In recent years, Pepsi's investments have been directed towards increasing production capacity, expanding new market channels, product shelving, and freezing machines, rather than traditional distributors.

Pepsi's Spring Festival advertisement "Bring Happiness Home, Enjoy a Fragrant New Year" has been widely shared across major platforms. However, a distributor told Beijing Business Today that, unlike previous years, Pepsi has reduced its investment in the beverage sector's channels, even owing distributors nearly one million yuan in promotional fees.

In the eyes of industry insiders, this is an important reason why PepsiCo Beverages has fallen behind in its competition with Coca-Cola. Additionally, compared with Coca-Cola, a bigger problem for PepsiCo Beverages is its lag in product R&D, failing to keep up with the development trends of China's beverage industry.

-01- Breaking Dependence

At the turn of the year, a distributor from Heilongjiang told Beijing Business Today that in recent years, PepsiCo Beverages has changed its original high-investment style and significantly reduced investment in channel promotion.

The distributor told Beijing Business Today, "Pepsi once maintained competition with Coca-Cola through high investment. But in recent years, it has invested less and less in channels, and has asked distributors to advance some promotional fees, yet has been slow to repay the debts. Many distributors have suffered losses. One distributor in the Heilongjiang region has been owed nearly one million yuan in promotional fees."

In response, Beijing Business Today interviewed a Pepsi-Cola spokesperson, but received no reply by press time.

According to the aforementioned distributor, in a prefecture-level city in Heilongjiang, sales of Pepsi's beverages have been unsatisfactory. There was a verbal agreement with a Pepsi-Cola representative, and the distributor advanced many fees, which are now difficult to recover. To recover the advanced payments without terminating the contract, the distributor is in a dilemma.

Industry insiders say that this is because, under the pressure of new retail channels, Pepsi has reduced its dependence on traditional distributors.

It is understood that in recent years, Pepsi's investments have been directed towards increasing production capacity, expanding new market channels, product shelving, and freezing machines, rather than traditional distributors.

Zhu Danpeng, an analyst at China Food Industry, believes that the main reason Pepsi-Cola is reducing investment in channels is that it is changing its original promotion channels under the company's overall strategic adjustment.

Data shows that Pepsi is continuously strengthening its omni-channel capabilities, especially in e-commerce. In 2019, Pepsi's e-commerce retail sales are expected to reach nearly $2 billion.

On January 14, 2020, Pepsi signed a strategic agreement with JD.com, focusing on in-depth cooperation in product reverse customization, marketing, data sharing, category management, and supply chain improvement, and proposed a strategic goal of achieving 300% growth in sales of family combo packs on the JD platform within three years.

-02- Shift of Focus

In addition to channel adjustments, Pepsi has also shifted its focus to the food sector.

In 2019, at an earnings meeting, Pepsi's Chairman and CEO Ramon Laguarta said that as of the third quarter of 2019, Pepsi's investments involved many major brands and regions, while also supporting innovation and the development of emerging brands.

In August 2018, Pepsi announced an additional investment of nearly $100 million to expand and renovate its Shanghai Songjiang plant, adding new production lines, introducing advanced packaging and warehouse technology, and comprehensively improving the plant's modernization level.

A Pepsi spokesperson said that after the investment is completed, the Songjiang plant will add potato chip production capacity to meet the growing demand of Chinese consumers, and will provide about 370 direct employment opportunities and over a thousand indirect employment opportunities.

In addition, in June 2019, Pepsi announced an investment of $50 million to build a new PepsiCo Foods Sichuan production base in the Deyang Economic and Technological Development Zone in Sichuan Province. This plant is also Pepsi's first potato chip factory in southwest China. On July 26, Pepsi announced an investment of approximately $131 million in China to acquire a 26% stake in China's Grain Brain Food Holdings International Co., Ltd., becoming its second-largest shareholder and increasing its focus on the health food sector.

Regarding the continuous investment in the food sector, a Pepsi spokesperson told Beijing Business Today that in 1993, Pepsi's food business entered China with the introduction of Lay's potato chips, and it has become a leading brand in China's snack category. The food brands include Lay's potato chips, Quaker oatmeal, Doritos, and Cheetos, all of which are brands under PepsiCo with annual retail sales exceeding $1 billion.

It is understood that in 1902, Caleb created Pepsi-Cola. In 1965, Pepsi-Cola merged with snack food giant Frito-Lay and was officially renamed PepsiCo. Starting in 1977, Pepsi entered the fast-food industry, acquiring Pizza Hut, Taco Bell, and KFC, reaching the peak of diversified operations.

In 1981, Pepsi built a Pepsi-Cola bottling plant in Shenzhen, marking the beginning of its investment in China and becoming one of the first American business partners to enter China. In November 2011, Tingyi and Pepsi reached a strategic alliance. Pepsi transferred its equity in 24 bottling plants in China to Tingyi Beverage Holdings in exchange for shares in Tingyi Beverage Holdings.

-03- Widening Gap

In the view of Xu Xiongjun, a strategic positioning expert and founder of Jiude Positioning Consulting, as a food brand, beverages are not its most important business segment, but as the most direct area of competition with Coca-Cola, the current situation shows that Pepsi's gap with Coca-Cola in the beverage sector has widened.

On the product side, in 2019, Coca-Cola launched 12 new products in China, including coffee and lemon tea. In particular, in the winter of 2019, Coca-Cola launched four hot beverage products of different categories and flavors for the first time, sold through various channels in more than 20 provinces, municipalities, and autonomous regions. In addition, Coca-Cola also introduced sports drink Powerade and plant-based beverages to China.

In the new product area, besides launching a salt caramel flavored cola, Pepsi will also launch Pepsi Energy Drink and a limited-edition coffee cola beverage, Pepsi Café. It is worth noting that Gatorade, Pepsi's world's No.1 sports drink brand, has been in China for ten years but has not yet achieved absolute dominance.

It is worth noting that Coca-Cola, through its new product strategy, has raised the unit price of mainstream products from 3 yuan to 5 yuan in the C-end market, increasing the average transaction value. However, except for salt caramel cola at 6 yuan per bottle, Pepsi's other mainstream regular products remain at 3 yuan per bottle. In the B-end market, Coca-Cola continues to focus on the full-meal market, while Pepsi-Cola mainly focuses on the fast-food market with relatively lower average transaction values.

From a performance perspective, there is also a gap between the two. In 2019, Pepsi's first-quarter revenue was $12.88 billion, with net profit of $1.41 billion. Coca-Cola's first-quarter revenue was only $8 billion, but net profit was $1.678 billion.

In the second quarter, Coca-Cola's sparkling beverages achieved overall sales growth of 3%, with classic Coca-Cola growing 4%, and zero-sugar Coca-Cola continuing double-digit growth, achieving growth for seven consecutive quarters. During the same period, Pepsi also achieved double-digit growth in China, but Laguarta believed this reflected "the benefits of Pepsi's increased investment."

"In fact, Pepsi still has certain advantages in the beverage sector. If it can actively adjust its current strategy, Pepsi Beverages still has great development space in the future," Xu Xiongjun said.

Source: Beijing Business Today

Tips will be paid 400-2000 yuan once adopted.