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On November 4, 2011, Chinese food and beverage giant Master Kang Holdings and Pepsi reached an agreement, according to which Master Kang Holdings’ subsidiary company Master Kang Beverage Co., Ltd (hereafter Master Kang Beverage) will become the franchise bottler of Pepsi in China. If the agreement is approved by the Ministry of Commerce, Master Kang will get 72% of the stake of Pepsi’s 25 bottlers in China and establish a cooperative relationship with Pepsi’s current bottlers in China. It will be responsible for producing, selling and distributing Pepsi’s soda drinks and Squeak drinks and Pepsi will remain its brand as well as the promotion.
Two days before the publicity of news, Pepsi China has already been infested with various “rumors”, saying that Pepsi China was going to be acquired by Master Kang. When workers of Pepsi China were still probing into its reality, the rumors, or at least a part of them proved to be true. Tim Minges, president of Pepsi Greater China, confirmed the aforementioned acquisitions and told the employees “not to worry about it”.
The agreement states that Master Kang will exchange 5% of Master Kang Beverage’s stake for the 72% of the stake of Pepsi’s 24 bottlers. Meanwhile, Pepsi is given the option to increase the stake of Master Kang Beverage it holds to 20% with cashes before 2015.
Master Kang is the leading tea drink company in China while Pepsi is the second largest beverage drink in the world. Soon there came out the guesses about the possible pressure from the two companies’ alliance for Coca Cola in China. Analysts from Euromonitor said that Coca Coal took 16.8% of the Chinese soft drink market in 2010. It was followed by Master Kang, whose market share reached 14.4%. Hangzhou Wahaha Group took the third place with a 7.2% market share. Pepsi took 5.5% of this market and ranked No. 4. If we simply add the market share of Master Kang and Pepsi together, the figure is higher than Coca Cola’s market share. In addition, the product portfolios of the two companies can complement each other and the bottlers will have an enhanced bargaining ability after integration.
Therefore, after publishing the acquisition, Master Kang’s stock price had a 14% increase. However, some securities dealers pointed out that it was not easy for Master Kang to turn around of loss of Pepsi China. Wei Yingzhou, board chairman of Master Kang, said that the relevant reorganization and restructuring would cost three to five years and the beverage business might be divided before going public.
What’s more unexpected is that the alliance also revealed Pepsi’s business performance in China, which Pepsi has remained a secret for years. In 2010, Pepsi suffered an after-tax loss of 175 million U.S. dollars in China. It is known that Pepsi’s sale of drinks in China amounted to 18 billion yuan (USD 2.83 billion) in 2010 but it was outnumbered by the cost. Its food section saw the sale of 2 billion yuan (USD 314.2 million) in the same year but the profit only reached 5 million yuan (USD 785.5 thousand).“The salaries and bonuses for its foreign senior executives were close to 10 million yuan (USD 1.75 million). Where are the profits from?” said a former employee of Pepsi.
From this viewpoint, there are a lot of uncertain factors for Pepsi-Master Kang alliance to help Pepsi turn the loss into profit and achieve the result that“one plus one equals more than two”.“Actually, the best way to get rid of loss for Pepsi China is to cut the cost. But forming such an alliance indeed blurs its outlook. As a minor stakeholder, Pepsi China will meet trouble if there are any disputes about the future strategy,” said the aforementioned employee. “Pepsi has lost its chips of negotiation in the cooperation with Master Kang.”
In the past few years, Pepsi tried every means to buy back the stake of its bottlers in China. But did Pepsi do it only for selling the stake to Master Kang? A guess says that Pepsi wants to look for a strong partner in China but the saying has not been confirmed.
Futile“Marriage”
In 1979, Coca Cola stepped into China upon the invitation from China Oils, Foodstuffs Corporation. Then it achieved partnership with Swire Pacific and other important companies. Pepsi, which is second to Coca Cola in the global beverage market, entered China two years later than its U.S. peer. It chose many local bottling companies in China as its partners, which fermented troubles for its unsmooth development in China. Its cooperation with state-owned enterprises also leads to the obstacles in the enforcement of strategies related with launching new products due to the outdated operation system of its Chinese partners.
