Russian Sea sales to top three customers drop 41%

Russian Sea Group has been in talks to renegotiate contracts with retailers after sales to its top three customers plummeted in the third quarter of 2012.

Sales to Russian Sea’s top three customers -- which are amongst the country’s largest five retail chains -- dropped by 41% in the quarter, Russian Sea said in its quarterly update.

This drove an overall 14% drop in retail sales to less than RUB 2 billion ($63m), the group said.

One of these top three customers is suspected to be Dixy, Russia’s third largest food retail chain. Dixy stopped buying salmon from Russian Sea in the third quarter as their price was 30% above market average, one industry source told Undercurrent News.

Russian Sea supplies most of the country’s leading retail food chains such as X5, Dixy, Magnit, Sedmoi Continent, Metro and Auchan.

"Russian Sea refused to participate in tender-basis activity, because we believe that this procedure cannot work with exclusive products"

The company, which is an important salmon and trout importer and processor, said the drop was due to retailers’ decision to buy its products on a tender basis.

This led to Russian Sea losing out to competitors who had better offers, an analyst said. “If retailers see demand for more expensive but higher quality Russian Sea products, they will buy it from the company, [but this] did not happen in 3Q12,” Ulyana Lenvalskaya, analyst at Renaissance Capital, told Undercurrent

According to one Russian industry source, retailers started using more tenders this year due to a change in regulation. The biggest change came when X5, the largest chain, also switched to using tenders this year, he told Undercurrent.

In its update, Russian Sea said it was in talks with retailers to make them buy its products on an exclusive basis instead. The company’s future success “largely depends on its ability to decomoditize [its] main categories,” the update said.

"Russian Sea refused to participate in tender-basis activity, because we believe that this procedure cannot work with exclusive products, such as Russian Sea fish or caviar ones,” a spokesperson told Undercurrent.

“As of today all main nationwide retailers have our full product range on their shelves and we continue our negotiations with local retailers to make our regional presence wider.”

The crux of Russian Sea’s argument is that its products are premium and should therefore not be considered purely on a price basis.

The group has emphasized this push by rolling out a premium salmon roe range in July followed by delicacy fish products in October. The products are said to differ by packaging, quality and, in the case of the roe, by type of species.

Tenders are an established practice in Russian retail, and have recently been extended to branded products, Lenvalskaya said. “Retailers often prefer to buy using tenders. The biggest retailers even have the tenders online,” she said. “Historically, the tenders were held only for private labels; later the system was expanded on other categories including branded products.”

Lenvalskaya said tenders are usually held only for large volume goods. “So not everything on a retail shelf is bought through the tenders, there are many exceptions.”

Russian Sea owns a factory in Noginsk, Moscow, with a capacity to produce up to 35,000 metric tons a year. Its brands include Russian Sea, Islandska, 7 Uzlov and Flottika.

Russian Fish drives growth

Despite the retail sales drop, Russian Sea’s revenues in the quarter were up by 5% to RUB 4 billion in the quarter. This was mainly driven by its largest subsidiary, Russian Fish, which reported a 10% increase in revenues to RUB 3.39 bn.

Russian Fish, which imports fish from 18 countries, including from companies such as Marine Harvest, Shetland Catch and Norway Pelagic, attributed the growth to increased sales of Russian cod and mackerel and higher imports of pelagic fish, including mackerel and capelin.

In contrast the ready-to-eat segment saw revenues drop by 16% to RUB 654m. However, sales of its delicacy salmon have started increasing and sales of its Mediterana Grill range are also showing positive signs, the group said.

Taken over the first nine months of 2012 the results are weaker, with overall revenues down by 7% to RUB 11.6 bn, driven by a 4.4% drop in Russian Fish and an 18% drop in the ready to eat unit.

Meanwhile, the company is starting to record its first revenues from its nascent trout aquaculture division in Karelia, which made revenues of RUB 59m in the first nine months of the year, up from RUB 4m last year. Its trout farms have the potential to produce more than 30,000t of trout. The company has also started setting up Atlantic salmon farms in the Murmansk region, with the potential to produce more than 40,000t.

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