Confectionery company gets on Tallinn Stock Exchange

  • 1998-08-06
  • Kairi Kurm
TALLINN - Kalev, Estonia's largest confectionery manufacturer, has reported increased productivity and has long held an edge on Western competitors thanks to its strong position in the as-yet untapped Russian and Ukrainian markets

Last week, the company put another feather in its cap when it was listed on the additional list of the Tallinn Stock Exchange (TSE).

Kalev's 1997 profit totaled 33 million kroons ($2.3 million), 10 percent more than the company's forecast and double its 1996 profit figures.

Kalev CEO Tonis Allik said that the growth took place mainly in the Baltic and the Ukrainian markets. Kalev also boosted its sales in Estonia by 5 percent.

In 1998, the company expects exports to Ukraine alone to form one-fifth of revenues, or about three times the 1997 level.

Although sales to Russia were stable last year, they could fall in 1998 partly because of the new customs tariffs imposed by Russia.

Since 1992, Kalev's sales in Russia have dropped dramatically as a result of double custom duties imposed on Estonian imports to Russia.

To avoid double duties and thereby improve export opportunities to Russia, Kalev acquired a 25 percent stake in a second largest Lithuanian confectionery producer, Vilniaus Pergale, in 1997. Through this acquisition, Kalev also improved its position in the Lithuanian market.

Although Kalev at present has a minor share in Latvia and Lithuania, it has set a target to gain approximately 5 percent by 1999, which should be achieved on the back of increased export efforts and the Free Trade Agreement. The Free Trade Agreement with other Baltic States came into effect on Jan. 1, 1997.

Although Estonia's favorable Free Trade Agreement with Ukraine enables the company to keep almost the same profit margins on exported products as it does in its domestic market, Kalev is interested in purchasing or leasing an Ukrainian confectionery plant in order to cut costs on wages and transportation.

Kalev is also the first Estonian company to gain certificates recognized by the Ukraine for its production.

"The possible accession to the European Union may finish the advantages of the Free Trade Agreement. The other reason for buying a confectionery plant is to gain a market share as Kalev is not known in the Ukraine," said Allik.

In 1997, Kalev acquired 50 percent of the Moscow confectioner Bogator and 56 percent of the Kaliningrad confectioner Tsarodeika because of its favorable position in Russia.

Kalev has great potential to increase its exports to Russia because its products have been known in Russia for more than 40 years and its products are more in accordance with Russian consumers' taste preferences than many other imported confectionery items. It is believed that the Russian confectionery market is growing faster than Western European markets because the fall in consumption caused by weakening purchasing power has turned the other way. According to statistics, the present per capita confectionery consumption in Russia (10 kg) is below its historical level (16 kg) and less than averages in Western Europe (12 kg).

According to statistics Estonians consume about 8.8 kg a year. As Kalev is producing about 19,000 tons of confectionery in 1998, which amounts to about 13 kg per capita it is clear that most of the production has to be exported.

Kalev is not the only confectionery on the Estonian market. About 49.5 percent of the market are hold by other companies - Fazer, Kraft Feira Marabou, Leaf, Uzvara and others.

Until 1990, Kalev was the main confectioner in Estonia. In 1995, Kalev's market share fell to 30 percent due to stiffer competition following the liberalization of the Estonian market. During the next years, Kalev managed to regain 20 percent of the market.

Kalev has strong brand recognition in the Estonian market and also in the former Soviet Union market. Kalev is as well known in Estonia as, for example, Marabou is in Sweden, Fazer in Finland or Cadbury in the UK.

Kalev earned about 53 percent of its sales in 1997 from Estonia, 28 percent from Russia, 6 percent from the Ukraine and 13 percent from the Baltic states.

Kalev is also active in Finland and there are plans to go on the Scandinavian market.

"There is no sense in entering a mature and divided Western market," said Allik.

Finnish Fazer as well as many other companies has been interested in cooperation with Kalev in order to get access to the Baltic markets.

Presently Kalev is owned by 1,682 shareholders. The biggest shareholder is Talinvest, which acquired a majority share right after the privatization in 1995. Now it holds about 33.5 per cent. The other investments company AS Epeks owns about 30 percent, 7 percent is owned by Forekspank and 25 percent by small investors.

Although the company has invested several million kroons into production, it is still very labor-intensive and not competitive compared with Western European standards.

"Until now we have been active in expanding and investing outside. Next year we should put more emphasis on the internal development and invest in the technology to acquire European standards," said Allik.

Kalev has about 1,100 employees, and last year, the productivity was approximately 14 tons per employee.

Kalev makes 100 different types of candy. Chocolate encompasses 70 percent of the company's production.

The main raw materials, cocoa beans and sugar bought from Western Europe, make up more than half of Kalev's production costs. The best season for sales is at the end of the year.