Coca Cola's Success In Russia Depends On Healthy Juice Drinks

Carbonated water was an 18th century invention in England, associated with the brewing of beer.

Fizz came in just over a hundred years later in New Orleans, when carbonated water was added to a cocktail of gin, lemon, lime, egg white and sugar, stirred.

After years of trying fizzy drinks from the US, the Russian drinker appears finally to have decided enough is enough, at least for bubbles.

Coca-Cola is discovering that its growth in Russia now depends on its Russian branded juice beverages, while sales demand for Coca-Cola-branded products appears to be declining.

The Coca-Cola company is reluctant to admit what’s happening. What the latest company financial report to the US Securities and Exchange Commission (SEC) for the past quarter to September 30 says is this:

“In Eurasia and Africa, unit case volume increased 6 per cent [compared to the same period of 2010], which consisted of 4 per cent growth in sparkling beverages and 14 per cent growth in still beverages. Excluding the impact of our acquisition of OAO Nidan Juices (“Nidan”) during the third quarter of 2010, still beverages in Eurasia and Africa grew 10 per cent during the period. The group’s unit case volume growth was largely due to growth in our key markets, including India and Turkey.

India experienced 19 per cent unit case volume growth, led by 19 per cent growth in sparkling beverages. India’s growth in sparkling beverages primarily consisted of 21 per cent growth in both Trademark Thums Up and Trademark Sprite as well as 17 per cent growth in Trademark Coca-Cola. Growth in India’s sparkling beverages was led by integrated marketing programs across various social platforms. Still beverages in India grew 17 per cent and included 17 per cent growth in our Kinley water brand. Turkey had double-digit unit case volume growth during the period, primarily due to growth in still beverages. Eurasia and Africa also benefited from 9 per cent growth in the Company’s Middle East and North Africa business unit during the period despite geopolitical challenges in the region.”

“The group’s unit case volume growth in the markets described above was partially offset by unit case volume declines in Russia and South Africa of 5 per cent and 3 per cent, respectively. Excluding the impact of Nidan, unit case volume in Russia declined 11 per cent during the period. Unit case volume in Europe was even during the period, despite an unseasonably cold and rainy summer selling season as well as a moderating consumer confidence index. The group had 1 per cent growth in sparkling beverages…”

The report also indicates that for the nine months to September 30, compared to the same period last year, “unit case volume grew 7 per cent in Russia during the period, primarily due to our acquisition of Nidan in the third quarter of 2010. Excluding the impact of the acquired Nidan juice, Russia’s overall unit case volume declined 1 per cent.”

In Coca-Cola’s global accounting, Russia is counted, not in Europe, but in Eurasia and Africa. But whether European or Eurasian in taste, Russia stands out as the largest declining sales market for the company worldwide – down 5% in sales overall, and down even more if Coca Cola’s most recent takeover of the Nidan juice company is excluded from the accounting because it is so recent. If Coca-Cola hadn’t bought Nidan last September, the decline in Coca Cola branded drinks would have been 11% for the quarter. For the year to date, the growth in Russia is in the takeover of a non-carbonated fruit juice company, Nidan.

For a company which spends several hundred million dollars each year on advertising pitches, the news from Russia isn’t quite what the company means by its current slogan, “Life begins here.” Indeed, the shift in Coke’s Russian slogans last year takes on new meaning. From “Всегда Coca-Cola” until 2009, the new slogan, “Coca-Cola идет в дом!”, suggests that Russian consumers are taking something quite different home, and it’s not called Coca-Cola, nor does it taste remotely like it.

Coca-Cola is more talkative about the market trends in western Europe,, where they are the reverse of the Russian drinking trajectory. In Germany, France and Great Britain, the company claims that branded Coca-Cola fizzy water is on the upswing, and still beverages are going down.

When asked to explain what the company thinks is happening to the fizz in Russia and why, Coca-Cola in Moscow said that it only answers questions once a fortnight. The company’s press secretary was reported to be “on a business trip and out of reach.” When asked for the name of Coca-Cola’s spokesman in Russia, the company source said “corporate policy” doesn’t allow that.

