Printer Friendly

'Go there and get the business.' (interview with PepsiCo's Chairman of the Executive Committee Donald M. Kendall on business opportunities in Eastern Europe)(Chairman's Agenda: Acquiring in Eastern Europe) (interview)

Don't play the waiting game in Eastern Europe and the Soviet Union.

An interview with PepsiCo's Donald Kendall

One of the exhibits at the 1959 American National Exhibition in Moscow was a display of Pepsi-Cola. Soviet Premier Nikita Kruschev and U.S. Vice President Richard M. Nixon visited the exhibit, and photographs of the Soviet leader drinking a Pepsi appeared in newspapers throughout the world.

The exhibit was arranged by Donald M. Kendall, then President of Pepsi-Cola International. Over the next 13 years, Kendall patiently worked to develop a relationship with Soviet officials. Finally, in 1972, PepsiCo signed a historic trade agreement providing for the bottling and sale of Pepsi in the U.S.S.R. Pepsi-Cola became the first foreign consumer product to be sold in that nation. Today, it is the leading foreign soft drink in the Soviet Union, and is widely available in restaurants, grocery stores, and from street kiosks in over 23 major cities. Pepsi-Cola is also the most widely distributed soft drink in Eastern Europe, and is the market leader in Poland, Czechoslovakia, Hungary, Bulgaria, and Romania.

Kendall, the engineer of PepsiCo's breakthroughs in Eastern Europe and the Soviet Union (and in China, where PepsiCo is the largest multinational soft drink producer), joined the company as a fountain syrup sales representative, following service as a naval aviator in World War II. He was elected as Chairman and CEO in 1971, a position he held until his retirement in May 1986. Under his leadership, PepsiCo has become one of the 50 largest corporations in the United States. He is now Chairman of the Executive Committee and is still very active in promoting both PepsiCo's and the U.S.'s East-West relations. Excerpts from a recent conversation with this business visionary and pioneer follow.

Directors & Boards: What impressions of Moscow in 1959 have stuck with you?

Donald Kendall: A lot of people go to the Soviet Union today and talk about how terrible it is. Compared with 1959, it's not terrible. They've made a tremendous amount of progress -- not in our terms, but you can't compare the U.S. or Western Europe with the Soviet Union. You have to go back and look at what they had during the 1950s and what they have today. A lot of changes have been made. The hotel where I stayed had a statue of Stalin out in front. The hotel is still there, but now Stalin is gone. Lenin is even disappearing in some places. Up until a few years ago, there were communist signs and slogans all over the place, and those are disappearing. And, of course, the people are more open. Before, people were very guarded in their conversation. You couldn't get people to really talk, and you had to be very careful when negotiating. That is not true today.

D&B: What were you attempting to achieve when you first set out to do business in the Soviet Union and Eastern Europe?

Kendall: The initial reason why I wanted too get into Eastern Europe was that I was running an international company and it was almost impossible to get into Western Europe. Coca-Cola got into Western Europe with the troops during World War II. Coca-Cola people actually were in uniform, and they set up bottling plants. There was nothing wrong with that. But by the time we got around to going to Europe, Coca-Cola was so strong that if we opened a market, they could put a truck in front of our truck and another one behind it. It was very difficult, and it is difficult still. I made up my mind that that wasn't going to happen in Eastern Europe. I always felt that at some point Eastern Europe was going to change -- that it couldn't continue to function the way it was.

D&B: What is remarkable is the success you've had with the foreign exchange in entering this market and growing your business.

Kendall: We always invested on the basis of whether we had good opportunities to get our money out. We got a barter agreement on vodka and have been able to get our money out through the vodka. The first plants that were put in we financed, and got our money out through an override on the concentrate. Since that point, we haven't had to financed the plants. We've been able to generate enough foreign exchange. We have 26 plants over there now, and we're putting in 28 more. That's over $200 million worth of bottling equipment alone. You can't sell that much vodka, so I worked out an agreement with the Soviet Prime Minister on new oil tankers where we will get 25% of the foreign exchange generated by the tankers. That program has been so successful that it is not only financing the expansion of the Pepsi operation but it also financed the opening of Pizza Hut.

