PepsiCo, Inc. (PEP): This Beverage Giant Has Its Eyes on Asia

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PepsiCEO Indra Nooyi often talks about the PepsiCo, Inc. (NYSE:PEP) algorithm, which calls for balancing out growth initiatives between developed, developing, and emerging markets. It is heartening to see that management is delivering on this strategy. Over the last 7-8 years, the company has increased its focus on more geographic diversification and has created a success story out of this.

In 2005, PepsiCo, Inc. (NYSE:PEP) generated around 61% of its sales from the U.S., which moderated to 51% in 2012. The brilliance of this move lies in the fact that U.S. and other developed markets like Canada and the U.K. are mostly growing at single-digit rates while developing and emerging markets are often clocking double-digit growth rates.

The hub of activities is where else, but Asia?

PepsiCo, Inc. (NYSE:PEP) is focusing on Asia for a good reason. During the first quarter, organic beverage volumes in China grew 17% and organic snack volume grew a whopping 47%. Organic revenue was up 37% in Pakistan, 9% in India, and over 20% in Saudi Arabia, Vietnam, and the Philippines.

This is just the tip of the iceberg. The potential of these markets are huge. And PepsiCo is making all the right moves.

Driving growth in China

Distribution is a big challenge in China and PepsiCo has found an excellent solution to tackle this. In 2012, it entered into a joint venture with China’s biggest food and beverage company, Tingyi. Under this venture, PepsiCo, Inc. (NYSE:PEP) will utilize Tingyi’s enormous network for distributing all its beverages across the length and breadth of China.

The results are already visible in the first-quarter numbers. It is quite significant that rival The Coca-Cola Company (NYSE:KO) generated just 1% volume growth in China during the same period.

The maker of Lays and Quaker is also capitalizing on the thriving snack market in China. It has a deal with Swiss market expansion specialist DKSH for pushing its food products into China together with other nearby markets.

At the same time, the company set up a snacks plant in Wuhan in July 2012. PepsiCo, Inc. (NYSE:PEP) is focusing on producing local flavors to increase its penetration further.

So, the doubling of snack revenue that we saw in China in the first quarter is just the beginning.

Sponsoring IPL in India

PepsiCo had secured the title sponsorship of the annual Indian cricket tournament called ‘Indian Premier League’ or IPL for a period of five years. The competition happens in midsummer each year which coincides with the peak demand season for all soft drink makers. So, the timing is perfect.

PepsiCo, Inc. (NYSE:PEP) has paid around $73 million for securing this deal and is expecting returns of around six to seven times. It waits to be seen whether this move can help the company close the gap with The Coca-Cola Company (NYSE:KO), which rules the market with approximately double the market share.

The Indian soft drinks market is growing rapidly and is expected to double to $18.2 billion by 2017 according to Euromonitor.

Pepsi Smash in Pakistan

PepsiCo is sponsoring a music show on television called Pepsi Smash in Pakistan. Such sponsorship is not unusual or uncommon for the company, but what is significant is that The Coca-Cola Company (NYSE:KO) sponsors a similar show called Coke Studio which is highly successful.

The show went on air in 2008 and is presently into its fifth season. The success of this show is often regarded as a key factor for the large market share gains that Coke made immediately after. According to a WSJ report, in the 1990s, Coke had 20% share compared to Pepsi’s 80%. But by 2010, the dynamics changed to 35% share of Coke and 65% of Pepsi.

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