Pepsi’s Russian Biscuits
Pepsi’s Russian Biscuits
How PepsiCo found a winning formula for snacks in Russia by actually listening to the consumer
How PepsiCo found a winning formula for snacks in Russia by actually listening to the consumer
Following an expanded market footprint through a 2010 acquisition, by 2012 PepsiCo managed to develop a thriving line of snack products in Russia and Eastern Europe. Company management studied local eating habits and developed efforts to up-trade them to ‘value-added’ products slowly, leveraging distribution networks to lower supply chain costs across different product lines.
Expanded presence in Russia through Wimm-Bill-Dann acquisition
In 2010, PepsiCo acquired 66% of Wimm-Bill-Dann for $3.8b for an implied enterprise value of $5.4b¹ with the remaining shares to be purchased at a later date. Wimm-Bill-Dann was a leading consumer goods company headquartered in Moscow with a large portfolio of dairy brands that were popular with Eastern European consumers.
Wimm-Bill-Dann was founded in 1992 by Russian entrepreneurs who built their first local fruit juice brand before expanding into dairy products by leveraging extensive relationships with milk producers and livestock farmers. Earlier in 2010, Danone had exited its stake in the Wimm-Bill-Dann business² leaving the space uncontested for an international suitor looking to expand their footprint in Russia. In 2008, PepsiCo had acquired a Russian juice company, Lebedyansky, and had begun building a larger presence in the region³.
The context was highly challenging for new transactions. The consumer goods market had begun to respond to the financial crisis that had rocked the world only two years prior. A handful of companies were waking up to the challenge of evolving customer preferences in developed markets, particularly PepsiCo. As Indra Nooyi said in 2009⁴:
“Consumers in the developed world are adjusting to a changing macroeconomic environment by placing value at the top of their agendas” — Indra Nooyi
PepsiCo’s strategic imperative to thrive in the next few years would bank on being able to shore up discount and cost-driven product lines in the developed world while, counter-intuitively, design and deliver businesses for value in emerging markets to offset the pressure.
Externally, PepsiCo communicated very clear financial rationales for the Wimm-Bill-Dann acquisition. The expectation was they would be able to deliver on cost synergies and drive improved distribution. The year before, following a protracted bidding war, PepsiCo acquired the remaining outstanding shares in Pepsi Bottling Group (PBG) and PepsiAmericas (PAS), two of its largest bottlers, for $7.8b⁵. Although the two companies had previously been spun-out of PepsiCo in 1999, the pressure to deliver on new cost synergies had significantly increased following the onset of a recessionary consumer environment in 2007–2008.
However, the strategic rationale went one step further: PepsiCo needed Wimm-Bill-Dann for its brands, its distribution but especially its knowledge of the Russian consumer.
Never Invade Russia in the Winter
In 2010, Russia was weathering some of the effects of the crisis that had begun to hit European neighbors and presented an attractive opportunity as a market that could deliver on some of the value PepsiCo needed to maintain profitability through the recession. With almost 300m middle-class consumers in the region, the opportunity for branded consumer products was palpable.
While Russian consumers had begun developing a taste for branded products that were popular in the Western world, entrenched consumer habits meant that many Russian consumers were still relying on traditional food & beverage snacks and breakfasts at home.
“Eastern Europeans are only now warming up to packaged snacks and on-the-go munching. The potential — and challenges — are personified by 41-year-old Elena Kuchurnyi, who lives with her college-age daughter, 7-year-old son, and husband, an Aeroflot pilot, in a cramped Moscow apartment. Some mornings her daughter grabs a Nature Valley granola bar made by General Mills. Hershey’s syrup and Heinz ketchup sit in the fridge. Still, Kuchurnyi and her husband mostly eat what they grew up with: compote juice boiled from fresh apples, cabbage soup made from scratch, or a breakfast of buckwheat porridge.”⁶
The tundra was littered with the husks of Western consumer goods companies that had failed to crack the Russian consumer.
