The Untsiya Company: Business Development in ...

The CASE Journal

Volume 6, Issue 1 (Fall 2009)

The Untsiya Company: Business Development in Russia Galina Shirokova, St. Petersburg State University (Russia) Gina Vega, Salem State College_____________________________________

In the frozen landscape of winter in St. Petersburg, Russia in 2008, Sergey Nikolaev, founder and CEO of the Untsiya Company (The Ounce), a leading tea shop chain in St.Petersburg, dropped into his Nevsky Avenue shop on his way back home to warm up with a cup of Russia’s favorite hot drink. One question was uppermost in his mind – how could he use the limited space in his tea shops more effectively? His eyes swept the room. He noted the marble tables and old-fashioned chairs where a few customers were sitting comfortably, enjoying some rare or premium tea. “What about starting a real café?” he wondered. “We’ve been considering bringing in a line of sweets for a long time. We could combine premium tea, high quality sweets and a small cozy café where customers could find comfort and exclusive products. Could the café be both comfortable and fast? Could it be delicious and still fast? Could we build a global brand like Starbucks, but leave the coffee to them and win our market with tea?” Sergey took a look at the warm smile of the server bustling around a new customer. Sure, the idea of a café was not a bad one, but would his team be capable of handling several new business directions at once? There were many ways to expand: sweets, catering, tea production… but maybe he should concentrate all his efforts on the development of only one main business - selling exclusive tea in small exclusive shops?

THE RIGHT SHOP IN THE RIGHT PLACE The first Untsiya shop opened in St.Petersburg in 2002. By 2007, there were 12 chain shops ranging in size from 15 to 30 square meters (160-320 square feet) operating in Russia’s Northern Capital. They sold tea by the ounce. The average cost of 1.75 oz of tea was 120 rubles (USD 5.00). The average check in the tea shop was 390 rubles (USD 16.00). Each shop offered up to 220 kinds of loose tea from China, India, Ceylon, Taiwan, Japan, and Germany. Wholesale teas and related products were distributed to 45 regions of Russia. By 2007, the company employed 120 people. In 2006, the company revenues were USD 3.8M. In 2007 they had risen above USD 5M, an annual growth rate of roughly 75 percent (see Exhibit 1). With old books and prints on the walls, dark oak cupboards, and a solid marble counter, the atmosphere in the Untsiya tea shop was reminiscent of a time long past. The muffled classical ___________________________________________________________________________ ©2010 by the author and The CASE Journal. Contact the author at [email protected]. Volume 6, Issue 1 (Fall 2009)

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music and hundreds of clear glass jars filled with tea leaves on the shelves provided a romantic backdrop for several young sales clerks who filled individual packets with tea and, dipping quill pens into an inkpot, inscribed exotic brands of tea on the paper bags. Their deftness captivated the customers who were waiting for to be served. See Exhibit 2 for a picture of a typical Untsiya tea shop.

THE RUSSIAN TEA MARKET Russia has always been a tea-drinking nation, even in the 18th century, when one pound of tea delivered from China cost as much as 220 pounds of high-quality granular caviar. Although the proportions have changed, a cozy tea shop selling loose, premium tea has always been both a profitable and stable business. Tea-consumption was not limited to one demographic sector; it was enjoyed equally by both men and women irrespective of age, education or income. 1 Fully 98 percent of the country’s population drank tea at least once a week in 2006; 80 percent drank it every day. The average annual per capita tea consumption was 3.3 lbs, making Russia one of the top ten teaconsuming countries in the world. Russia was the world’s third largest market for black tea after India and Great Britain. In 2006, the market amounted to USD 1 B. A 2006 survey conducted by Levada-Center revealed consumer preferences for tea brands, flavors and packaging. The survey questioned about 1600 Russians aged 18 and older. The majority of consumers (69 percent) bought tea at least once a month 2 (see Exhibit 3). An earlier survey conducted in 2002 among a similar representative sample showed similar results. Tea-drinking has long been a well-established tradition in Russia. The purchase and consumption patterns of the Russian consumer remained stable despite the introduction of new brands, changing from loose to bagged tea, from traditional black tea to more exotic varieties. The majority of Russian respondents (65 percent) preferred loose tea over bagged tea (see Exhibit 4) in the 2006 study. However, bagged tea has grown in popularity, driven in part by office consumption, with a number of tea-breaks during a working day, and also by the convenience of bagged tea for busy people. Bagged tea consumers represented the most physically active population group: young people aged 18 to 24, single men and women with higher education, and relatively high income and social status. Russians were conservative when it came to consumer preferences for tea flavors with 77 percent of respondents traditionally preferring black tea (see Exhibit 5). What distinguished the younger, more financially secure and adaptable citizens of capital cities, especially Moscow, was that they more frequently chose bergamot or fruit tea as well as various green teas. As their income increased, Russian citizens gradually shifted their preferences to more expensive brands such as Ahmad, Lipton, or Greenfield, 3 leaving Beseda and Lisma 4 brands behind. Although regarded as a relative novelty on the Russian market, other teas (green and flavored tea, mate, oolongs, etc.) have also grown faster than the common black tea market. Tea was most often sold pre-packaged in boxes or decorative containers in supermarkets or other food stores. But there was another, much less common way a seller could offer tea: a customer was first given a chance to smell the tea, and then purchased a bag filled with the desired amount. These specialized shops usually offered a choice of 50 to 100 different kinds Volume 6, Issue 1 (Fall 2009)

