World crisis cannot prevent Russian Sea Group from reaching 1 billion USD turnover

Despite the world crisis which has already hit a number of fish businesses in Russia, one of the nation's largest seafood producer Russian Sea Group of Companies, owner of the same called federal brand, has set an ambitious target for its turnover to reach one billion USD by the year 2011, thus doubling the group's current annual earnings of 500 million USD, reports www.fishnet-russia.com (www.fishnet.ru) with reference to Expert Magazine, the issue of 10-17 November 2008.

The report has quoted the group's CEO Dmitry Denezhkin as saying that the crisis can only slow down their development, but it cannot prevent them from moving forward to the announced destination. Russian Sea actually aims at becoming a global seafood player which will compete with the world's leaders in the sector on equal terms.

In the recent two years Russia's seafood market has been growing by 20% and the group has been always advancing even faster with its 70% annual rise. Moreover, such positive development has been achieved "organically", that is without any acquisitions or mergers.

Dmitry Denezhkin says that the nation's seafood market consists of four important sectors - fishing, wholesale fish trade, processing and aquaculture - and the group has been engaged in the latter three spheres. Though the current balance of the group's proceeds sourced from these three sectors is estimated at 70%, 30% and 0% correspondingly, in some five years the Russian Sea Group is planning to change the balance to fifty for processing and fifty for aquaculture.

Aquaculture

In line with positive dynamics in the world's aquaculture sector the group has targeted to farm 10,000 metric tons of trout at its new farm in Karelia commissioned in 2007. For comparison, all the fish farms based in Karelia, which is Russia's leading producer of cultured trout, grew 8000-9000 tonnes in 2007 with the biggest Karelian farm hardly harvesting 1000 tonnes.

The construction and the first trout farming cycle from 5-gram fry to 3-kilo fish, which takes three years at the least, mean large expenses for the group and under the burden of the financial crisis it will have to slow down the aquaculture project, but the activity itself belongs to the group's strategic spheres. On recovering after the crisis the group is going to develop its aquaculture activities in combination with onshore processing of the harvest.

The farmed trout roe will go for processing at the group's factory, while the trout itself initially will not be processed until the harvest grows large in volume. When it comes to life, the group will look into construction of a new production complex in Saint Petersburg or in the surrounding Leningrad Oblast.

Seafood trade

The group's CEO thinks that in the coming five years seafood traders in Russia will be losing their market shares as this business is far from very profitable with its extremely low margins and instability of the supply and demand.

Seafood producers, namely fishermen and fish farmers, have their own preferences as to sales of their products. More specifically, fishermen who harvest particular species once a year, will rather sell the harvest immediately, get the money and switch to harvesting other species, while fish farming gives comparably stable results throughout the year, but the breeding cycle itself takes from several months to several years.

In the meantime, retail chains, which are the final element in the product chain from producer to consumer, do not care whether the fish is harvested once a year or every day, but they ask for a reliable supply of a wide range of fish at steady prices and from several traders (not plenty of them). Therefore, seafood traders which have the whole stock of products on offer, build its business exclusively on connecting producers and retailers. Thus, it is purely managerial and logistical business which should be always pushed ahead via various promotion campaigns and other know-how marketing technologies. At the same time, this business cannot bring super profits because the competition on the Russian seafood market is very strong now.

Mr. Denezhkin says that the strong competition among traders can be explained by the absence of barriers for entry into the trading business. Any company engaged in foreign trade can buy fish from the world's leading producers, bring this fish to Russia, pay all the customs duties and sell it to chains, for instance. The other side of the medal is that the competition naturally limits the margins, which in seafood trade amounts to 2-3% on the average (the margins noticeably depend on product prices, e.g. cheap fish such as blue whiting cannot bring as big profit as chilled salmon).

Import

The Russian Sea Group trades in both imported fish and national fish, the latter is also exported to the international market. The current ratio of imports to home production on the Russian seafood market amounts to 70% to 30%, but it tends to change with the domestic products gradually winning a larger share, Denezhkin says.

