PEPSI ONCE OWNED A NAVY BIGGER THAN SOME COUNTRIES'
For a brief moment in 1989, PepsiCo acquired 17 Soviet submarines, a cruiser, a frigate and a destroyer.
No.
Pepsi wasn't secretly becoming a military power.
The ships were old, decommissioned and destined for scrap.
But the reason Pepsi ended up with them is one of the strangest business stories of the Cold War.
IT STARTED WITH PEPSI IN THE SOVIET UNION
Pepsi's relationship with the Soviet Union actually began decades earlier.
In 1959, Soviet leader Nikita Khrushchev famously tasted Pepsi during an American exhibition in Moscow.
The photograph of Khrushchev drinking Pepsi with U.S. Vice President Richard Nixon became an important piece of Pepsi's international marketing story.
But getting Pepsi into the Soviet market was complicated.
The Soviet ruble wasn't freely convertible into dollars.
So Pepsi couldn't simply say:
"You owe us money. Send us dollars."
The companies needed another solution.
PEPSI STARTED TRADING COLA FOR VODKA
In 1972, Pepsi reached an agreement that allowed it to enter the Soviet market.
The Soviets couldn't easily pay Pepsi in hard currency.
So they offered something Pepsi could sell elsewhere:
Stolichnaya vodka.
The arrangement effectively turned Pepsi into a strange international middleman:
Pepsi syrup → Soviet Union
↓
Vodka → Pepsi
↓
Vodka sold internationally
It was an unusual solution to a very real currency problem.
THEN THE VODKA DEAL STOPPED BEING ENOUGH
By the late 1980s, Pepsi's business in the Soviet Union had become much larger.
But the payment problem remained.
And vodka wasn't always enough to cover the expanding relationship.
So the Soviet side began looking for other assets that could be traded.
And that's when the story gets ridiculous.
PEPSI GOT SUBMARINES
In 1989, PepsiCo acquired:
17 submarines
plus:
A cruiser
A frigate
A destroyer
The submarines were reportedly valued at around $150,000 each.
Suddenly, a soft-drink company had acquired a collection of Soviet naval vessels.
And that created one of the strangest jokes in corporate history.
Pepsi's CEO Donald Kendall reportedly joked to U.S. National Security Adviser Brent Scowcroft:
"We're disarming the Soviet Union faster than you are."
The joke was memorable because, technically, Pepsi had just become involved in the transfer of part of the Soviet fleet.
BUT PEPSI DIDN'T WANT A NAVY
This is where the viral version of the story gets misleading.
The submarines weren't modern military assets waiting for Pepsi to put crews inside them.
They were decommissioned, obsolete vessels.
Pepsi wasn't going to train submarine commanders.
It wasn't going to patrol the Atlantic.
And it wasn't building a private military.
The company was essentially acting as a middleman.
The vessels were transferred onward to a Norwegian company for scrap.
So the "Pepsi Navy" existed mostly on paper.
WHY WOULD PEPSI ACCEPT WARSHIPS?
Because Pepsi didn't actually need the ships.
It needed something that could solve the underlying commercial problem.
The Soviet Union had limited access to hard currency.
Pepsi wanted to expand its business there.
The Soviets had assets they could trade.
So the logic became:
Soviet assets
↓
Pepsi receives them
↓
Assets are sold for hard currency
↓
Pepsi can continue expanding its Soviet business
The submarines weren't the business.
The business was the trade.
PEPSI WAS MAKING A MUCH BIGGER BET
And the submarines were only one tiny part of a much larger plan.
Pepsi was trying to dramatically expand its presence in the Soviet market.
A later 1990 agreement was valued at more than $3 billion over the following decade and involved commercial tankers and freighters that would help support Pepsi's expansion. The plans also included bringing Pizza Hut, then a Pepsi subsidiary, to Moscow.
Pepsi wasn't interested in becoming a shipping company.
It wanted access to a massive consumer market.
The ships were simply another strange piece of the financing puzzle.
THEN HISTORY DESTROYED THE PLAN
There was one enormous problem.
The Soviet Union was disappearing.
In 1991, the USSR collapsed.
And Pepsi suddenly had an extraordinary business problem:
The government it had signed its huge agreement with no longer existed.
Pepsi executive Donald Kendall later described the situation as having a multibillion-dollar contract with a nonexistent entity.
The company's enormous Soviet expansion strategy had been built around a country that was about to break apart.
AND COCA-COLA SAW AN OPENING
The collapse didn't end Pepsi's presence in the region.
But it changed the competitive environment.
Coca-Cola moved into the newly opened Russian market and quickly expanded its presence.
The strange Pepsi-Soviet business relationship that had once looked like a major strategic advantage was suddenly operating in a completely different political and economic environment.
The Cold War was ending.
And so was one of the strangest corporate arrangements it had produced.
SO DID PEPSI REALLY HAVE THE SIXTH-LARGEST NAVY?
Not in any meaningful military sense.
The popular story says Pepsi briefly possessed the sixth-largest navy in the world.
But research published by Foreign Policy found that the 17 submarines would have roughly tied with India for the seventh-largest attack-submarine fleet at the time if they had actually been an operational fleet.
They weren't.
They were obsolete vessels that were transferred for scrap.
So saying "Pepsi had a navy" makes for a fantastic headline.
But saying "Pepsi temporarily acquired Soviet warships as part of a commercial barter arrangement" is much closer to what actually happened.
THE STRANGEST PART ISN'T THE SUBMARINES
The submarine story gets all the attention.
But the more interesting business lesson is the original problem:
The Soviet Union couldn't simply pay Pepsi in the currency Pepsi wanted.
So both sides became creative.
Instead of:
money → Pepsi
they built a chain:
Pepsi syrup → Soviet consumers
↓
Vodka / other assets → Pepsi
↓
Resale / conversion → hard currency
↓
Business expansion
The deal looks insane if you only look at the submarines.
It makes much more sense when you look at the underlying problem.
PEPSI WASN'T BUYING WARSHIPS
It was buying something much more valuable to the company:
access to a market.
The ships were essentially a strange financial mechanism inside a much larger commercial relationship.
And that's why this story belongs in business history.
A company doesn't always need to receive exactly what it wants.
Sometimes it needs to figure out what can be exchanged for what it wants.
MAACAT PERSPECTIVE
The Pepsi submarine story is usually told as:
"Pepsi once had a navy."
The real story is more interesting.
Pepsi had a commercial problem.
The Soviet Union had a currency problem.
Both sides had assets the other side could use.
So they built a bizarre chain of trades involving:
cola
vodka
oil tankers
submarines
warships
and eventually billions of dollars of planned business.
Pepsi never became a military power.
But for a brief moment, one of the world's biggest soft-drink companies became the middleman in a deal involving 17 Soviet submarines and three warships.
That's what makes the story so strange:
The world's cola wars once involved actual warships.
