Russia makes a lot of people's lists of hot growing markets into which American companies should expand. It is the "R" in BRIC, the acronym describing "must be in" emerging markets -- the others being Brazil, India and China. Emerging markets, even hot ones, however, can present a unique challenge for companies who have forged their product success in a developed market like the US.
As discussed previously in this blog, Russia is essentially a first generation capitalist economy, and one which by some measures seems to be backsliding into more state control such that much of the growth one sees in the economy as a whole is in govrnment dominated industries such as energy development. Coupled with problems like the kind of coruption and relative lack of well devloped commercial legal constructs that can create problems in many developing economies, Russia can be a challenging market in which to actually turn a profit.
Perhaps the biggest challenge facing companies from developed markets when entering devloping markets, however, is a failure to appreciate the different cultural orientation toward certain developed market value propositions such as "fast, easy, labor saving" driven by the opposite relationship between the cost of labor and the cost of goods in producing final outcomes. When the cost of labor is high and constitutes a greater relative cost than other inputs, fast and easy equals cheaper and more profitable -- it's a winner. But when the value of labor is cheap, including the value of an individual consumer's own labor, compared with the cost of goods, then saving labor by incorporating those costs into a finished product through mass production doesn't translate into a winning proposition.
The latest example of a company to learn this lesson is Campbell Soup -- the iconic maker of concentrated soups and broth. What could be easier than just add water, heat and serve for a quick meal. Campbell launched into Russia with high expectations 4 years ago -- expectations based on the fact that Russians consume 32 billion bowls of soup a year versus only 14 billion consumed in the US. Seems like a no-brainer -- a soup company with it's soup in an easily exportable form looking to a "hot fast growing" market of positively ravenous soup consumers. In theory a market over twice the size of their US market.
The problem is, Russians like to make their soup themselves from scratch. Some of this is a long ingrained cultural preference which is always a challenge to sell in the face of. Another part is the fact that the value of their labor time is less relative to the cost of goods so that saving time in making soup is just not good home economics. As a result, Cambpell just announced, as detailed in an article in today's Wall Street Journal, that it is exiting the Russian market and completely shutting it's operations there. No report on how much money they lost over the 4 years invested there.
So the lesson for other companies thinking about building a new market presence in a developing economy -- even one of the hot BRIC's -- is to be sure that your value proposition translates into the new cultural and economic environment that you will find there, and to be realistic about the real size of the market opportunity for your product. If your success in your home market is based on "fast, easy, labor saving", you might be better off in western Europe or Japan.