PepsiCo’s portfolio moves in a healthy direction via acquisition

PepsiCo has announced that it has reached an agreement to buy a 66% stake in Russian dairy, baby food and juice manufacturer Wimm-Bill-Dann for US$3.8 billion.

Wimm-Bill-Dann is Russia’s leading packaged food and fourth largest soft drinks manufacturer, with a well-established presence in most CIS and Central Asian markets.

The company’s total retail value sales reached US$3.6 billion in 2009. With this acquisition, PepsiCo will fulfil more than one of its strategic objectives – enhancing its operations in wellness-related food and drink categories and also strengthening its position in emerging markets.

Enhanced operations in health-related food and beverage categories

With PepsiCo’s core categories seriously affected by growing consumer concerns about health issues such as obesity, a growing focus on health and nutrition is central to PepsiCo’s progression in both packaged food and soft drinks.

One of the company’s specific objectives is to increase its nutrition business from around US$10 billion to US$30 billion by 2020. The integration of Wimm-Bill-Dann will mean an instant increase from US$10 billion to over US$13 billion.

PepsiCo’s current presence in Russia and wider Eastern Europe is limited to sweet and savoury snacks, but the ownership of the majority stake in Wimm-Bill-Dann will secure it the leading position in Russia in strongly health-associated categories, such as dairy, baby food and fourth position in fruit/vegetable juice.

The fact that four of the top five dairy labels in Russia (Domik v Derevne, Vesely Molochnik, Chudo and M) belong to Wimm-Bill-Dann demonstrates the high brand equity in such a category over which PepsiCo will gain instant control.

Additionally, PepsiCo will also be the majority owner of 38 production plants and an established distribution network in Russia, which will further strengthen its manufacturing capabilities in the region.

Expansion in emerging markets

The company has already established a global presence and is focused on further expanding its coverage of emerging markets, which are seeing rising purchasing power, changing lifestyles and developing retail networks drive significant growth.

While it is focused on the global development of major brands, PepsiCo is also seeking to benefit from strong local/regional labels.

Battle of the multinationals in the Russian dairy market

Competition is heating up in the Russian dairy market. Just within the last few months Danone merged its Fresh Dairy operations with Unimilk and now PepsiCo is assuming market leadership through acquisition.

Russia’s dairy market remains a focus for many expanding dairy players. For example, previous to the two most recent Danone and PepsiCo moves, Lactalis acquired the Yefremovsky milk processing plant.

The country’s dairy market is expected to outperform the Eastern European region as a whole with a 4% CAGR over 2010-2015, and in absolute retail value terms the country will account for some 60% of regional market growth over the period, although volume growth is expected to remain below value growth, at less than a 3% CAGR, indicating an increase in unit price and stiff competition in the dairy market’s health and wellness categories.

Competition to achieve a health-focused positioning, both in emerging and developed markets, is becoming increasingly intense between major packaged food players.

PepsiCo needs to refine its health-oriented innovation and marketing, targeting particular consumer groups and health requirements more precisely in order to successfully drive growth with its newly acquired assets and look for further expansion in this direction.