In truth, over 20 joint ventures of Pepsi in China all suffered weak performance. In 2009 nearly half of them encountered losses. In addition, three of Chinese stakeholders of Pepsi’s joint ventures sold their stakes in 2010 because these three companies had severe losses in that year. The most recent underselling of stake happened in Fujian. China(Fujian) Light Industrial Corporation for Foreign Economic and Technical Cooperation, the stakeholder of Fujian Pepsi Cola Co., Ltd, undersold 11.1% of the stake it held with 13.7085 million yuan(USD 2.15 million). Pepsi was the one acquiring this stake and thus increased its stake to 88.9%, becoming the biggest stakeholder of this joint venture.
Another case with significant influence is related with the joint venture in Chongqing. Chongqing Tianfu once owned 108 bottlers in China and in the eight years before its cooperation with Pepsi, it accumulatively paid the tax of 60 million yuan (USD 6.43 million), accounting for 75% of the tax income from China’s cola market. In 1994, Tianfu Cola and Pepsi established the cooperation with the shareholding structure in which Pepsi took 60% of the stake. The goal of their cooperation is to develop the Tianfu brand beverage and produce Pepsi drinks based on the market demand but the production of Tianfu drinks should not be lower than 50% of the total production.
However, the cooperation turned out to be different from the agreement. After his appointment, Cong Ming, for- mer vice president of Pepsi West China, made use of Pepsi’s shareholding and operation rights to fully promote Pepsi brand from advertising to marketing. An insider from Tianfu said that Pepsi could get 80% of bottlers’ profits by controlling condensed liquid and increasing the price, leaving its Chinese partners in a vulnerable status.
“The whole process is well designed and carried out step by step. In 2006 the production of Tianfu Cola was completely stopped and now it has completely quitted the market,” said Qiang Huang, general manager of Tianfu Cola. In 2006, Tianfu was forced to sell its stake to Pepsi with 130 million yuan (USD 20.4 million). Apart from earning nothing, Tianfu lost its brands, market and assets and fell foul with Pepsi. In October 2009, Tianfu filed a lawsuit against Pepsi over its “long-time illegal embezzlement of confidential technologies and illegal acquisition of commercial secrets” and claimed a 1-million-yuan compensation.
After pulling several state-owned enterprises into loss and failing to give them the support they deserved, Pepsi’s relation with the Chinese government was not as good as before.
The tension was reflected in the “Case of Display Fees”in Guangzhou. From May 2007 to February 2008, Pepsi signed the entry and promotion agreements with many shopping malls and supermarkets in several cities of Guangdong. The agreements required the retailers to place and display Pepsi’s Tropicana products as Pepsi required. However, Pepsi’s branch in Guangzhou did not pay for the entry and display fees, which amounted to 247.9 thousand yuan (USD 38.95 thousand) after getting the sales of 3.0532 million yuan(USD 479.7 thousand) as well as the profit of 650 thousand yuan (USD 102.1 thousand). The authority ordered to confiscate the 650-thouasnd-yuan income with the additional penalty of 50 thousand yuan (USD 7.86 thousand) for Pepsi. Pepsi’s deeds violated relevant agreements and regulations, but the cases that suppliers defaulted on the entry and display fees of the retailers have become quite common in China. Nearly 90% of the suppliers committed the same thing but only Pepsi was fined because of this.
Short of Innovation
Pepsi was never tuned with the development opportunity in China. It always lost to Coca Cola in pricing in this country.
Since Pepsi got into China in 1981, Li Ziqiang, CMO of Pepsi Greater China, established Pepsi as a young brand through engaging celebrities as its spokesperson and the slogan “Dare for Pepsi”. These nearly drew Pepsi on a tie with Coca Cola in the sales in China. However, Pepsi ignored the holistic distribution of other product lines while Coca Cola carried out two measures.
The first measure was to improve the Sprite brand, which has beaten Coca Cola and Pepsi Cola and won the champion in the soda drink market.
The second measure was to develop more non-soda drinks. More juice, milk and water products have been added into Coca Cola’s product portfolio. Meanwhile, Master Kang increased the number of its tea and water products. In comparison, Pepsi still held onto the soda drink and was not willing to improve its juice products. “For a beverage market, an early comer is hard to be caught up by its competitors if its market share in a certain area exceeds 50%,” said a practitioner in the beverage industry.
