Valio refused to produce at the Ehrmann site

The Russian structure of German Ehrmann (Epica, Ermigurt, Smetanovna brands, etc.) appealed to the Arbitration Court of Moscow region with a claim for recovery over 271 million rubles fr om the structure of Finnish Valio. The hearing on the case is scheduled for October 19.

Valio reported that since 2014, they have been producing thick yogurt and soft cottage cheese under the brand Valio Clean Label at the Ehrmann facilities in Russia. At the end of 2020, Valio offered the partner to make changes to the commercial terms of the contract due to the changes in the situation on the dairy market over the past six years. However, the companies failed to reach a consensus, which became the reason for the termination of the contract and, as a result, filing a lawsuit. They did not go into details in Valio. Ehrmann did not answer any questions. 

Valio operates the only factory in Russia in Yershovo in Moscow region, wh ere it produces processed cheeses Viola and Oltermanni, as well as hard cheeses. The rest of the assortment, including yoghurts, cottage cheese, cream, is produced at the enterprises of partners, including Galaktika, Agrokomplektatsiya, Ecomilk. Alexey Gruzdev, Head of Streda Consulting, explains that after Russia imposed a food embargo in August 2014, Valio lost the right to supply products directly from Finland, so it was forced to organize contract production in Russia. 

A source in the market explains that such contracts are usually long-term, which means that there are a number of reasons why companies could not agree on conditions for continuing cooperation. As the interlocutor suggests, one of the parties could not be satisfied with the price for the products produced against the background of cost growth. At the end of August, the National Union of Milk Producers (Soyuzmoloko) said that the cost of milk processing over the past year has increased by 6-8%, despite the fact that prices on the shelf have increased by 3-5%. In addition, Valio could request an inconvenient matrix for Ehrmann in terms of assortment and volume, which would require the restructuring of production to meet the requirements of one customer, the interlocutor concludes.

Partner of Pen & Paper Sergey Uchitel reminds that unilateral termination and modification of contracts is not allowed, but in practice, legal disputes often arise between former partners. According to him, for each type of contract, the legislation and practice have formulated which violations should be considered as significant, allowing to unilaterally refuse its execution, because it is very difficult to assess the prospects of one dispute without knowing the details. Dmitry Zhdanukhin, director of Collection Development Center, adds that Ehrmann, perhaps, in this case, believes that the contract is valid, and therefore requires payment through the court.

Valio said that the range produced at the Ehrmann facilities has already been transferred to other sites. According to Alexey Gruzdev, in 2014, when Valio returned to the Russian yogurt market, there was actually no serious alternative to Ehrmann's facilities in the country. Now the company will not have any difficulties with finding other partners. Nevertheless, this is not an easy process and the company may face temporary non-critical difficulties due to the transfer of volumes to a new site, Mr. Gruzdev notes. Meanwhile, interlocutors in the industry noted that the crisis led to a shift in demand from yoghurts to more traditional dairy products. According to Soyuzmoloko, in 2020, yogurt sales decreased by 2-4%, to 814.7 thousand tons year-on-year.