Pepsi is focusing on health food, but its cream of business remains in cola

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Pepsi pushing ahead in India


No big role in Formula 1

PepsiCo in India is concentrating on Formula 1 Airtel Indian Grand Prix race that is to take place in a few days’ time. It has picked up beverage rights at some F1 stands. The company has opted to serve Pepsi, Mountain Dew and Aquafina at some areas of racing tracks and stands. Coca Cola, Pepsi’s chief rival, tried its level best to bag the deal but had to opt out because of the high payment demanded. Even Pepsi has not bagged the pouring rights for the event. Both the companies have not sponsored the event either. This is a big surprise. Perhaps, both the cola companies would have thought that F1 was not going to generate the same enthusiasm as that of say an IPL cricket match. Another reason is that multiple agencies are conducting F1 sponsorship whereas in case of IPL, a single agency is involved and it is easier to negotiate. Sponsorship of F1 involves a payout of around Rs.10 crore every year. But it is not guaranteed to bring any reasonable return out of this expenditure as racing is not a mass sports in India. Pepsi and Coke spend around Rs.125 crore every year towards marketing expenses. Pepsi is the official global sponsor of the ICC World Cup cricket matches which generate tremendous excitement and following in the cricket playing countries of the world. Both Pepsi and Coke are sponsors for the IPL T20 cricket league. Coke sponsors football events also.

Donation for a noble cause

PepsiCo has donated $8 million to Water.org to help provide clean drinking water and sanitation programmes in India. PepsiCo Chairman and CEO Indra Nooyi stated that water is an integral part of PepsiCo’s business eco system and ensuring access to clean, reliable sources of water is vital to the health and livelihood of communities around the world. Indra Nooyi is an Indian. She is one among very few women in the world who have reached highest positions of power in the corporate world. Indra Nooyi studied at Madras Christian College, Tambaram near Chennai. She is among the two highest paid CEOs in US. The other CEO is Motorola Mobility’s Sanjay Jha. Indra Nooyi is among the five CEOs of Indian origin at the helm of major US corporations. Indra Nooyi is now 55 years old. She became the CEO of PepsiCo in 2006 and has steered the company ahead from difficult situations.

Re-launching Duke’s range of beverages

PepsiCo has re-launched Duke’s range of beverages in Mumbai. These beverages were stopped by the company seven years back. Now, if the market response is good in Mumbai, PepsiCo may launch these beverages in other parts of India as well. PepsiCo is launching them in four flavours namely Raspberry, Masala Soda, Gingerade and ice cream Soda. The beverages come in 200 ml retro style returnable glass bottles costing Rs.10 and a 500 ml PET bottle for Rs.25.

Focus on health drinks

PepsiCo plans to set up a joint venture with a German dairy company Theo Muller group to enter into the fast-growing yoghurt business. The new yoghurt brand will be launched in USA first. PepsiCo had formed the Global Nutrition Group to bring growth of its nutrition portfolio. To help achieve in this mission, PepsiCo is constantly looking at opportunities involving product innovation and partner offerings. PepsiCo plans to more than double sales from healthy drinks and snacks to $30 billion by the year 2020. PepsiCo also sells Quaker oatmeal, Tropicana orange juice and Lay’s potato chips. Most of the items that PepsiCo sells do not come under the banner of health foods. Maybe, pricked by its conscience, it is focusing more on coming out with health foods. It has introduced breakfast cereal in India. Quaker Oats is a globally leading brand and fast picking up in popularity in India.

Quaker Oats lowers cholesterol

India is the first market for PepsiCo in targeting value segment customers with its health products. Indian breakfast market is worth Rs.2000 crore. The share of cereals like oats, cornflakes and muesli is around Rs.500 crore. In big cities and metropolitan areas, people are health conscious and experiment with new food options. It is here that PepsiCo can introduce products like Quaker Oats to attract customers. Quaker Oats provides cent per cent natural wholegrain nutrition advantage to the consumers. Beta glucan, a soluble fibre, present in whole oats lowers blood cholesterol level and help heart patients and even normal patients to protect heart. This fact has been verified and accepted by USFDA itself.

World’s largest snack food maker

PepsiCo Inc is world’s largest snack food maker. It reported a 4.1% increase in the third quarter profit. This was achieved through price increases and sales of snacks in Latin America. Net income increased from $1.92 billion in the corresponding period of the previous year to $2 billion. During the quarter, CEO Indra Nooyi increased the snack and beverage prices globally in order to compensate for higher commodity prices. The company has projected that commodity prices will continue to increase in the coming months. PepsiCo has reduced its full year profit forecast.

