Analyzing Arlas Prospects of Marketing Organic Dairy Products in Ukraine

Analyzing Arlas prospects of marketing organic dairy products in Ukraine.a report for Cross Cultural Marketing

Kateryna Osypova, Lars Rachlitz, Stefán Steinsen, Akira Saito and Jespe Weltz

Aarhus School of Business and Social Sciences

Analyzing Arlas prospects of marketing organic dairy products in Ukraine. Page 1 of 31

Abstract (all) 4

Introduction (all) 4

Problem statement (all) 4

Limitations (all) 5

Methodology (all) 5

Arla (Jesper) 6

Market Definition (Kateryna) 8

PEST analysis for Ukraine (Stefán, Akira) 8

Political Factors 8

Landscape 8

Foreign Relations 9

Corruptions 9

Tax for milk products 9

Economic Factors 10

Landscape 10

Social Factors 11

Landscape 11

Population 11

Education 11

Technology Factors 12

Internet 12

R & D 12

Production Technology in Milk Processing 12

Overview of PEST 13

Segmentation 13

Geographical (Lars) 13


Demographical (Stefán) 13

Age 13

Gender 14

Occupation 15

Income 15

Family status 17

Psychographic and behavioural (Lars) 17

Ukrainian consumers 18

Organic consumers 20

Overview of segmentation (Lars) 21

5-Forces (Kateryna) 22

Rivalry 22

Potential Entrance 23

Supplier 23

Consumers 24

Substitutes 25

Overview of 5-Forces 25

SWOT (all) 26

4 P’s (all) 26

Product 26

Price 27

Place 28

Promotion 29

Conclusion (all) 30

Reference List 32


Abstract (all)

This research is based on secondary data and addresses the issue whether Arla should enter

the Ukrainian market and start producing organic dairy products in a joint venture with a Ukrainian

company called Galychyna. The organic dairy market is non-existent in Ukraine but organic

products have seen increasing growth rate. In helping us to decide we utilise different marketing

models such as PEST, market segmentation, Porter 5 forces, SWOT analysis and the 4ps. Based

on our findings and after analysing all the data we think that at this moment this is not the right time

to enter Ukrainian dairy markt.

Keyword: Arla, Co-branding, Organic dairy, Ukraine.

Introduction (all)

The idea of bringing organic dairy products in to Ukraine is originally based on an article that

suggested that the Ukrainian population was ready for a movement towards organic food (Grishko,

2010) and the fact that Denmark is home to the world’s biggest producer of organic dairy products,

(Arla, Organic history, 2011) namely the Aarhus based company Arla. On this basis we decided to

look in to whether Arla would have a realistic chance In Ukraine, when it comes to marketing of

organic dairy products.

Problem statement (all)

In this report we will focus on the possibility of organic dairy sales in Ukraine and whether this

will be a realistic market for Arla to enter in the near future and how they should potentially go

about such a task. Our problem statement thus takes the following form:

Will Ukraine be a potential market for Arlas organic products, and in which way will it be best

for Arla to go in to the Ukrainian market.


We aim to answer this problem statement through the following sub-questions:

I. What opportunities and risks are present in the Ukraine market?

II. How is the Ukrainian population composed, and which segment(s) is/are the most interest-

ing targets?

III. How is the competition situation in the Ukraine dairy market?

IV. How should Arla adjust the 4 Ps in case they should decide to enter the market?

Limitations (all)

The study will be conducted by using secondary data sources. This will, of course, mean that

the paper will take a rather general form, compared to if we have had the time and resources to

collect our own primary data. We will instead identify the most important areas in which key

information might be missing.

We have had difficulty obtaining information about ukraine attitude toward scandinavian and

western products and products.

Methodology (all)

In the following research paper we will be analyzing the Ukrainian market from different

perspectives and find the best possible strategy that Arla might use, if they should decide to enter

the market based on our analysis of risks and opportunities. Our approach takes the shape of a

funnel. Firstly, we will use the PEST-analysis, which will help us to generate a general picture of

the country regarding political, economic, social and technical aspects. This is done to get a picture

of the overall attractiveness of the Ukrainian market. Next, we will take a look at the consumers, in

order to find out who could be potential target groups and if/why they’d might be interested in

organic products marketed by Arla. Segmentation by geographical, demographical, psychographical

and behavioral criteria will provide us with needed information by taking all relevant and available


secondary data into account, mostly in the form of scientific research on the Ukrainian consumers

and on organic consumer patterns across the globe. Thirdly, Porter’s 5 forces analysis will form the

framework from which we will analyse the more competition-related parts of the Ukrainian dairy

market, which will be required in order to choose the potential strategy for Arla that has the highest

chance of turning out to be a successful one. Our findings will be summarized via a

SWOT-analysis, and our assessment of the market potential, as well as our suggestions to how Arla

should adjust the 4 Ps. These suggestions will be of a more strategic than operational nature.

Arla (Jesper)

Arla Foods is a Aarhus based Danish-Swedish cooperative, and Scandinavia’s largest producer

of dairy products. Arla was formed in April 2000 as the result of a merger between the Swedish

dairy cooperative Arla and the Danish dairy company MD Foods. (Arla, History, 2011) Despite

Arla’s strong position on the local markets where they have a market share of respectively 95

percent in the Danish dairy production market and 65 percent of the Swedish market, these two

markets only account for 38% of Arlas annual turnover of 49 Billion DKK. (Arla, Annual Report

2010, P. 2, 16)

Arla Foods is the seventh largest dairy company in the world measured by turnover.

