Guiding Lines: Jack of all Trades

In the year 1997 the company bought the century-old Kalinkin beverages plant and launched production of its low alcohol drinks. In the summer of 2004 Borodino moved its production facilities to the town of Mytishchi outside Moscow, spending about $12 million on the relocation.

Today Borodino is set to build an 85,000-square-meter commercial property on the same site planning to spend at least $70 million it has earned from production.

It remains unclear why the low alcohol magnate with annual sales of $250 million should be interested in development. The real estate business can hardly vie with Borodino’s core business in terms of profitability. Alcoholic drinks producers report a rate of return as high as 50% while the rate of return on a project similar to the one Borodino plans to develop at Rusakovskaya barely reaches 18%, with a payback period on investment of at least 6-7 years.

The goals pursued by commodities firms actively breaking into the real estate development market over the last few years when their markets were booming were clear -- they sought to diversify their operations and secure a rate of return of up to 100%. But these days, when nearly half of all development projects are doomed to failure, entering a new field with which you are less than familiar is, at best, unwise.

But it appears to be fashionable. Real estate consultants have seen an influx of new clients that include chocolate and drinks producers, publishers, as well as developers proper. All of them seek to spend at least $5-10 million on real estate development. Some are ready to spend much more. Realtors are delighted by their willingness to develop non-core businesses, anticipating the arrival of prime new properties.

But expensive projects do not necessarily imply good quality. Therefore, the misgivings of conservative consultants are quite understandable. Indeed, a project may be expensive and ambitious, but it remains to be seen whether inexperienced developers will be able to competently make use of the precious land in downtown Moscow.

The same misgivings were expressed by real estate consultants when a Wimm-Bill-Dann shareholder established the Agent 002 real estate agency offering mediation services for a 2% fee. Realtors did not conceal their skepticism saying that the business was not viable.

They were not mistaken. They survived the new rival’s dumping attacks. Agent 002 gave up its active advertising campaign and has already experienced a staff reshuffle – its chief executive stepped down four weeks after the agency opened. It appears that being a Jack of all trades does not necessarily mean one can cope on the development market.