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of tea of higher than average quality. The bulk of available options comprised flavored teas (black tea blended with flowers, berries, and fruits bits) and premium teas (oolongs, mates, rooiboses, and flower teas). These teas were usually sold in specialized shops, specialized departments of department stores, or in small stalls within a supermarket (the shop-in-shop format).

COMPANY HISTORY: FROM A BUSINESS IDEA TO A NEW VENTURE Aleksey Asvarishch and Sergey Nikolaev, co-founders of the Untsiya Company, were childhood friends. Before launching their venture, they worked in different fields: Asvarishch was in public relations, Nikolaev in radio. Mr. Nikolaev was famous in St.Petersburg as co-founder and the chairman of the Board of the “Modern” radio station. Popular in the 1990s, this radio station was a launching pad for a network of DJs who then populated virtually all existing Russian FM stations. In 2001, Mr. Nikolaev and his partners sold the radio station to Logovaz News Corporation (currently owned equally by Boris Berezovsky and media tycoon Rupert Murdoch). The sale of the radio station brought its owners roughly USD 500,000 5. Alexey Asvarishch, a childhood friend of Sergey Nikolaev, made his career and wealth in political public relations. When Sergey offered him the opportunity to invest in a new business, he agreed without any hesitation because he always trusted his friend’s entrepreneurial mind of. They divided the shares in the new enterprise between them, with Nikolaev owning 60 percent and Asvarishch — 40 percent. Unlike the creative and energetic Nikolaev, Asvarishch was calmer and more stable. While Nikolaev was open and pleasant, Asvarishch was close-mouthed and taciturn. Nikolaev was the one who developed new ideas and initiated teamwork and creativity within the company. All new lines of business were the result of his efforts. Along with these characteristics, Nikolaev was people-oriented and interested in human relationships. It was important for him to sustain a family climate in the company. Asvarishch was more results-oriented and he focused on fully implementing all projects initiated by his partner, paying close attention to the day-to-day operations of the company. After selling his share of the radio business, Sergey started to look for another project, determined to find just the right business to enter. “I just compiled a list of what I liked and what I disliked. First of all, I wanted to create a business in an emerging market. The radio business where I was operating right at the moment was depressed. When we started our radio project, the share of radio advertising in the national advertising spending budget was 17 percent, but by the time we sold it, the share was only 8 percent. The number of competitors grew dramatically. The market shrank. We couldn’t generate any optimism about the future of the business. The investors who acquired my business expected to see 30 percent market growth, while I anticipated only 15 percent. And I was right, the market did not come anywhere near 30. But I preferred to act on a growing market. When the market is shrinking you have to run twice as fast just to stay in the same place. This is exhausting, and for what? I didn’t want to stay in this mode. Volume 6, Issue 1 (Fall 2009)

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Second, I wanted to avoid personality-centered businesses. No more strong personalities in my life. And although I was overwhelmed with countless offers to come back into one or another area of media business, e. g. newspaper or magazine, I resisted them because I had had enough. I had spent ages in negotiations with celebrities and was completely sick of their endless attempts to get more and more money for nothing. Third, I was looking for something new, for a business without one single, limiting business model. I thought innovation should be somehow related to profitability. Now I think that actually we can perform old traditional tasks successfully even without inventing something new. But at that moment I was strongly oriented towards searching for a new business model. Also I wanted the business to be flexible, with plenty of options to shape it the way we wished. Look at the radio -- there is only one profit center, the advertising department, and all other departments are cost centers no matter what you do. Everything is rigid and pre-determined. It takes nine full months for an action to lead to real change because of the organizational complexities. You cannot quickly apply a new strategy because any move influences all the people involved. Actually you are rigidly tied to one business and there are no opportunities for growth or diversification. I was sick of that rigid business where you could not experiment and freely search for better practices. And one more reason -- I didn’t want to stay in the mass media business. Strictly speaking it is a weird business. If we compare the roles of status and wage in motivating an employee, we may see that people in that business are oriented basically to status. In other words, people are ready to work at a very low wage because they like the idea of being affiliated with show business and entering celebrity circles. I was really astonished. There were heads of departments with a monthly salary of USD 600 after eight years of professional employment. I did not want this bias towards fame at the cost of personal financial reward. This bias creates organizational distortion. People should be well-paid. Finally, I wanted my father to approve of my business. I wanted it to be socially beneficial. These are the criteria I identified in the very beginning” 6. After defining these criteria, Nikolaev went in search of a business idea, starting with his friends. The ideas they suggested included ceiling production, commercial real estate development, and selling fresh fish, among others. Finally, one of his friends, Pavel Adadurov, complained that there was no good tea sold in the city. Nikolaev reacted immediately. Tea was a monoproduct, it had clear positioning, the rules of the game were straightforward, it represented a new trend, and there was no ready-made business model. Moreover, tea was a warm comfort product that evoked diverse connotations: for each person it brought to mind either India or colonial settlements, tea clipper ships, or the traditional Russian tea-party. It meant family, friends, and informal socializing. More than that, it was characterized by a huge market, as tea was consumed by most of the country's population. Russia was the right place to launch a tea business. All in all, it was a lucky coincidence - the concept of the new business corresponded with all of Nikolaev’s proposed requirements. Volume 6, Issue 1 (Fall 2009)