(Euromonitor, Arla Foods, 2010) And One of Arlas strongest business areas is organic dairy

production, (Arla, Organic vision, 2011) where Arla is the world’s biggest producer of organic dairy

products and with a history of organic dairy production dating back to 1988. (Arla, Organic history,

2011) Arla has in many ways paved the way for organic milk production I Scandinavia together

with the retail chain COOP, then known as FDB, when they in the early 80 introduced a range of

different organic products. (Arla, Organic history, 2011 & Brandt, 2008)


In 2008 Arla adopted its current strategy in witch their aim is to significantly increase sales of

milk-based products, by focus on its tree main brands, where Castello, and Lurpak shout become

there cheese and butter brands, and the Arla brand as an umbrella brand for a range of smaller

brands such as Kærgården and Yoggi This is a change form earlier where Arla had the Lurpak and

Castello as international brands and a number of brands for all other product categories than chess

and butter. This wide range of brand has for the most part been country specific. With Arla’s new

strategy they are trying to make the Arla brand into an international brand that will be

acknowledged as more of a goblet brand. (Euromonitor, Arla Foods, 2010 & Arla, brands 2011 &

Arla, Annual Report 2010, P. 12-13)

When it comes to Arla’s focus on markets the work with three types of export market Core

market, Growth market and Value markets. (Arla, Annual Report 2010, p. 10) As seen in Appendix

1. This tree market types are as follows.

Core markets are markets where the focus on obtaining or maintain a key position on these

markets, with a focus on creation value added products. (Arla, Strategy 2011)

Growth markets are markets where Arla focus on their core product categories and by growing

through mergers and acquisitions, the target of these markets is to make a strong platform for fur-

ther growth. (Arla, Strategy 2011)

In value markets the main focus of Arla is to move focus from business sales to consumer sales,

and to start an introduction of leading product categories, this is to be achieved through partnerships

with shared interests. (Arla, Strategy 2011)


Market Definition (Kateryna)

Before establishing any kind of business activities in the country, we have to consider potential

market, available market and target market. Potential market – is those in the total population, who

have the interest to buy the product. Since organic dairy market belongs to general dairy market, we

assume that potential market is all the current consumers of dairy products. Available market – are

those in the potential market, who have money to buy the product, so we assume that more wealthy

people will be willing to spend more on organic dairy. Finally, our target market will include

health-conscious consumers with higher income. (netMBA 2010)

PEST analysis for Ukraine (Stefán, Akira)

Political Factors

Landscape

Ukraine, the second largest country in the Eastern Europe, got its independence from the Soviet

Union on August 24, 1991. Orange revolution in 2004 motivated the change and improvements in

the government system. In February 2010, Viktor Yanukovych became the president of Ukraine. He

attempts to keep the balance in the country’s diplomatic relation with Russia and the EU (The PRS

Group, Inc., 2010, Ukraine Country Report, Political Framework P. 33). His government is sup-

posed to go forward with the reform; however, the fact that he does not have a great power in coun-

cil will lead administration to interrupt his challenging (Datamonitor, 2010, Country Analysis Re-

port Ukraine In-depth PEST Insights, P. 11).


Foreign Relations

Although Ukraine develops a friendly relation with neighbors, Ukraine has to keep a balance

between Russia and Western Europe. The reason is that Ukraine strongly relies on energy resources

from Russia which provides amount of 35 percent of consumption (Journal of European Public Pol-

icy, 2009, P. 866). Russian Gas diplomacy could be the source of distress for Ukraine government.

At the same time Ukraine established partnership with NATO, and also Ukraine attempts to join the

EU which is the largest trading partner. (Datamonitor, 2010, Country Analysis Report Ukraine In-

depth PEST Insights, P. 12)

Corruptions

There is a high level of overall corruption in Ukraine, according to “Corruption Perceptions

Index”, ranking them 134th out of 179 countries, which is a main barrier to foreign investment.

Corruption in Ukraine arises from institutional traditions, such as the insufficiency of transparency

to make decision and low social comprehension about corporate governance (The PRS Group,Inc.,

2010, Ukraine Country Report, Climate for Investment & Trade, P. 1).

Tax for milk products

In 2010, the government stopped refunding back VAT to milk processing plants. This action

increased the price of both raw milk and end products. The average price of milk drinks increased

by 15% in 2010 (Euromonitor, 2011, Drinking Milk Products – Ukraine, P.1).


Economic Factors

Landscape

Entirely economic reform contributed to expand an average GDP growth around 6.9% from

2001 to 2008. Although the economy in 2009 shrank by 15% because of the global financial crisis,

it turned around to 4.2% in 2010. The inflation in Ukraine peaked at 25% in 2008. However, the

inflation fell down to 16.5% in 2009 and it is expected that it would average around 9% during

2010–13 (Datamonitor, 2010, Country Analysis Report Ukraine In-depth PEST Insights, P. 18).

Foreign Trade

Ukraine became a member of the World Trade Organization (WTO) on May 16, 2008. WTO

entry was the first step to develop the investment condition for Western countries (The PRS Group,

Inc, Ukraine Country Report, 2010, Climate for Investment & Trade P. 1). In fact, foreign direct

investments have dramatically increased in Ukraine. The largest part of investment comes from EU

countries; its main areas are the production with 27.6% and the financial sector with 16% (Bulgar-

ian Investment Consulting Agency, 2008, PEST Analysis of Ukraine, P. 5).

