We are proud to continue our Lessons in Innovation Leadership series. This series showcases experienced business leaders who have led, and learned, from significant innovation initiatives. Interviews feature the innovators’ experiences and cover key lessons concerning what worked, what didn’t work and why. For this interview, we broadened the scope of our conversation to reach beyond innovation to the larger question of overall leadership within specific growth markets, such as Russia and India, including some of the distinctive features and challenges associated with such economies. We believe these aspects possess attributes that are similar to issues confronted by leaders in other markets, including developed ones.
We’re pleased to continue the series with a candid conversation with Sanjiv Kakkar, Executive Vice President of Unilever Russia, Ukraine and Belarus.
He has worked in Unilever for 29 years and was on the Board of Hindustan Unilever Ltd., India, as Executive Director Foods and then Customer Development, before moving to head the business in Russia. He received his MBA from the Indian Institute of Management Ahmadabad, India in 1984.
Q: Let’s begin by setting the stage, if you don’t mind, with your assessment of the Russian economy now, and well your expectations for growth prospects.
Sanjiv Kakkar (SK): The Russian economy went through a sharp downturn in 2009, much more than what was seen elsewhere globally. GDP dropped by almost 8 percent. It has since bounced back, growing between 3 to 4 percent each year, which I expect to continue for a fair period of time. Given the magnitude of the drop however, the GDP didn’t reach pre-crisis levels until mid to late 2011. The fact is, this growth is very oil dependent; as long as the price of oil remains $100 or above, we should continue to see these kinds of growth rates.
Q: Do you have any expectations for retail growth specifically?
SK: As long as oil prices hold, we will see retail market growth in the region of about 5-6 percent. The retail market has enormous potential for two reasons. First, because of the large percentage of households earning more than $10,000 per capita, per household, per annum. Second, because these households, and most Russian consumers, are extremely brand conscious, as well as quality conscious and are also willing to spend to buy the right brand, and the right quality. Given that, this region will be a very attractive destination for most consumer goods categories across the world.
Q: One area of consumer growth we are observing is the middle class. Where do you see some of the opportunities associated with this growing middle class moving forward?
SK: It’s interesting. The population of Russia is about one-10th of that of China. However, if you look at the market sizes of some of the categories that we operate in, the market sizes are between about a third to almost equal to the Chinese market. That gives you a sense for the size and scale of this market today relative to the size of the population.
If you look to the future, a couple of things really stand out. One, if you look at the average consumption and penetration levels across all of the personal care and food markets, they are still significantly lower than what you would see in Western Europe or the U.S. Second, if you see the absolute number of households that sit in the middle class here, it is comparable to or even larger than what you’d observe in India or Brazil, for example.
So, in terms of current market size, size of the middle class, or current levels of penetration and/or consumption, they all point to the fact that this is a big market with huge opportunities. I think what the crisis has shown us is that there is a strong opportunity at the middle to lower end of the market and there is a very strong opportunity—continuing opportunity at the premium end of the market.
Q: What do you see as any similarities or differences in how the Russian consumer fared during the financial crisis compared with developed market consumers in Western Europe?
SK: It’s a bit difficult to compare, but I would suggest a couple things. I think there is a huge desire for quality amongst Russian consumers. They are driven by more rational benefits and very importantly, particularly on the food side, there is a need and a desire for anything that is natural. They like to go “back to the earth” and are very conscious of what they are putting into their systems in terms of chemicals, which are going into foods. When I compare that with the typical Western European consumer, I would say that Western Europe in recent years has had a lot of attention on price and value, and there is not such a strong focus on naturalness.
Q: Do you have specific examples in mind which might offer more color?
SK: If you look at the dressings market for instance, over the last many years all dressings—whether local or international—have moved into the natural space aggressively. They are promising either natural ingredients or 100 percent natural, you name it. Similarly, look at the personal care market and you will see a huge trend, particularly at the mass end of the market, into brands that promise a natural-based formulation. When you do qualitative consumer groups and you interact with consumers and you watch how they shop, typically they would pick up a product and read the ingredient list pretty carefully.
Similarly if you look at the percentage of retailer-owned brands over here in Russia, that's much, much lower than what you would see in Western Europe. Consumers here still shop for quality, and the level of promotional intensity in this market is much lower than what you would see in a typical Western European supermarket. It's not a usual driver over here for companies for trade and for the retail chains.
Q: So clearly there are some differences between Russian and Western consumers. Previously you spent several years working for the Indian unit of Unilever. When you compare with that experience, do you see differences between the Indian and the Russian consumers?
SK: Yes, I think that consumers are pretty different. The reality is that the Russian consumer is far more homogenous as compared with the Indian consumer. India is a land of huge diversity, both economic and cultural. I would broadly say that Russia is a much more homogenous market. As you travel across the country, you will not see major and significant regional differences in terms of consumption patterns. In addition, you don't see as much of pack-size regional diversity happening over here as you see in India. Because in India you’re trying to cater to a consumer who is living on $3 or $5 a day all the way up to the top end Indian consumer whose buying patterns are very similar to what you would see in Western Europe. As a result, you see pack sizes in shampoo that range from the small sachet priced at one rupee all the way going up to one liter shampoo bottles. We would not see that over here. The food market in Russia is far more evolved in terms of consumption patterns than in India. Consumers here are less value conscious as opposed to what you would typically see in India.
