PepsiCo China- Building Tomorrow’s Enterprise- Authors: Sharat Neppalli & Srilakshmi
Chodavarapu
China has surpassed Japan to
“China will soon surpass the United States to become the largest
become the world's secondbeverage market in the world,” said PepsiCo Chairman & CEO Indra
biggest economy and at its
Nooyi as PepsiCo and Tingyi Holding Corp announced their partnership
current growth rate, analysts
to create a strategic beverage alliance in China in March, 2012
reckon that China will replace the
US as the world's top economy in
about a decade. With a massive
billion-plus population and with an IMF estimated purchasing power parity of $18.98tn in 2016 (U.S $18.81tn), China,
poised to become the largest consumer market by 2020, offers huge potential rewards to consumer goods companies.
Macro-environmental influences and their impact on business:
As the Chinese communist, socialist philosophy continues to have a considerable impact on the political/legal
environment, companies must learn to work in the complex regulatory and legal environment. They must build a
portfolio of products to specifically suit the price-sensitive, local-brand-favouring Chinese. In an economy to be
driven by investment and private consumption, companies that focus on sustainability, have tremendous
opportunity to leverage China’s emerging markets
Environmental Forces
Political
High degree of intervention of Chinese government in nearly
all aspects of business in China
Economic
*The economy grew at 9.2% in 2011 and will drop to a
sustainable 8-8.5% in 2012 due to a self-induced slow-down
*With the YOY inflation in check (peaked at 6.5% in July 2011
and dropped to 3.2% in Jan 2012), the government will have
some allowance to loosen lending and cut interest rates
Social
*Burgeoning middle class, increasing incomes and rising
aspiration for a better life
*With rising inflation, Chinese consumers have become more
price-sensitive and less loyal to their preferred brands
*Consumers regard local brands as their first priority
Technological
*Emphasis on science and technology and R & D through
funding and reform
*Several achievements in education, infrastructure, high-tech
manufacturing, academic publishing, patents, and commercial
applications
Environmental
*Growing popularity of ‘Low-carbon economy’ and ‘green
production’
*The government to strictly impose energy consumption
regulations and environmental protect laws
Legal
*Chinese government is striving to create and enforce
investment-friendly laws
*Local labour bureaus and labour unions are very powerful
Business Implications
Need to identify key decision makers and give sufficient
importance to building government relations
China trying to rebalancing its economy through promoting
investment and private consumption is good news for
consumer goods companies
Benefit from cutting production costs and passing on those
savings to the consumer and building a portfolio of
products that suit Chinese tastes and preferences
With Chinese government highly supportive of indigenous
innovation and research, companies can engineer new
products and new solutions and technologies for greater
productivity and environmental compatibility
*Sustainability should become a primary focus area for
organizations
*Environmental and social initiatives will also help in
earning Chinese government’s goodwill and in branding
*Partnerships and business agreements are still
complicated due to the complex regulatory and legal
environment
*Local leadership is crucial to handle government,
regulatory and labour issues
PepsiCo and China:
The journey of PepsiCo in China has been classified into 4 phases based on key developments and market environment.
The following table shows the market scenario in each phase and corresponding change in actions taken/ strategies.