Currency Trend

Ukraine currency, Hryvnia, declined by 47.2% in 2009 because of financial liquidity crisis in

the banking sector that resulted from non-performing loans, severely affecting construction and

mortgage sectors (Euromonitor, 2010, Risks and Vulnerabilities Ukraine, P. 5). Emerging Euro

Monitor mentioned that The National Bank of Ukraine would maintain effective intervening in the

exchange market, and keep market continuous stable condition.


Social Factors

Landscape

In terms of ethnical group, Ukrainians compose 77.8% of the total population, Russian consists

only 17.3% (CIA, 2011, The World Factbook). Ukraine could be divided two main regions, eastern

and western. The majority in eastern part of the country is ethnically and linguistically Russian. In

contrast, the great part of people in the west are Ukrainians (The PRS Group, Inc., 2010, Ukraine

Country Report, Comment & Analysis P. 11).

Population

The total population in Ukraine was announced to be 45.8 million as of 1st of December, 2010

(United Press, 2011). Since reaching its peak of 52.17 million in 1993 the total population has been

declining, resulting from lower birth rate and shorter life expectancy. However, the birth rate

increased significantly by 23% from 2009 to 2010, induced with financial support from the

government (Euromonitor, 2010, Consumer Lifestyle, P. 2-3). Rapid urbanization is a

demographical challenge for Ukraine. Currently 68.3% of the population is living in urban areas

and 31.7% in rural ones. According to Emerging Europe Monitor by 2035, almost two-thirds of

Ukrainians will be city dwellers, rising to almost 80% by 2050 (Bulgarian Investment Consulting

Agency, 2008, PEST Analysis of Ukraine, P.10).

Education

The literacy rate in Ukraine is around 99.4% (Euromonitor, 2010, Country Analysis Report–In-

depth PEST Insights, P. 31). There are many highly educated people in Ukraine and the country

produces the fourth largest number of academic graduates in Europe (CIA, 2011, The World Fact-

book).


Technology Factors

Internet

The Internet penetration reached 15 million in 2010, almost 33.2% of the total population.

Main users of Internet are younger and middle-aged people in the urban cities. Along with increase

in internet penetration e-commerce grew by 120% from 2008 to 2009. People can buy a large range

of products online, from grocery products to car parts. However, the online payment system is not

totally secure because of low technical development. (Euromonitor, 2010, Consumer Lifestyle,

P.3-4)

R & D

According to the Ukrainian Statistical Institute, 14.2% of all enterprises were engaged in

innovative activity and 11.5% introduced innovations during 2007 (State Statistics Service of

Ukraine, 2011, Innovation). The government strongly encourages innovation and technological

developments with state support and tax benefits.

Production Technology in Milk Processing

In terms of hygiene, there is not enough to have technology and inspection equipments to keep

milk processing healthy and tasty. Milk having sour taste or large number of bacteria is often dis-

tributed to the market and thus exceeding established standards. Milk is monitored only few times a

month and only the fat in the milk I checked (Euromonitor, 2011, Drinking Milk Products, P.1).


Overview of PEST

We have concerns about the political uncertainty, however we realize that Ukraine government

has been improving their transparency and encouraging foreign investment. We reckon that Ukraine

has a good opportunity of economic growth by the implementation of market reforms against cor-

ruption and increasing privatization.

Segmentation

Geographical (Lars)

The 5 largest cities in Ukraine are all placed in either the central – or eastern parts of the

country. In many of these cities Russian is preferred over Ukrainian as the spoken language, and in

a city like Kharkov it is only around 5-10% who speak Ukrainian on “the street”. Even in the capital

of Kiev, this number is only around 30% (TryUkraine, 2010).

Demographical (Stefán)

Ukraine is now ranked as the world’s 27th largest country. It is the second largest country in

Eastern Europe and the sixth largest in the whole of Europe. The Ukrainian population is on a

decreasing trend, but recently that decline has been less rapid (Euromonitor, 2010, lifestyles, p.10)

Age

Ukraine has had a demographic crisis since the 1980s because of its high death rate and a low

birth rate. The population of Ukraine has declined by more than 3 million since December 2001

and as of Dec. 1, 2010 (Appendix 2), the country’s people numbered approximately 45.796.000

(United Press, 2011). There is a clear indication that the population is ageing and this could

certainly have effect on consumer trends in the future. The share of Ukrainian’s over retirement age

is quite high (for women 55 and for men over 60) or about 24% (Appendix 3) (Euromonitor, 2010,


lifestyles, p.2). This shift in demographics could put pressure on labor force growth and could

lower the country’s potential economic growth (Euromonitor, 2010, lifestyles, p.2). Elderly people

also tend to be more conservative in their lifestyle and spending habits. This can also affect some

key socioeconomic issues and also help in predicting future potential political issues. Countries

with aging population that is with high percentage of the population over 65 tend to invest more in

the health sector. Economic prospects are not favorable due to economic trends. While the work

force is aging fewer workers will be available and that will make it harder for the Ukrainians to

achieve economic transformation in the future.

Age structure for Ukraine is as follows.

0-14 years: 13.7% (male 3,186,606/female 3,014,069)

15-64 years: 70.8% (male 15,282,749/female 16,673,641)

65 years and over: 15.5% (male 2,294,777/female 4,682,865) (2011 est.)

Source: CIA, The World Factbook, Ukraine

The life expectancy of both males and females in Ukraine is much lower than in Western

Europe. For females it is 75 years of age and for males life expectancy at birth is only 63 years

(CIA, The World Factbook). There has been little change in the Ukraine’s health care system since

its independence and most facilities that are operated by the state are weak and unable to perform

the most basic functions (Menon, 2010).

