Sagitova began to sell milk, got up with his wife when they were Cycling in the vicinity of the dairy. Logo and design Ruslan drew himself. In the first months of the plant processed only 200-300 liters of milk per day, and the coordinator and his staff trained at other companies. “In the neighboring village worked dairy, comparable in processing volumes. They behaved beautifully and shared experience,” says Sagitov. The plant owners decided to preserve: they live in another region and could not control all the processes, ” he recalls. He Sagitov was convinced — if you buy modern equipment and to establish control, the production will become profitable, and the father will relieve a headache.

The milk market

According to retail audit Nielsen, the dairy market in Russia — the second in terms of sales volume and first cash among all segments of the food market. Last year the growth of prices for dairy products amounted to 9.7%, and a liter of pasteurized milk, the average cost 46 rubles, the Volume of sales on the Russian dairy market in 2015 grew by 2.5% in real terms. Compared to 2014 (+5%) is slowing.

Top 3 brands by sales in natural terms in 2014-2015 — “Buttermilk” (Danone Russia), “House in village” and “the Miracle” (“Wimm-bill-Dann”, controlled by PepsiCo). Despite the dominance of large international companies, in Russia there are hundreds of small local producers. “There is a significant growth of sales in low – and middle-price segment, partly due to the increasing market presence of private brands [cheap private brands of retail chains], which enjoys considerable demand, partly due to the strengthening of the local producers who are increasing their sales and offer products at more affordable prices,” says Director of group companies of the food market Nielsen Sergei Glamazda.

“I want to win — get best price”

“The key problem of such dairy startups. Unknown brand very hard to sell, and the time of storage of the dairy products is very short,” — says the Chairman of the Association “Soyuzmoloko” Andrey Danilenko.

The first batch of products 1 APR 2014 lucky the freight forwarder to Orenburg (the city is 75 km from the village of Kubankino). “We came in a regular [brick and mortar] stores, said that present the products of the new plant, proposed to try. Someone refused, and who then slowly took the sample. Came in two days, and we have been waiting for,” says Sagitov. Soon, he says, the products under the brand name “White lake” can be found in almost all retail outlets in the vicinity of the plant. Six months later, the company has increased the capacity of processing 3 tons of milk per day.

At this point, the coordinator has found a new distribution channel. In 2015, he began to track online tenders for public procurement. “At first we were afraid. For us, the public procurement a new one. But soon won several tenders, no problems and there were no obstacles. Want to win — get the best price and everything,” says Sagitov. The selling price of milk under the brand “White lake” with a volume of 1 liter fat content of 2.5% was approximately 31 rubles (the cost of production 26,35 RUB) is a segment. Now the plant is working with kindergartens, provides dairy products to local schools, hospitals.

Once you master the tenders, the coordinator decided to go ahead and become a supplier of large businesses. “Steppe” was able to win the competition for the supply of dairy products Mednogorsky copper-sulphur plant (part of Ural mining and metallurgical company) and the helium plant of Gazprom (both in the Orenburg region). For “Gazprom” “the Steppe” supplies milk issued to employees “for harm”, and dairy products for the dining room, only about 6 tons per month.

In the same 2015 among the clients appeared large trade networks: Metro Cash & Carry, O’key, Magnit. “Delivery networks unstable. Much depends on the season: in winter, well taken and, in summer, 20-30% sales decline. But government purchases provide us with orders in the winter and summer,” says Sagitov.

<p>Economist Ruslan Sagitov</p>

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Photo: From personal archive

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Economist Ruslan Sagitov

Direct competitors of the company Novosergievskaya dairy plant, dairy Tasiemski, the company “Orenburg milk”: they all produce milk with a short shelf life. This product requires special conditions of carriage, so often the winner is the manufacturer, which is just closer to the consumer.

“Such projects have a future in the local market. Across the country there are examples of such production, combined with processing: “Sayapin” in the Kaluga region, Dmitrova Gora” in the Tver region,” — says Danilenko.