1981-1994
1994-2001
2002-2010
2011-2012
Key
developments
*1981: Pepsi entered
China market
*1981-1994: Set up Joint
Ventures
1994:
*Set up Pepsi (China)
Investment Company
in Shanghai to oversee all
China operations
*JV with Sichuan
*Frito-Lay entered the
Chinese market
with its popular Cheetos
brand snack
1997: Lay’s Potato Chips
enters China market
*Pepsi-Sichuan Pepsi
controversy: The
contractual JV demanded
higher margins and
better business terms,
complained that it paid
too much for the
concentrate
*Pepsi took legal action
to close down the JV
*Agreed to sell its interest
in 24 soft drink bottlers in
China to Hong Kong-listed
Tingyi Holdings Corp (now
PepsiCo's franchise bottler
in China)
*5% stake of Tingyi-Asahi
Beverages (TAB) now
*Option of increasing its
stake to 20 percent by
2015
Market
Environment
*Unpredictable business
investment climate
*Domination of
Carbonated Soft Drinks Coca-Cola and Pepsi
*Victory of bottled water
like Wahaha, Robust and
Nongfushangquan
*Domination of Coca-Cola
and Pepsi broken by local
competitors
*Rise of branded tea
beverage
*Intense competition
from Coke, with its share
of the Chinese market
more than triple that of
Pepsi (fueled by CocaCola’s Minute Maid
Pulpy)
*Lost money amid
soaring raw material
costs and intense
competition from CocaCola
*Rise in popularity of
fruit juice, represented
by Uni-president’s
Orangeate and Minute
Maid Pulpy
*Growth sectors-fruit
juices and fruit blend
drinks, and tea
*Combination of Tingyi
and PepsiCo creates a new
market with a combined
~20% share
(Morgan Stanley Asia
analyst report)
*Helps continue
concentration on the food
industry
* Broadens its
distribution, allows it to
unload those loss-making
operations
*Helps TAB increase its
fruit juice business
through PepsiCo's
renowned brand names
*Helps late entrant
PepsiCo acquire a greater
share of China's ready-todrink tea market
Growing problems with JVs: Different business goals, structure of management,
issues of financial irregularities, disagreement on development of more local brands
Actions taken
*Took small stakes in
Joint Ventures
*Business model: Sold
drinks concentrate to
Joint Venture partners
(bottlers)
Aggressive strategy:
*Set up 40 wholly owned or
JV bottling plants,
4 snack food factories
*Marketed almost all Pepsi
brands in China
*Spent millions of dollars on
brand building and
advertising
*More investment in JVs
and bottling operations
*More efforts into
marketing, research and
development and food
development
*TAB, partnering with
PepsiCo's current bottlers,
to manufacture, sell and
distribute PepsiCo's
carbonated soft drink and
Gatorade brands
*PepsiCo to retain
branding and marketing
responsibilities
*They are to co-brand
their respective juice drink
brands using Tropicana
brand name
Took several environmental sustainability initiatives
Matching strengths and opportunities:
China’s massive modernization has resulted in a dynamic market where westernized consumers demand new products.
PepsiCo has been able to cash in on this growth with its large portfolio (19 different product lines) of billion-dollar food
and beverage brands. PepsiCo has committed to invest 2.5 billion in China in 2010. Along with this, PepsiCo has made
significant investments in R&D by customizing their products to appeal to the Chinese palette (Eg: Quaker and Congee).
By actively supporting a range of public welfare and agriculture-related development programs such as waterconservation initiatives, China Women's Development Foundation, PepsiCo Library Project etc., PepsiCo has earned
Chinese government’s goodwill and an opportunity to build a strong brand.
Offsetting Weaknesses with Opportunities:
Thwarting threats through strengths:
PepsiCo (with its loss-making bottling business and limited
access to national distribution networks) recognized the
need for a strong local partner to compete with Coca-Cola
and penetrate growing markets. It tweaked its franchise
model in China from its other international markets (where
it acquires bottlers) by selling off its bottling to Tingyi which
will help Pepsi reduce significant distribution infrastructure
costs. This model is especially useful because organized
retail is only about one third of the market while
fragmented trade (small and mid-size stores, corner
groceries, local restaurants and bars is about 60-70% of
sales in CPG category. As this will remain to be a critical
channel, having a local bottling partner will result in
significant competitive advantage.
As PepsiCo wrestled with partnerships, Coca-Cola was already investing in building a direct distribution system. PepsiCo
pursued this challenge by trying to make Pepsi more readily available through a direct sales force. PepsiCo adopted the
expanded distribution network model bringing its products to department stores, mass retailers, wholesalers etc. They
monitored sales, checked stocks, put up displays, and provided personal support for their customers. The down to earth
approach of these ‘sales terminals’ helped PepsiCo in distributor & retailer relationship management and helped Pepsi
to hold its firm grip in China's key cities such as Shanghai and Changchun.
