PepsiCo explores options for Russian companies as Ukraine crisis deepens

PepsiCo Inc.

DYNAMISM -2.82%

is considering options for its business in Russia, including canceling the value of the unit, people familiar with the matter say, a move that would mark a turning point for a company that introduced American cola to the Soviet Union at its peak cold War.

PepsiCo revenueit’s

DYNAMISM -2.82%

Russian unit stood at $3.4 billion in 2021, down 30% from its peak of $4.9 billion in 2013, making it the third largest market for the company after the United States and Mexico. The impact of delisting the Russian unit would be minimal because it contributes little to PepsiCo’s earnings, some people said.

A growing number of Western companies have said they plan to withdraw from Russia or make changes to their operations there. The moves came after Western governments imposed sanctions on the country in retaliation for its invasion of Ukraine, and financial firms took steps that could close Russia to global markets.

Tuesday, McDonald’s Corp.

MCD -0.69%

said it was temporarily closing its approximately 850 restaurants nationwide. Apple Inc..

AAPL -1.17%

stopped selling iPhones and other products there. Boeing Co C BA 2.74%

y. suspended parts and maintenance support for Russian airlines. British energy giant BP PLC has announced that it will exit its nearly 20% stake in Russian oil producer Rosneft, which is controlled by the Russian government..

Since Russia invaded Ukraine in late February, the United States and allied countries have imposed heavy sanctions on Russia. The WSJ’s Shelby Holliday explains how these sanctions affect everyone from President Vladimir Putin to ordinary Russian citizens. Photo: Pavel Golovkin/Associated Press

New York State Comptroller Thomas DiNapoli, who oversees one of the largest public pension funds in the United States, wrote last week to PepsiCo, McDonald’s and other companies, asking them to consider to suspend or terminate their operations in Russia.

PepsiCo has 20,000 employees in Russia. The company’s 24 factories and three R&D centers manufacture soft drinks, crisps, milk, yogurt, cheese, baby food and infant formula. The bulk of its business in Russia is Wimm-Bill-Dann, a dairy and juice company that PepsiCo bought in 2011 for around $5 billion.

Top-level officials at PepsiCo have discussed the geopolitical crisis in the region almost every day since Russia invaded Ukraine in February, some people familiar with the matter said. For weeks they have been weighing different scenarios about how the company might be affected by supply chain and other financial challenges resulting from the dispute and what actions PepsiCo might need to take, one of the interviewees said. people.

A packaging line for Vesyoly Molochnik sour cream, a brand owned by PepsiCo, in Omsk, Russia.


Photo:

Feoktistov Dmitri/Zuma Press

PepsiCo could write off the value of its Russian business by modeling the process it used for its Venezuelan operations in 2015, some people have said. The Venezuelan unit is still in operation – and PepsiCo still owns it – but it does not contribute to the soda and snack giant’s revenue.

If the Russian unit of PepsiCo manages to generate profits while the Russian economy is collapsing, it is unlikely that PepsiCo will be able to transfer those profits out of the country given the restrictions on the transfer of Russian rubles due sanctions, said one of the people.

PepsiCo’s operations there operate in rubles, use locally sourced milk and potatoes, and import soft drink concentrates. Its revenue has declined dramatically since Russia invaded Crimea in 2014, and it now faces supply chain challenges as Western countries impose sanctions on Russia, some people said.

The company could take this opportunity to delist a business that hasn’t generated as much revenue as it had hoped, some people said. At the same time, PepsiCo has a long-term view of emerging markets and doesn’t want to lose the goodwill of buyers there, current and former executives said.

Pepsi was one of the first American brands to establish itself in the Soviet Union. In 1959, the company organized a stand at the American National Exhibition in Moscow. With the help of Vice President Richard Nixon, PepsiCo executive Don Kendall offered a drink to Soviet Premier Nikita Khrushchev, who accepted several refills and declared it “refreshing.”

Soviet Premier Nikita Khrushchev tries Pepsi-Cola as Soviet President Kliment Voroshilov, far left, and then-Vice President Richard Nixon, second from right, look on.


Photo:

Archive Bettmann

PepsiCo opened its first factory in the Soviet Union in 1974 after agreeing to a barter deal in which the beverage giant took its profits in Stolichnaya vodka. The deal made Pepsi-Cola the first Western-branded consumer product bottled in the Soviet Union and gave it a head start over rival Coca-Cola. Co.

that wouldn’t hit the market for more than a decade.

PepsiCo continued its breakthrough in the region in 1988 when it became one of the first Western advertisers to buy Soviet TV ads, including a pair of TV spots featuring Michael Jackson.

Business was booming in Moscow for Pepsi-Cola, which opened its first plant in the Soviet Union in 1974, years before Coca-Cola entered that market.


Photo:

Archive Bettmann

Mr Kendall – who was chief executive of PepsiCo from 1963 to 1986 and later served as the company’s ambassador – believed companies could help build bridges between nations at a time of high tensions between the Soviet Union and the West.

“Trying to find a way to build relationships through business was something Don was passionate about,” said Michael White, a former executive who ran PepsiCo’s overseas business from 2003 to 2009 and met a times Russian President Vladimir Putin with Mr. Kendall. “Unfortunately, that’s not what we all hoped for.”

The entry of Coca-Cola in 1992, after the fall of the Soviet Union, brought the cola war to Russia. PepsiCo opened its first snack factory there in 2002. Then the rivalry shifted to juices. Coke bought fruit juice maker Multon Co. for about $500 million in 2005, and PepsiCo followed with the $2 billion acquisition of fruit and vegetable juice company OAO Lebedyansky in 2009. Coke responded by buying Nidan Soki, another major juice maker.

Students on school holidays selling Russian bottled Pepsi-Cola to motorists in Moscow twenty years ago.


Photo:

Alexander Zemlianitchenko/Associated Press

Then in 2011, PepsiCo bought OAO Wimm-Bill-Dann. The deal was PepsiCo’s second-largest acquisition after its purchase of Quaker Oats Co. in 2001, and established PepsiCo as Russia’s largest food and beverage company and a leader in the world’s fast-growing dairy market. country. PepsiCo said it made the acquisition because it was looking for growth in emerging markets and to expand into healthier foods and beverages. The company expected Russia to provide around $5 billion in annual revenue.

After Russia invaded Crimea in 2014, the ruble plummeted and Russia fell into a recession that hurt the Russian businesses of PepsiCo and the Coke bottler there, Coca-Cola HBC..

The business unit now faces operational challenges as the Russian economy becomes increasingly cut off from the rest of the world. Russians tend to buy Western brands like Coke, Pepsi or Lay’s crisps when they have disposable income, but turn to cheaper local brands when cash is tight, industry executives said . To manage inflation, PepsiCo’s Russian business may need to raise prices or reduce package sizes. And it may face supply chain disruptions as sanctions disrupt shipments from other countries. Pepsi, for example, ships soft drink concentrates from Ireland to Russia, as does Coca-Cola HBC, industry executives said.

Coke did not respond to requests for comment.

Write to Jennifer Maloney at [email protected] and Emily Glazer at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8