Gender

As stated above, about 45.796.000 million people live in Ukraine and women are in majority as

they account for 54% of the total population. In the majority of Ukrainian households women are

responsible for grocery shopping (Euromonitor, 2010, lifestyles, p.34). Ukraine has one of the most


gender-equal labour markets in the world when it comes to figures, mainly because levels of male

and female employment are almost the same (United Nations, 2003). There is however a huge

gender inequality whereas women get paid on the average 30% less than men (OECD, SIGI). A

law providing for equal opportunities for men and women was passed in 2006, but very few judges

are aware of its existence. In general terms, Ukraine’s legislation upholds the rights of women and

guarantees their protection. Negative stereotypes persist, however, and continue to limit women’s

participation in society (OECD, SIGI). Women in Ukraine have become more independent in the

last decade or so due to better career opportunities and increased financial stability leading them to

having children later in life.

Occupation

Ukraine is an emerging free market. Formerly a big part of the Soviet Union economy,

experienced sharp fall in GDP the first 10 years of its independence. Ukraine experienced rapid

growth from 2000 until 2008 and was ranked 45th in the world. However Ukraine was greatly

affected by the economic crisis of 2008 and as a result a 15.1% decrease in Ukraine's GDP took

place over 2008 and 2009 (National Bank of Ukraine).

Income

Before the current downturn in the economy, strong Ukrainian economic growth resulted in a

significant increase in real gross income and disposable income (Euromonitor, 2010, lifestyles,

p.24). In terms of income, the rural western and central regions of Ukraine are the poorest while

Kiev and the industrialized eastern regions of Ukraine are the wealthiest. That goes along with that

most of Ukraine’s big cities are located in the eastern part and city of Kiev having the highest

average monthly income. The most affluent consumers in Ukraine are those in their late thirties.


http://en.wikipedia.org/wiki/2008%E2%80%932009_Ukrainian_financial_crisis




http://en.wikipedia.org/wiki/Late-2000s_recession

http://en.wikipedia.org/wiki/Late-2000s_recession

This age group was being educated during the first years of Ukrainian independence. They

overcame many obstacles during their development and are reaping the fruit of their labor now. The

average annual gross income of different age group, figures in hryvnia, is as follows:

Table 35 Average Annual Gross Income by Age (Current Value): 2005-2009

2005 2006 2007 2008 200915-‐19 yrs 7,330 8,937 11,624 15,588 15,38420-‐24 yrs 9,549 11,581 15,070 20,247 20,01425-‐29 yrs 11,800 14,254 18,511 24,820 24,51530-‐34 yrs 13,254 16,025 20,839 27,980 27,71935-‐39 yrs 13,548 16,422 21,417 28,824 28,62440-‐44 yrs 12,741 15,496 20,273 27,368 27,27145-‐49 yrs 11,283 13,770 18,047 24,383 24,31050-‐54 yrs 9,575 11,714 15,390 20,839 20,79255-‐59 yrs 8,217 10,032 13,153 17,760 17,67460-‐64 yrs 7,123 8,792 11,681 15,922 15,93265-‐69 yrs 6,445 7,982 10,563 14,383 14,41770-‐74 yrs 5,775 7,265 9,727 13,364 13,44275-‐79 yrs 5,283 6,648 8,888 12,202 12,31780+ years 4,987 6,303 8,466 11,669 11,827

Source: National statistical offices, Euromonitor International

In 2009, Ukrainians spent the majority of their disposable income on essential goods and

services. Over 42% of income went on food and non-alcoholic beverages compared to only 13%

for residents of Western Europe (Euromonitor, 2010, lifestyles, p.26). Consumer spending differs

between rural and urban dwellers where urban inhabitants tend to spend more on entertainment,

leisure and recreation whereas rural inhabitants spend more on essential goods that they are not able

to produce themselves, that relates to that wealthier consumers are city dwellers.


Family status

Ukraine has one of the lowest birth rates in the world, 1.28 per woman (CIA, The World

Factbook). There has been a trend toward delayed childbearing in almost all countries in Europe.

There are various reasons for Ukraine’s depressed fertility rate involving a combination of

economic, social and political factors. One contributor is a sharp drop in the number of women of

childbearing age (15-49 years). The population of this particular group will decline by more than

2.5 million between 2000 and 2020 (more than 20%) (Euromonitor, 2008, demographics, p.7).

According to studies the main reason for the fall in fertility and birth rates has been postponed or

decline in the number of second births (Euromonitor, 2008, demographics, p.9). The average

number of members per household in Ukraine is 2.59 (State Statistic Service of Ukraine,

Household). The number of household members has been going down for the last decade. The

main contributing factors are people’s preference for independence and more widowed and divorced

couples (Euromonitor, 2010, lifestyles, p.17).

Psychographic and behavioural (Lars)

There are, without a doubt, differences in the mindsets of e.g. Danish and Ukrainian consum-

ers. The question is how to measure these cultural differences in order to paint a sufficiently clear

picture of the people we are trying to persuade to buy our products. Optimally, we would have ac-

cess to a ready-made study on the culture and habits of Ukrainian Organic dairy consumers. Natu-

rally, such a study does not seem to exist, so we will have to fill in the blanks by other means. We

will her try to do this by using what is available, namely articles and other materials, readily avail-

able, on the Ukrainian consumers in general and on organic consumer patterns in general.