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THE CONCEPT OF THE NEW BUSINESS: AFFORDABLE LUXURY Untsiya was founded on the concept of "affordable luxury" which was built on three principles: 1. Quality at a competitive price. By 2007, Untsiya was a market leader providing high quality tea to the Russian customer. Besides purchasing pure black tea directly at auction in India and Ceylon (competitors in the premium tea market purchased tea in Germany, which meant that the tea arrived six months or even a year old), their price to the consumer was also highly competitive. Although price was secondary to quality, it was nevertheless an important issue because no matter how high the quality, the customer expected an attractive, competitive price. 2. Special atmosphere. The special atmosphere of Untsiya shops reassured customers that they had made the right choice by coming to that store and their selection would be a quality product. The owners paid a great deal of attention to the interior design of the shops, to their exclusive packaging, and to providing refined service. Every customer was able to consult a sales assistant on various kinds of tea and get The Tea Leaf newspaper, a special edition about tea issues. 3. Distinctive Service. The third principle was a special approach to clients. Untsiya customers were treated with respect. Sales assistants, trained to become experts, regarded their customers as individuals in search of information about a specific product. To assure consistent behavior, the company developed a system of personnel management that involved strict requirements for personnel selection, personnel training, examinations to evaluate field-related knowledge, intensive instruction, and tailored programs in personnel motivation and development. To maintain high quality, the company required compulsory certification of store managers and the individualized training programs for sales assistants. Because of all these factors, one out of two customers was a repeat visitor to Untsiya shops. According to Untsiya customer surveys, quality service came in first or second among other factors of Untsiya shops’ appeal 7.

EARLY DIFFICULTIES When he founded the Untsiya Company on August 15, 2002, Nikolaev couldn’t imagine that it would be a tough task. However, the experience he gained during his years of managing the radio station did not help much during the formative years of the company. Problems cropped up nearly everywhere (See Exhibit 6 for information about doing business in Russia) Real Estate The founders thought that real estate would be a simple matter of calling a real estate agency, explaining their needs and waiting until they found the perfect space (or, at least, a space that satisfied their requirements). Although they were paid by the lessees, real estate agencies worked for the landlords. The lessors ruled the property market, and agents were dependent on them for their income. Agents looked for lessors offering space, arranged an exclusive Volume 6, Issue 1 (Fall 2009)

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agreement, and uploaded information about the space available to a public database (akin to a “multiple listing service” in the United States). Prospective clients then chose from the available listings. As "unique" or unusual spaces were rare, significant problems arose when the client wanted something out of the ordinary. Nikolaev needed a space between exactly 17 and 32 square meters. Nonetheless, agents called offering space of 80 to 120 square meters. In all, it took three months and help from the founders’ friends to find suitable space for the first shop. Suppliers Getting supplies posed the greatest difficulty. At the very beginning, with only one shop in operation, it was impossible to import tea independently. The founders tried to find suppliers within the country, but when they began to purchase from them, Nikolaev learned firsthand the facts of import life. He explained, “My team was deeply shocked. It turned out that people in that business believed it was quite all right to arrange supply, deliver the first and then the second batch of goods and then absolutely unexpectedly and without warning set a different price for the second half of the order. That is, an invoice based on new prices was submitted after the tea was delivered. They also delivered the wrong tea. It was not that one or two kinds of tea arrived differently from the ones ordered, but 30 percent of the total order was wrong. All of that was accompanied by a low level of service, and a feeling that you were being deceived.” This was anathema to Mr. Nikolaev who, as a former media executive, was used to civilized communication. He commented, "Why is it so difficult to get a job on the radio? It is so because it attracts smart guys who want to become famous, because it is a community of educated and intelligent people. On the radio no one will try to conceal information if it is obvious that one can get it any other way. A person simply makes a call and asks for necessary information. It saves a lot a time. The tea market seemed something medieval to me. People talked about tea as if it were some miracle. Not in the sense that they loved tea so much, but with a shade of shamanistic reverence, ‘It's tea, it's a miracle, you can't even imagine how difficult it is to buy it.’ Later I understood that other countries also have similar problems with suppliers and this business is full of professional cheaters.” The problems the founders faced with suppliers made them think about individual importing, which, in its turn, resulted in the development of wholesale and franchising business lines. MAJOR PROFIT CENTERS By January 2004, 18 months after the company's launch, according to Sergey Nikolaev: “ It became clear that the strategy of developing a chain of specialized shops selling premium tea in St. Petersburg would be a success. The company established four profit-making shops and introduced a system of chain management which could easily control up to 20 points of sale (POS). It also became clear that for St. Petersburg it was reasonable to open 15 to 20 shops.” Moreover they could easily predict its natural growth trajectory. They established seven profit centers: 1. HoReCa: The company entered the HoReCa segment (tea supply to hotels, restaurants and cafes). As the company sold premium teas and its image was perceived by restaurateurs largely through the activity of retail shops, Untsiya decided to concentrate on the upper-price segment. The HoReCa line did not compete with retail sales. The company employed sales representatives who looked Volume 6, Issue 1 (Fall 2009)

