PepsiCo invests in Russia
PepsiCo invests in Russia
It was recently announced that PepsiCo intended to investone billion dollars over the next three years in Russia creating bottling plants and setting up production for the Frito Lay snack line. This bold move on the part of PepsiCo was possibly timed to coincide with President Obama’s recent visit to Russia and to help demonstrate a new economic cooperation between the Russia and United States. Also it is important to note that Coca-Cola already has a foothold in Russia having invested almost $2 billion. Politically speaking this move might have its own advantages and even short term financial gains. But I wonder if anyone really thought it through long term. Russia’s Ministry of Finance reports that more than $40 billion dollars of foreign investment was lost in the first quarter of 2009 and that another $70 billion will be lost in the near term. According to President Obama Russia currently makes up only 1% of the United States world trade capacity at $36 billion, comparable to America’s trade with Thailand. Russia is euphemistically called an emerging market, but is it really? Russia’s economic picture is more than a little cloudy, so perhaps Russia’s demographic portrait can clear things up.
Pardon my segue here but I need to make a point about strategic planning
I was in Michigan last week speaking to the members Michigan Credit Union League at their annual conference. This is a state that is very hard hit by the problems precipitated by the big three automakers. It was a big, very well attended, meeting. I expected a very somber group but these people seemed to be made of different stuff. I wouldn’t say that they were ebullient but there was no sign of corporate depression. The conference leaders didn’t ask me to paint a rosy picture of Michigan’s economy; they just wanted me to tell the truth. Most of the people in attendance were senior enough to know that good times and bad times are cyclical so they just wanted to know the long range economic picture and when they could expect a recovery, if at all. I told them that from my thirty-thousand foot demographic perspective, the future was bright. Manufacturing would return to the United States as China’s enormous demographic blunder, the one child only policy began to cripple their workforce. Detroit’s big three would recover. I qualified the fact that my view was long range (about five to seven years) and very big picture and reminded them that it is the long range picture is the only one that really counts.
Considering that most United States corporations are driven by the annual report and many by the quarterly report, the lack of long term vision is ostensible and understandable. The problem is you cannot be a visionary thinking one year into the future nor can you arrive at a viable strategic plan.
Strategic plans should map out your company’s direction three, five, seven and even ten years into the future. Obviously one of the most important considerations in developing a long range plan is determining how many customers you can expect to buy your product going forward. It would follow that most U.S. corporations don’t take this vital consideration into account because they are apparently content projecting the present infinitely into the future.
Back to PepsiCo and the billion dollars of shareholders money they plan to invest in Russia. From demographic perspective Russia is a Forth World country, a crash and burn disaster. The only way it could be worse is if the country went into famine or was being devastated by the plague. Hasn’t anyone noticed that Russia’s population has fallen by 500,000 people per year for years and that the prospects are for more of the same until further notice? Why? Because Russia has catastrophically low fertility and high mortality, they are not having kids and people are dying at very young age. This is a very bad situation that is only getting worse. A sixteen-year-old male in Russia has a fifty-fifty change of living to sixty-years-old. To put this in perspective Russia’s average life expectancy is lower that Pakistan or Bangladesh. Demographically Russia is going backwards. According to world famous demographer Nicholas Eberstadt, the Henry Wendt Scholar in Political Economy at AEI, the youth group, 15 to 24 years old, in Russia is slated to decline by half between now and 2025. I wonder if PepsiCo knows about the half part. Do young people consume soft drinks or eat chips?
PepsiCo’s foray into Russia demonstrates a classic lack of vision and planning. Russia’s consumer base and workforce will shrink to unacceptable levels and Russia’s economy will collapse. At that point Russia’s geography, resources and yes, women will be will be very attractive to their unstable southern neighbor China. Should be interesting.
Kenneth W. Gronbach
3 Comments
Reader Comments (3)
But I don't understand the high mortality rate in Russia, I mean in the abscence of war, what makes the chances of reaching 60 years of age only 50%?
Nice to have you writing again :)
@Yogi
Basically, you have alcohol and AIDS which are pretty determining factors here.
Ken is right ... any large scale investments in Russia on the idea of a future consumption boom seem quite ill advised. At least, I would argue that there is an opportunity cost (a big one) for not doing your basic homework in the context of demographics and what it means.
Claus
Pepsi had better have budgeted a large value for the losses due to bribery and extortion if Ikea's experience is to be learned from. There is often a thin line between bribery and extortion in Russia due to the interconnection of corruption. If I were a shareholder of Pepsi I would be very concerned about what this decision says about the company's management.