China Consumer

Time to can them

Why Pepsi has bought out Chinese JV partner

Time to can them

Will new strategy fizz?

The first time Indra Nooyi, the chairman and chief executive officer of PepsiCo, went to China two years ago she stayed for 12 days. Before the trip she even asked Henry Kissinger to give her a crash course on the country, because she “didn’t want to come here clueless about what was going on,” she told Business Week at the time.

Nooyi also travelled much further afield than most CEOs, visiting not only Beijing and Shanghai, but also the western cities of Chongqing and Xi’an as well as rural Inner Mongolia where Pepsi, maker of Lay’s and other snack foods, operates China’s largest potato farms.

Nooyi said she wanted to demonstrate how important the mainland market is to Pepsi. “China represents our single largest opportunity today outside the US,” she says. “It’s going to remain that way.”

Last May, the soda giant announced plans to invest an additional $2.5 billion in China over the next three years, in addition to the $1 billion investment the company had already announced in 2008. The new spending will be allocated to building new manufacturing facilities and scaling up the company’s research and development operations.

The company is also planning to spend $111 million to buy out the stake in Beijing Pepsi Cola Beverage held by its joint-venture partner Beijing Yiqing, the 21CN Business Herald reported. Pepsi wants to buy back the stake, says National Business News, to turn it around its sub-par financial performance.

Two months ago it also bought out its Shenzhen partner. Buying out regional JV partners also makes it easier for Pepsi to implement its ambitious investment plans unhindered. That matters as Pepsi is looking to catch up with Coca-Cola which has 17.5% of the nation’s soft drinks market, according to Euromonitor International. Pepsi controls only 7%, behind Taiwan’s Tingyi (which owns the brand Master Kong, see WiC67) which has 11%.

“Pepsi will definitely gain more with full control of its business in the Chinese market,” Huang Wei, a food and beverage analyst with China Jianyin Investment Securities told the China Daily.

But Pepsi has not been without setbacks. The US firm lost a lawsuit in December in Chongqing against another former joint-venture partner, Tianfu Cola.

The two beverage firms formed their JV in 1994, when Tianfu Cola was one of the most popular soft drinks in the Chinese market, with more than a 70% market share.

But relations gradually soured. The Chongqing-based firm accused PepsiCo of breaching commitments that at least half of the JV’s products would be under the Tianfu brand. Instead, it said, the JV’s production volume of Tianfu Cola fell from 74% in the first year of cooperation to 0.5% in 2007. The court ruled in Tianfu’s favour, and gave it the right to make its cola again. It says it is determined to start afresh and hopes to make a comeback next year. That could lead to more competition, for Pepsi (and Coke too).

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