A placement in Interfax last week puts the blame for Coca-Cola’s dismal performance on the weather. “The company attributes the slump in the third quarter to the high base figure of last year, when sales in Russia shot up 30 per cent in July-September due to the unusually hot weather.” Another way of putting this is that unless there is a heat wave in Russia, and the fields are literally burning up, Russians won’t drink Coke to quench their thirst — if they can have a Nidan product, or kvass, or water instead.

The takeover of Nidan was first announced in March 2010. At the time, Reuters reported Vladimir Kravtsov, Coke’s Moscow spokesman, as saying: “We are interested in buying Nidan”. Reuters claimed that Coca-Cola already owned the local Multon beverage brand, and that with the addition of Nidan, its beverage market share would jump to almost 40%, ahead of PepsiCo, whose Russian beverage and bottling company is Lebedyansky.

Coca Cola bought a 75% stake of Nidan from the London-based private-equity company Lion Capital, with the remaining 25% held by Nidan’s founders – Igor Shilov and Leonid Shaiman, and their Hungarian partner Chaba Baleyr Layosh. Nidan claimed to have a 17% share of the all-Russia beverage market; 43% in Siberia. Juice production and packaging plants are in Distribution extends throughout Russia to the Ukraine, Kazakhstan, Kyrgyzstan, Belarus, Mongolia, Uzbekistan, Moldova, Georgia and Armenia.

According to Yulia Vishnevskaya, spokesman for Nidan: “The most popular Nidan juices and nectars go under the Moya Semya brand. It was first introduced to the market in 2000 and managed to quickly gain popularity among consumers, becoming one of the leaders of the Russian juice market. Over the eleven years of its existence, Moya Semya has demonstrated an unprecedented growth rate. According to the Romir research agency, Moya Semya is recognised as the most recognisable juice brand (89% of respondents), and accounts for 39% of Russian consumer preferences. On average, Russian consumers drinks more juice, water and tea than soda and mineral water. Nidan has about 10% of the Russian juice market.”

Lion Capital didn’t say how much it forked out for its stake in Nidan when it announced its deal with Shilov and Shayman in August of 2007. Lion didn’t even acknowledge that it was buying just 75% of Nidan, not 100% as the press release implied. The disclosure did acknowledge that in 2006 Nidan’s sales revenues amounted to “approximately $270 million”. When Lion sold three years later, it admitted that sales had fallen to $180 million in 2009. There was no special press release on the sale; no disclosure of the purchase price received from Coca-Cola. Just this: “final exit: August 2010.”

If Nidan’s sales went down by $90 million (33%) between 2006 and 2009, the weather cannot have been to benefit or to blame. Lion’s tone hints that it may have taken a bath on its Russian beverage investment.

Lion may have done much better on its investment in vodka producer, Russian Alcohol (Zelenaya Marka), which it says it bought from Sergei Generalov’s Industrial Investors holding in July 2008, and sold in December of 2009. Generalov, whose record for transparency isn’t famous, doesn’t mention the sale of anything to Lion Capital, nor does the website of Russian Alcohol, which continues to be a Generalov-controlled investment, according to Generalov. Central European Distribution Corporation (CEDC), a NASDAQ-listed and SEC-regulated company, has a very different tale to tell about its purchase of “62.25%” and “control of Russian Alcohol” from Lion and from an entity called Cirey Holdings, “a private company domiciled in the British Virgin Islands and the ultimate controlling party of Russian Alcohol“. If Cirey is or was a Generalov company, and if the Generalov website’s claim to control Russian Alcohol reflects shares he received in CEDC, those involved aren’t saying exactly. Officially, Industrial Investors acknowledges that it withdrew from the capital of Russian Alcohol about a year ago; there is no explanation why the holding website suggests otherwise.

But let’s go back to soft drinks. Coca Cola didn’t tell the Russian press what it was paying for Nidan last year, and there were estimates in the press that the amount was $450 million, including Nidan’s debts. Coca Cola told the SEC, in a Form 10-K report dated February 28 of this year, that “total consideration for the Nidan acquisition was approximately $276 million, which was primarily allocated to property, plant and equipment, identifiable intangible assets and goodwill.” A report in Kommersant in September of 2010 reported a Nidan source as hinting that the company’s debts may have been as high as $150 million.

