One time in 1853, the American railway tycoon Vanderbilt was having dinner with his French business partners. One of the Frenchmen commented that fries are sliced thinner in France, so Vanderbilt ordered his chef George Croom to make thinner fries right away. Croom sliced the potatoes paper-thin, and deep-fried them with salt. Both Vanderbilt and his guests totally loved the new style fries and soon had them patented. This gave rise to a new trend in potato cooking which has since evolved into an enormous industry, and the day of that dinner is considered the birthday of potato chips.
Back in the 80s, Soviet-made chips could only be found in Moscow for 10 kopecks a bag. On a mass scale, however, chips first came to Russia in the early 1990s, together with other food imports. Russians were overwhelmed by the plethora of chips in attractive packaging crowding the store shelves. They wanted them all.
The segment of potato chips has since developed its own taste and brand loyalties. People know the exact flavor they want. Between 30% and 40% of potato chips are consumed by beer drinkers aged 16 to 45; 30% goes to kids aged 3 to 15; and about 20% is consumed as a snack by young people aged between 16 to 23.
Analysts have calculated that the proportion of domestic and imported chips consumed in Russia is about 50% to 50%. The domestic leader is Russian Product, the owner of Koloss factory that used to make potato chips in the Soviet Union. Another popular brand is Our Champion, made by Russian Potato since 1998. Another major player is the Vologda Food Complex, which found a good investor – Moscow’s Kuntsevo – in time to save itself from bankruptcy. Now the company has straightened itself out and its sales are on the rise. Having sensed big opportunities and quick returns, scores of domestic small and medium-sized companies staked out the rest of the segment launching dozens of potato chip production lines.
The competitive edge of Russian-made potato chips lies in their low price and the popular delusion that domestic products are made of all natural ingredients. People still remember numerous cases of international manufacturers being exposed for using genetically modified produce or fat substitutes the human body could not digest. Imported chips owe their continued success to their great taste and the brand loyalties of the more affluent people.
The world market of potato chips is dominated by a few transnational manufacturers and their world-wide brands. Few Russians know that Pringles are actually made by Procter & Gamble, which is better known in Russia as the manufacturer of cleaning products. Another major chip brand, Estrella, is owned by the food giant Kraft Foods, Inc. (Jacobs and Maxwell House coffees), a Philip Morris group company. Lays are marketed world-wide by Frito Lay, a division of PepsiCo. It is no surprise then that Russian manufacturers are facing stiff competition in the domestic market from these transnational food empires, who spare no expense on marketing or advertising. When all imports dropped in the aftermath of the 1998 crisis, the imports of potato chips were the quickest to resume, and have more than tripled over the three years since.
According to customs statistics, 4.7 tons of potato chips worth a total of US $11 million (the sum total of all contracts for potato chip supply signed that year) were imported into Russia in 1999. In 2000, Russia was already eating more potato chips than it had been before the crisis. Imports were up to 10.7 tons in natural weight, or US $22.4 million. In the first 11 months of 2001, Russia imported 17.6 tons, or US $33.1 million worth of potato chips. Not a bad growth rate. This at a time when the domestic output of chips was also rapidly increasing.
The geography of imports has changed dramatically since new potato processing facilities were launched in Europe. In 1999 and 2000, Frito Lay’s Polish factories supplied between 80% and 90% of the company’s potato chip exports to Russia. Between January and November 2001, the figure dropped to 51%. Frito Lay currently supplies 14% of its Russian exports from Turkey, and 9% from Belgium. Eleven percent of Estrella imports come from Finland. Pringles chips are imported from Belgium.
Despite the launch of new production facilities and soaring sales, Lays cut its exports to Russia in 2001. In 2000, Lays supplied 77% of Russia’s potato chip imports in natural weight, and 88% in monetary value. In January through November 2001, the percentages dropped to 54% and 71%, respectively. In quantitative terms, Estrella’s market share has hardly changed in three years. In monetary value, Estrella’s share went up from 6% to 14% due to higher prices. Pringles boosted its imports 18% in weight and 5% in value in 2001 compared to 2000, although sources at the Russian rep office of Procter & Gamble said they no longer deal in potato chips directly. Chio, Crunchips and Star have all increased their exports to Russia.
Breakneck growth rates have made the potato chip market highly appealing to investors. Frito Lay, for one, has resumed construction on its $60 million potato chip factory in Kashira near Moscow. Following a series of cultivating experiments for the right kind of potatoes, Kraft Foods looks set to start construction on its potato chip factory near Novgorod. Kraft Foods has been moving into the Russian market aggressively across a broad spectrum of food products, having launched an instant coffee packing factory near St. Petersburg, and acquired Stollwerck’s chocolate factory in Pokrov, Vladimir Region.
Domestic companies are trying hard to keep in pace with their foreign counterparts. Russian Potato completed the installation of its new Dutch-made production line last summer, which will triple its output of potato chips. Russian Product purchased new potato chip-making equipment in Germany last fall.
Russia currently consumes about 0.5 kg of potato chips per capita annually; Europe, between 1 and 5 kg. In the United States, annual consumption of potato chips reaches 10 kg per person. Sure enough, we have a long way to go before Russia can start vying with America, but if the economy and consumer purchasing power keep growing and foreign investment keeps flowing in, Russia’s consumption of potato chips will inevitably increase, at least to an average European level.