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upon tea as a special product and promoted it accordingly. Slowly, clients started asking if it was possible to sell Untsiya tea in cafes or other specialized shops. 2. Wholesale:The company launched a wholesale line which was originally part of the HoReCa subdivision. To avoid dilution of the Untsiya trademark, the company created the Tea-Dealers Partnership brand for the new wholesale line. This line started by selling loose tea to specialized tea shops, which turned out to be popular in some of the other areas of Russia such as the Urals, Siberia, and South Russia. To grow and extend this subdivision, the company participated in Moscow trade shows, which attracted new clients. By autumn 2006, they were supplying wholesale tea to 40 Russian cities. 3. Franchising. The city of Novosibirsk proposed that the company set up an Untsiya shop there. This gave them the idea of developing a franchising package containing terms and conditions, franchise selection criteria and pricing details. Novosibirsk decided not to participate in this project, but the company successfully presented the franchising package in Moscow where it gained popularity. The first franchised Untsiya shop opened in 2005. As of 2008, there were 20 such shops operating in 15 Russian cities. (See Exhibit 7 for these locations). Further expansion was expected as franchisees were committed by contract to open one shop per 300,000 citizens every 18 months. 4. Packaging. Another new subdivision selling packaged tea to supermarkets and retail chains appeared under similar circumstances. The company wholesale department received a request from Globus Gourmet (a 24-hour upscale grocery store founded in 2005) asking to let it sell Untsiya brand tea through their supermarket chain. It was stipulated that tea should be sold in traditional prepackaged tea packs. Having emerged from the wholesale line, this subdivision controlled distribution channels to chain supermarkets, and the product bearing the in-house name Packaging was distributed through different channels, such as an inhouse network and to franchise and wholesale clients. Sales started in March 2007. 5. Coffee. In autumn 2006, Kafe Kult, a new product specially developed for Untsiya by the HoReCa subdivision, appeared. As rivals offered both tea and coffee and Untsiya traded solely in tea, they decided to introduce a new product to overcome a competitive disadvantage. The choice fell on Kafe Kult, the German supplier. Coffee was distributed not only through HoReCa channels but also through the inhouse network, to franchise and wholesale clients. 6. Moscow In-House Network. In spring 2007, two in-house Untsiya shops opened in Moscow. A dual strategy was designed to make inroads into this market by opening both company stores and franchise shops. The company believed that its operations in Moscow would further develop such business lines as wholesale, franchising and packaging in other regions of Russia. At the end of 2007 there were 13 franchise Untsiya shops operating in Russian cities and CIS countries (Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, and Uzbekistan). There were profit-making shops in Kaliningrad, Kemerovo, Tomsk, Kazan, Omsk, Kostroma, Ryazan and Saratov. New shops were to start in autumn 2007 in Tbilisi (Georgia), Novosibirsk, Novokuznetsk and Engels 8. (See Exhibit 7). Volume 6, Issue 1 (Fall 2009)

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7. Domestic Production Project. In autumn 2006, Untsiya determined that its German supplier of flavored teas had breached its obligations under the exclusive agreement to supply Untsiya tea to Russia. While looking for another supplier, the company saw the possibility of launching domestic flavored tea production. Flavored tea, a blend of pure black or green tea, flowers (e.g. cornflower, sunflower), fruits, berries (strawberry, raspberry, pineapple, guava) and flavorings, was 70 percent of Untsiya’s business by weight and 50 percent by revenue. Ninetyeight percent of premium tea was produced in Germany, which sold only ten times more in weight than Untsiya did alone in 2006. In addition, German production and logistics were considerably more expensive. Domestic production of flavored tea would give Russia more flexibility in satisfying consumer demand for the wholesale line. Untsiya stepped up its development of the Domestic Production project. By June 2007, they planned to rent a 1500 square meter production and storage facility. Commissioning was due to finish by August. By October, the company was planning to produce 30 kinds of flavored tea, and by spring or summer 2008, they intended to start producing its full range of flavored teas. Company revenue in February, 2007 from these sources amounted to USD 421,000 (see Exhibit 1).

