Western Investors Hunger for Chunk of Russian Chocolate Firm

DESPITE the end of cold war intrigues, there's a new hunt for Red October under way in Moscow.

This time, it is not the United States Navy searching for a threatening Soviet nuclear submarine, but Western candy manufacturers angling for a bite of Moscow's biggest chocolate factory.

Red October, Russia's largest producer of chocolate, announced Nov. 29 that it will launch the country's largest ever public-share offer for cash on Dec. 5, seeking $33 million from 5.5 million shares.

Cadbury-Schweppes, Nestle, and Hershey are reportedly all involved in the hunt to buy about 2 million of the shares, which a single Western investor will be allowed to acquire within the next six months to help develop a new factory outside Moscow.

``We wanted to be able to sell our shares like they do in the West, according to Western standards,'' says Yuri Yegorov, a bustling executive in a plaid sport coat who is Red October's chief economist. ``We didn't search for investors, they found us.''

The factory, a grand, red-brick building occupying a piece of prime real estate on the banks of the Moscow River, employs about 3,000 workers and produces about 60,000 tons of chocolate and confectionery annually.

Despite antiquated machinery and obsolete equipment, Red October, which became a joint stock company in 1992, made more than $5 million in profits in the first six months of 1994, with a $22 million turnover.

It was this success in Russia's dog-eat-dog economy that attracted the British Know-How Fund, which is helping Russian factories privatize themselves.

Foreigners sweeten the deal

It has helped Red October - a company with a quintessentially Soviet name - to attract an advisory team from the top drawer of international capitalism: English merchant bankers Samuel Montagu, lawyers Linklaters & Paines, the accountants Deloitte & Touche, and the public relations firm Burson-Marsteller.

``Our main rationale is a straightforward one - to support Russia's transition to a market economy,'' says David Moran, head of the British Know-How Fund in Moscow. ``What we really wanted to do is to use British expertise to work with Russian counterparts and well-run Russian companies to show them how to raise lots of capital.''

The 5.5 million shares will be offered to domestic and foreign investors at about $6 each. Of these, roughly 1.5 million shares will be reserved for Russian small investors, 1 million for Russian institutional investors, and the remainder for international investors.

Money from the sale of shares will be used to modernize equipment and machinery, build warehouse space to accommodate expanded confectionery lines, and install computerized information control systems, Mr. Yegorov says.

Red October currently exports only 14.5 percent of production, mainly to Mongolia and Afghanistan, which do not impose import tariffs. But management would like to eventually increase exports to 25 percent to 30 percent of total sales, so that cocoa beans, nuts, and packaging can be bought without purchasing dollars for rubles.

But the planned sale isn't impressing everyone.

``It's not good for foreigners to buy our factory. It belongs to us,'' says Anna Vasina, a 30-year Red October veteran, whose comments reflect the feelings of many Russians who worry about a foreign industrial invasion.

Pre-Lenin orgins

Built in 1867 by German candy manufacturer Theodore Einem, the factory was nationalized by the Soviet government in 1918 following the Bolshevik Revolution and renamed ``Krasny Oktyabr.'' The plant still boasts a large marble statue of Lenin in the main lobby.

Once the chocolate supplier to the Imperial Household, during World War II the factory produced fire extinguishers and other items to help with the war effort by order of the Ministry of Defense, along with chocolates fortified with extra cocoa beans and nuts to give soldiers more energy.

These days, the factory produces about 240 tons of candy daily, including such Russian favorites as Mishka Kosolapi (Mishka the Pigeon-Toed Bear) chocolates and Rakoviye Sheiki (Crayfish Tail) caramels.

On the factory floor, outdated machinery whirs as plastic and metal molds whiz past a vat of warm chocolate. Kerchiefed young women carefully unroll slabs of hot, sticky toffee from conveyor belts, some of which date as far back as 1919.

But the apparent backwardness does not affect quality, Yegorov says. He disparages Western rivals, such as Snickers bars, saying his chocolates are superior as they contain no additives or preservatives, just natural cocoa beans and sugar.

``Snickers is not our type of market. They're fast food,'' he says. ``Our chocolates can only be sold in specialty shops by weight. They don't exist just to get quick satisfaction. The Russian mentality has a different way of looking at chocolate. It's not food, it's a delicacy to be savored over a cup of tea.''

Although new marketing techniques entail a return to pre-revolutionary chocolate boxes, Yegorov says Red October has no real need to advertise at home.

``Russian manufacturers are very skeptical towards advertising. Russian buyers wonder to themselves, `Gee, their business must be really bad if they need to advertise,' '' he says.

``There's a real market loyalty in Russia,'' agrees Fred Hawrysh, Burson-Marsteller's director for European privatization. ``People always queue for Red October's chocolates because they have years of brand allegiance. I guess if they don't have to advertise, why spend the money?''