Reprieve for now

Kerala High Court has directed the State government to constitute a technical committee to study the environmental impact caused by the extraction of ground water by PepsiCo. Earlier, a single judge order permitted PepsiCo India Holdings to extract 6 lakh litres of ground water per day for its use in its beverages. The government had challenged this ruling in the High Court. The High Court had expressed its opinion that only after the proposed technical committee submits its opinion to the Court, it will be possible to decide one way or other in this issue. Till then, PepsiCo has got a reprieve.

Splitting operations on the card

Internationally, food and beverages companies are restructuring through splitting their operations. Kraft Foods and Tyco International are some of the examples to cite. McGraw Hill stated that it will separate education from financial ratings business. PepsiCo may also follow suit by splitting its snacks and food division from its beverages division. If this happens, then the shareholders of PepsiCo will gain. This will offset their loss of 10% in the last one year when the shares of PepsiCo plunged to around $60. PepsiCo’s beverages are losing their market share in USA. But its snacks division is growing. Moreover it is easier to manage two smaller companies than one big company. Small is beautiful, so goes the saying. PepsiCo has successfully integrated its bottling business and expects to realize further benefits in North American markets. The combination of beverages and snacks portfolios creates significant value for the stakeholders of PepsiCo through synergies driven by a common customer base and distribution platform, shared infrastructure and supplier leverage.

Different competitors in different segments

PepsiCo has created two new groups to market snacks and drinks together and guide snack innovation. The groups are The Power of One Americas Council and the Global Snacks Group. Both will be headed by John Compton. PepsiCo’s full year profit forecast has dropped from $106.4 billion to $95.6 billion whereas its arch rival Coca Cola’s figures increased by $28.3 billion to $162.2 billion. PepsiCo faces different competitors in different segments like Coca Cola, Dr Pepper, Kraft, General Mills, Hershey Kellogg, Danone and Unilever. PepsiCo faced increasing costs for plastic packaging and ingredients.

More tie-ups

PepsiCo is scouting for more tie-ups to push for marketing other companies’ products quite similar to its tie-ups with Tatas and Unilever. PepsiCo has 32 bottling plants. It is adding more in India to cater to its increasing business. Two more bottling plants will be added in the current fiscal year at an investment cost of Rs.1000 crore. One plant will be in the northern region and the other in the southern region. These bottle plants will manufacture PepsiCo’s entire range of beverages including carbonated soft drinks and juices. PepsiCo has also started marketing water brands and beverages outside its manufacturing range. For example, Tata Pepsi joint venture will see the company market the Himalayan brand of water and beverages.

India, one of the top five markets for Pepsi

Among all the international markets, India is one of the top five markets for PepsiCo. PepsiCo is very bullish on India. The other markets are China, Europe and West Asia. The principal business of PepsiCo in India comprises of among others Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. PepsiCo gained entry into India in 1989. Since then, it has invested more than $1 billion in India. In 2008, PepsiCo CEO Indra Nooyi predicted that PepsiCo would invest $500 million in India over a three years period and triple its revenues in a period of five years. The investments will be used for expanding its manufacturing capacity, market infrastructure, environment sustainability initiatives, agriculture, new product development and R&D.

Rich haul of potatoes from West Bengal

For the current festival season, PepsiCo has asked Manish Malhotra to design special PepsiCo cans for Diwali festival. PepsiCo India will have its food plant at Sankrail near Kolkata, a hub for making newer products as it is expanding its portfolio of nutritious and healthy food. PepsiCo has also plans to make this plant as a global benchmark. PepsiCo has already invested Rs.450 crore in West Bengal including for this plant, cold storage and distribution infrastructure. PepsiCo invested Rs.170 crore in this Sankrail unit to more than double its installed capacity to 51000 tonnes per annum. West Bengal government has promised to provide an additional 1.7 acre land for PepsiCo. PepsiCo plans to source nearly 30% of its products from this new plant. Currently this new plant manufactures snacks brands Lay’s, Kurkure, Cheetos and Kurkure Desi Beats. 8500 farmers grow potatoes for PepsiCo in West Bengal. Very soon, this operation will be expanded to cover 10000 farmers. It is the largest potato sourcing hub for PepsiCo. PepsiCo also sources potatoes from other States like Madhya Pradesh, Gujarat, Punjab, Karnataka, Uttar Pradesh and Bihar. PepsiCo is developing special potato seeds in USA through its research. This special variety will increase the life span of potatoes. Soon, it will be brought into India.

