Russia | Frontier Markets

Okay, so Russia isn’t technically a “frontier” market. Rather, it is, and has long been, one of the preeminent emerging markets, the “R” in Goldman’s “BRIC,” the Putin (Medvedev?) lead land of oligarchs and opportunistic barons who somehow not only survived the IMF’s ill-advised ‘shock therapy,’ but then transformed the vast country into a commendable economic force that sits on more than a fifth of the world’s known reserves of natural gas and about 7% of total world oil reserves and thus basically holds Europe hostage over energy.

This article on Nestle and Russia, however, caught my eye for reasons wholly separate from energy. One trend I’m particularly interested in relates to how food companies are expanding into emerging and frontier markets. There is a huge growth opportunity in said markets, especially given changing demographics and specifically rising per capita income. One only has to look to China to see that increased wealth also means, at least to some degree, a change in diet (I’m thinking of China’s increased meat consumption). If nothing else, it means that people can afford more of the same foods, or the same foods, but of better quality.

Nestle’s executives see Russia as “its growth engine in Europe. . .suggesting [that] inflationary pressure in the country is mitigated by escalating purchasing power.” The world’s largest food company plans to increase Russian sales up to $1.9 billion in 2008, from $1.6 billion in 2007 (its worldwide sales stood at around $130 billion last year) and also to expand in the region. “Our ambition over all countries of the region is to be the engine growth for Europe for Nestle and a centre of confidence within the group,” said Bernard Meunier, head of Nestle Russia, referring to the region of Russia, Belarus and some Central Asian states.

Nestle feels that salaries and incomes in Russia are still growing faster than inflation, and that therefore consumer purchasing power has not markedly waned. But in 2007, the Russian economy grew 8.1%, leading many to conclude that it had overheated and would require wage controls to cool the economy and combat inflation. The government wants wage growth to come into line with the growth in productivity, but Russian workers have grown used to rapid income growth, as wages have grown around 10% a year in real terms since 2000. This is now causing strife among unions, and Nestle’s is no exception (see below).

Nestle has operated in Russia since 1995, but the past few years especially have seen a flurry of action. In fact, goods produced in Russia account for about 90% of Nestle sales in the country. Reports have Nestle interested in Russian ice cream companies (it is now number two in the market), acquiring a chocolate factory (it is now number one), starting to process coffee (Russians are the world leaders in consumption of instant coffee), and even opening a pet food plant.

That said, the food giant has met some resistance. This past spring, BusinessWeek reported that it was involved in “a bitter industrial dispute with its workers,” while refusing to negotiate on the issue of increasing real wages. Russia’s labor union federation threatened to strike and said that the “anti-worker” company shouldn’t be allowed to operate in Russia. “European quality, European standards, European wages,” read one of the picket signs outside Nestle’s Russia headquarters back in March, as factory workers (see protest picture) called for a 55% raise that would take the monthly wage to about 24,000 rubles ($1,014).

But Andrei Bader, head of corporate affairs at Nestle Russia, said the demand was unreasonable, considering Russian cost of living and average wages in the region, which are around 12,000 rubles. “There needs to be a balance between the quality of the labor and its cost. . .Once that balance is broken, the future of this economy loses its promise,” Bader said.