Coke and Pepsi Battle over Russia’s Shrinking Market

cocacola072409.jpgWhen Obama made his first presidential visit to Russia a few weeks back, the executives from Pepsi hopped along for the ride and took advantage to ink a $1 billion investment in Russia – a direct answer to a similar push from Coca-Cola to flood the country with dollars.  The guys over at Seeking Alpha simply don’t get it, and point out that the two beverage companies are battling over one of the world’s most rapidly shrinking markets for this business.

Coke, which sells more than 400 different drinks around the globe, claims that Russia is its 12th largest market by volume, and the company’s CEO, Muhtar Kent, has claimed that Russia will eventually become one of the top five markets for Coke and its bottlers in terms of revenues and profit. Meanwhile, Pepsi executives called the country a “very attractive growth market,” in announcing the expansion of their investment in the country.

We think Coke and Pepsi executives spend too much time worrying about how to wage their market-share war, or perhaps just sample too much Vodka during their visits to Russia, because the country represents one of the worst growth prospects in the developed world.

Granted,in the short term both companies can increase market share by sellingto the relatively large number of Russian consumers who have not yettried their products. On the longer term, though, both companies willhave the Sisyphusian task of trying to increase sales to a rapidlyshrinking customer base, this in a country with a business (andpolitical) culture fraught with corruption, and an economy that ishighly reliant on the price of oil.

As we pointed out in our July 16 Seeking Alpha article, Demographics Make Russia a Risky Long-Term Investment,Russia is losing its population at a percentage rate that could within40 years match that of medieval Europe’s population loss during theplague years. Russian birth rates are so low and its death rates sohigh, that the country is expected to lose at least 30 percent (if not50 percent, according to some researchers) of its population within thenext 40 years, falling from a currently estimated 141 million tosomewhere between 80 to 100 million. (Data compiled by the United Nations.)