Since the Cold War, Coke has overtaken Pepsi in Russia
Both Cola companies plan massive expansion in Russia and other developing economies, but problems with red tape, domestic competition and even patriotism abound.
Throughout the last 50 years or so, numerous high-level political summits between Russia (or the former Soviet Union) and the United States have seen one particular sticky black liquid share the stage with the politicians. The liquid isn’t oil: It’s cola.
With their images closely associated with the United States, Pepsi and Coca-Cola have seen their fortunes in Russia rise and fall alongside high-level political relations. Pepsi gained the upper hand after Nixon persuaded Khrushchev to sample a glass during their Kitchen Debate at the Moscow Trade Fair in 1959. Although forced to wait until 1973, the fizzy drink was the first Western consumer product to be produced and sold in the former Soviet Union.
The current crisis has hurt Russia badly, but PepsiCo CEO Indra Nooyi said in July that the company was pushing ahead with its expansion and would invest over $1 billion in its Russian operation over the next three years.
Meanwhile, Coke has recently introduced eight new brands to the Russian market and will pump $1.2 billion into its infrastructure in the coming years. The pair has also been busy buying up domestic brands, particularly in the fruit juice segment, as they battle for market share among more traditional Russian soft drinks. In 2005, Coke bought the country’s second biggest juice maker, Multon. Pepsi returned the salvo in 2008, paying $1.4 billion for top producer Lebedyansky.
It’s easy to see the attraction, especially as these companies are watching consumption patterns in developed markets stagnate, if not fall. Emerging markets, on the other hand, offer large populations with growing incomes and a low penetration: Recent predictions state the soft drinks segment will grow 36.2 percent by 2014.
Hopes may be high then, but the cola giants have met numerous obstacles to their bid to turn Russians into dedicated consumers. The pair has battled against Russian resistance to cola, whether that be the result of a general disdain for carbonated drinks, increasing focus on health or the recent renaissance of patriotism. Additionally, traditional fruit juices and kvas (a drink made by fermenting rye bread), have taken back market share in recent years. This development is what led to the acquisitions of domestic juice makers, and Coke’s investment in producing its own brand of kvas. While Datamonitor expects cola to achieve a compound annual growth rate of 5 percent, juices are anticipated to grow by 9 percent, and the patriotic kvas by a stunning 28 percent. In 2009, cola managed to capture just 25 percent of the soft drink market total.
International brand soft drinks, on the other hand, suggests Dale Clark, retail and consumer practice leader for Pricewaterhouse Coopers in Russia, may not be so easily available outside major cities. Coke and Pepsi have to wait for the development of modern retail chains into the central and eastern regions of the country. Not only do modern retailers provide the bulk of sales for the likes of the cola companies, but their distribution and logistics networks will also prove vital in such regions. That said, Clark points out that modern retailers are starting to sell their own private labels.
Just as much of a challenge as distribution is the ability to build the right capacity to serve an emerging market that is still to find political, legal and economic stability. For example, Coke is reported to run over 14 bottling plants and 60 distribution centers. Given the decline in discretionary spending during the crisis, it is no surprise that both Coke and Pepsi have seen numerous delays in putting new infrastructure into operation over the past couple of years. PepsiCo, for instance, has postponed the commissioning of a 170 million snack food plant in the south of the country more than once.
Clark explained that overcapacity is the norm for these beverage companies in emerging economies. “These companies have a long view and know that growth will absorb extra capacity. In fact, excess capacity is crucial because building a facility takes a long time, and because they don’t have the option to outsource should they need to increase production.”
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