Stay or go? Western consumer brands grapple with the Russian dilemma

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Vladimir Putin’s invasion of Ukraine led to an exodus of well-known Western brands from Russia, but not all companies joined the rush.

As Apple suspended sales and BP hastily announced its exit over the past two weeks, the multinationals that make products Russians rely on for daily life, from food to baby formula and by personal care items, struggled to decide whether or not to stay.

In addition to supplying basic products since the fall of the Soviet Union, these companies, including the American soft drinks group PepsiCo and the British household goods manufacturer Unilever, generally have significant manufacturing operations in Russia and employ thousands of local people.

“You’re damned if you do [pull out] and you’re damned if you don’t,” said advertising veteran Sir Martin Sorrell, who now runs digital marketing firm S4 Capital, referring to the dilemma facing businesses.

Some Western consumers want brands to leave, Sorrell said. “You see the atrocities that are being committed, and obviously that’s going to stir huge emotions in people, and rightly so.” But companies that continue to provide basic necessities do so largely “because they don’t want people to suffer more than they are already suffering”.

In an apparent domino effect, several global companies announced withdrawals from Russia on Tuesday and Wednesday. Among them, PepsiCo and Unilever, but the cessation of their operations was only partial. PepsiCo, for example, which employs 20,000 people in Russia, is suspending sales of global beverage brands, including its namesake cola, but maintaining sales of food and local brands, including from its large dairy operation.

Confectionery boxes in production at the Rossiya chocolate factory, operated by Nestle, in Samara, Russia. The world’s largest food maker has halted investments in Russia but will still sell products there © Andrey Rudakov/Bloomberg

Christopher Rossbach, managing partner at fund manager J Stern & Co, said: “Companies should distinguish between essential goods like staple foods or infant nutrition, and more discretionary goods. It’s a hard line to draw.

Some consumer multinationals, such as manufacturer Dettol Reckitt Benckiser, chocolate maker Lindt & Sprüngli and cigarette maker Japan Tobacco, continue to operate in Russia. Supermarket operators such as France’s Auchan and Germany’s Metro have also opted to stay, an approach that contrasts with some other retailers like Inditex, the parent company of fashion chain Zara, which has closed stores but retained its 9,000 employees.

Yet companies such as French dairy maker Danone, the world’s largest food maker Nestlé, confectionery and pet food maker Mars and British tobacco group Philip Morris have taken such steps. such as freezing new investments in the country while continuing to sell there, or stopping sales of international branded products while continuing to manufacture and sell local products. Coca-Cola said it was “suspending” operations in Russia without giving details.

Danish brewer Carlsberg, which owns Russia’s largest brewery Baltika and has 8,400 employees there, around 20% of its global workforce, initially halted investment and exports but went further a few days later. later by committing not to produce or sell its flagship Carlsberg. brand in Russia. He said he would consider “a full range of strategic options” for his Russian business.

Since the February 24 invasion, more than 300 companies have halted Russian operations, according to Jeffrey Sonnenfeld, a professor at the Yale School of Management – far exceeding the 200 major companies that left South Africa because of the apartheid in the 1980s.

Sonnenfeld argues that all Western companies should leave Russia to help fuel discontent against Putin. “The purpose of these economic blockades is to cripple the economy and create distress,” he said.

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For many consumer goods groups, Russia accounts for 3% or less of sales, meaning the impact of halting operations would be limited. Among those most at risk are Danone, Henkel and Carlsberg, which made about 10% of their revenue in Russia and suspended their annual financial forecasts due to the fallout.

Yet Western governments haven’t pushed mainstream brands to leave, several companies said – except for Ukraine itself, which has applauded those pulling out.

Investor views on the matter vary. Last week, the New York State Common Retirement Fund, which manages $280 billion in assets, urged consumer groups to leave Russia. But another investor said countries that cut off the supply of commodities risk “causing quite significant harm to the people who in many cases do not want to participate in this war”.