How could Shilov and Shaiman have borrowed and spent so much money in the three years they were under Lion Capital’s control, only to generate such dwindling revenues? Perhaps they leveraged Nidan’s assets to spend on something more delicious than fruit water, and then presented Coca-Cola with a bargain it couldn’t refuse.

The Russian Federal Antimonopoly Service (FAS) reviewed the takeover in line with the competition and concentration criteria of Russia’s anti-trust regulations, and in September 2010, issued its approval. Yevgeny Izotov, a spokesman for FAS, confirmed approval of the deal, but he refuses to release the FAS analysis of its impact on the beverage market.

One of the few experts on the Russian beverage market, who asks for anonymity foor himself and his Moscow investment house, says that “the Russian consumer is very different from consumers in other countries. Especially from the US and Europe. The main difference stems from several factors. In comparison with other countries, the history of soft drinks in Russia is very short. The first Pepsi factory appeared in the USSR in the late 1970s. Coca-Cola actually appeared in the early 1990s. Over two decades the market has made a giant leap, but still it cannot be compared with the markets in which Coca-Cola and Pepsi are present for 40 to 50 years.”

In the source’s view, the Russian consumer of soft drinks isn’t interested in loyalty, either to a particular brand or to a particular taste — his taste is in novelty for its own sake. “The Russian consumer has access to a huge number of novelties. And not just in beverages. He likes to try new things. [By contrast] the consumption of Coca-Cola and Pepsi in markets with high consumption is based on regular customers.”

There is another market obstacle for Coca-Cola in Russia. It is costly, compared to the local and traditional alternatives. The analyst again: “The Coca-Cola and Pepsi products are quite expensive. Not everyone can pay and want to pay 70 rubles [$2.25] for 2 litres of soda. There are beers worth 60 rubles a liter; there is milk worth 30; there is also a tea and fruit compote culture.”

Nadezhda Razumovskaya, a spokesman for Baltika, which is mostly a brewer of beer, says of the traditional bread-fermented brew, kvass: “In the Russian market kvass by popularity currently gives way to beverage categories such as waters, juice and lemonade. However, it is still more popular than ice tea and energy drinks. According to TNS Media Intelligence, over the first half of 2011, 39.2% of the Russian population, aged 16 years old and older living in large cities, prefer kvass. Kvass has traditionally been a popular drink for all ages. The greatest preference for this drink is given by middle-aged people. It also shares popularity with a significant part of the youth.”

The sector and investment analyst acknowledges that the heat-wave in the summer of 2010 helped to revive demand for soft drinks, especially after low-base effect in 200o9, when reduced real income, following the 2008 crash, cut consumer spending. But neither the weather nor the economic cycle is driving the Coca-Cola financial performance.

“The conclusion here is that the Russian consumer likes to try new foods. He has a vision of a healthy diet. He is not rich. He almost never drinks cola at home. Never in the morning, extremely rarely in the afternoon, and sometimes in the evening in front of the television set. He drinks [Coca-Cola or Pepsi] on holidays, on vacation. A bit in restaurants. There is almost no daily consumption culture.”

He concedes that there is a fizzy-drink market which Coca-Cola can still conquer in Russia. “Competitors exist. Concerning fizzy drinks, those are mostly local brands and diversification offspring of the alcoholic beverages and beer companies – a separate one for each region. Pikra, Master, Crazy Cola, Chernogolovka, Laimon Fresh and dozens of others. Some are fairly successful, but Coca-Cola with a 37% market share and Pepsi with 17% market share for sweet fizzy drinks should welcome such enthusiasm, as they kill the profitability of the core business and raise their category. Indirect competitors are kvass, mineral waters and so on. Coca-Cola has 19% of the total nonalcohol market and Pepsi has 16%.”

So that appears to be the Russian secret Coca-Cola wants to keep secret. After the novelty wears off, Russians don’t like Coke much. In this respect, their palates are almost unique in the civilized soft-drinking world. And so, for Coca-Coal Company to continue showing profits in the Russian market, the company has concluded that it must buy up Russian juice companies, and sell something different from Coca-Cola.

“For the next 10 to 20 years,” the analyst believes, “consumption [of Coca-Cola in Russia] will grow quickly, but I’m sure it will never reach the level of Mexico or Ireland.”

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