PepsiCo and Tingyi Beverage Partnership – Maybe Just a First Step

To be a successful global beverage company, it is important to have a strong presence in China.  PepsiCo is certainly making significant investments in the Chinese market, but even with these investments, PepsiCo is being out-spent by its rival, Coca-Cola.  On top of spending, Coca-Cola has shown an ability to adapt faster to the Chinese market than PepsiCo during the last few years.

Historical context

In 2004, the year Minute Maid Pulpy was introduced, Coca-Cola was the leading soft drinks company with a 12.2 percent share of off-trade value and PepsiCo was second with a 6.6 percent share.  The share differential in 2004 was driven primarily by lemonade/lime carbonated soft drinks, not their namesake colas. 7-Up  had a 14.9 percent share versus Sprite’s 66 percent share.  By 2010, the share differential had become 5.5 percent for PepsiCo soft drinks vs. 15.5 percent for Coca-Cola.

As far as its namesake colas are concerned, PepsiCo has done a relatively good job of keeping up with Coca-Cola, but even here, PepsiCo has lost ground.  In 2004, Pepsi’s 40.1 percent share of off-trade value slightly trailed Coke’s 43.6 percent share.  By 2010, Pepsi had gained +2.2 percentage points (pp) while Coke gained +11.2pp, and the share differential grew to a rather substantial 42.3 versus 54.8.   PepsiCo’s results in China over the past six years are a reflection of being one step behind Coca-Cola.

While PepsiCo was concentrating on cola carbonates, Coca-Cola grew Sprite to be the number one carbonate brand, surpassing Coke and Minute Maid Pulpy to be the number one fruit/vegetable juice brand in China.  In the course of six years, the share differential between PepsiCo and Coca-Cola had grown from under 6pp in share to 10pp.  Clearly PepsiCo had to act.

The partnership with Tingyi not only gives PepsiCo access to 73,000 direct retailers, it also provides local knowledge.  Leveraging the local knowledge with PepsiCo’s global research and development capabilities may be the hidden opportunity.  Clearly this could be a win-win by better directing PepsiCo resources and growing volumes for Tingyi.  It appears that the process has begun on soft drinks.

There may be a bigger strategic opportunity for both PepsiCo and Tingyi

There has been much talk among analysts about PepsiCo splitting into separate beverage and snacking companies.  PepsiCo has insisted its current business model of a combined company offers more value to shareholders than separate enterprises.  It has sighted supply chain efficiencies as the primary reason.

In North America, PepsiCo owns the majority of its bottlers.  Because of this, both PepsiCo beverages and snacks are delivered directly to store on PepsiCo owned trucks.  It would be more efficient to send one truck to every store than two trucks (with two different salesmen).  PepsiCo needs to win the bottler in order to put Frito-Lay products on the same truck as beverages.

Since PepsiCo has just sold its bottling operations in China, it will not be able to sell beverages and snacks through the same distribution channel themselves. The untapped opportunity may be to integrate the marketing and distribution of these two apparently disparate product categories in a way that adapts to the Chinese marketplace.

Tingyi already has a win under its belt; it acquired PepsiCo’s bottling assets at an attractive price.  PepsiCo also has a win in the sense that, with Tingyi’s assistance, its brands now have an opportunity to capture momentum in a very important market.

But the real win for PepsiCo may be in the future by partnering with Tingyi to leverage its snacking portfolio.  PepsiCo has insisted on not splitting the company.  If it is going to catch-up to Coca-Cola in beverages in China, leveraging marketing synergies between beverages and snacks is something Coca-Cola cannot match.

PepsiCo has agreed to license its Tropicana brand to Tingyi.  Perhaps this is testing the waters for a broader strategic alliance between the two companies.  In addition to beverages, Tingyi also has the number one instant noodle brand in China, Master Kong.  If the Tropicana licensing is beneficial for both parties, perhaps PepsiCo would also license the Lays brand.  There may be marketing or new product synergies by a complimentary positioning of Master Kong Instant Noodles, PepsiCo beverages and PepsiCo snacks.  This could only be possible by combining Tingyi’s local knowledge with PepsiCo’s global product development resources.  This may be a case where the value of the combined efforts of PepsiCo and Tingyi are much greater than either company separately.