The above trend of increasing home production can be attributed to aquaculture developments and better conditions for trade in Russian fish which has been growing more preferable thanks to easier logistics versus no customs duties and no problems with customs clearance. Moreover, in the recent months the Government of the Russian Federation has been taking measures aimed at a considerable rise of home production. These are the initiatives of the Federal Fisheries Agency (successor to former State Fisheries Committee) on shipping all the fish harvested in the Russian EEZ to the Russian ports for customs clearance, supporting construction of fish processing plants via soft loans, etc. These measures cannot but lead to a decrease of seafood imports and an increase of home production for domestic consumption.

Actually, imported and domestic fish do not compete with each other for most of the product items. For instance, Pacific salmons (chum, pink, coho, etc.) have got no direct competitors originating from foreign farms. The chilled North Atlantic salmon is a completely different product belonging to another price segment. It has to be imported from Norway so as to maintain the cool chain which will be inevitably broken while transported from the Russian Far East. All the seafood which is imported into Russia from the Southeast Asia cannot be produced inside the country (the product range includes pangasius, shellfish, mollusks, octopus, etc. though mussels, for example, are produced in small volumes in the Russian Far East).

Dmitry Denezhkin says that the group has the strongest positions in the delicatessen sector (Atlantic salmon, trout), salmon caviar and marinated herring. The group has been operating in the premium and above the medium segments, where the product quality is in the greatest focus. In order to support the current position of its brand the group has to concentrate on the product quality via monitoring the the entire route from the fish landing till its final processing.

Towards that end, the group has been importing frozen herring fillets in vacuum packs, because the Russian product does not fit for the group's production purposes, though other Russian processors do purchase it as the raw material. Besides, Denezhkin adds up, none of the Russian fishermen can guarantee reliable shipments all the year round.

In their expectations as to the herring quality the Russian Sea has moved as far as to send its production engineers to Norway, where they meet every ship calling at port for landing, watch the catch being processed, frozen, and then tag the appropriate goods with the group's own label.

Along with herring, the group has been importing Norwegian salmon and shellfish/mollusks from all over the world (e.g. the Southeast Asia) for further processing. Along with imported raw material, the group's processing facilities also work on the Russian raw material, mostly on fish roes.

Product range

Apart from monitoring the quality of the raw fish, the group is also keen on securing the product quality while processing, says Dmitry Denezhkin. That is achieved via strict hygiene standards applied in the factory, which has own laboratory, own effluent purification service, complicated conditioning systems, water and air preparation systems. Denezhkin says they have invested a lot of money to build up the whole technological culture at the group's production premises.

Speaking about the technologies applied at the factory, the group's CEO says that now they focus more on marinated seafood (known in Russia preserves) rather than on canning in view of the general trend towards healthy food. The group's long term plans provide for upholding its existing strong positions in such segments as salmon products and widening of its product range, especially in those market segments where its current shares are very small. In particular, one of the group's novelties is canned capelin roe which has been showing a quick rise of sales. The group plans to introduce such new products as shellfish-based spreads (pastes and creams) and develop its traditional range of salmon and salmon caviar.

Financial policy

In the nation's seafood sector the Russian Sea Group has been the first one to issue public debt instruments, ruble obligations and produce consolidated accounts in compliance with the International Financial Reporting Standards (IFRS). It is also going to become Russia's first seafood business to practice IPO. Mr. Denezhkin says that the group will be able to launch IPO already in 2009, but the current crisis makes it impossible to forecast whether the market will be ready.

The group's development has been normally backed by borrowed money. However, the current crisis has resulted into smaller loans aggravated by higher interest rates and in such a situation the group has chosen a policy of reducing its need in outsourced money thus sacrificing potentially brisk growth for the sake of its greater stability.

