--- title: "First Revealed: The Real Reason Behind PepsiCo's Investment in WuGuFang is Not Purely Financial" description: "Over a month ago, an equity acquisition deal in China's food industry not only broke PepsiCo's recent record of no acquisitions in China but also sparked curiosity about the logic behind it. Last Friday, WuGuFang (1837.HK) held its 2019 interim results conference, providing an excellent window into the deal. Data shows that less than a year after listing on the Hong Kong Stock Exchange, WuGuFang, known as the 'second-largest natural health food company in China,' received an olive branch from PepsiCo." author: "小食代" publisher: "New Distribution" email: "zhaobo258@gmail.com" telephone: "+8615854817671" published: "2019-09-03" categories: "Capital, Earnings & M&A" language: "en" canonical: "https://xinjignxiao.com/en/articles/first-revealed-the-real-reason-behind-pepsico-s-investment-in-wugufang-i-330bcb3f/" markdown: "https://xinjignxiao.com/en/articles/first-revealed-the-real-reason-behind-pepsico-s-investment-in-wugufang-i-330bcb3f.md" original_source: "https://mp.weixin.qq.com/s/KpNMHUNigHM2GImNH9DRrA" translation: "https://xinjignxiao.com/zh/articles/%E9%A6%96%E5%BA%A6%E6%8F%AD%E5%BC%80-%E7%99%BE%E4%BA%8B%E5%85%A5%E8%82%A1%E4%BA%94%E8%B0%B7%E7%A3%A8%E6%88%BF%E7%9A%84%E8%83%8C%E5%90%8E%E5%8E%9F%E5%9B%A0-%E5%B9%B6%E9%9D%9E%E7%BA%AF%E8%B4%A2%E5%8A%A1%E6%8A%95%E8%B5%84-330bcb3f.md" attribution: "New Distribution — https://xinjignxiao.com/en/articles/first-revealed-the-real-reason-behind-pepsico-s-investment-in-wugufang-i-330bcb3f/" citation: "小食代. “First Revealed: The Real Reason Behind PepsiCo's Investment in WuGuFang is Not Purely Financial.” New Distribution, 2019-09-03. https://xinjignxiao.com/en/articles/first-revealed-the-real-reason-behind-pepsico-s-investment-in-wugufang-i-330bcb3f/" usage_policy: "https://xinjignxiao.com/ai-policy.txt" --- # First Revealed: The Real Reason Behind PepsiCo's Investment in WuGuFang is Not Purely Financial > Over a month ago, an equity acquisition deal in China's food industry not only broke PepsiCo's recent record of no acquisitions in China but also sparked curiosity about the logic behind it. Last Friday, WuGuFang (1837.HK) held its 2019 interim results conference, providing an excellent window into the deal. Data shows that less than a year after listing on the Hong Kong Stock Exchange, WuGuFang, known as the 'second-largest natural health food company in China,' received an olive branch from PepsiCo. Over a month ago, an equity acquisition deal in China's food industry not only broke the record of the US food and beverage giant PepsiCo having made no acquisitions in China in recent years, but also made outsiders curious about the logic behind it. Last Friday, WuGuFang (1837.HK) held its 2019 interim results conference, which became an 'excellent window' for outsiders to peek into this deal. Data shows that less than a year after listing on the Hong Kong Stock Exchange, WuGuFang, which claims to be the 'second-largest natural health food company in China,' received an 'olive branch' from PepsiCo. Xiaoshidai noticed that at the results conference, Gui Changqing, founder and chairman of WuGuFang, shared for the first time the details of the contact with PepsiCo's senior management in China regarding the investment, as well as the framework for future cooperation between the two sides. She believes that the growth of China's natural health food industry is obvious to all, and both domestic and foreign companies are exploring market opportunities in this area. 'The announcement by PepsiCo at the end of July to invest in WuGuFang is a good proof of that,' Gui Changqing said at the meeting. It is reported that PepsiCo plans to send a senior executive to WuGuFang to serve as a director, and WuGuFang may issue an announcement next month. **PepsiCo's senior management personally drove the deal** On July 26 this year, PepsiCo announced an investment of approximately $131 million (over RMB 900 million) in China to acquire a 26% stake in WuGuFang Food International Holdings Co., Ltd., making it the second-largest shareholder, second only to Gui Changqing in terms of shareholding. Looking back at the materials released by PepsiCo at the time, the official announcement quoted Ram Krishnan, CEO of Greater China, as saying that WuGuFang's business is 'outstanding,' with strong growth and good profitability. 'This time, PepsiCo's investment decision (in WuGuFang) was very fast,' Gui Changqing said at the meeting last Friday. She said that the pace of PepsiCo's advancement of the investment in WuGuFang did not go through the long process that is usually understood for Fortune 500 companies, from the China region up layer by layer to the global headquarters. She revealed to investors that the investment was personally driven by Ram Krishnan, CEO of Greater China, and added that Krishnan, who also serves as a global executive at PepsiCo, 'spent a lot of time' promoting the actual cooperation with WuGuFang. This shows that the investment was highly valued by PepsiCo. WuGuFang stated that during the entire transaction process, Krishnan maintained efficient and frequent contact with senior management including Gui Changqing, founder and chairman, and CEO Zhang Zejun. It also described that PepsiCo highly recognized WuGuFang's position as a leading company in the natural health food field and expressed admiration for WuGuFang's understanding and insight into China's natural health food industry. The transaction between the two sides has now been successfully completed. In addition, it is understood that PepsiCo will also send a director to WuGuFang, who is said to be 'a very important executive in PepsiCo China and a very senior executive in the consumer goods industry.' **Definitely not a pure financial investment** Regarding the latest progress of cooperation between the two sides, which many investors are concerned about, Gui Changqing said that the specific progress of cooperation between WuGuFang and PepsiCo is not convenient to disclose in detail, but this investment by PepsiCo in WuGuFang is definitely not a pure financial investment. 