“Apart from its soda drinks, Pepsi had no products that can help the com- pany earn profits in China,” said a source close to Pepsi. Pepsi had no Innovation Center in China and the development of new products was outsourced to a third party. A new product could come out every eight years. In comparison, Coca Coal launched the Minute Maid Pulpy for the Chinese consumers in 2004. After gaining a big success in China, Coca Cola spread this product to the world.
“Pepsi saw a tiny increase of its share in the Chinese food market, but it was offset by the decrease in the beverage market. The new products of Pepsi only had changes in the test without great innovation. Its ability of innovation even pales in front of the Chinese local brands,” said Joy Huang, an analyst from Euromonitor. The statistical data shows that Coca Cola’s Minute Maid took 2.7% of the beverage market in China in 2010, ranked No. 9 among all brands. In com- parison, Pepsi’s Tropicana only accounted for 0.5% of the market, 25th place in China.
“Pepsi has a big and complicated product line in China but could not find a profit source. In comparison, Coca Cola is always able to launch products that the market likes and thus has established a lot of branded products,” said Chen Jing, an analyst of soft drink industry from Agricultural Consultant& BOABC.
As a long-term runnerup who always misses high profit margin, can Pepsi turn the situation around with capital operation? The result may not be so optimistic.
Two days before the publicity of news, Pepsi China has already been infested with various “rumors”, saying that Pepsi China was going to be acquired by Master Kang. When workers of Pepsi China were still probing into its reality, the rumors, or at least a part of them proved to be true. Tim Minges, president of Pepsi Greater China, confirmed the aforementioned acquisitions and told the employees “not to worry about it”.
The agreement states that Master Kang will exchange 5% of Master Kang Beverage’s stake for the 72% of the stake of Pepsi’s 24 bottlers. Meanwhile, Pepsi is given the option to increase the stake of Master Kang Beverage it holds to 20% with cashes before 2015.
Master Kang is the leading tea drink company in China while Pepsi is the second largest beverage drink in the world. Soon there came out the guesses about the possible pressure from the two companies’ alliance for Coca Cola in China. Analysts from Euromonitor said that Coca Coal took 16.8% of the Chinese soft drink market in 2010. It was followed by Master Kang, whose market share reached 14.4%. Hangzhou Wahaha Group took the third place with a 7.2% market share. Pepsi took 5.5% of this market and ranked No. 4. If we simply add the market share of Master Kang and Pepsi together, the figure is higher than Coca Cola’s market share. In addition, the product portfolios of the two companies can complement each other and the bottlers will have an enhanced bargaining ability after integration.
Therefore, after publishing the acquisition, Master Kang’s stock price had a 14% increase. However, some securities dealers pointed out that it was not easy for Master Kang to turn around of loss of Pepsi China. Wei Yingzhou, board chairman of Master Kang, said that the relevant reorganization and restructuring would cost three to five years and the beverage business might be divided before going public.
What’s more unexpected is that the alliance also revealed Pepsi’s business performance in China, which Pepsi has remained a secret for years. In 2010, Pepsi suffered an after-tax loss of 175 million U.S. dollars in China. It is known that Pepsi’s sale of drinks in China amounted to 18 billion yuan (USD 2.83 billion) in 2010 but it was outnumbered by the cost. Its food section saw the sale of 2 billion yuan (USD 314.2 million) in the same year but the profit only reached 5 million yuan (USD 785.5 thousand).“The salaries and bonuses for its foreign senior executives were close to 10 million yuan (USD 1.75 million). Where are the profits from?” said a former employee of Pepsi.
From this viewpoint, there are a lot of uncertain factors for Pepsi-Master Kang alliance to help Pepsi turn the loss into profit and achieve the result that“one plus one equals more than two”.“Actually, the best way to get rid of loss for Pepsi China is to cut the cost. But forming such an alliance indeed blurs its outlook. As a minor stakeholder, Pepsi China will meet trouble if there are any disputes about the future strategy,” said the aforementioned employee. “Pepsi has lost its chips of negotiation in the cooperation with Master Kang.”