UNTSIYA’S ORGANIZATIONAL DESIGN Untsiya’s organizational structure has been subject to constant change. In January, 2003 it had a classical functional structure (see Exhibit 8). By 2007, the company’s two major lines were each headed up by one of its founders (see Exhibit 9). According to Sergey Nikolaev, “… direct control is the major coordination tool the company employs. But we decided to divide the control among two owners because we both wanted to be in the company management.” Thus, there were two systems exerting direct control. Financial Controls The first system involved monthly budgeting. This system permeated the company, i.e. each employee budgeted finances for the operations for which he was responsible and submitted the budget and financial report for approval to his immediate supervisor. These planning activities were regular and were performed on a monthly basis. The system proved to be effective not only when it came to issues of financial control. When composing a financial plan, the head of a subdivision also needed to plan and explain its activity and then report on work performance (e.g. if some of the expenses planned had not been spent, that may have been efficient from a financial standpoint, but ineffective from a performance standpoint). Personnel Controls The second system was a program of regular meetings. The idea behind it was that when a manager and his subordinate knew that they were to meet and discuss the current state of affairs and performance, they prepared for the meeting beforehand by gathering all the necessary information. Company experience showed that this format was convenient for both the manager and his subordinates. These meetings became less frequent as the planning horizon extended along with the company’s growth. In 2004, meetings of directors and heads of departments were conducted weekly. In 2005, they were held every other week and in 2007, they morphed into so-called "strategic sessions" which took place once every six to twelve weeks. At these meetings, the company discussed different perspectives, set targets Volume 6, Issue 1 (Fall 2009)

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for the next three to six months, determined if some department or subdivision needed help from the head office, and planned further steps to be taken by management. There was always room for feedback and coaching. This system was moving towards less frequency and enhanced effectiveness. The company’s organizational structure in 2007 was characterized by the following features: 1. Job expansion. It was common practice for the company to expand job responsibilities. For example, Ms. Kseniya Musina, head of the wholesale department, franchising and Moscow network business lines, had held six positions by 2007. Musina started as a sales assistant, then, while still in that position, she simultaneously worked as a gift packaging designer, later taking charge of the gift packaging department. Following that, she worked in the procurement department. Then she supervised the wholesale project which later developed into the wholesale subdivision. After that, Musina took control over the franchising line. Later, without quitting her other jobs, she supervised the establishment of the inhouse network in Moscow. Another example was Ms. Belokurova who joined the company in February, 2006 as the second accountant. In May, 2006 she entered the cross-functional team responsible for packaging design and revealed herself as a talented market analyst and good organizer. From September, 2006 until January, 2007, Belokurova was simultaneously employed as second accountant and deputy chief of the warehouse. From February, 2007 she worked as a project developer and chief of production at the storage facility. It was very often the case that there were several employees participating in job rotation. Within two and half years, rotation was conducted three times and affected senior positions involving up to seven employees at a time. 2. Another distinctive feature of Untsiya’s organizational structure was that the company had two owners as its directors who, despite mutual respect, differed significantly in their approach to management. Asvarishch preferred a more structured approach to management, but Nikolaev felt that it was necessary to build a creative atmosphere in the company. This meant that for Asvarishch, the business was a source of wealth; for Nikolaev, the business provided an opportunity for self actualization. Consequently, they seldom interfered with each other’s activities. Collaboration There were some significant collaboration aspects to Untsiya, including the interior design of the office. Most office staff worked in a bullpen, behind 1.5 meter (4 ½ foot) high partitions that separated the different departments. There were also two conference rooms, a kitchen and a smoking room. This structure facilitated more small meetings and communications in general (both effective and ineffective). Temporary project groups were a second popular collaboration approach. These teams were set up to launch new projects and products (this was how, for example, the Packaging and Coffee projects were implemented) or to work on issues that concerned a number of the company's departments and divisions (e.g., significant changes to the company’s web-site or semiannual inventory). Teams were usually cross-functional and operated within varying Volume 6, Issue 1 (Fall 2009)