'They place more emphasis on deeper cooperation in the Chinese market in the future,' Gui Changqing said. WuGuFang said that the company and PepsiCo have conducted some discussions on the framework for future cooperation. **'Future cooperation will be full value chain cooperation, including all channels, special catering channels, innovative product portfolios, manufacturing, and management, among other aspects.'** In WuGuFang's view, in the future, it can leverage PepsiCo's strong sales network and penetration rate built over more than 40 years in the Chinese market, as well as its strengths in brand building, key account management, production R&D, and efficiency improvement, which are highly complementary to WuGuFang, to bring new momentum to its own development. **However, Gui Changqing also roughly revealed the future direction of cooperation between the two sides, including 'visible parts' and 'invisible parts.'** **The invisible parts refer to the integration of supply chains, talent exchange, and the exchange and learning of management systems behind the scenes. The visible parts are that 'in the near future, we will see WuGuFang products appear on more shelves, and the operators behind the shelf resources will not be WuGuFang itself.'** It is not difficult to see that for WuGuFang, PepsiCo's strong channel advantages are one of the resources it values most. 'With the hand-in-hand cooperation with PepsiCo, I believe we don't have to work very hard to rebuild our channels,' Gui Changqing said. She believes that WuGuFang has resources in R&D, production, and branding, and by grafting PepsiCo's channels, it can greatly help its channel development project called 'New Continent' and its grain meal replacement product project. **Favoring 'down-to-earth' innovation** In Gui Changqing's view, PepsiCo's interest in WuGuFang is not only because it is optimistic about the prospects of China's natural health food industry, but also because the latter is 'down-to-earth.' **She said that during the short few months of contact between the company team and the PepsiCo team, the latter conveyed the message that China is a huge market and, compared with the global perspective, also has good market opportunities.** **'But facing the changes in the Chinese market and consumers, we can no longer do business with traditional thinking. They (i.e., PepsiCo) are very eager for change,' Gui Changqing said.** She described that what PepsiCo is most interested in about WuGuFang is its digital operation and customer reach capabilities. Currently, WuGuFang has its own 'data bank,' and its WeChat official account has 7.5 million followers. In addition, over the past three years, the company's WeChat official account follower operation and sales revenue started from zero and reached RMB 120 million last year. In fact, both Krishnan and PepsiCo's global CEO Ramon Luis Laguarta have shown high attention to innovation and digitalization in China. Data shows that in April this year, during his visit to China, Laguarta led PepsiCo's Asia Pacific, Middle East, and North Africa senior management team to visit Alibaba, specifically discussing product innovation, consumer communication, and digital operation capabilities. Ram Krishnan, President and CEO of PepsiCo Greater China And Krishnan, who is quite skilled in social marketing, has significantly increased the company's social marketing efforts since he took over as the new head of Greater China. For example, earlier this year, PepsiCo's cereal brand Quaker used the APP most favored by elderly consumers to market and promote its new product 'Chia Seed Mixed Instant Oatmeal.' Xiaoshidai introduced in April this year that PepsiCo's Chairman and CEO Ramon Luis Laguarta visited China, during which he revealed for the first time PepsiCo's latest strategy in China. At that time, he pointed out that over the past 12 years, PepsiCo had invested more than RMB 48 billion in China. Ramon Luis Laguarta, Chairman and CEO of PepsiCo Laguarta said that PepsiCo's way of growing in China is to respond to changing demands by focusing on the future and to regard the company as a true partner of China. He said that at the category level, PepsiCo, which has both snacks and beverages, will invest more funds to seize more market share and is committed to responding to various consumer demands. 'From indulgent to functional products, from social occasions to personal enjoyment, from value for money to premium value, and across all consumption occasions from morning to night.' He also emphasized that **China is and will continue to be one of PepsiCo's growth engines, and it is necessary to provide more nutritional products to Chinese consumers.** According to his introduction, because consumers in China's big cities are becoming more mature and picky in food choices, new demand for healthy food choices has been driven. 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