Ukrainian consumers

When trying to get a hold of what distinguishes consumers in Ukraine, a good place to start is

by analyzing the population on a more general and abstract level. Ukraine was not included in the

famous Hofstede-study on cultural dimensions, but luckily a Ukrainian university has used the

framework to analyze Ukrainian consumers (Chayka, G., 2005), thus giving us a tool for comparing

the people of the country to others, e.g. the people of Denmark. According to this study, Ukraine

scores significantly different on three of the scales when comparing to Denmark and other of Arla’s

core markets, like Sweden; They score high on the “power distance” index, low on “individualism”

(and thus high on “collectivism”) and high on “uncertainty avoidance”. These findings are sup-

ported by the fact that the scores for Russia are very similar (Hofstede, 1973) and the fact that

Ukraine and Russia have often been considered as being – at least loosely part of the same Eastern

European cluster. Even so, one should be wary of comparing Ukraine and Russian consumers too

much with one another. Even though the countries have often been linked together by marketers,

they are in fact not nearly as tightly connected as for example the Scandinavian countries (Interspe-

rience, 2011). This could have consequences for foreign companies who want to enter the Ukrainian

market. The Ukrainian market is in many ways highly fragmented and divided, both economically

and politically between East and West (Euromonitor, 2010, Lifestyle, p. 4) and not very homogene-

ous in the sense that there is a constant tension between a Russian - and a European orientation in

people’s minds. In that connection it should be mentioned that, in general, the Ukrainian people are

fairly western oriented or at least oriented towards the EU. A survey found that only 16% do not

wish for Ukraine to join the European Union while around 60% explicitly want Ukraine to join at

some point in the future (Bernd, J. and Govorucha, S., 2011). Whether this is purely for economical

reasons, or whether Ukrainians feel culturally connected with Europe, the survey does not say. But

even if we assumed that Ukrainians are generally closer tied with Russia, when it comes to the mat-


ter of culture, this is not necessarily a “bad” thing when it comes to Arla’s prospects of marketing

organic food in the country. Like in Ukraine, consumers’ preferences are also changing in Russia

due to different factors such as a general westernization of markets and increasing disposable in-

come. This has, among other things, lead to a steady increase in the demand for organic food, buy-

ing locally produced and an increased focus on quality (Euromonitor, 2011 – Spotlighting). But

even if we know that Ukrainian and Russian consumers are similar in many aspects compared to

one another, it does not tell us a lot if we do not know to what degree they are similar or different

when compared to the western markets in which Arla has, so far, been active. Research conducted

with mainly young Ukrainians, Russians and Rumanians vs. Americans (Strizhakova et. al., 2008),

as respondents, on, among other things, ethnocentrism has theorised that consumers in these Eastern

European countries are more ethnocentric and believe less in global citizenship than their western

counterparts. However, they are also more culturally open, and there are no apparent differences in

the importance of global brands between them and western consumers. More than 85% of young

consumers in both developed (western) and developing (East European) markets show strong pref-

erences towards global brands. According to the authors of the paper, a positive relationship be-

tween ethnocentrism and importance of branded goods supports the notions of previous findings

that a glocal identity is evolving among young people – especially in developing countries like

Ukraine. In these countries, national patriotism often co-exists with global influences and global

brands signal a path for national empowerment and value sharing. In other words: These ethnocen-

tric youths will often welcome global belongingness and brands as a potential road to success for

their local companies and cultures (Strizhakova et. al., 2008, p. 77-78). A trend among Ukrainian

consumers – especially among the younger ones, is that health is becoming increasingly important

(Market Europe, 2004 and Euromonitor, 2011, Lifestyle - p. 8). Even when taking account of the

relatively low disposable incomes of Ukrainians, consumers are willing to spend a disproportion-


ately large amount of their money on food and will often pay a premium for perceived quality

(market Europe, 2004, Euromonitor, 2011, Lifestyle p. 26). Food consumption has been very much

shaped by what is available on the local markets, but these markets and neighbourhood stores,

which have traditionally dominated the market are loosing out to super- and hypermarkets in the

cities (Market Europe, 2004 and Euromonitor, 2008, Goodbye Lenin). Fuelled by the global finan-

cial crisis, Discount chains have recently made a big impact as well. The rapid success of these

chains is, however, not expected to be long lived when/if the economy goes back to similar condi-

tions as in before 2007 (Euromonitor, 2009, Retail Therapy). One of the reasons why consumers,

and especially the middle-class, are turning to mass-market chains, besides a wider selection (also

of global brands) and superior hygiene, is an increased focus on packaging and presentation of non-

durable goods (Euromonitor, 2008, Goodbye Lenin). Ukrainians do not support the use of geneti-

cally modified (GM) foods and since the beginning of 2009 products with more than 0.9% GM in-

gredients are not allowed to enter Ukraine (Euromonitor, 2010, Lifestyles).

Organic consumers

Research on the purchase and consumption of organic food, so far, is sparse and has sometimes

been contradictory. However, a study from 2007 that compiled most of the existing data on the mat-

ter found that the average buyer of organic food is female, has children and is “older” (Hughner et.

al., 2007 – p. 96). Some studies have found that consumption of organic goods are closer linked to

education than to income, but other studies have found the opposite to be true, so the verdict is still

out on this matter. People’s motivations for buying organic are varied but universal reasons are: En-

vironmental concern, animal welfare and health. That consumers, so to say, buy a lifestyle and a

belonging to a certain social group could also be a factor (Fahlbeck and Nilsson, 2002; Hughner et.

al., 2007 – p. 350 and 360). The health-related motivations seem particularly interesting since there


has never been any proof, that organic food is actually healthier than “regular” food (Hughner et.

al., – p. 106). Furthermore, people in large cities tend to be more interested in environmental issues

and are thus more likely to buy organic and the same can be said for people who live in university

cities (Fahlbeck and Nilsson p. 359). Research has also shown that even though high prices can act

like a barrier, too low prices will often make consumers perceive the products as being inferior or of

a lower quality than other organic products. Another noteworthy finding is that consumers express

strong confusion about what “organic” actually means. (Hughner et. al., 2007, p. 105 and 106).