D&B: What are some of the problems in developing a barter arrangement?

Kendall: A lot of companies don't have the people who understand barter. You have to have people who have the ability to go into a country and find things that you might be able to sell in the West. We've been able to find products not only in the Soviet Union but throughout Eastern Europe. We've set up a wine division in the U.s. Monsieur Henri, to handle barter goods. We get wine from Romania and Bulgaria. We also buy very fine bottling equipment there. In fact, the bottling equipment we put in China is Bulgarian. We get some out of Hungary. We get chickens out of Hungary, and tomato paste for Pizza Hut. The tables and chairs for Pizza Hut in the U.S. are made in Poland. We've also taken brewer's yeast and various other things from Poland. If you get people who understand barter and go into these countries and search around, you can find things to generate the foreign exchange. We've been very successful at it, and the result is that we have a very strong market position.

D&B: Is it easier to do business in the Soviet Union today than in years past?

Kendall: Dealing in a democracy in the Soviet Union today is much more difficult. Before, you had a Foreign Trade Ministry where all the decisions were made. It was centralized control, so it was easy. They destroyed what they had before -- a command centralized economy -- but it hasn't gone from there down below. People are negotiating out in the republics, through the central system and the republics, and in the cities. If your don't know your way around, it's difficult to find out who you should talk to and who can make a decision.

D&B: Would you recommend acquisition or start-up as a way of getting in quickly?

Kendall: That's an individual decision. That would depend on the type of businesses and on what's available. In the case of Pizza Hut, there was nothing to acquire except land and buildings.

D&B: It is almost universally understood that the technology, the facilities, even the skills in many of these countries are not competitive on a world market.

Kendall: Of course they are not. If they were, why would we go over there? They wouldn't need us. From a technology and production standpoint, they are behind. The plants are antiquated. They haven't made the capital expenditures to bring them up to date. That is true all over Eastern Europe and the Soviet Union. You can go to some places where the Russians have plants that are as modern as anywhere else in the world, but that's pretty spotty.

D&B: You have been successful in identifying potential partners. How difficult is it to find local partners?

Kendall: The problem is not finding local partners, it's finding local partners that can bring something to the table. That is more important. We have some terrific partners in Pizza Hut. They put up the land and the building. Remodeling the building, putting the equipment in, and setting the whole thing up was our responsibility. The Russian people we hired and trained turned out to be very good. But you have to spend time training them and making an investment in them. We sent these Soviet citizens to London and had them working within the Pizza Hut system until they understood it. We sent our people there from Canada, the United States, England, Egypt, Australia, and New Zealand to train them. They all developed an esprit de corps that is unbelievable. The Soviets have a lot of very bright people, and they are very well educated. They have excellent research people. There is a lot of talent there. It just doesn't have any direction.

D&B: Given the current instability in the Soviet Union, would you encourage your colleagues in major Western companies to enter the Soviet Union at this time?

Kendall: Absolutely. There is no place with greater opportunity. If you wait until you have stability and convertible currency, the opportunity is going to be gone. When you have an opportunity is when there are problems -- when everybody is not running there. In running a business, you have to take risks. Where there is opportunity there is always risk. If there were no risks in the Soviet Union, someone else already would have the business. So I don't think instability is something that would stop me from going to the Soviet Union. What is going to happen? They are not going back to what they had before. You might have civil unrest. A lot of the republics may end up seceding from the union. But they are going to have some system that will be different. It probably won't end up like the United States or Germany. It will probably end up as more of a socialist country like Sweden or Finland. Or a combination of the two. Nobody knows how it's going to end up. But there will be some structure there in which you can continue to operate. Nobody would have dreamt years ago that you would have what's happened in the Soviet Union today. But I believed back then that given the opportunity, we could be successful. We were successful under the old system, so you know we are going to be very successful under the new system.

D&B: What are your sentiments about the current Soviet leadership?

