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. Last Updated: 07/27/2016

Germans Sell Plant To Krasny Oktyabr

Krasny Oktyabr, a leading Moscow confectionery producer, recently became the first Russian food company to buy local assets from a foreign owner.

Earlier this month, Krasny Oktyabr bought out Kraft Jacobs Souchard's 99.8 percent stake in the St. Petersburg factory Petrokonf for a price neither side wants to specify.

The acquisition allows Krasny Oktyabr to extend its empire, now boasting six factories across Russia in addition to the flagship unit in Moscow, to the country's second-largest city.

The St. Petersburg area, with a population of 7 million, is a huge market that is almost untapped compared to Moscow's, Krasny Oktyabr chief Anatoly Daursky said in an interview. Petrokonf plans to open 10 stores in St. Petersburg.

According to Daursky, the purchase of Petrokonf marked the completion of the Krasny Oktyabr group, which is not looking to buy any more facilities. Krasny Oktyabr's share of the Russian confectionery market is currently just under 10 percent, he said.

Daursky hopes to bring production at Petrokonf, which makes mostly cookies and wafers, to 10,000 to 12,000 tons next year. Krasny Oktyabr's other factories produced a total of 75,000 tons of confectionery products last year.

This year, Petrokonf, which employs 600 workers, is likely to produce a total of slightly less than 7,500 tons, down from 45,000 tons in its heyday before the breakup of the Soviet Union.

Kraft, a German-based food giant, explained its decision to sell Petrokonf by a change in its strategic plans.

Purchasing the factory was part of an earlier strategy that included buying cookie factories in several European countries, Kraft Vice President Edward Rowland said. But now the company has given up on the plan in Central and Eastern Europe, deciding instead to concentrate on coffee and candy.

The company's Jacobs Coffee is one of the top brands in the Russian market.

One analyst with a major Western investment company speculated that Kraft was in fact shielding itself from political risks involved in doing business in Russia. If things get worse and the company has to pull out of Russia altogether, it will be easier to do if Kraft has no local production facilities, the analyst said.

"This was a rather defensive step on their part," he added.

Rowland denied the allegation, saying the decision was made last July, before the crisis erupted. Even if Kraft had retained Petrokonf, it would have had to bring in most of the raw materials for it from abroad, analysts said.

Daursky said Krasny Oktyabr imports about half the raw materials it uses, mostly cocoa and nuts, which are not produced in Russia. The group, however, is increasing local production of some components, such as packaging. Sugar and flour also come from local suppliers.

Although the crisis has affected foreign confectionery makers, believed to hold between 25 and 30 percent of the market, more severely than Russian ones, Daursky said he didn't expect a mass exodus of foreigners, predicting only that some companies that have no local production facilities would be nudged out of the market.

Foreign companies producing candy and cookies in Russia include Nestl?, Mars, Cadbury's and Danone.

Daursky said Russian and foreign producers are not in stiff competition because locals mostly cater to the lower end of the market. "Mars has its own niche, and we have ours," Daursky said.

Daursky said consumers seem to have gotten over the initial shock they experienced when steep price rises followed the Aug. 17 ruble devaluation. Candy sales are now nearing pre-crisis levels after a sharp drop in September.