Overview of segmentation (Lars)

Two different potential segments to target emerge from the above stated: A “youth” segment

and a “family” segment. The youth segment seem particularly interesting because they are deemed

to be the ones that respond most positively to global brands, are most “westernized” and make up a

large part of the population in the large cities, that would appear to be the best place to market

organic goods. It is in these population centres that – not only youth, but also high education and

income is mostly concentrated. The family segment (primarily women with children) is another

obvious group to target since the archetype of an organic consumer – on a worldwide basis at least,

is a woman with a family. This segment also has the highest income.


5-Forces (Kateryna)

In order to build the right strategy for Arla in Ukraine it is important to learn all the features of

Ukrainian dairy market. Porter’s 5 forces model is very appropriate tool to use in this case.

Rivalry

- 11 big companies have 60.2% of the market. They include companies from Ukraine,

Russia, France, and Holland. The rest 39.8% of the dairy market belongs to 300 small firms

or individual farms (Menzhunova M., 2011). Big firms are working on the national level,

however small ones are often working locally in one of the regions.

- According to numerous reviews, next 2-3 years, dairy market will be characterized by

consolidations between big companies (Marketing research “Cheese market”, 2011). Some

Ukrainian companies will merge with each other; others will be absorbed by foreign

investors. This is actually already happening: in 2010 Russian UniMilk, which owns 9% of

the market merged with French Danone - 5% of the market (Danone web-site).

- After Ukraine joined WTO in 2008, many European dairy producers got access to the

Ukrainian dairy market (example: Danone, Lactalis).

- Nobody on the market has organic products in its assortment (Galashevskiy S., 2011);

therefore there is a possibility of the first mover advantage.

- The biggest rivalry for the dairy companies is open-air markets (Milk market, Ukraine,

2011), where farmers sell their home-made milk products (sour cream, cottage cheese,

cream, milk).


Potential Entrance

- Nowadays competition between milk processing firms is quite fierce because of the

decrease in the production rates of milk (Lisovych M., 2011); therefore for the new entrance

it’s crucial to build a strong relationship with milk producers (farmers).

- A lot of consumers have already formed their preferences among the existing brands. It

can be complicated for the new entrant to come with absolutely new brand.

- Retailers have a lot of power and they may not accept the diary producer to their

assortment (International Marketing Group, 2011).

- As well as there are many dairy producers on the market, none of them has a significant

share of it, entrance barriers are acceptable.

Supplier

- The relationship between milk producers and milk processors are quite tough, they are

fighting about the price.

- On the one hand, caused by the recent decrease in production of milk in the country -

4% annually during the last 4 years (Masur E., 2011), producers can be seen as more

powerful, the demand exceeds the supply.

- On the other hand, processors have the way higher levels of modern technology than

producers; therefore they require better quality milk and have the opportunity to influence

the price formation.

- There are two types of entities that produce milk in Ukraine: individual farms and big

farm enterprises. About 67% of all the milk is coming from individual farms (State Statistic

Service in Ukraine), whose facilities are not good enough in order to maintain the quality of


the raw milk, therefore big milk processors prefer to work with farm enterprises (Antoniuk

G., 2009).

- One of the positive trends on the market is that milk producers are constantly improving

the quality of milk aiming to earn higher profits (first class milk is 30% more expensive that

second class milk).

Consumers

- Dairy products account for 32% in the consumption basket of the average Ukrainian

and remain the first biggest grocery category (Observer, 2011).

- Drinking milk products grew by 16% in 2010 and is assumed to increase up to 13%

regarding value terms (Euromonitor, Drinking milk – Ukraine, P.1).

- Consumer prefers dairy products made in Ukraine, especially those that are produced

locally in his region.

- Low level of price recall.

- Price sensitivity: if the price goes up, consumption falls down (Dairy Business in

Ukraine and in the World).

- Consumer perceives milk, kefir, sour cream – as a basic product, but yogurt sometimes

still seems like a pleasure product (like a desert).

- Consumers prefer traditional tastes: apple, pear, cereals.

- According to sociological survey, 79% of the consumers want to buy organic products

(Gryshko.L., 2010).


Substitutes

- Consumers may prefer cheaper dairy products

- Dairy products can be substituted by vitamins in some occasions, but in cooking

traditions and taste preferences it does not have substitutes.

Overview of 5-Forces

Nowadays, Ukrainian dairy market is quite glutted. There are around 10 brands that deserved

consumer loyalty on the national level. It may be difficult and costly to embed a comparably new to

the market product (organic), produced by foreign company under the unknown brand. So, the

solution that we found is to create a partnership with one of the existing Ukrainian dairy processors

that works on the national market and to extend its product line with the assortment of eco-products.

We believe that this will help to gain customers’ support more easily.