Now the geography of deliveries of dairy “the Steppe” — the shops and businesses in a radius of 150 km from the village of Kubankino as to carry perishable products continue to be profitable. About half of the products the company sells in the tenders, the rest are divided between corner stores and online. “In rural areas, convenience stores more than networking, so the ratio is about 70/30% in favor of small, local outlets,” explains Ruslan. The average convenience stores buy from “Steppes” 1 t milk and dairy products per month.

A commodity line of “Steppes” consists of the products segment short shelf life (milk, yogurt, varenets, fermented baked milk, yogurt), sour cream cups, curd, and butter in blocks. “We chose this range because this segment is presented only to local manufacturers, and Federal players may not carry perishable products and, therefore, easier to compete,” says Sagitov. In the segment of oil to compete with Belarusian suppliers, so the primary product is milk.

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“For us and our buyers manufacturers, such as “the Steppe” — the salvation. In contrast to the large holdings they are willing to work on natural raw materials and to produce quality products without additives,” says Yevgeny Schepin, Director of external communications of companies “Hut” and “Coswell”.

The main problem of milk production — special conditions and increased sanitary requirements for the production, storage and transportation. If somewhere you make a mistake, the milk is immediately sour. Therefore, the plant operates a chemical laboratory, where there are daily primary analyses. “Sometimes we see that the milk comes to us already overheated or dirty, someone could on the farm to finish the cow, and the milk contaminated,” says Sagitov.

Store the milk at the plant for more than one day is impossible — he was immediately driven counterparties. Thus it is necessary to monitor the buyers. “Sometimes you have to go to the place and measure the temperature in the refrigeration equipment as it turned out, it is not always necessary”, — says Ruslan. Father Sagitova owns four shops in rural areas, which, of course, purchase products, “Steppe”: it turned out that in them is non-compliant with the requirements of the equipment, and I had to change the fridge.

A “real”business

The initial investment in a dairy factory amounted to almost 40 million rubles. About 12 million rubles from the businessman went to renovate, furnish, communications. Another 14 million rubles. Sagitov spent on the purchase and installation of equipment, the most expensive purchase was a pasteurizer for thermal treatment of milk, which cost 2 million rubles At the first stage we wanted to keep the free area of the plant for growth, but in the end, the equipment had to be purchased, and now the whole plant is already full, ” says Sagitov. — It turns out that it was necessary to build the room of even greater size.” Working capital took about 8 million rubles. packaging, purchase the first batch of raw ingredients. Plus bought six vehicles refrigerated trucks to 5 million rubles.

According to SPARK, in 2014 the revenue of OOO “Steppe” was 36 million rubles, the company received 8 million loss. According to Sagitova, in 2015, the company’s revenue grew to 48 million rubles, and the profit was about 3 million rubles. But the owners of “Steppe” reinvest in the expansion of production. Over half of 2016 revenue amounted to 30 million rubles. “We are going according to plan and we are going to reach 60 million worth of sales by year-end, reworking 3000 tons of milk,” — says Ruslan. From January 2016, the dairy plant processes all the milk that is produced in “Dawn”, and attracts third-party vendors. According to the calculations of the entrepreneur, to recoup the investment will succeed by the spring of 2019.

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No problems with the staff in the village there. “We have comfortable working environment, because someone used to work on the tractor in the heat, and then plant where well-maintained toilets, showers, clean clothing. People have something to compare, they are happy to come to us. It is believed that it is prestigious and high — status work”, – Ruslan says. At the dairy plant in Kubankino now employed 20 people, production managers, technicians, packers, nurses, operators of gas boiler guards. It’s a family business — Ruslan helps sister, mom entrepreneur is responsible for accounting, the wife is responsible for legal support.

Monthly revenue of the factory is now approximately 5.6 million rubles, 80% of the proceeds (or 4.5 million rubles) comes at the expense of sales: 40% of milk, 32% of dairy products, 28% — the cheese and butter. 20% of total revenue is the processing of milk for third parties. Now the company is “tax holidays” — due to the investment expenses of previous years tax is only 1% of revenues.

Now the coordinator prepares documents for the drilling of wells and building a new building. He plans to add to the milk production of drinking water: in winter, the yields fall, and the water demand all year round and relations with the local retail already established.