PepsiCo has worked with Serm Suk in Thailand for over half a century

PepsiCo has worked with Serm Suk in Thailand for over half a century

PepsiCo's partnership with Serm Suk is under threat after 59 years, signalling the dawn of a new and inevitably challenging era for the soft drinks firm in the country.

Serm Suk has been an exclusive distributor of Pepsi brands since 1962, and will continue distributing PepsiCo's products until November next year. However, advance termination by Serm Suk of this contract and PepsiCo's subsequent agreement to sell its 41.5% stake in the company this month, means that the US soft drinks giant may have to make alternative arrangements in Thailand.

The cracks in the tie-up have been apparent for several months. In April, Serm Suk's president and CEO, Somchai Bulsook, sent a contract termination notice to PepsiCo due to the two firms being unable to agree new terms on distribution. The contract has another 14 months of life, but, at this stage, is not set to be renewed.

This month, Thai Beverage (ThaiBev) announced that it would scoop up Serm Suk for THB15.42bn (US$514m). The acquisition will allow it to leverage Serm Suk's efficient logistics and distribution systems, as well as expand its portfolio of non-alcoholic drinks in the country.

PepsiCo may have felt it was left with no choice but to sever its ties with the Thai bottler completely, particularly given that it also failed in its attempt to purchase a majority share in the company last June.

Datamonitor consumer packaged goods analyst, Michael Hughes, told just-drinks: "The announcement by PepsiCo to sell its stake in Serm Suk follows a rejected acquisition of the Bangkok company made by the multinational, highlighting the decision to sell was not the preferred option by PepsiCo and means it has to adjust its strategy in Thailand." 

On ThaiBev, Hughes added: "The deal is beneficial for ThaiBev as it will help boost their non-alcoholic beverage operations as they look to profit from a soft drinks market that generates more value than neighbouring countries such as the Philippines, Taiwan and Malaysia, as well as recording an impressive overall growth rate of 17% over the period 2005-2015."

For PepsiCo, however, the deal raises serious questions as to the company's future distribution plans in the THB36bn Thai soft drinks market.

Zack's Equity Research has cited PepsiCo's vulnerability to currency translations, and a possible inflationary impact of around $1.4bn to $1.8bn in the country, as stumbling blocks to going it alone. The company will also face fierce competition from local conglomerates that have decent financial backing.

Of course, PepsiCo does have alternatives. It could set up its own logistics system, albeit at some cost. Perhaps the most sensible option would be to attempt to patch things up with Serm Suk's new owner.

Given Serm Suk's huge distribution network of over 300,000 outlets, PepsiCo might want to look at building bridges with the bottler - at least in the short-term anyway. It could take PepsiCo years to build up its own bottling and distribution systems.

Nonetheless, PepsiCo appears confident of retaining its presence in the Thai market and has said it will continue looking at its options in the country. Hughes believes the Serm Suk sale is unlikely to deter PepsiCo from increasing its presence in Thailand.

"Although the move will be a set-back for PepsiCo, it has stated that it still recognises Thailand as a market that offers long-term opportunities and plans to formulate products that specifically match the preferences of Thai consumers," he said. "This means it will be well placed to capitalise on the 21% forecasted growth that the [soft drinks] market is expected to record over the period 2010-2015."

It could be an anxious few months as PepsiCo waits for the Serm Suk dust to settle.