The perennial example of a Western company that had failed to design for value and had simply pressed ahead with launching the same products that worked in developed economies is Campbell Soup. After entering the Russian market in 2007, by 2011 they had retracted most of their ready-made product line and closed down local production⁷.
To support the launch of its product line, Campbell had identified the opportunity — Russia was one of the world’s largest soup markets — and had spent a considerable amount of resources on consumer research and household tests, including interviewing 10,000 individual consumers⁸. This statistic is quoted often in PR and company statements, suggesting an underlying management belief that a successful product launch depends on the number of consumers you include in your survey, rather than whether the product has been designed well from the outset.
By 2011, Campbell was telling the press that “though Russia remains an attractive potential growth market, the results of the business have fallen short of original expectations”⁷.
Other Western soup companies had already learned that Russian consumer took pride in the quality of their homemade soups and viewed ready-made soups as a functional food for camping trips. Consumers could have responded to soup broths, bases or ingredients that could help them produce better soup at home but Campbell designed for existing product lines that succeeded in the West despite having local production facilities and 10,000 consumers in their surveys.
HrusTeam: Horseradish, cold boiled pork, hunting sausage and spicy cheese
Russian consumers place a huge symbolic value on bread, a cultural marker visible in phrases such as “a severed slice” for a person who has cut themselves off from their family or the popularity of the biblical “bread is a staff of life”⁹. It’s considered poor form to throw away stale bread and a variety of snacks and even drinks are made at home from loaves of stale rye bread. A popular homemade snack are essentially croutons, made from fried stale bread and seasoned with local flavors or spices, but most commonly simply salt.
After carefully studying local customs, in 2007 PepsiCo launched a packaged version of the traditional snack and branded it Хрусteam (HrusTeam). The marketing team had identified key cultural markers that made bread such a staple and found ways to develop products that could be distinguishable from home-cooked goods while remaining familiar all the same. Know-how and brands acquired through the Lebedyansky and Wimm-Bill-Dann would bring supply chain economies of scale as well as insights into new flavors and product extensions that Russian consumers might enjoy.
The snack quickly became a favorite among consumers. It offered the same, familiar, homemade custom for younger consumers who might not have the time or disposition to buy a new loaf of bread every morning and who certainly did not have the time to reuse stale bread in new recipes. Current incarnations offer flavors built on bases that range from traditional sticks of stale rye bread all the way to slices of white flour baguette bread with seasonings like sausage, squid or beef.
In 2013, following on the success of the new snack, PepsiCo expanded savory production lines in Russia¹⁰ and followed on by expanding the snack to new geographies in the region such as Ukraine. PepsiCo’s winning approach with HrusTeam, to name but one example of a broad portfolio of successful PepsiCo Russian snacks, leveraged existing consumer behaviors and traditions and worked to address their needs, instead of waging an expensive battle with conservative food customs.
The company could have tried to shove existing products down people’s throats. Instead, PepsiCo took advantage of the opportunity that shifting demographic trends offered to combine modern lifestyle snacks with traditional values. They listened to what the consumer actually wanted and worked to cater to the palette of a nostalgic and homesick Russian consumer.
² “Danone sort du russe Wimm-Bill-Dann”, Le Figaro (August 2010)
³ “Pepsi to buy into Russian juice maker for $1.4b”, Reuters (March 2008)
⁴ “PepsiCo expects ‘age of thrift’ to continue”, FT (October 2009)
⁵ “PepsiCo raises price to win bottlers”, FT (August 2009)
⁶ “PepsiCo’s East European Snack Attack”, Bloomberg BusinessWeek (March 2013)
⁷ “Campbell Finds it Can’t Break Tradition”, The Moscow Times (June 2011)
⁸ “Campbell Outlines Entry Strategy and Product Plans for Russia and China”, Press Release (July 2007)
⁹ “Fried grenki: How to make use of stale bread”, Russia Beyond (May 2017)
¹⁰ “New Line in Russia Doubles Production of Savory Products” Press Release (October 2013)