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time frames – from several meetings up to six months. As a rule, teams were not hierarchical; all team members were equal and decision making was consensus-based. This approach was originally used to map out business processes (sales subdivisions forecasting; procurement planning; supply and delivery order placement; warehousing and inventory; distribution of scarce and slow-moving items between subdivisions), but the use of teams in this way failed. The third aspect to collaboration was the Club, as it was popularly called. Every second Thursday at the end of the working day all those interested got together to listen to and discuss someone's report on a preannounced topic. These reports might be educational and deal with some business issues, such as Jack Trout's Concept of Positioning or What Makes Japanese and European Management Different. Or, some department might make a presentation focusing on its problems or plans after which the audience would discuss the issues covered. The format of these meetings was conversational rather than decisionmaking or a negotiation. No one expected consensus or a specific solution, although some decisions emerged through discussion. The second part of the Club meetings was an informal gathering with wine and a snack. These gatherings provided a venue for establishing a shared viewpoint. Such meetings gave employees a chance to discuss various cases from the company's practice or best experiences of other companies which led to reevaluation of company standards. On the one hand, such gatherings were quite popular as even retired employees asked for permission to visit or make reports. On the other hand, they occasionally grew into operations meetings conducted during off-duty hours, raising suspicions that some employees attended these meetings only because they felt they were supposed to. The fourth aspect of collaboration was meetings of heads of departments at which directors/owners were not present. In 2007, this became an inconsistent tool as sometimes these meetings were conducted regularly, were chaired and minutes taken in turns, and sometimes they were called off. On occasion they were initiated by some concerned head of department, an approach that prevailed in conjunction with moving to a new office and holding a great number of minor operations meetings. The final collaboration tool was in-house e-mail correspondence. Roughly 20 messages a week were addressed to all staff members with just a few of them coming from senior management. Much of this correspondence was an alternative to the usual operations meetings. WHAT’S NEXT? POTENTIAL PROJECTS Coffee shops and loose tea Nikolaev planned to have his experts analyze the effectiveness of setting up a coffee shop chain selling loose tea. Provided they developed a promising format, the chain could easily expand through franchising and establish operations in many regions of Russia. Expansion would resolve the problem of finding small selling spaces. Due to the scarcity of small retail spaces in the country, it was difficult to find appropriate locations of 20 to 35 square meters. Some company expenses (e.g. management and logistics) were connected with the number of points of sale, but not with the amount of selling space. Expenses per square meter of selling space were high. Moreover, it was impossible to decrease them by enlarging the company's tea range up to 300 brands, as customers were not likely to be able to select between that Volume 6, Issue 1 (Fall 2009)

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many types of tea. As Nikolaev said, “Creating a coffee shop chain seems rather an appealing idea because it involves similar key competencies.” The project had not launched as of 2008 because the company already had a significant number of recently implemented projects. See Exhibit 10 for a timeline of corporate developments and Exhibit 11 for a Profit and Loss Statement for 2007. New supermarket lines It also seemed promising to expand the efforts of some of the already operating subdivisions. For example, with supermarkets as an important distribution channel, established procurement and production processes facilitated the introduction of another tea line under a different brand, positioned in a slightly lower yet broader market segment. A second option would be to expand the efforts of the wholesale and production subdivisions to launch a less expensive line of high-quality loose teas. New market segments Sergey Nikolaev described the Untsiya company strategy as follows: “The company wants to grow large; it aims to be innovative; it pursues only related diversification; by entering new market segments, it tries to achieve market differentiation. I believe that it is possible to increase the company's revenues tenfold in five years, to USD 40M.” Further, Nikolaev said: We have reached that classical stage of setting new objectives. I love it. Some objectives have been reached, some not, some were slightly altered. So I'm thinking of what to do next. The company has a certain experience, it has learned something, and I have also learned something. People are different, people are talented and are ready to act. What I want is to come up with some idea which, provided it is amply financed (and I, thank God, do not have problems attracting funds), could develop into something special, some format based on our business, our knowledge which could be a real breakthrough, could become something really serious if not in the world, then within Russia. We are already leaders in the tea market. Our 100 shop chain is the greatest chain of tea shops in the world. But we want more. It is not clear yet if it is possible to create something new under the same brand expanding the tea shop format, or it should be something else which will make the business grow larger and more fundamental with capitalization of at least USD 100M. So far I don't know if I will manage to come up with some idea, but I want something special, something real.


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Exhibit 1 Company Revenue in February, 2007

February

Retail sales

Franchising

Whole HoReCa -sale

Corporate presents

Tea Club

Production

Revenue (%)

48.0%

21.2%

22.0%

4.6%

3.3%

0.5%

0.4%

Profit (%)

31.1%

34.3%

37.%

5.3%

12.2%

–19.9%

0.0%

Total 100 % 100 %

Source: Company Records


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Exhibit 2 A Typical Untsiya Store

Source: From company records Volume 6, Issue 1 (Fall 2009)

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Exhibit 3 Tea Purchase Frequency as a Percent of Respondents

35 30 25 20 15 10 5 0

26

26 25

20 21

14

si x in

Frequency Frequency

on ce

in

si x

m on th s/ ne ve r

m on th s

3 2

on ce

or th re e

le ss

th an

in

tw

2002 2006

8

m on th s

m on th o

a e

on ce on ce

tw

ic e

or th ric

a

m on th

6

or m or e ee k w a on ce

30

20

of te n

%

Source: Russian Tea Market Review at http://www.advertology.ru/article45552.htm


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Exhibit 4 Consumer Preferences of the Type of Tea Packaging as a Percent of Those Buying Tea No Less Than Once in Six Months 70 60 50 40 30 20

10

Don’t know

Loose tea in A tin caddy

Bagged tea

%

Loose tea in a carton pack

0

Type of tea packaging



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Exhibit 5 Consumer Preferences of Kinds of Tea as a Percent of Respondents

