China Consumer

Tasty investment

New R&D centre helps Pepsi cater to local palates

Tasty investment

Try our goji berry porridge too

When Pepsi first launched in China – so the legend goes – the translation of its slogan “Come alive with the Pepsi generation” gained a little something in translation. Instead, shoppers were greeted with a startling promise for a soft drink: that “Pepsi brings your ancestors back from the dead”. (PepsiCo has never denied the story).

Resurrecting the dead may be beyond PepsiCo’s ability. But the company is going out of its way to figure out what tickles Chinese taste buds. Just weeks after operations began at a new food processing plant in Wuhan – its sixth in China, specialising in potato chip production – Pepsi has also announced the opening of a new food and beverage innovation centre in Shanghai. Significantly, it’s the largest such facility outside the United States.

The R&D hub, which cost $40 million to build, includes a pilot manufacturing plant that allows researchers to test how quickly a new product can get from concept to supermarket shelf, so that Pepsi can learn more about reacting faster to competition from China’s homegrown rivals.

Also importantly, the centre will work on designing new products for Chinese consumers, as well as imbuing some of the food and beverage giant’s existing portfolio with a more localised flavour, such as Lay’s hot-and-sour fish-soup potato chips and Quaker Oats’ white fungus oatmeal.

“China will be the largest consumer market in the next decade, and PepsiCo aims to be the largest food and beverage company in the market,” said company chief executive Indra Nooyi, without outlining a specific timeframe.

Compared with rival Coca-Cola, Pepsi has catching up to do. In beverages, PepsiCo has a 4.4% market share in China, trailing Coke’s 15%, according to the most recent data from research firm Euromonitor International. Both companies are operating in an increasingly competitive market, with consumers switching from fizzy drinks to waters, teas, juices and sports drinks. Coke saw its China sales rise 2% in the third quarter after double-digit growth a year ago.

Pepsi’s approach to beverage sales has been to transfer its local bottling operations to Tingyi, the Taiwanese firm behind the Master Kong brand (see our Focus issue, The Magnificent Seven, for more on this company). Tingyi now sells and distributes a number of Pepsi products. The plan, says Tim Minges, PepsiCo’s chairman for Greater China, is to free Pepsi up to concentrate more on product development and marketing of food products.

Snack food is an important part of the strategy (and one where Pepsi outflanks Coke). Euromonitor reckons that sales will reach Rmb77 billion ($12 billion) by year-end, up 44% from 2008. Pepsi’s Nooyi says that there are just a few aisles dedicated to snacks in stores in the US, while in China there can be as many as 10, seling everything from potato chips to duck’s tongue or pig’s feet.

There is also potential for growth. By Pepsi’s count, Chinese consumption of potato chips (crisps to the British) isn’t high: a small bag every two to four weeks per person, compared with 15 bags in the same time period in the United States.

But the new R&D centre will also be critical to broadening some of Pepsi’s healthier lines too, including Quaker Oats. Quaker launched in China two years ago and has found favour with consumers accustomed to eating rice porridge for breakfast. Since then Quaker products have tried to infuse more local flavour, some of them inspired by traditional Chinese medicine, like the current bestseller goji berry.

Pepsi’s latest investment reflects a broader trend in which multinationals are now generating new product ideas for sale in the Chinese market within China itself, says the Financial Times. Previously, they tended to sell products in China that had been created elsewhere or at best only modified for the Chinese consumer.

But that is no longer good enough for a market deemed crucial by most companies.

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