From a customer perspective, I think both markets have a hybrid trade environment. I would say this is a more complex trade environment than India and because in India the modern trade is still developing and is still growing rapidly but is still not a very large part of the overall operations in India while over here it’s about half and half. It's a very complex trade environment over here even compared with India.
Q: Interesting. That actually brings me to my next question about the idea that multi-nationals need to be a combination of global and local, sometimes referred to as “glocal.” Where do you think glocal balance lies within Russia either for Unilever specifically, or more generally for multi-nationals?
SK: Broadly the comment I would make is that most companies can do a whole lot better to adapt to the reality of the Russian consumer and to cater their propositions far more strongly to what the Russian consumer desires and wants.
This is a market where one of the things that really stands out is, particularly in the foods market, is the strength of some of the local players and how they have been able to tailor their propositions and they've got very strong businesses in foods and beverages because they have a much better, faster response to the consumer needs. Similarly for instance, the business that we acquired, Kalina, which is the largest in the personal care business, has built on a very strong consumer understanding of the local Russian consumer. So, broadly I would say more certainly these multinationals can do a whole lot better in terms of catering themselves to local needs.
Q: In your time as chairman in Russia, what have been the major surprises that you have encountered?
SK: To me the biggest surprise is the huge gap between the perceptions of Russia outside versus what is the reality within the country. There is a perception about Russia that remains dominated by “Soviet imagery,” the chaotic times of the nineties and even a little bit into the early 2000s and a feeling that this is still the Wild West. When people come and work here and live here they realize what an attractive market this is with enormous potential. We have cities like Moscow and St. Petersburg, which would compare with any West European capitals, in terms of shopping, consumption areas, facilities, the quality of life and security is spectacular.
Q: In a similar vein, what have been some of the key challenges you’ve encountered in growing the Unilever business within Russia?
SK: I think the first big challenge was the sheer size and scale of the country, and its implications. We need to deal with the scale and complexity of moving products and distributing products across nine times zones, couple that with the climatic conditions under which one has to operate across almost five to six months of the year. It’s challenging.
The second challenge relates to this being a first generation corporate market. Most businesses started operating here from 1992, 1993 onward, and I've been in business here for about 20 years. The talent over here has never really seen or worked in a corporate environment, other than the last 15 years or so. Therefore, building a talent pool that is wide enough to support the needs of the business into the future as well as deep enough in terms of capability to be able to help businesses to scale up is crucial and critical and at the moment most businesses find themselves lacking in this space.
It's a very dynamic talent market because there is good talent out there but that good talent is scarce and is in great demand. Attracting the right talent, building them into the future and more importantly, retaining them, so that you're able to get the full benefit of the investment that you're making in the talent and capability is crucial. That to my mind is the second challenge.
Finally, I think the third challenge is the high-cost nature of this market. The fact is, the geographical spread of the region, combined with the scarce talent, makes the market expensive. Trying to constantly drive down your costs to make this an efficient and profitable operation is a key challenge in this country. Especially as long as your business does not have the scale that is needed to cover a lot of the fixed costs.
Q: Let’s talk about innovation specifically. Has Unilever had specific examples of innovation here that enabled it to win and succeed in the marketplace?
SK: Succeeding in Russia has been a combination of using Unilever's global best practices and adapting them to the Russian environment. It’s unlikely that we will find something that is very different in Russia than the way Unilever would approach it in other developing and emerging markets. But I would say that a lot has been taken and adapted to the Russian reality and implemented well to build a successful business over here.
Q: When you say “adapted,” can you give some specific examples of that?
SK: For instance, if you take our route to market work that's happened. When you take distributor models and you apply them to Russia, initially of course we ended up fragmenting our distributor space and ended up with a very large number of distributors and as it happened there in India. But when you then apply that to the Russian reality and look at the size and scale of this country and you look at the same time the fact that business over here to the late 1990s and most of the 2000s was at a scale that was not large enough to build a very fragmented distributor model as has been applied in Asia, we realized the need to consolidate our distributor base and work with the strategic distributors and strategic partners in order to be able to be leveraged scale with them and to get optimum service out of them. So, it's the same model but it's adapted to the Russian reality and therefore done differently.
Q: What kind of leadership advice would you have for a young manager who is working within a promising growth market?
SK: My one advice would be to take a long-term view. Unfortunately in today's world, generally short-term pressures crowd out the long-term view. It's very very important for anybody who really wants to demonstrate results and for any leader who wants to build a business in these markets it's about having the courage and the resilience to take the long-term view and then to stick with it. And not to always chase the urgent and what is needed in the short term. So, that would be my one big advice to anybody who is involved in these markets.
The second advice is that in most of these emerging markets it’s wrong to assume that they are one country. India is actually many Indias. Brazil is many Brazils, China is many Chinas. Russia is a bit more homogenous, but still I would say many Russias. The level of segmentation of approach that is needed whether in terms of brand or in terms of customer strategies, is it’s absolute, or in terms of geography, it is absolutely crucial to practice many Indias or many Russias or many Chinas or many Brazils approach rather than a unified country approach.