In 2005, PepsiCo, Inc. (NYSE:PEP) generated around 61% of its sales from the U.S., which moderated to 51% in 2012. The brilliance of this move lies in the fact that U.S. and other developed markets like Canada and the U.K. are mostly growing at single-digit rates while developing and emerging markets are often clocking double-digit growth rates.
The hub of activities is where else, but Asia?
PepsiCo, Inc. (NYSE:PEP) is focusing on Asia for a good reason. During the first quarter, organic beverage volumes in China grew 17% and organic snack volume grew a whopping 47%. Organic revenue was up 37% in Pakistan, 9% in India, and over 20% in Saudi Arabia, Vietnam, and the Philippines.
This is just the tip of the iceberg. The potential of these markets are huge. And PepsiCo is making all the right moves.
Driving growth in China
Distribution is a big challenge in China and PepsiCo has found an excellent solution to tackle this. In 2012, it entered into a joint venture with China’s biggest food and beverage company, Tingyi. Under this venture, PepsiCo, Inc. (NYSE:PEP) will utilize Tingyi’s enormous network for distributing all its beverages across the length and breadth of China.
The results are already visible in the first-quarter numbers. It is quite significant that rival The Coca-Cola Company (NYSE:KO) generated just 1% volume growth in China during the same period.
The maker of Lays and Quaker is also capitalizing on the thriving snack market in China. It has a deal with Swiss market expansion specialist DKSH for pushing its food products into China together with other nearby markets.
At the same time, the company set up a snacks plant in Wuhan in July 2012. PepsiCo, Inc. (NYSE:PEP) is focusing on producing local flavors to increase its penetration further.
So, the doubling of snack revenue that we saw in China in the first quarter is just the beginning.
Sponsoring IPL in India
PepsiCo had secured the title sponsorship of the annual Indian cricket tournament called ‘Indian Premier League’ or IPL for a period of five years. The competition happens in midsummer each year which coincides with the peak demand season for all soft drink makers. So, the timing is perfect.
PepsiCo, Inc. (NYSE:PEP) has paid around $73 million for securing this deal and is expecting returns of around six to seven times. It waits to be seen whether this move can help the company close the gap with The Coca-Cola Company (NYSE:KO), which rules the market with approximately double the market share.
The Indian soft drinks market is growing rapidly and is expected to double to $18.2 billion by 2017 according to Euromonitor.
Pepsi Smash in Pakistan
PepsiCo is sponsoring a music show on television called Pepsi Smash in Pakistan. Such sponsorship is not unusual or uncommon for the company, but what is significant is that The Coca-Cola Company (NYSE:KO) sponsors a similar show called Coke Studio which is highly successful.
The show went on air in 2008 and is presently into its fifth season. The success of this show is often regarded as a key factor for the large market share gains that Coke made immediately after. According to a WSJ report, in the 1990s, Coke had 20% share compared to Pepsi’s 80%. But by 2010, the dynamics changed to 35% share of Coke and 65% of Pepsi.
So now that PepsiCo is trying to repeat the trick, it would be interesting to see the ripples that it creates. In any case, irrespective of any shift in market share, a huge promotion such as this is surely going to generate additional demand for the brand.
Entering Afghanistan
PepsiCo has announced that it will set up a plant in Afghanistan which would be up next year. This will be the first time that the company will produce its drinks locally in this country. So far, people of Afghanistan had to quench their thirst with the PepsiCo drinks that would be imported from Pakistan.
The country is going through a phase of transition as foreign troops are leaving after 13 continuous years of warfare. And it is expected that eventually there would be a phase of economic development which would support higher demand for consumer products. PepsiCo is planning to be a beneficiary when that happens.
Coca-Cola had started its manufacturing here in 2006.
Asia beckons all
With Coca-Cola and PepsiCo, Inc. (NYSE:PEP) both focusing on Asian markets, it is imperative that the cola wars will heat up in the region. But, irrespective of whoever garners a higher share, the fact remains that these markets are still highly untapped.
Coca-Cola has estimated that compared to 403 servings of its products per person annually in the U.S., it is just 38 servings in China and only 12 in India. Given the fact that a lot of these countries have huge populations and are witnessing their early waves of economic development or are about to do so, their potential is huge.
During the first quarter, Coca-Cola reported revenue of around $2 billion from Eurasia & Africa and Pacific segments combined, and a total operating profit of $884 million from these regions. On the other hand, PepsiCo had revenue of $1 billion from its Asia, Middle East, and Africa segment and earned an operating profit of $184 million.
Even Dr Pepper Snapple Group Inc. (NYSE:DPS), which is more or less happy sticking to North America, is warming up to the lure of Asia. As a first step, it recently re-acquired distribution rights of its Snapple brand tea, juices, and some other non-carbonated beverage brands from Mondelez. While any immediate boost in sales is unlikely, it would be interesting to see if the company formulates a strategy for the Asian markets.
Summing up
The future of PepsiCo, Inc. (NYSE:PEP) lies in new markets like Asia. The company is already following a clear cut strategy in the region and is not letting any opportunities go by. As the investments start yielding results, these markets can be significant catalysts for future growth.
The article This Beverage Giant Has Its Eyes on Asia originally appeared on Fool.com and is written by Eshna De.
Eshna De has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Eshna is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