Ben Ritchie, head of European equities at fund manager Abrdn, a shareholder in companies such as Unilever and Coca-Cola HBC, the US group’s bottler in the region, said: “I don’t think investors would put the Consumer goods companies under pressure to exit Russia without fully understanding their responsibilities in the country, as well as the financial costs and consequences of doing so.

“Consumer goods companies typically have contractual obligations to suppliers, franchise partners and distributors, which makes it much more complex than selling directly to the public.”

A senior official of Russia’s ruling party, United Russia, upped the ante this week by threatening to nationalize foreign-owned factories that have gone out of business because of the war. “It’s an extreme measure, but we won’t tolerate being stabbed in the back,” said party general council secretary Andrei Turchak.

An adviser to U.S. consumer goods groups said the Russia dilemma has prompted “relentless calls from board and CEO meetings. They immediately worry whether our employees will even be imprisoned or arrested for shutting down a business? »

Still, the companies are facing criticism for continuing to operate in Russia from consumers and their own employees outside the country, said Niklas Schaffmeister, managing partner at brand consultancy GlobeOne. “Internally, there is a lot of activity, and even hate speech on [company] intranets where people are really pushed to the limit.

The cosmetics groups L’Oréal and Estée Lauder illustrate the divergent response from consumer groups. L’Oreal, which has 2,000 employees in Russia, has halted online sales and closed the few dozen stores it directly operates, but the vast majority of its products like shampoos and skincare will still be in sale through local retailers. Estée Lauder went further, suspending all business activity in the country, saying it must “take action consistent with our company values”.

Analysts said the war response also has its roots in a growing expectation that business leaders will tackle social issues such as racism, as well as sustainability. Still, companies are reluctant to make political statements and “don’t want to be seen as doing Ben & Jerry’s, weighing in on every issue,” said Rabobank analyst Nicholas Fereday.

The Unilever-owned ice cream maker provoked a backlash on social media ahead of the Ukraine invasion by urging the US president not to “fan the flames of war” by sending more troops to Europe.

Other large-scale human rights violations also raise concerns. “Should a company have a look at appalling events all over the world? China is behind the scenes, of course,” Fereday said. “Will mainstream brands only sell in democratic countries?

It’s a tricky line to walk. When Dolf van den Brink, chief executive of Heineken, announced on LinkedIn the company’s €1 million donation to support “those affected by this terrible crisis”, dozens of comments described the response as weak. A 21-year-old former employee said: “Freeze your operations in Russia while this aggression lasts. . . The longer you wait, the greater the frame drops. I would like to be proud of Heineken again.

The brewer subsequently halted new investment in Russia, exports of its international brands to the country and sales of the Heineken brand in what it called “unprecedented”, although it is still selling brands local. Van den Brink added to his post a condemnation of Russia’s “unprovoked and totally unjustified attack”.

Brands targeting younger consumers feel pressured to pull out, said Yerlan Syzdykov, global head of emerging markets at Amundi, Europe’s largest asset manager. “The west is trying to cancel Russia. Those western brands that are associating with a younger generation, who are going to stop buying your products if you don’t join this cancel culture, will be the first to shoot [out].”

Some groups say privately that they are considering additional measures, including finding other sources of Russian-origin ingredients and moderating social media posts, even those unrelated to Russia, to avoid a backlash.

Most suspensions so far are temporary but may signal a permanent withdrawal. Heineken said it was “evaluating our strategic options for the future of our Russian operations.”

Some executives seem to be struggling with the idea that selling their products in Russia is now seen as a political statement. Dieter Weisskopf, chief executive of Lindt & Sprüngli, was asked this week during an earnings briefing about the company’s decision to continue its small operation in Russia. He said, “We don’t provide weapons or fuel, keep that in mind. But we are monitoring the situation closely.

Reporting by Judith Evans, Leila Abboud, Harriet Agnew, Alistair Gray, Andrew Edgecliffe-Johnson and Ian Johnston

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