When David Steer moved to Russia nine years ago to head marketing for a big tobacco company, a colleague warned him that it was easy to lose focus in a fast-growing market that rapidly was becoming more Westernized.
"There are so many opportunities in this market that it is tempting to pursue every one of them," says Mr. Steer, an Australian who took over as head of Kraft Food Inc.'s Russian business in December.
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Mr. Steer, 45, is narrowing his sights on premium lines to cater to newly affluent Russians. While Kraft continues to sell millions of boxes of mac and cheese and Oreo cookies to middle-class Americans, Mr. Steer is pushing fancier offerings such as Carte Noire coffee and Milka chocolate.
Russia, the eighth-most-populous country with 140 million people, is one of Northfield-based Kraft's most important markets: CEO Irene Rosenfeld has set a goal of doubling sales to more than $1 billion a year within two years. Buoyed by oil exports, Russia's per capita income is rising faster than other large emerging economies. Overseas expansion is crucial to Kraft, which has seen sales slow for many of its mature brands in the United States.
But investing in Russia comes with risk. Besides the bureaucracy and corruption, Kraft faces intense competition from rivals such as Switzerland-based Nestlé S.A. and Michigan-based Kellogg Co.
"Foreign companies are investing in Russia more than ever before," says Joseph Serio of Houston, who published a book this year about the Russian mafia and has advised companies on entering the country. "However, there is a danger of rushing into the market thinking all of the corruption and red tape that has existed for years has disappeared. My advice to American businesses is to go slow and do their homework."
Kraft's experience in Russia mirrors that of many U.S. and foreign companies that entered the country in the early 1990s following the fall of the Berlin Wall. Like them, Kraft retreated quickly after the country's 1998 financial crisis. That year, Kraft sold a biscuit plant that it had bought just three years earlier.
The company began slowly re-building its presence again early this decade, acquiring the Alpen Gold chocolate business from Germany's Stollwerck GmbH in 2002. Mr. Steer is accelerating Kraft's growth. The company completed a $100-million coffee plant in March and plans next year to open a $40-million biscuit facility. Kraft employs about 2,500 in Russia, which is up from 250 in 2000. Kraft is the country's top seller of cookies, or biscuits, and is the second-largest seller of coffee behind Nestlé.
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GROWING ECONOMY
A booming economy, fueled by energy exports, has given many Russians more money to spend and lured back major Western food companies. The country's economy has grown more than 6% a year since 2003. The average Russian's income has increased fourfold since 2001, and the average consumer has at least 50% more money than counterparts in rapidly growing markets such as Brazil, China and India.
In the past year, Kellogg, Nestlé and Kraft have all bought businesses with a significant presence in Russia. The company is in a tight race with U.S. rivals Chicago-based Wm. Wrigley Jr. Co. and Virginia-based Mars Inc. for chocolate sales.
"Everyone wants a piece of this market," Mr. Steer says.
Kraft's $7.8-billion acquisition of Paris-based Groupe Danone S.A.'s cookie and cracker businesses last year included Bolshevik biscuits, a top seller in Russia.
"Paying that sort of money shows how serious we are about expanding overseas," says Sanjay Khosla, hired last year as executive vice-president overseeing all of Kraft's international business. Overseas business accounted for about 40% of Kraft's $37.2 billion in sales last year and provides much more significant growth opportunities. "But rather than plant our flag all over the world like we have done in the past, the idea is to focus on areas we can win."
Mr. Khosla is giving more responsibility and control to overseas executives. For the first time, country leaders have full control of their budgets and expansion strategies. While Mr. Khosla kept some top executives in place, he also looked outside the company to fill key posts with people such as Mr. Steer, who has surrounded himself with Russian executives to provide local connections and expertise. His 12-person leadership team includes eight Russians, he says.
Mr. Steer was director of sales, marketing and distribution in Russia from 2002 to 2004 for British American Tobacco. He started there as head of brands in 1999. At Kraft, heeding advice to focus only on the best opportunities, Mr. Steer is putting much of his sales and marketing money behind best-selling premium brands such as Jacobs and Carte Noire coffees, Milka and Alpen Gold chocolates, and Bolshevik biscuits.
AGGRESSIVE PROMOTION
To get in front of more consumers, Mr. Steer is trying to beef up distribution in the many Western-style grocery stores opened in the past few years. Kraft products are available in more than 65,000 locations in more than 635 cities, he says.
In an effort to raise the image of Carte Noire coffee, Mr. Steer says the company aggressively promoted it at operas and fashion shows.
The Russian market is becoming polarized, with well-off consumers looking for pricey premium products and others looking for the cheapest possible brands, says Dalia Gabrielaityte, an analyst in London with Euromonitor International.
She says many Russians view Western European brands as superior to local counterparts and look very carefully at the ingredients in their food.
"Russians are less loyal to certain brands and more willing to try new products than Western shoppers," Ms. Gabrielaityte says. Enditem
