The Rising Influence of Rising Affluence

[DewDiligence]

PepsiCo Chips Away at China

[PEP isn’t generally thought of as a play on China, but it ought to be, IMO.]

http://online.wsj.com/article/SB10001424052702303292204577518464208380158.html

›July 10, 2012
By LAURIE BURKITT

WUHAN, China—PepsiCo Inc. is expanding its business in China, where executives hope consumers will devour hot-and-sour fish soup potato chips, white fungus oatmeal and blueberry Gatorade, propelling the company toward its goal of becoming the biggest snack and beverage maker in the world's second-largest economy.

Chief Executive Indra Nooyi cut the red ribbon of a new Lay's potato-chip plant in China's landlocked city of Wuhan on Tuesday, its sixth snack plant there and the latest sign of its three-year, $2.5 billion commitment to the fast-growing market. Company executives said it illustrates PepsiCo's increasing focus on China's hinterland, where consumers are spending more on food as their incomes rise. Many of them have yet to even try a potato chip, PepsiCo executives say.

"China will be the largest consumer market in the next decade, and PepsiCo aims to be the largest food and beverage company in the market," said Ms. Nooyi in an interview, without specifying a timeframe.

Other efforts include a planned new research and development plant in Shanghai that could better tailor products to local tastes, potentially adding new products to a current lineup that includes hot-and-sour fish-soup potato chips, white fungus oatmeal and blueberry Gatorade. PepsiCo also plans to increase ad spending in the country. Executives declined to disclose details but said they will increase spending on Lay's by 25%.

The company has high hopes for a deal completed earlier this year that transferred its local bottling operations to a local joint venture with significant market share. The sale will free Pepsi to concentrate on more food, marketing and research efforts, said Tim Minges, PepsiCo.'s chairman for Greater China.

The effort comes as the Purchase, N.Y., company—which makes Doritos corn chips, Tropicana juices and Quaker oatmeal—looks for ways to pump up its profits and satisfy investors disappointed by its U.S. market share loss in soda to rival Coca-Cola Co. Many have called for the company to split its lagging beverage business from its stronger snacks division.

PepsiCo's executives say they are only making a dent in the country's food and beverage markets so far. Consumption of potato chips in China is around one small bag every two to four weeks, compared with 15 bags in the same time period in the U.S., according to Mr. Minges. The average Chinese buys a beverage 230 times per year, while the average American buys 1,500 in the same period, Mr. Minges said.

"The growth potential is massive," said Mr. Minges, noting that while many companies are concerned about a potential slowdown in China, PepsiCo is still eyeing the country as one of its booming markets.

Revenue from Pepsi's emerging markets reached $22 billion in 2011, representing 34% of total revenue and nearly tripling from $8 billion in 2008. Much of that growth came from China, a company spokeswoman said. PepsiCo doesn't break out its China revenue.

Offering the same Cool Ranch Doritos PepsiCo sells to U.S. consumers isn't an option for China, said Mr. Minges. The company plans to open a new research and development center in Shanghai this fall, enabling it to create chip, drink, and oatmeal flavors and new textures that span beyond its current portfolio of such flavors as pork and ketchup, little tomato, cola-grilled chicken, and cucumber.

Mr. Minges said PepsiCo will also expand its oatmeal offerings, exploring more flavors that are inspired by traditional Chinese medicine, such as its current wolfberry flavor. Quaker launched in China two years ago and is beginning to take hold with consumers who are accustomed to eating rice porridge for breakfast.

PepsiCo is boosting its agricultural projects in China, attempting to improve potato yields and cut costs by improving its irrigation systems, Mr. Minges said.

China's snack-food market is expected to reach an estimated 77 billion yuan (about $12 billion) by year-end, up 44% from 2008, according to research firm Euromonitor International. Its soda market is poised to reach 71 billion liters this year, nearly doubling from five years earlier, the firm projects.

PepsiCo was the fifth-largest seller of savory and sweet snacks in China in 2010, according to Euromonitor's most-recent data. In beverages, PepsiCo has a 4.4% market share, compared with Coke's 15%. But its sale this year of its China bottling operations to a beverage joint venture including Tingyi (Cayman Islands) Holding Corp. and Asahi Group Holdings Ltd. will give it a lift there, analysts say. Tingyi itself has a 14% market share in China, according to Euromonitor International.‹