Opportunities and challenges ahead:
The emerging China market is a classic case of
innovation driven growth opportunities and
institutional voids. With great diversity in income
level, education, culture and local and political
atmosphere, Chinese markets present a wonderful
opportunity and challenge to PepsiCo. Companies
like PepsiCo must adopt granular strategies to
develop, market and distribute products in these
diverse micro-markets. The adjacent chart is a
snapshot of the regional disparity in China. Based on
a qualitative study, it clusters the micro-markets.
The chart shows that east and south China regions
are most urbanized, north west is most price
sensitive etc.
Emerging Economies
The following framework for PepsiCo’s growth momentum, innovation and smart sourcing in China can be used to
develop, market and distribute products in these markets.
Sustainable Tomorrow
Organizations like PepsiCo fighting it out in emerging economies are realizing that ‘sustainability’ is not just a distraction
from making profit but is a pro-growth strategy for the longer term. Companies have an implicit social contract to factor
social & environmental aspects as key dimensions in business. The following framework (Target-Manage-Improve)
essays PepsiCo’s ‘Performance with purpose’ for delivering sustainable growth in China. Target-PepsiCo’s sustainability
goals & commitments, Manage-present initiatives and Improve-future initiatives.
Target
● Improve water use efficiency by 20%
per unit of production by 2015
● Strive for positive water balance in
PepsiCo's operations in water
distressed areas
● Provide access to safe water to 3
million people in developing countries
Water
Manage
● Reduced water and energy use
by 40%, amounting to savings of
15.6 million tons of water and 600
million kwh of energy
● Introduced water conserving
drip and sprinkler irrigation in its
farms, reducing water use by 50%
over conventional flood irrigation
techniques
Improve
● Commitment of $8 million to
construct rural water cellars,
centralized water supply projects and
new water purification systems to
provide safe drinking water to more
than 500,000 people in China
● Continued association with All
China Women’s Federation in
providing clean drinking water access
to over 58,000 Chinese citizens
Target
● Improve electricity use efficiency by
20% per unit of production by 2015
● Reduce fuel use intensity by 25% per
unit of production by 2015
● Reduce packaging weight by 350
million pounds, avoiding creation of 1
billion pounds of landfill waste by 2012
Target
● Apply proven sustainable agricultural
practices on farm lands
● Provide funding and technical
support to local farmers
● Promote environment education and
best practices among associates and
business partners
Energy & Recycling
Manage
● The use of electricity rather
than diesel to cut CO2 emissions
by 4,165 tons
● Investment plans of $3.5 billion
to develop local R&D capability to
fund agricultural projects to
reduce carbon emissions
Farming
Manage
● Partnership with Government
to invest in R&D to accelerate the
development of the countryside
Improve
● Development of Environment
Sustainability Learning Center to
educate others on the importance of
energy conservation
● Push to convert all bottling plants
to LEED Gold and LEED Silver
standards
Improve
● Investment of more than RMB 200
million in agriculture‐related
development programs
● Using best practices and setting up
demonstration farms: PepsiCo potato
farms in China yield 45 tons per
hectare, among the highest yields in
the world
● Contract Farming for yield
improvements and reduced financial
risks for the farmer
Summary
This paper discusses the Chinese macro-environment and its impact on consumer goods companies. It analyzes
PepsiCo’s journey in China through classifying phases based on key developments, analyzing the market scenario in each
phase and corresponding change in PepsiCo’s actions/ strategies. It evaluates how PepsiCo used its strengths to take
advantage of opportunities, offset its weaknesses by opportunities and thwarted competitive threats by using its
strengths. It lays out a framework for PepsiCo to succeed in the complex emerging Chinese markets and essays through
a ‘Target-Manage-Improve’ model PepsiCo’s sustainable growth deliverables and initiatives.
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