China Consumer

Pepsi’s challenge

US firm inks key deal with noodle giant Tingyi

Pepsi’s challenge

Old strategy gets canned

Multinationals have long maintained that localisation is key to successful sales in China, and Indra Nooyi, Pepsi’s chief executive, extolled it again this week: “To win globally, we need to have absolutely the best business partners locally.”

Nooyi was referring to Pepsi’s announcement that it was selling its Chinese bottling operations to Tingyi, the Tianjin-based (but Taiwanese-owned) firm best known for its Master Kong brand of instant noodles.

In return, Pepsi will take a 5% stake in Tingyi’s beverage subsidiary, which will also become its franchise bottler in China.

The US company also has an option to expand that holding to a 20% stake by 2015.

The move marks Pepsi’s latest effort to catch up with rival Coca-Cola, which has 16.8% of China’s soft drinks market, says market research firm Euromonitor.

Pepsi controls 5.5%, behind Master Kong, which has 14.4% share of the market.

Under the deal, Tingyi will sell and distribute Pepsi’s carbonated beverage and Gatorade brands, as well as co-brand its juice products with Tropicana. Pepsi also says that the joint venture will allow it to distribute more efficiently across China and cut costs. Pepsi’s expertise in soft drink production will be welcome at Tingyi too, as it steps up its challenge to Coke, says Zhou Siran, a food industry expert.

Xinhua reckons the tie-up marks a long-awaited foray from Tingyi into carbonated drinks. The company already dominates China’s instant noodle market, says CBN, with a 57% share of sales, as well as other beverage categories like bottled tea (54%). Tingyi also enjoyed 21% of the juice market as of June this year (see WiC67).

Further, the deal allows Pepsi to exit the bottling business in China. In issue 92, we reported that it had bought out one of its bottling partners Beijing Yiqing because it had been bleeding cash, and performance on a wider front has been disappointing. According to a Tingyi statement, Pepsi’s bottling operations reported an after-tax loss of $45.5 million in 2009, which widened to $175.6 million in 2010.

“The deal would greatly benefit Pepsi, as the bottling industry has very low margins and gas, shipping and real estate costs are rising,” Shaun Rein, founder of Shanghai-based consultancy China Market Research Group, told the Wall Street Journal.

Rival Coke has had much better luck with its bottling partners, having taken an early decision to concentrate on joint ventures with partners such as state-owned giant COFCO, as well as Swire Pacific, a Hong Kong-based firm with long-term relationships in China (Coke maintains major equity positions in these joint ventures).

That strategy paid off. Coke now has distribution in almost every province and beverage volume rose 11% in the third quarter. Juice volumes grew faster at 19%, thanks to the continued strength of its Minute Maid Pulpy brand. The orange juice drink has been a major success, becoming Coke’s first “emerging market” brand to surpass $1 billion in sales.

Pepsi has other challenges in China says Doug Young, a former China news chief at Reuters, who wrote ths month that the Pepsi name is poorly recognised due to ineffective marketing. Its main juice drink brand, Tropicana, is also a “relative unknown,” Young warned in his industry blog. “Pepsi needs to grasp the importance of marketing in China… otherwise this latest tie-up with Tingyi could end up as hollow as an empty bowl of noodles.”

Pepsi boss Nooyi will be hoping too that the new partnership works out much more positively, although the proposed deal now has to negotiate China’s anti-monopoly legislation.

The combination of the two companies is also bound to raise concerns among competitors, with one analyst telling CBN that the deal may not get the required approvals.

Apparently, the combination of “a Taiwanese firm and an American company” might not bode well in Beijing, either.

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