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PepsiCo’s Growth Potential in Russia and the CIS Regions

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Strategy update

In the Barclays Conference held on September 9, Ramon Laguarta, CEO of PepsiCo’s (PEP) Europe Sub-Saharan Africa, or ESSA, business, discussed the company’s initiatives in the emerging and developing regions of Europe.

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East Europe and Sub-Saharan Africa region

In part 2 of this series, we mentioned that the developing and emerging East Europe and Sub-Saharan Africa region accounted for 59% of ESSA segment’s 2014 revenue. Russia is the dominant country in this region and accounted for 56% of this region’s revenue in 2014. Compared to the West region, the East region has a lower margin due to the presence of a company-owned, direct store delivery system, which requires more capital. However, this region offers more growth opportunities, as the per capita consumption of snack and beverages is still low here.

PepsiCo competes with Coca-Cola (KO), Mondelez (MDLZ), and Kellogg (K) in the Europe region. Coca-Cola, Mondelez, and Kellogg derived 10.5%, 40.6%, and 19.8% of their fiscal 2014 revenue, respectively, from the Europe region. PepsiCo, Coca-Cola, Mondelez and Kellogg together account for 11.9% of the portfolio holdings of the iShares Global Consumer Staples ETF (KXI) and 1.9% of the iShares Russell 1000 ETF (IWB).

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Strategy in Russia and CIS countries

PepsiCo’s growth potential in Russia and the CIS (Commonwealth of Independent States) regions will be driven by favorable factors such as urbanization, the growing middle class, and the rise in the preference for packaged foods. PepsiCo is leveraging its Russia business to establish a greater presence in CIS countries such as Belarus, Georgia, and Kazakhstan. Although there are short-term challenges in these regions, the company is optimistic about the long-term potential of these countries.

The company is focusing on gaining more strength in Russia through its global brands such as Lay’s, Pepsi, Lipton, and Ad Rush. PepsiCo has also been building its presence in Russia through local brands such as Agusha and Tchudo in snack foods and J7 in beverages.

PepsiCo continues to build the image of its brands in the region. A recent example of the company’s major promotional events in the region is the Summer Tastes Better with Lay’s campaign. The company has a 61% market share in potato chips in Russia.

PepsiCo is working on increasing its productivity to offset the impact of challenging conditions in Russia. As part of its efforts to streamline its assets, PepsiCo closed one juice factory and two dairy factories in 2015. The company is also working on efficiently managing its working capital and has been able to reduce its cash conversion cycle by 72% over the past four years.

The next article dwells on initiatives for PepsiCo’s Frito-Lay North America business.

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