Despite the crisis the group is not going to change its plans to the end of 2008. In the coming year 2009 the Russian seafood market is expected to show a slower growth of 10-15% versus 15-20% observed before the crisis. However, Denezhkin says that by the end of 2008 the growth of the group's sales will still exceed 50% versus the initially projected figure of 70%.

Though the crisis cannot but affect the group, leaders of the Russian Sea positively estimate the group's outlook. Consumers will continue eating seafood, and though they will most probably switch to cheaper fish, the Russian Sea produces seafood in various price segments and will have the range to satisfy the consumer demand, Denezhkin says. Then, the group's financial positions are stable enough to let it solve the emerging economic problems.

Current strategy of the Russian Sea Group is aimed at rising profitability of its activities e.g. via reducing its costs. However, the group does not think of selling off any of its businesses. Taking into account its growth rates, in several years none of the strategic investors inside the industry will afford purchasing the group, Denezhkin claims. Moreover, in five years leaders of the Russian Sea ambitiously think that they will afford to acquire businesses themselves.

Background

The Russian Sea has been engaged in seafood production and trade since its foundation by brothers Andrey and Maxim Vorobyov eleven years ago. The group's founders have started with construction of a fish plant on the premises of an old vegetable base from the Soviet times. The construction process has been neither suspended nor halted even in the Russian financial crisis of 1998. The plant has now become one of the nation's largest facilities and one of the best outfitted in Europe. In 2007 the group's proceeds from seafood sales amounted to ca.4 billion rubles.

The Russian Sea Group has got more than 30 selling offices and seven purchasing offices all over Russia (from Kaliningrad to Petropavlovsk-Kamchatsky) and in China.

The Russian Sea Group of Companies is now headed by Chairman of the Board Maxim Vorobyov.

Each of the Group's member companies has got its own profile inside one of the priority directions:

ZAO Russian Fish Company (closed JSC)

Established in 1997 ZAO Russian Fish Company is Russia's largest trader of freshfrozen and chilled seafood. The company is engaged in importation and distribution of salmon species (Atlantic salmon, trout), pelagic fish (mackerel, herring), bottomfish and non-finfish marine products. The company has won a share of ca.7% of the Russian seafood market while contributing 70% to the proceeds of the Russian Sea Group. The company has been sourcing products from countries based on all the continents, but for Australia. Direct contracts have been signed with the largest world and Russian producers.

Wide geography of the company's product sales has been achieved thanks to its branchy dealer network and 23 own offices in the largest cities of Russia. By the end of 2007 the company's affiliates are to grow to 60 in number. The main part of purchased products is sold to out-of-house buyers: wholesale traders, processing companies, retail chains and HORECA sector. Some 10-15% of the company's raw fish is delivered to JSC Russian Sea for processing.

ZAO Russian Fish Company is headed by General Director Dmitry Dangauer.

ZAO Russian Sea (closed JSC)

ZAO Russian Sea was established in 1997 and until 2004 it was called ZAO BogorodskRYBA. The "Russian Sea" label was registered in 1999.

Russian Sea specializes in production of ready-to-eat range including marinated preserves from herring, shellfish/mollusks, mackerel and Baltic sprat, delicatessen products from salmon species, caviar products from salmon and other fishes, spreads, etc.

In May 2007 construction of a new production building took off at the company's premises in Noginsk near Moscow. The new facility is to be commissioned in late 2007 - early 2008. Apart from the company's main dynamically expanding production complex, a proportion of its branded range is partly produced at contracted plants located in Moscow region, Kaliningrad and in the Russian Far East. The company generates 30% of the Group's total proceeds.

The company's main label is TM Russian Sea. Besides, Russian Sea is the subbrand for a number of sublabels such as Selyodochka Stolichnaya, Bochkovaya Seld, Islandka, Red Ball, Ikryanoy Bochonok, Zolotaya Liniya (Golden Line), Mediterrana and Umaisagi.