Kendall: There is no question that Gorbachev is more popular abroad than he is at home. People there can now finally criticize their government. They don't like what they see in their stores and they are jumping all over him. But I notice that every time they have a vote, he ends up with the votes. Gorbachev has demonstrated an ability, so far, to stay on top of the issues. Every time you think there is a crisis, he seems to be leading the new wave. He is a smart politician, has unbelievable staying power, and a great sense of humor. I think he will survive at least during the period to which he's been elected, which is another four years.

D&B: You even held a PepsiCo board meeting in the Soviet Union way back in 1974 -- the first U.S. company to do so. Do you think other boards have begun to embrace the opportunities to be found in the Soviet Union and in Eastern Europe? Or is it more of a curiosity?

Kendall: I wanted the board to understand the opportunities. One of the problems we have in the U.S. with our international operations is that a lot of chief executives don't get involved. Somebody said one time that a lot of chief executives are inclined to travel the |silk stocking' route -- they love to go to London, Rome, and Paris. They won't go over to the Soviet Union and conduct negotiations. This will change with time, but if a chief executive -- the decisionmaker -- goes over there, he can get something done. Furthermore, you don't get the enthusiasm for something unless the chief executive gets involved. The same is true in China and in a lot of other countries. You must go there and find out what the opportunities are.

D&B: German companies seem to have a great deal of interest and seem to be doing quite well getting a foothold into Eastern Europe. Is the U.S. going to be up to the competition there?

Kendall: We're not going to compete against the Germans if we don't get more aggressive. Otherwise, the Germans will end up with the business. The Germans themselves are concerned about dominating Eastern Europe because of the political implications. They are not going to stop Western companies, particularly from the U.S., from going into Eastern Europe. They're happy as hell to see us involved over there. The French and the Italians are already in moving in. The Japanese sure as hell are starting there. Now is the time for us to go. But we have to get our government to change the ground rules so that we can compete on a level playing field with the Western Europeans.

D&B: What do we need from Washington?

Kendall: We have to get rid of the Jackson-Vanik Amendment, which was set up in 1974 when Scoop Jackson was running for president. It is based on nothing but Jewish emigration. They are allowing so many Jews out of the Soviet Union today that the Israelis are complaining that they are having trouble handling them, and they've even asked the United States for help in relocating them. Obviously, what it was set up for is no longer a problem. We have to find a way to get rid of Jackson-Vanik so that the Soviets can market their goods here in the same way other countries market their goods, without paying an extra duty, which makes it almost impossible for them. (Editor's Note: In December 1990, a few weeks after our interview with Mr. Kendall, President Bush did indeed waive the Jackson-Vanik amendment, which had barred closer U.S.-Soviet economic ties until Soviet Jews and others were free to emigrate in large numbers.) We have to get Export-Import Bank credit. German companies going into the Soviet Union have credit facilities available at interest rates that we can't compete with unless we have Ex-Im bank credit. PepsiCo doesn't have any problem because of the size of our company. But there are a lot of midsize and small companies in the U.S. that should be doing business in the Soviet Union, but they can't compete without Ex-Im Bank credit. They also need OPIC (Overseas Private Investment Corp.) guarantees. Obviously, there is a political risk and there are some small companies that can't afford to take that risk. With OPIC guarantees, they can cover that. If we get those things, everybody should be encouraged to get over there.

D&B: What advantages do U.S. companies have in setting up in Eastern Europe?

Kendall: You go throughout Eastern Europe and the Soviet Union, and people still think we're the best. The Bulgarians, for example, would like to do business with the U.S. They don't want to go back to the traditional relationship they had with Germany. (Former Bulgarian Prime Minister) Lukanov has made that statement numerous times. Despite the things that have happened, the average Soviet person still thinks we have the best source of supply and wants to work with us. So, we have a tremendous amount of goodwill over there. All our people have to do is go there and get the business. We cannot sit back and say it's a political risk, that we don't have a convertible currency, etc. That attitude is one of our problems with the balance of trade today. When you look back at the 1950s and 1960s, we built up tremendous businesses overseas and had those markets that people are aggressively going after. We've got to get back and get aggressive again.

