Pepsi increases marketing, R&D after swap in bottling operations

PepsiCo Inc is putting more effort into marketing, research and development and food development in China after it swapped its holdings in its bottling operations in China for a stake in a leading Chinese drink maker, Indra Nooyi, company CEO, said.

At the end of March, PepsiCo and Tingyi Holding Corp announced the formation of a strategic alliance in China. As a result, Tingyi's beverage subsidiary has become PepsiCo's franchise bottler in China.

"The strength of both companies will help make the products available for Chinese consumers in an affordable way," Nooyi told China Daily at the Boao Forum for Asia Annual Conference 2012.

In the agreement, PepsiCo is to retain control of the branding and marketing in the drink business while Tingyi is to oversee manufacturing, sales and distribution in China, Nooyi said.

The US beverage and food company transferred its stake in its Chinese bottling operations to Tingyi. In exchange, PepsiCo received a 5-per cent indirect equity interest in Tingyi's drink subsidiary. PepsiCo also has an option to raise the proportion of its holding to 20 per cent by 2015.

Nooyi said her team has spent a lot of time becoming familiar with Wei Ing-chou, Tingyi chairman.

"In this case, the cultural fit is very good," Nooyi said.

Tim Minges, chairman of PepsiCo Investment (China) Ltd, said the deal merely changed the ownership of the equity interest in the local bottling operations and that nothing else will be changed.

"We guarantee the jobs and give all employees a two-years' guarantee," he said.

Analysts said Tingyi, also known as "Master Kong" in China, could help PepsiCo better position itself in the fast-growing Chinese market, and again an edge over its long-term competitor Coca-Cola Co.

Coca-Cola's sales were up by 13 per cent in China last year. It opened its 42nd bottling plant in China on Thursday.

PepsiCo has 23 bottling plants in China with another under construction. Minges said the company's soft drink business also enjoyed "solid double-digit" growth in 2011.

PepsiCo announced plans in 2010 to invest $2.5 billion in its China business over the next few years. The partnership with Tingyi is part of that, Minges said.

"The bigger story here is that while we do beverages with Tingyi, we can continue to concentrate on the food industry," Nooyi said.

PepsiCo also plans to open its largest research and development center in Asia and a pilot plant in Shanghai later this year, executives said.

It will employ over 100 scientists and will work toward developing new food and beverage products for both China and the rest of Asia, said Minges.

Innovation will help it bring such goods to market faster, he said.

"Today, if we have a sample, we have to send it to Chicago," he said. "And they send the sample and we test it. In the future, we can make and test the food downstairs."

Both China and India rank among the top five countries for PepsiCo globally in their potential for growth, Nooyi said.

The Chinese market for food and beverages will continue to grow by double-digit rates every year for the next five to 10 years, the company predicted.

The biggest difficulty for companies such as PepsiCo will be to keep up with the pace of growth in China, said Nooyi, adding a priority for the company will be to build a supply chain in China.

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