Close cooperation inside the Russian Sea Group has been playing an important role in the company's production cycle. The bulk of its raw fish is supplied by Russian Fish Company thus securing stability of shipments, high quality of the raw fish and the level of purchasing prices in accordance with the market.

The Russian Federation is the main market for the company with the product range shipped to more than 50 regions of the country. Besides, Russian Sea TM products are realized in other CIS countries, Europe and America.

The company's distribution network includes 2 affiliates, one in Saint Petersburg and one in Noginsk, and dealer representative offices.

ZAO Russian Sea is headed by General Director Svetlana Fedoseyeva.

OOO Russian Sea-Kaliningrad (ltd)

OOO Russian Sea-Kaliningrad is the second division engaged in fish processing within the Russian Sea Group. The company produces some of the Russian Sea labelled range of the medium and lower than medium price segments under the sublabels of Sem Uzlov (7 Knots), Seld Mirovaya (Top Herring) and Madam Skumbriel.

OOO Russian Sea-Kaliningrad is headed by Acting General Director Oleg Zakonov.

OOO Russian Sea - Aquaculture (ltd)

Within the guidelines of its long-term development strategy in 2007 the Russian Sea Group has launched a project of breeding various fish species in Russia. The project provides for rainbow trout and Atlantic salmon farming in the nation's Northwest Federal District (Republic of Karelia, Arkhangelsk and Vologda regions) and river trout farming in Krasnodarsky Krai Territory in the south of Russia.

Within the framework of the project in spring 2007 OOO Trout Farm Segozerskoye (ltd) has been acquired to form the basis for construction of a new up-to-date fish farming complex and a smolt hatchery.

OOO Russian Sea - Aquaculture is headed by General Director Oleg Beginin.

OOO Russian Sea Managing Company (ltd)

OOO Russian Sea Managing Company was established in 2006 as part of restructuring management of the Russian Sea Group of Companies in order to consolidate a number of the functional areas across all the Group's member companies, the areas including finances, logistics, personnel and legal services, IT divisions, etc. In fact, thanks to this link the Group has been operating as a single whole.

The managing company has been keeping consolidated accounts of the Group according to the international financial reporting standards. In November 2007 the Group's IFRS accounts for the fiscal year 2006 will be audited by Ernst and Young Company and the results of the audit will be made public afterwards.

OOO Russian Sea Managing Company is headed by General Director Dmitry Denezhkin.

Contact details:

Head Office
10 Aviamotornaya str., bld. 2
111024 Moscow
Russia
Tel.: +7 (495) 648-90-50
Fax: +7 (495) 648-90-51
E-mail: rs@russiansea.ru

Production
Station Zakharovo
142403 Noginsk
Moscow region
Russia
Tel.: +7(495) 789-89-60
Fax: +7 (495) 775-41-58
E-mail: info@bfish.russiansea.ru

Russian Sea Delivery (Noginsk Logistic Centre)
Station Zakharovo
Betonnaya str. 4
142403 Noginsk
Moscow region
Russia
Tel.: +7(495) 797-67-91
Fax: +7 (495) 797-67-92
E-mail: info@bfish.russiansea.ru

Russian Sea Delivery (RF regions, CIS)
10 Aviamotornaya str., bld. 2
1111024 Moscow
Russia
Tel.: +7 (495) 648-90-50
Fax: +7 (495) 648-90-51
E-mail: rs@russiansea.ru

Russian Sea Delivery (Moscow, Retail Chains)
Amurskaya str. 2
107553 Moscow
Russia
Tel.: +7 (495) 589-19-80
E-mail: info@frost.russiansea.ru

Russian Sea Delivery (St. Petersburg)
Nevelskaya str. 7
198035 St. Petersburg
Tel.: +7 (812) 495-89-56, 495-89-49
Fax: +7 (812) 495-89-56
E-mail: info@spb.russiansea.ru

More about the company at http://www.fishnet-russia.com/companies/328/