The just-drinks interview - PepsiCo International, part two
PepsiCo returned to the headlines last month, when it announced its plans to buy a major stake in Russian juice company Lebedyansky. The transaction, for a 75% stake in the company - which accounts for 30% of the country's juice market - marked a clear statement of intent for the company in the emerging markets of the world. In the second part of this month's just-drinks interview, PepsiCo International's chairman and CEO, Mike White, tells Olly Wehring of the company's approach in the developing markets, and considers the effect of the current economic climate on the soft drinks giant.
Every drinks company is harping on about the BRIC markets and PepsiCo is no exception. Earlier this year, when posting its full-year results for 2007, the company saw its International division - those markets outside of North America - produce a volumes increase of 9% on 2006, with the Middle East, China, Brazil, Argentina, India and Russia receiving credit for producing strong performances in the year.
"Our emerging markets portfolio continues to be a huge growth engine for PepsiCo, and has been for the last several years," White says. But, he argues, the company has broadened its emerging market presence beyond the big four. "We have a pretty diversified set of emerging markets - it isn't just the BRICs. We've got some outstanding positions in countries like Argentina, Turkey, South Africa, Ukraine, Poland, Vietnam, Thailand, Egypt, Pakistan. So, it isn't just the big ones. In all of those markets, our goal is to continue to broaden our beverage footprint into healthier offerings, and to continue to explode per capita consumption."
Prior to assuming his current role at PepsiCo International in 2003, White served for three years as president and CEO of Frito-Lay's Europe, Africa, Middle East division, so he is well-versed in the perils and pitfalls facing entry into new markets. "Each one has got its own unique opportunities and challenges," he says. "But we're quite pleased with our progress with emerging markets overall, and they're critical for us." The growth of the middle class in these markets is, White believes, key to success for companies like PepsiCo. "I think you've got a huge middle class that is going to be crashing through over the next ten years as the young population in these countries enters into the workforce and crosses into US$5,000 to $10,000 (a year) in income," he says. "That really is a breakpoint in our experience in getting people to consume packaged goods products in general."
|Mike White, chairman and CEO of PepsiCo International|
Once in the markets, however, a company can go one of two ways - either look to steal market share from existing players, or attempt to grow the category outside of its current remit. "There are still a lot of local brands that we've been gaining share from, and we've been doing pretty well in holding our own compared to our global competitors," White says. His previous experience in PepsiCo's snack division, however, has shown White a 'third way'. "In snacks, it's usually about building the category with innovation and locally-relevant snacks. Our success in Russia has been driven by our ability to target snacks and make them locally relevant. We've tried to tap into the pride of consumers in their own customs and traditions.
"On the beverage side," White continues, "it's often a combination of things like getting a local platform like a Lebedyansky and then bringing our technology and innovation to that. We've got some terrific products that we can bring to these markets. So, there's probably an element of gaining share from local brands and competitors, an element of innovation and an element of distribution gains that we're driving in each of these markets. It's pretty well-balanced."
PepsiCo's purchase of Lebedyansky could be seen as an indicator to the company's future approach in emerging markets - acquiring existing local players. Does this mark the end of a 'greenfield' approach? White says not. "We've done greenfields in the snacks market in Russia - we don't rule that out in beverages. You have to look opportunistically and make those calls." In snacks and soft drinks, however, White concedes that it is becoming increasingly difficult to find existing local acquisitions. "In non-CSDs, there may well be acquisition opportunities. In Russia, we did Lipton and Aqua Minerale on a greenfield basis. But I think you'll see a blend of strategies, I don't think you can rely on one versus another."
One other major cause for concern within the soft drinks category, as in all other industries around the world, is the current economic climate, which is threatening to tighten its grip. White is optimistic, however, that the drinks industry will not see a negative effect coming from the consumer direction. "From a top-line standpoint, we have not seen a slowdown," he says. "Our business continues very strong. There may be some countries that have real estate and are heavily financial services oriented, like the UK, where you may see an impact, but I can't say I've seen it on our business yet."
His bigger concern, however, is the effect that rising commodity costs could have going forward. "There's tremendous pressure on agricultural commodity prices right now," he says. "It's requiring us to take some price increases that we normally wouldn't take to cover our costs. I'm cautiously optimistic, but I'm keeping a close eye on our price-volume trade-off as we head into the second and third quarters."
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