Milestones in PepsiCo's Trade with the U.S.S.R.

1959 -- Donald M. Kendall, president of Pepsi-Cola International, arranges for a Pepsi
 exhibit at the American National Exhibition in Moscow. Kendall continues
 with Soviet trade officials after the exhibition.

1965 -- The first Pepsi-Cola plant in Eastern Europe opens in Constanta, Romania. 1972 -- Kendall announces agreement that will make Pepsi the first foreign consumer
 product sold in the U.S.S. R. PepsiCo is given exclusive rights to impor
t and
 distribute Stolichnaya Russian vodka in the U.S.

1974 -- The first bottle of Soviet-produced Pepsi comes off the production line in Novorossisk.

-- The PepsiCo board of directors meets in the Soviet Union, making it the first U.S.

company to hold such a meeting there.

-- An agreement to build a second Soviet Pepsi bottling plant in the U.S.S. R. is signed

later the same year, doubling production.

-- Stolichnaya sales in the U.S. more than double as a result of PepsiCo's marketing
 support and advertising campaign, pointing out that the vodka is the onl
y authentic
 Russian vodka imported into America.

1977 -- Annual Stolichnaya sales in the U.S. pass the 100,000-case mark for the first

time, starting a U.S. imported-vodka boom.

1978 -- Kendall announces a contract that doubles, to 10, the number of Pepsi plants

in the Soviet Union.

-- Stolichnaya introduces acclaimed and highly successful "ice block" advertising


1979 -- Pepsi goes on sale in Moscow for the first time. Sales outlets include red, white, and

blue kiosks.

1980- 1984 -- Nine new Pepsi plants open in the Soviet Union. 1982 -- More than a half million cases of Stolichnaya are sold in the U.S.; brand continues as

category leader.

1986 -- Pepsi sponsors Goodwill Games, and Pepsi-produced commercials are the first

from the West to appear on Soviet television.

1988 -- Pepsi-Cola launches Fiesta, a cloudy, lemon soft drink, and Tanez, which means
 "dance" in Russian and is an orange-flavored soft drink; both products w
 developed specifically for the Soviet Union.

-- Pepsi becomes the first advertiser to buy commercial time on Soviet television.

-- Pepsi-Cola films a new television commercial on location in the Soviet Union.

starring a group of 20 Soviet teenage actors and actresses speaking in Russian.

1989 -- Stolichnaya Cristall, a limited-edition, ultra-premium Russian vodka, is introduced
 to the U.S. for the first time. Initial shipment sells out in under thre
 months. Tens of thousands of cases of Cristall are sold in the first nin
e months,
 exceeding all expectations.

1990 -- PepsiCo formally extends its reciprocal trade agreement with the Soviet Union to the
 year 2000. In the most far-reaching and innovative trade agreement betwe
 a single U.S. corporation and the U.S.S.r., the deal represents more tha
n $3 billion in
 retail sales of Pepsi-Cola and Stolichnaya Russian vodka. It calls for t
he establishment of
 26 new Pepsi plants in the Soviet Union, increased purchases of Stolichn
aya Russian
 vodkas by PepsiCo, and the building of at least 10 Soviet commercial shi
pping vessels to
 be sold or leased to international markets.

-- The first Pizza Hut opens in the Soviet Union, in Moscow.
COPYRIGHT 1991 Directors and Boards
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Publication:Directors & Boards
Article Type:interview
Date:Jan 1, 1991
Previous Article:The emergence of the global consumer.
Next Article:Reconstruction and the art of the possible.

Related Articles
GRAPEVINE: News About People
GRAPEVINE: News About People.
GRAPEVINE: News About People...
Aviko aims high as Cosun challenges it to boost share of market. (News from Europe).
PepsiCo Inc.
Food and drinks giant PepsiCo has named Michael D. White as vice-chairman of the corporation and appointed him to the board of directors.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters