The Consumer Analyst Group Europe (Cage) conference last week heard from a number of the world’s leading food makers keen to emphasise their plans for expansion in emerging markets. One company, Dean Best writes, had a particularly compelling narrative for analysts and investors.
One by one, the companies presenting at the Consumer Analyst Group Europe (CAGE) conference in London last week, outlined to analysts their presence in the world’s emerging markets – and their ambition to grow further.
Alongside the ongoing concern over commodity costs, the moves that the likes of Nestle, Danone and Unilever were continuing to make in the developing world formed the second key theme of the conference.
To some of the companies at CAGE, the potential of emerging markets is not a new notion. Nestle and Unilever have been present in the developing world for decades – Nestle, for instance, moved to highlight that “historical” presence to investors with a slide detailing when the company made its first sales of infant formula in certain markets, with countries like Brazil and India entered in 1875 and 1899.
However, investor interest is in the here and now and, given the potential future prize on offer, Nestle, as well as the likes of Unilever and Danone, is battling to increase its footprint in emerging markets. Nestle and Unilever already have impressive-looking operations in the emerging markets. Compared to Nestle, a greater proportion of Unilever’s turnover is made in the developing world, although sales in those markets are driven by its non-food operations in home and personal care.
However, in some ways, it was PepsiCo‘s comments on one emerging market in particular that demanded attention. The Quaker and Lay’s maker still generates the majority of its turnover in the US but the company is growing fast internationally, not least in one key emerging market – Russia.
Zein Abdalla, the head of PepsiCo’s European operations, which take in the Russian market, emphasised that Russia was not a new market for the company. He pointed to former PepsiCo chief Don Kendall visiting Russia in 1959 and presenting then Soviet President Khruschev with a bottle of Pepsi-Cola. Abdalla said PepsiCo had since built “scale” in the country, as well as “know-how at every level” – in terms, he said, of “interactions with instititutions” and of our operating management team, so we know how to get the job done in good times and in challenging times”.
However, Russia offers even greater potential to PepsiCo now following the US company’s acquisition of Russia’s largest food and drink company Wimm-Bill-Dann. The deal has meant PepsiCo is, according to stats presented by the company at CAGE, twice the size of its nearest competitor in Russia – the venture between Danone and Russian dairy processor Unimilk.
Nevertheless, Abdalla was at pains to emphasise the room that PepsiCo’s enlarged business in Russia still has to grow. The consumption of savoury snacks – a sector that PepsiCo leads in Russia – is at 1kg per person in Eastern Europe.
The acquisition of Wimm-Bill-Dann gave PepsiCo ownership of Russia’s largest dairy processor and Abdalla pointed to the relatively low dairy consumption in Eastern Europe. It stands at 3.7kg per capita in the region, compared to 15.1kg in the west of Europe.
And, driving the potential category growth, will be the continued “explosion” in income that Russia is set to enjoy, PepsiCo said. The company told CAGE that, in 2001, 92% of the country’s population had disposable income of less than US$25,000. By 2010, that had fallen to 66%. By 2015, PepsiCo said, it is estimated that a fifth will earn less than $25,000 – with 42% enjoying income of between $25,000 and $55,000 and 36% bringing in over $55,000.
Abdalla said the “significant growth” in middle-income households in Russia had fuelled the “acceleration” in the consumer goods market in the country, which he said would be the biggest consumer goods market in Europe.
“We expect that [income growth] to increase significantly again as we look forward to 2015,” Abdalla todl analysts. “As an income of a household crosses the $10,000 threshold, we see an S-curve inflection point in the growth across our categories. It drives expansion in per capita consumption.”
Abdalla added: “One kg per capita [in savoury snacks consumption] and you can see how much headroom there is for growth in a market like Russia and we start with the number one savoury position in Russia. Look at the dairy per caps – significantly behind western Europe.”
Wimm-Bill-Dann gives PepsiCo scale. The acquisition boosts PepsiCo’s presence in Russia from 29 cities to 47 cities, which equates to 75% of the population, Abdalla said.
The acquisition also, the PepsiCo executive claimed, gives both companies the opportunity to drive “top-line synergies” in the country. “We can take Wimm-Bill-Dann now into convenience by leveraging their portfolio through our massive cooler infrastructure and truly bring convenient solutions to the dairy category – as a result of our know-how both in terms of go-to-market and also in terms of taste and consumer marketing for convenience,” Abdalla explained.
“We have a clear strategy for Russia to not just hold the number one but to accelerate away from the pack.”
Of course, for all PepsiCo’s experience and scale in Russia, the market remains a developing one, with a degree of regulatory and political uncertainty to consider when considering to invest.
Furthermore, PepsiCo may be ahead of the pack at present but the likes of Danone, Coca-Cola and Nestle will be looking to continue to expand in Russia, given the potential rewards on offer.
And, at the CAGE conference, the chief executive of PepsiCo’s nearest challenger Danone, Franck Riboud, highlighted the opportunity that Russia gives to his company following last year’s deal with Unimilk.
PepsiCo will not have it all its own way in Russia – but it is certainly well positioned to capture the growth that looks set to emerge as we move through the decade.