Ben Aris in Moscow -
Russians love chocolate. In Communist times the Soviet state made sure there was a plentiful supply of chocolate and it was one of the few little luxuries widely available. Even today when visiting a friend in Russia it is de rigueur to bring some flowers, a bottle and a box of chocolates.
French Kiss is a boutique chain of handmade chocolate stores that was founded in Moscow 10 years ago to sell top-quality fancy chocolates to Russia's emerging middle class. Open the box and you will find an array of sweets with a variety flavours and fillings sculpted into attractive and almost artistic shapes.
"Handmade chocolate was a new idea at the time, but the people who tried it always came back," says Huseyin Yamanyilmaz, the founder and owner of French Kiss. "So we have been opening more branches and began to import ingredients from different countries."
All the chocolates are made by hand in the store and carefully packaged. The customers are mostly individuals, but companies also order bespoke designs to give as corporate gifts.
Rather than reinvent the wheel French Kiss imports a lot of the raw materials from other countries. Raw chocolate comes from Belgium and cherries and oranges are from Greece. Chocolate and most of the other ingredients are not included in the current EU food ban imposed by the Kremlin in September, but Yamanyilmaz says he is already having problems sourcing pecans and almonds that come from the EU and US.
"We chose the brand French Kiss as it was romantic and sexy. There is some commonality between a French Kiss and eating chocolates," says Yamanyilmaz wryly.
The turnover of the company has been growing steadily and Yamanyilmaz has continued to open more stories. There are a total of 16 branches now in Moscow and another 18 franchisees in other regions. With the fresh capital the plan is to open at least four more stores in Moscow and two more in the regions in the short-term.
Currently most of the branches are standalone retail outlets but Yamanyilmaz says that part of the expansion is to move into malls and sell more online.
The price of a French Kiss box of chocolates is significantly higher than that from the Soviet-era factories, most of which are amongst the few Soviet-era products that have successfully retooled and trade on their widely-known brand names. However, compared to a box of hand-made chocolates made in the rest of Europe, French Kiss' products remain relatively cheap: a box of French Kiss chocolates retails from about RUB1100 ($29).
The new Russian private equity firm VIY Management (VIYM), run by Andrei Yakunin, the son of the chairman of Russian Railways, Vladimir Yakunin, and his partner, Israeli citizen Yayr Ziv, have just bought a blocking stake in French Kiss.
The fund recently launched the "Russia and Former Soviet Union Growth Equity Fund" that is targeting small and medium-sized enterprises. It has $120m under management, of which half has already been invested.
While the fund doesn't disclose the size of his financial transactions, the typical ticket size is between $5m and $15m, says Dmitry Schuetzle, the managing director of VIYM.
French Kiss is a typical investment, says Schuetzle, who is looking for specialised niche players that have successfully found a foothold in the market and need growth capital to scale up. VIYM has also invested in a company that produces rice in southern Russia - including specialist rice grains such as sushi and risotto grains - and a domestic top-end toilet paper producer, amongst other companies.
Handmade chocolates is typical of the niches that Russian entrepreneurs are starting to fill out. Following the collapse of the Soviet Union, the basics, such as generic chocolate producers, struggled for half a decade to get back on their feet, but as Russia recovers on the back of ever rising incomes, entrepreneurs are now building new businesses and filling out the corners of the market. Getting into the chocolate business in the 1990s was cheap and most of the international players are long since well established in Russia and turning over tens or hundreds of millions of dollars. But there is still plenty of space to grow in the smaller niches. And thanks to the sheer size of the Russian consumer market these remain extremely lucrative for a successful venture.
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