Black

77

Bergamot black tea

9

Flavored black tea/ with additives

7

Green tea

6

Green tea with additives

5

Hibiscus tea

2

Herbal tea

1

Fruit tea

1

Kind of tea 0

10

20

30

40

50

60

70

80

90 %



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Exhibit 6 Doing Business in Russia9 Doing business in Russia was a very different process from doing business in the United States in several areas. The reader should recognize that Russia was still adapting to capitalist structures and environments nearly twenty years after the breakup of the Soviet Union. The process of moving from communism to capitalism was a rocky one, with rapid, discontinuous change creating social and economic pressures that posed unique challenges to Russian business owners and investors. A Little Russian Background Russia was a member of the Commonwealth of Independent States (CIS), which included Ukraine, Kazahkstan, Belarus, Ajerbaijan, Uzbekistan, Turkmenistan, Georgia, Armenia, Tajikstan, Kyrgyzstan, and Moldova, all previously members of the Soviet Union. Russia continued to maintain business ties with many of these countries. Russia was a federal presidential republic with a population of 141.1 million, a little less than half the population of the United States. Its primary language was Russian, and English was taught in all schools as a required subject. Russia was the second largest oil producer and exporter (after Saudi Arabia) and was the world leader in natural gas. Russia was the fastest-growing retail food market in the world; about 40 percent of Russian income was spent on food. The communication industry was growing quickly; as of 2006, 150 million mobile phones were active. However, Internet had only reached about a quarter of the population during the same period. Russia’s main trading partners were Germany, Netherlands, Italy, China, Ukraine, Belarus, Turkey, Poland, Finland, USA, Kazakhstan, Japan, and South Korea. Prices in Moscow and St. Petersburg were the highest in Russia; in fact, Moscow was the world’s most expensive city according to the Cost of Living Survey (Mercer Cost of Living Survey). Hotel accommodations were very expensive due to the scarcity of rooms. Economic Conditions The economic conditions in Russia corresponded to the conditions in other countries, especially in the West, thriving from 2005-08. Regulatory Environment Market competition in Russia was controlled by the Federal Anti-Monopoly Service (FAS), whose role it was to ensure compliance with anti-monopoly legislation designed to prohibit unfair competition or permit abuse of a dominant market position by any corporate entity. All commercial entities had to obtain approval from the FAS before raising or lowering prices. Price setting was highly regulated; prices were determined by the FAS. Most property was owned by the State, with commercial entities leasing the land on which their buildings stood. The buildings themselves were privately owned. Commercial property could be obtained by foreign interests without penalty or premium.


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Corruption 10 Corruption has been highlighted as the major impediment to starting and growing businesses in Russia. In 2008, approximately one third of the entire national government’s budget was siphoned off by corrupt officials. Addressing this corruption was a priority of Pres. Medvedev, and a counter-corruption council was established in an attempt to put a halt to corrupt practices. The extra expense of bribes limited interest by business people in starting new businesses and in investing in others’ initiatives. Several Specific Problems of Entrepreneurship in Russia Paradis and Cervin 11 identified the following difficulties that Russian entrepreneurs faced: an unstable tax system, with additional payments at the regional level; shortages of capital and difficulties in obtaining loans; an unstable legal system; bureaucracy; bribery and corruption; and excessive control and reporting. Russian business and the entrepreneurial environment were characterized by problems of high transaction costs and high expenses for opening businesses, all caused by the inefficient legal system and frequent changes in legislation: unreliable financial resources, especially early in the creation of a new firm; a shortage of venture capital; and an adverse credit policy for small and medium firms 12. Opening a new business required passing through twenty steps in seven various official organizations. Additionally, entrepreneurs also had to pass through a number of informal procedures, and as a rule it was necessary to trade bribes for official permission, licenses, and offices. Russia’s entrepreneurial environment differed considerably from that in western countries in the following ways: animosities of the business environment; deficiency of resources; ways of thinking; and unstable state; excessive regulation, an underdeveloped legal system; an unstable tax system; and a weak business infrastructure 13. Several scholars noted that entrepreneurial development was stimulated in Russia by plentiful resources at great demand; however, they also noted the absence of an entrepreneurial culture and a low level of institutional, psychological, and educational environment 14 .