After we went through the information about the leaders of Ukrainian dairy market, Appendix

5, we found out who could be our potential partner. This is a joint-stock company, called

“Galychyna” (Galychyna web-site). The production facilities of the company are located in the

Western Ukraine. They have one huge factory and the products are distributed all around the

country every morning by equipped trucks. They have their own distribution system. There are

nearly 26 sales representatives of “Galychyna” in the regions of Ukraine, which are working with

the retailers locally. Company’s brand is one of the most recognizable dairy brands among

Ukrainians (Butenko A., 2011); it has the biggest market share in the yogurt category.

Most of the raw milk “Galychyna” buys is from individual farmers. Since we are introducing

organic products, we have to make sure that all the production standards are maintained on the

appropriate level. Therefore, we would make agreements with several farmers, who are ready to


change their production process into the required one. We would guarantee them higher purchase

prices and assistance in the system implementation.

These are our suggestions, relating to the 5 Forces analysis, that are based on the market

realities. If Arla decides to enter the Ukrainian market, we see this form of set up as the one with the

highest potential for ensuring a successful venture in Ukraine for Arla.

SWOT (all)

All our findings above is summarized in a SWOT analysis that can be found in Appendix 6

4 P’s (all)

Product

Milk and cheese are the two largest and most profitable product categories when it comes to the

Ukrainian dairy market. Therefore, these two areas should be the main focus of Arla if they should

ever decide to enter the Ukrainian market. As suggested in the section on 5 Forces we would

recommend that Arla use a co-branding strategy and try to establish a partnership with a company

like Galychyna – putting both names on the brand, and thereby catering to ethnocentric tendencies

that some consumers might exhibit, while also branding the name Arla in accordance with the

company’s current strategy. We assume that the safest way to go is by, at least starting by,

introducing organic versions of e.g. types of cheese that are familiar to Ukrainians and are already

“top-sellers”. Also, milk should reflect local preferences in taste and so forth. Since the trend in

Ukraine is an increased concern with health, and the purchasing of organic goods is also closely

related to health concerns, it is also highly probable that Ukrainian consumers will show some

degree of preference towards low-fat versions of milk, like skimmed milk which is already very

popular on the Danish market, if they were to introduce a similar product on the Ukrainian market.


The most important part is that the products have an organic “feel” in everything from (recyclable?)

packaging to taste, freshness and quality. The quality aspect poses a major challenge since it will

likely be costly and difficult to ensure, that local farmers will adhere to the rules of organic

production, and that processing workers will be working effectively, etc.

Price

Organic products are 30-50% more expensive that conventional ones. The main reason for this

is higher production costs. However, organic products are also considered a luxury category, so

higher prices reflect the fact that they belong to the premium level.

We considered 2 opposite pricing strategies that we could possibly use – price skimming and

market penetration. Price skimming anticipates entering the market with high price, in the case,

when company has competitive advantage, which is not sustainable though. Arla could consider

using this strategy, because it would have a first mover advantage in the organic dairy market.

However, we concluded this strategy does not make sense, when it comes to the grocery categories,

because firstly, consumers are very price sensitive and secondly, grocery products are not such a

prestigious category to fit under this strategy. Market penetration strategy suggests entering the

market with very low price in order to gain market share and once it is achieved the price is

increased. This strategy would not be appropriate for the organic products, because, as mentioned

earlier, this category is in the premium niche and too low price can confuse consumer perception of

better quality.

Finally, we decided to choose premium pricing strategy that assumes comparatively high price,

where there is uniqueness about the product. Today, organic products are not widely accessible in

retailer stores, therefore they are unique. This provides a rational for using this premium pricing


strategy. Consumers are willing to pay more for quality. Arla will provide high-quality product and

by this convince consumers to pay more.

In addition, it is important to adapt the price to the overall pricing strategy of the retailer stores,

we will work with. Our price should relate to the price level of the particular store, whether it is a

discounter or normal supermarkets. (MarketingTeacher.com, 2011)

Place

Organic food is normally more expensive than conventional food due to the fact it simply cost

more to produce. Wealthier consumers shop for food and non-alcoholic drinks at modern

supermarkets, while poorer consumers still do a lot of their grocery shopping at an open-air market.

As in large cities normally several competitive supermarkets are within reach, the key selection

criteria are opening times, range and quality of goods, and special offers and discounts offered by

retailers. Disposable income for urban residents is significantly higher than that of the rural

population. Deciding factors for consumers depend on their disposable income, product prices,

distance and availability of a private vehicle. The retail formats most popular with middle- and

higher-income groups are supermarkets in malls and large shopping complexes (Euromonitor, 2010,

lifestyles, p.34). Consumers of all ages, races, and ethnic groups who have higher levels of

education are more likely to buy organic products than less-educated consumers. It is also apparent

that organic food is bought by those with higher income and those who care for the environment.

Our focus should be on supermarkets and larger shopping complexes in the larger cities as our main

sales channel. As the organic movements starts to catch on we should think being in more places

and consider other channels.

Dairy products have different shelf life. For those products that have shorter shelf life, it’s

important to reduce the time from production to actual purchase by consumer. It’s thus vital to


optimize distribution cost. Production sites need to be situated close to the larger urban areas and

cities. Dairy business is local in nature and its products need to be stored and transported properly.

Whereas milk is a perishable product the ideal distribution channel would be from Producer to

Retailer. It makes the most sense in regards to reaching consumers in time and is more suitable for

transportation.

