Russia's Slowdown Trickles Down To US Consumer Companies
August 12 2009 - 12:38PM
Dow Jones News
The Russian economy has turned into a soft spot for U.S.
consumer manufacturers and multinationals, a contrast with other
major developing markets that have helped shore up the results of
these companies during the global economic downturn.
Between January and June, Russia's economy contracted around 10%
from a year earlier amid falling commodity prices and tight credit
conditions. The effects of that contraction have trickled down to
U.S. companies, which in recent years have sought to cash in on a
boom in consumer spending in the region.
Companies ranging from toothpaste maker Colgate-Palmolive Co.
(CL) to cigarette seller Philip Morris International Inc. (PM) have
in their recent quarters felt the effects of Russian consumers
cutting back. Philip Morris saw shipments of its flagship high-end
Marlboro brand slip 19% in Russia as more smokers traded down to
cheaper cigarettes. Colgate saw second-quarter sales fall 4.5% in
its Greater Asia and Africa operations as volume gains in India and
China failed to offset declines in such markets as Russia and
Ukraine. These companies don't disclose profit numbers for
Russia.
Consumer companies aren't the only ones feeling the pressure.
Xerox Corp. (XRX) said its second-quarter sales were hurt in part
by weakness in its Russia operations as tight credit conditions
weighed on business spending there.
Most multinationals don't publicly disclose sales from Russia
and the region accounts for just one slice of their international
earnings. But in recent years, the fast-growing market has become
increasingly important owing to strong consumer spending.
"The pressure to buy is there and there is a lot of money
sloshing around. It's an important market," says Marvin Zonis, a
professor at the University of Chicago Booth School of
Business.
As the U.S. plunged into recession, some of the largest American
companies have relied on international growth to shore up their
profits, but not all developing markets have held up equally. The
contraction in the Russian economy is at odds with what consumer
multinationals are seeing in the key Asian developing markets, with
the Indian and Chinese economies still on track to grow this year,
though at a slower pace.
Still, U.S. companies continue to push investment dollars toward
Russia in the hopes of a longer-term payoff.
In July, PepsiCo Inc. (PEP) along with a bottler announced plans
to invest $1 billion over three years in Russia to expand its
snacks and beverages business. The company takes a "long-term view"
of its investments, said spokesman Dick Detwiler. As in the U.S.,
the company has made a push to offer Russian consumers more
affordable products - like smaller snack packs that sell for 8 to
15 rubles.
"The Russian economy is a proxy on the price of oil and gas. The
fate of the consumer market in Russia is dependent on the price of
oil and gas," says Zonis. By contrast, he points out that countries
like India and China have far more diversified economies.
As the global economy improves and as demand for commodities
picks up, the Russian economy is expected to pick up steam as well.
Colgate said last month that macroeconomic conditions in the region
are improving. Manufacturing and other data have pointed to
potential improvements later in the year. Still, this year is
expected to be tough and the International Monetary Fund sees the
Russian economy shrinking 6.5% in 2009.
"The crisis is not over in Russia yet," said Philip Morris
International's Chief Financial Officer Hermann Waldemer on a
recent conference call with investors, pointing to high levels of
unemployment. Russia, which has a large smoking population, is an
important market for the cigarette giant. A Philip Morris spokesman
said via email that the company continues to invest in improving
its products and business there. The company's cheaper cigarette
brands like Bond Street and Optima saw sharp volume growth of 35%
and 23% in the second quarter in Russia, helping offset declines in
higher price brands like Marlboro.
Global food giant Kraft Foods Inc. (KFT), which in recent years
has named Russia a "priority" international market, acknowledges
that weaker consumer spending has hurt that market. But the food
maker says it is still expanding market share and sales, and is on
schedule to open a new biscuit manufacturing facility in Russia
this October.
-By Anjali Cordeiro, Dow Jones Newswires; 212-416-2200;
anjali.cordeiro@dowjones.com