What's at Stake for Marketers in Russia? About $25 Billion

About 4% of Global Sales for Mondelez, L'Oreal, P&G and Unilever Come From Country

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What's at stake for packaged-goods marketers given the political turmoil in Russia? About $25 billion in sales.

Russia accounts for less than 1% of U.S. trade broadly but for some major marketers, Russia means much more – averaging around 4% of sales for the western-based consumer packaged-goods industry as a whole by the estimates of Bernstein Research.

How Russia Stacks Up for Global Marketers
Marketer % of Business from Russia Total Russia Sales (in billions of dollars)
Carlsberg Group 21% 2.4
Danone 11% 3
Pepsico 8% 4.9
Avon Products 7% 0.7
Henkel 7% 1.6
Mondelez 4% 1.4
L'Oreal 4% 1.3
Procter & Gamble Co. 4% 3.4
Unilever 4% 2
Coca-Cola Co. 3% 1.4
Nestle 2% 2

Russia sales for just a dozen of the biggest or most Russia-involved western CPGs totaled around $25 billion last year, based on Bernstein estimates. At least that was before a 10% depreciation in the value of the ruble vs. the dollar since the beginning of the year.

Now, rising tensions with the country call into question the value of the investments marketers made in recent years, betting on the notion that modern trade ties would trump old geopolitical rivalries. Even discounting the worst-case scenario – a war between two of the world's largest powers – there are still some bad-case possiblities, such as Russian confiscation of U.S. or European-owned assets, or U.S. restrictions on doing business with Russia akin to what has happened at various times with Iran, Iraq and North Korea.

That latter risk is probably the biggest one for marketers longer term, said Ali Dibadj, analyst with Sanford C. Bernstein. The lesser, but more immediate risk, is a hit to Russia sales that stems from the economic fallout linked to sanctions and turmoil in Russian financial markets caused by the rising tensions over Ukraine.

Results of a Bernstein survey of 800 Russian consumers fielded in late February, even before tensions escalated further in recent weeks, found 52% of Russian consumers believed their economy was getting worse, compared to 22% who felt it was getting better. Those results are considerably gloomier than sentiments in similar surveys in China, Brazil and the U.S.

The gloominess appears to have cast a shadow on local spending habits, bad news for premium brands marketed by western companies. About 70% of Russian respondents said they have traded down to buy lower-cost brands in at least one category in the past 12 months. That is a a higher proportion than the 49% trade-down rate in China; the 67% rate in Brazil and 64% in the U.S. Russia's trade-down rates were the highest among household products and lower in personal care and food.

As U.S. marketers have increased their stakes in Russia in recent years, some agencies have been following suit. WPP announced in January plans to take an 80% stake in its GroupM and JWT businesses in Russia pending regulatory approvals and to buy the remaining 20% stake in 2016. WPP said its companies in Russia have revenues of over $300 million (accounting for around 2% of global revenue) and that it employs more than 2,000 people in Russia.

Credit: Bloomberg

Of all U.S.-based marketers, at least in packaged goods, Pepsico appears to have the biggest absolute stake in Russia, with reported annual sales of $4.9 billion, or around 8% of global sales per Bernstein. (In its filings, PepsiCo itself puts the figure at 7%). Pepsico declined to comment for this story.

Some other players have sales that make up a bigger proportion of their overall business, however, including Danish brewer Carlsberg Group with 21% of sales in Russia and Danone with 11%.

Pepsico's stake in Russia goes back further than most (aside from Germany's Siemens, which built the Russian telegraph network in 1853 under the czars and whose CEO Joe Kaeser paid a well publicized visit to Vladimir Putin last week in Moscow to pledge continued cooperation with leaders there.)

Pepsico has invested $7 billion in Russia since 2009, buying dairy and fruit-juice companies, but it actually began building its Russian business in 1959. That its Russia relationship has survived such things as the Cuban Missile Crisis and the Vietnam War may augur that it can survive a confrontation over Ukraine too.

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