Pepsi overtakes Coke in growth rate in India

PepsiCo’s main creative partner in advertising in India is JWT. Now PepsiCo is experimenting with other advertisers also. This strategy is good as relying on one single advertising agency, howsoever good it may be, is not prudent. In North America, PepsiCo is losing its market share in beverages. But in India, the opposite is taking place. PepsiCo is growing twice as fast as its rival Coca Cola. Of course, Coca Cola is still a leader, but the gap is narrowing down because of PepsiCo’s focus on rural markets and increase in its home penetration. In October 2010 (a year back), Coke was growing at a rate of 12% p.a. and PepsiCo at 11%. p.a. Now PepsiCo is growing at 17% whereas Coke is growing only at 8%. Coca Cola is campaigning with the taste the thunder phrase for its Thums Up. But it is PepsiCo that is really stealing the thunder in Indian market. Soft drink is a Rs.11000 crore market in India. Indra Nooyi, an Indian, will be happy to know this growth of her company in her country. PepsiCo expanded its sales force by 25%.

Made best use of Cricket World Cup

PepsiCo expanded its capacity and indulged in an aggressive marketing. It made the best use of the Cricket World Cup in February with its ‘change the game’ campaign. All its brands of beverages – Pepsi Cola, lemon drink Mountain Dew and mango based Slice hit the highest attention during the World Cup. With the launch of its 1 litre pack, it made penetration into many Indian homes. The steep price increases affected by Coca Cola on its beverages amounting to around 15% have also contributed to PepsiCo’s growth as PepsiCo increased its prices only by 5% to 6%. Coca Cola’s Thums Up and Sprite still remain as popular fizzy drink brands in India. But both PepsiCo and Coca Cola are growing slowly now as compared to two years back when their growth rates were at a high of around 25%. Just like automobile companies who look for their growth in India because of the slump in European and American economies, the beverages majors PepsiCo and Coca Cola are both looking for their growth in India.

Commercially sensible decision

PepsiCo and Coca Cola are reducing the amount of plastic in their bottles. This is an environment friendly action on the one hand and makes commercial sense on the other hand. The weight of their PET bottles has been reduced across the brands by an average of 10% - 12%. Coke’s one litre Kinley water bottle now weighs without water 22 gm which is down by 10% from the earlier 24 gm. PepsiCo’s Aquafina one litre bottle weighs 12% less. For every gram reduced, companies save ten paise per bottle. PepsiCo and Coke will be reducing the weight of their bottles further. In the US market, PepsiCo’s Pepsi Cola was pushed to number three spot. It trailed not only Coca Cola, but also Diet Coke. In recent years, more than 15 marketing executives have left PepsiCo in USA. PepsiCo has increased its TV advertising expenditure by 30% in North American markets to fight this challenge of losing market share.

Losing North American market to competitors

Last year, PepsiCo signed a deal to acquire a 66% share in Wimm-Bill Dann Foods OJC, a leading Russian dairy product maker at an investment cost of $3.8 billion. According to Beverage Digest, a trade publication, US sales of Pepsi Cola and Diet Pepsi fell 4.8% and 5.2% in 2010. In the same period, Coca Cola and Diet Coke also fell by 0.5% and 1% respectively. PepsiCo’s health products contribute only 20% of its revenue. Pepsi Cola contributes an annual retail sale value of $20 billion globally. PepsiCo’s Tropicana fruit juices have been losing their market share to Coke’s Simply juice brand. PepsiCo’s Gatorade’s is eaten by Coke’s Powerade. PepsiCo made the marketing mistake of introducing a noisy compostable SunChips bag. Sales starting falling immediately. Indra Nooyi defends herself by saying that concentrating on health foods instead of its top seller Pepsi Cola is to diversify the portfolio as consumers increasingly want healthier foods and beverages. In India, PepsiCo is targeting its low-priced products at 330 million consumers coming from the lower middle class level.

More tie-ups and re-launches

PepsiCo India is planning to export its Kurkure snacks. PepsiCo’s three new variants namely Mumbai Chatpata Usal, Bengali Jhaal and South Spice Mix cater to various Indian markets according to the taste and flavour. It has been priced at Rs.5 for 23 g, Rs.10 for 50 g and Rs.20 for 120 g. PepsiCo and Hindustan Lever are reviving their seven year old joint venture to sell ready-to-drink teas and tea-based beverages. The alliance will also re-launch Lipton Ice Tea in ready-to-drink bottles. This is in response to the tie-up between Coca Cola and Nestle in launching of Nestea ice tea in bottles in India. This is in tune with the consumers’ preference to healthier drinks like fortified juices, teas, vitamin water, energy drinks and milk based drinks over aerated beverages. When Lipton ice tea was introduced seven years back, it was a failure as the concept was ahead of its time. PepsiCo also tied up with Tata Global Beverages to launch a glucose-based beverage costing Rs.5. The drink has been named as Lehar Gluco Plus. It is lemon-flavoured and non-carbonated drink. It was to be rolled out in Maharashtra State first and then spread to other areas. The Himalayan packaged water will also be marketed through this joint venture. India’s health and wellness market will touch a whopping Rs.55000 crore by 2015. Currently it is at Rs.10150 crore.

PepsiCo focussing on Indian market

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