The Russian city of Azov isn't the kind of place most foreigners would think of plunking down $170 million. Located in Russia's deep south, the town has a population of just 80,000 and lies far from the country's big consumer markets, Moscow and St. Petersburg. But the area around Azov has one thing in abundance: potatoes. And that's something at least one investor, PepsiCo (PEP), is looking for. On Oct. 13, Pepsi began building a potato chip factory in Azov, the largest foreign investment the region has ever seen. "Russia is on the road to steady growth," says PepsiCo Chief Executive Indra Nooyi. "We're very bullish."
Slide Show >>
The new facility, the second in the country for PepsiCo's Frito-Lay chips, is just the latest step in an ambitious plan to reconquer the Russian market. The company's story in Russia goes back to a 1959 American trade fair in Moscow, when Richard Nixon persuaded Soviet leader Nikita Khrushchev to try a swig of Pepsi's trademark cola. He ended up downing eight bottles. The publicity coup bore fruit more than a decade later, in 1972, when Pepsi got permission to produce and sell in the Soviet Union—the first major multinational to win that privilege—in return for selling Russia's Stolichnaya vodka in the U.S. By the late '80s, Pepsi was ubiquitous in Russia, one of the few consumer products that was reliably available. Russians drank around a billion bottles of locally bottled "Pepski," as some called it, each year.
Despite that head start, Pepsi has faced tougher times more recently. When the Soviet Union crumbled, rival Coca-Cola (KO) quickly moved in, opening more than a dozen modern bottling plants across the country and plastering kiosks, billboards, and airwaves with its fire-engine-red logo. Pepsi's once-dominant share of the soda market in Russia plummeted to less than 15%. Pepsi bottlers have battled back, spending about $700 million on new plants since 1995. By 2006, Pepsi had 20% of the soft-drink business, compared with Coke's 36.5%, according to researcher Euromonitor. PepsiCo's overall sales in Russia will likely hit $1.1 billion this year, up from $850 million in 2006, investment bank Finam estimates.
Unlike during Soviet times, though, cola isn't the main focus of Pepsi's effort. As it's doing in other emerging markets such as China, PepsiCo is looking to snack foods and other beverages for growth. "We'd love to build our noncarbonated portfolio," Nooyi says. While the company's Lipton tea and Aqua Minerale bottled water are both leaders in Russia, Pepsi is an also-ran in fruit juice, long a favorite of Russians. Pepsi's imported Tropicana brand has just 2% of a market that will grow this year by 12%, to some $2.9 billion. Coke, meanwhile, in 2005 bought Russia's No. 3 juicemaker, Multon, for $500 million and now has 22% of the market. Fruit juice "is a very attractive business," says Clyde Tuggle, who oversees Coke's operations in Russia and nearby countries. Buying Multon "is really one of the smartest things that the company did."
Now it may be Pepsi's turn. Although company executives decline to comment, Moscow is rife with rumors that Pepsi may pay as much as $2 billion for Russia's largest juice producer, Lebed-yansky—the biggest foreign investment ever in Russia's food industry. Acquiring Lebedyansky, which has 27% of the juice market, would catapult PepsiCo into the No. 1 slot in the Russian drinks market. And Lebedyansky's wide distribution network would strengthen Pepsi's hand in the battle with Coke to get its drinks and snacks into stores.
PepsiCo is further along on the other big piece of its non-cola strategy. The Azov factory will boost production capacity for Frito-Lay in Russia by 50%, to 90,000 tons annually. And since opening its first Russian plant in 2002, Frito-Lay has captured a third of the country's $800 million potato chip market with flavors such as crab, sour cream, and white mushroom. "What we've done," says Paul Kiesler, PepsiCo's general manager for snacks in the country, "is take a very traditional American snack—the regular salted chip—and applied local Russian flavors."
Here's what others say about Pepsi's efforts to build a global snack culture and support it with ads that capture young consumers.
Pitching Pepsi to Russians
PepsiCo has won high marks for its advertising in Russia, with many industry insiders saying its TV spots are more memorable than Coke's. Just how memorable? One grabbed the attention of Russia's ad watchdog, the Moscow Times reported in February. The ad, featuring the pop group Zveri (Animals), was yanked for allegedly inciting antisocial behavior. It showed young people playing music and drinking Pepsi in the courtyard of an apartment building at night. After tenants complain, the musicians keep playing—but plug into high-powered amplifiers. This, according to the agency that oversees the airwaves, violated rules that bar ads advocating "violence and cruelty."
Tasty vs. Healthy
PepsiCo is on a drive to make health central to its snack and soda business. Brand Strategy reported in April that Pepsi has divided its products into various health categories. Regular Pepsi and Doritos? They're part of the "Treat for You" segment. But "Better for You" comprises a fast-rising share of the PepsiCo universe, including sugar-free Pepsi Max and Walkers' baked Potato Heads crisps. Then there are "Good for You" brands like Tropicana juice and Quaker Oats. A "Smart Spot" logo is reserved for the healthiest fare.
By Jason Bush