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Exhibit 7 Untsiya Locations in CIS and Russia

Source: http://lib.utexas.edu/maps/commonwealth/commonwealth_pol_97.jpg (accessed online December 1, 2009)


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Exhibit 8 Organizational Structure as of January 2003 from company records

Nikolaev S., Director

Nikolaeva N., Head of BackOffice

Aksyanova O., Chain Manager

Administrator (Nevsky shop)

Administrator (Vladimirsky shop)

Sales Assistants (5)


Administrator (Miller shop)


Purchasing Agent

Chief of the Warehouse

Chief Accountant

Musina K., Packaging Production

Accountant

Stock-Keeper and Driver (2)


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Exhibit 9 Organizational Structure as of February 2007 from company records

Nikolaev S., Director

Asvarishch A., Director

Aksyanova O.,

Nikolaeva A., Packaging and External Chains

Finance Manager

Chief Accountant

Accounting Department (3)

2 Operators

Ruchkin D., Operation Manager

Musina K., Head of Wholesales Department, Franchising and Moscow Network Business Lines

Chief of the Warehouse and Internal Logistics

Stock-Keepers (12)

Drivers (3)

Chain Managers (2) Kolodnikov I., Head of HoReCa Department

Nikolaeva A., Packaging and External Chains

Procurement Manager

Sales Managers (4)

Makarenko N., Head of Service Department

12 Shops

Administrator

Corporate Gifts and Delivery (2)

Office-Manager, Secretary (1)

Senior Sales Assistant Designer

HR Manager Sales Assistants (2 or 3)


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Exhibit 10 Timeline of Untsiya Events

July, 2001

Sergey Nikolaev sold the radio station and started to search for a new business idea

August, 2002

The first Untsiya shop in St.Petersburg opened

Autumn, 2003

Three new Untsiya shops opened in St.Petersburg

January, 2004

The new HoReCa business line was established

February, 2004

Sergey Nikolaev formalized his business relationship with Aleksey Asvarisch

August, 2004

The wholesale department was established

June, 2005

The first franchising contract in Novosibirsk was signed

Autumn, 2006

The coffee line was created under the brand Kafe Кult

March, 2007

The new tea production project was launched

Spring, 2007

The first Untsiya shop was opened in Moscow


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Exhibit 11 Profit and Loss Statement 2007

Retail chain, St-Petersburg

Retail chain, Moscow

Delivery

Horeca

Packing

Wholesale

Total

Sales, total $1 777 805

$67 443

$72 792

$166 380

$94 614

$1 686 577

$3 865 611

$555 224

$21 086

$27 825

$46 924

$38 213

$982 595

$1 157 160

$707 032

$96 864

$10 953

$81 910

$65 645

$194 756

$2 829 026

$1 262 255

$117 950

$38 777

$128 834

$103 858

$1 177 352

$1 036 585

$515 550

$(50 508)

$34 015

$37 546

$(9 244)

$50 9226

$640 881

$351 857

$27 097

$7 890

$29 296

$22 016

$202 725

$403 698

$165 229

$(77 556)

$26 215

$8 509

$(31 053)

$31 2354

$386 5611

Variable costs Fixed department cost Total costs Total profit Overhead company costs Net profit

Source: Company Records


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Endnotes The authors would like to express their gratitude to Sergey Nikolaev, founder of the Untsiya Company, for his assistance in the preparation of this case study. 1

Romanova T. “Tata priglashaet na chai” (Tata invites for tea), in Vedomosti, 13.08.2007, #149 (1923), p.5. Russian Tea Market Review at http://www.advertology.ru/article45552.htm (accessed September 5, 2009). 3 Russian Tea Market Review at http://www.marketcenter.ru/content/doc-0-6775.html (accessed September 5, 2009). 4 According to research conducted by the VladVneshServis company. For more information visit http://www.marketcenter.ru/content/doc-0-6775.html (accessed September 5, 2009). 5 Birger P. OtChayanny biznes (TeAmerarious Business) // Expert North-West magazine, # 21 (226), June 2005. 6 From the interview with Sergey Nikolaev. 7 Untsiya – mera nastoyashchego (The Present is Measured in Ounces) // Kupi Brend (Buy Brand) magazine, # 4 (8), October, 2006 8 Untsiya – mera nastoyashchego (The Present is Measured in Ounces) // Kupi Brend (Buy Brand) magazine, # 4 (8), October, 2006 9 Information in this section is drawn from Doing business and investing in the Russian Federation (2008). Pricewaterhouse Coopers. http://www.pwc.com/en_RU/ru/globalisation/assets/pwc_doing_business_in_russia08.pdf (accessed September 5, 2009). 10 Material drawn from: Corruption Costs Russia $120 Billion Annually. (October 2008). Moscow News. (2009http://mnweekly.rian.ru/business/20080610/55332947.html -- accessed September 5). 11 Paradis S., Cervin A. 1998. Entrepreneurship in the Russian federation: Organisation for Economic Cooperation and Development // The OECD Observer, vol. 210, pp. 20–22. 12 Kuznetsov A., McDonald F., Kuznetsova O. 2000. Entrepreneurial qualities: A case from Russia // Journal of Small Business Management, vol. 38 (1), pp. 101–108. 13 Puffer S., McCarthy D., Peterson O. 2001. Navigating the hostile maze: A framework for Russian entrepreneurship/Executive Commentary // The Academy of Management Executive, vol. 15 (4), pp. 24–38. 14 Stewart W., Watson W., Carland J., Carland J. 2003. A proclivity for entrepreneurship: A comparative study of entrepreneurs, small business owners, and corporate managers // Journal of Business Venturing, vol. 14 (20), pp. 189–214. 2


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