Promotion

Promotion strategy is aiming on the 2 target groups: young people and family segment (women

with children). The main messages we want to communicate to the consumers are: healthy lifestyle,

being green, sustain your future, learn more about the products you eat. Hofstede’s survey on

cultural dimensions would seem to suggest, that Arla should focus on using imagery, messages etc.

that reflects Ukraine’s (and Russian’s) high scores on collectivism and e.g. focus on how eating

organic will tie the consumer closer to certain groups like family or other consumers. The fall of the

Soviet Union could however have made this data outdated. According to the survey, conducted by a

social organization, 39% of Ukrainians are aware about the nature of organic products (Boiling,

2011). People in the central regions are more willing to pay higher prices for organic products than

people in the East and South. Communication tools have to be chosen carefully for each of the

target groups. Young people will be most successfully targeted via the Internet, because they are

active users of it. Blogs and social networks will serve as very good tools to inform youth about

organic dairy products. Internet marketing can cause word-of-mouth – this is basically what will

create the awareness in the society. Women can be targeted through fashion, fitness or leisure

magazines. Informative press-releases in these magazines that have educational purposes, telling

about what organic milk is, how it is produced and why is it better than conventional milk.

Discount coupons can be placed in magazines. In-store promotion in the initial phase of entering the

market will be very appropriate, because people are very inclined to get promotions or any kinds of


discounts. In order to capture wider potential market, we could use advertisement in transport and

city-lights. Presumably, people will start to look for more information, when they see entertaining

ads about organic products. Also it can be relevant to use celebrities in the TV-commercials, using

famous people, who have a healthy lifestyle and are famous for their environmentally-friendly

orientations can be used as role models. People will want to follow this trend. We don’t know the

attitude of the Ukrainian to Scandinavia or Scandinavian products, so we cannot decide how much

we should emphasize on the Danish origins of the company in the communication campaign.

Conclusion (all)

Based on our analysis we would not recommend that Arla enter the Ukrainian market with

organic dairy products at this moment in time. It seems as if the risks and costs associated with such

a move are simply too high. Even doing so on a small scale, in order to use Ukraine as a sort of

“test” market for other Eastern European markets, would most likely be impossible without

incurring substantial costs. Arla would have to adopt a mix of a push- and pull strategy, since

demand, as well as the supply-chain would need to be stimulated. Consumers would need to be

“educated” on what it means when food is organic, and the GDP is substantially lower than in

Arla’s current core markets for organic products. Farmers have little incentive to convert to organic

farming, with the way that the political landscape is currently shaped. However, the Ukrainian

market still holds lots of potential – either if Arla should decide on entering in spite of the

above-mentioned risks and costs, or if some of these factors were to change for the better in the near

future. Disposable incomes are on the rise, and Ukrainians are willing to spend a disproportionally

large amount on food, whereof dairy products make up a substantial part. Even though no in-depth

research has proven that Ukrainians would in fact buy organic - If given the chance, no research has

proven the opposite to be true either. Research has however suggested that Ukrainians could be


welcoming of global brands, and that a form of co-branding strategy involving local production

could be a way of entering the market. Other things that should be considered, if going in to the

country, include apparent prevailing cultural differences but also a conversion towards a western

consumer culture. Competition from large international players on the market is still limited, and

the prospects of obtaining first-mover advantages is only getting smaller as time goes by.


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Appendix 1

The distribution of Arlas tree types of markets

Source: Arla, Annual Report 2010, P. 10

Appendix 2

Source: State Statistics Committee of Ukraine

Appendix 3

Source: Euromonitor International, Future Demographic-Ukraine, October 2008.

Appendix 4

Projected population (in major cities):

Source: Euromonitor International (2011), Consumer Lifestyle -‐ Ukraine, p. 16

Appendix 5

Market shares of the main participants of Ukrainian dairy market, 2010 (Marketing Information

Database)

39,8 %

3,8 %3,8 %

4,6 %4,9 %

5,2 %

5,6 %

5,7 %

5,7 %

6,0 %

6,5 %8,4 % UniMilk

Wimm-Bill-DannGalychynaHerkulesLustdorfMilkiland-UkraineLactalisReinfordWestern Milk GroupDanonePridneprovskiyOthers

Appendix 6

Strength-‐ Good organic image of Arla in the world’s

market;-‐ Huge experience with organic produc-‐

=on;-‐ Strong Private Label opera=ons;-‐ Arla is a big company with big capital;-‐ Very strong posi=ons in Northern and

Western Europe;-‐ Arla already has sales office in Russia and

produc=on facili=es in Poland – access to the Eastern Europe;

Opportuni=es-‐ Economic growth;-‐ First mover advantage;-‐ Increasing demand for organic products;-‐ Westerniza=on of Ukrainian consumers;-‐ Increasing number of discounters could

be an opportunity, as well as Arla has good experience in producing products for PLs;

-‐ Rising health and environmental con-‐scious;

-‐ Growth in dairy consump=on for 16%;Weaknesses

-‐ Weak “Arla” brand in Ukraine compared to compe=tors like “Danone”;

-‐ Arla has a low presence in the South and Eastern Europe;

-‐ Big company can be difficult to associate with organic produc=on;

-‐ Heavily biased towards Western Europe-‐ Lacking a “global” brand

Threats-‐ Poli=cal instability, corrup=on;-‐ Foreign and domes=c compe=tors enter-‐

ing the market;-‐ Increasing number of discounters could

be a treat because they have lower prices and people are coming there in order to save money;

-‐ Decrease in the produc=on rates of milk in Ukraine;

-‐ Incompa=bility of cultures (Danish and Ukrainian);

-‐ Liability of foreigness

Documents

Analyzing Arlas Prospects of Marketing Organic Dairy Products in Ukraine