In the past few years, Pepsi tried every means to buy back the stake of its bottlers in China. But did Pepsi do it only for selling the stake to Master Kang? A guess says that Pepsi wants to look for a strong partner in China but the saying has not been confirmed.
Futile“Marriage”
In 1979, Coca Cola stepped into China upon the invitation from China Oils, Foodstuffs Corporation. Then it achieved partnership with Swire Pacific and other important companies. Pepsi, which is second to Coca Cola in the global beverage market, entered China two years later than its U.S. peer. It chose many local bottling companies in China as its partners, which fermented troubles for its unsmooth development in China. Its cooperation with state-owned enterprises also leads to the obstacles in the enforcement of strategies related with launching new products due to the outdated operation system of its Chinese partners.
In truth, over 20 joint ventures of Pepsi in China all suffered weak performance. In 2009 nearly half of them encountered losses. In addition, three of Chinese stakeholders of Pepsi’s joint ventures sold their stakes in 2010 because these three companies had severe losses in that year. The most recent underselling of stake happened in Fujian. China(Fujian) Light Industrial Corporation for Foreign Economic and Technical Cooperation, the stakeholder of Fujian Pepsi Cola Co., Ltd, undersold 11.1% of the stake it held with 13.7085 million yuan(USD 2.15 million). Pepsi was the one acquiring this stake and thus increased its stake to 88.9%, becoming the biggest stakeholder of this joint venture.
Another case with significant influence is related with the joint venture in Chongqing. Chongqing Tianfu once owned 108 bottlers in China and in the eight years before its cooperation with Pepsi, it accumulatively paid the tax of 60 million yuan (USD 6.43 million), accounting for 75% of the tax income from China’s cola market. In 1994, Tianfu Cola and Pepsi established the cooperation with the shareholding structure in which Pepsi took 60% of the stake. The goal of their cooperation is to develop the Tianfu brand beverage and produce Pepsi drinks based on the market demand but the production of Tianfu drinks should not be lower than 50% of the total production.
However, the cooperation turned out to be different from the agreement. After his appointment, Cong Ming, for- mer vice president of Pepsi West China, made use of Pepsi’s shareholding and operation rights to fully promote Pepsi brand from advertising to marketing. An insider from Tianfu said that Pepsi could get 80% of bottlers’ profits by controlling condensed liquid and increasing the price, leaving its Chinese partners in a vulnerable status.
“The whole process is well designed and carried out step by step. In 2006 the production of Tianfu Cola was completely stopped and now it has completely quitted the market,” said Qiang Huang, general manager of Tianfu Cola. In 2006, Tianfu was forced to sell its stake to Pepsi with 130 million yuan (USD 20.4 million). Apart from earning nothing, Tianfu lost its brands, market and assets and fell foul with Pepsi. In October 2009, Tianfu filed a lawsuit against Pepsi over its “long-time illegal embezzlement of confidential technologies and illegal acquisition of commercial secrets” and claimed a 1-million-yuan compensation.
After pulling several state-owned enterprises into loss and failing to give them the support they deserved, Pepsi’s relation with the Chinese government was not as good as before.
The tension was reflected in the “Case of Display Fees”in Guangzhou. From May 2007 to February 2008, Pepsi signed the entry and promotion agreements with many shopping malls and supermarkets in several cities of Guangdong. The agreements required the retailers to place and display Pepsi’s Tropicana products as Pepsi required. However, Pepsi’s branch in Guangzhou did not pay for the entry and display fees, which amounted to 247.9 thousand yuan (USD 38.95 thousand) after getting the sales of 3.0532 million yuan(USD 479.7 thousand) as well as the profit of 650 thousand yuan (USD 102.1 thousand). The authority ordered to confiscate the 650-thouasnd-yuan income with the additional penalty of 50 thousand yuan (USD 7.86 thousand) for Pepsi. Pepsi’s deeds violated relevant agreements and regulations, but the cases that suppliers defaulted on the entry and display fees of the retailers have become quite common in China. Nearly 90% of the suppliers committed the same thing but only Pepsi was fined because of this.
Short of Innovation
Pepsi was never tuned with the development opportunity in China. It always lost to Coca Cola in pricing in this country.
Since Pepsi got into China in 1981, Li Ziqiang, CMO of Pepsi Greater China, established Pepsi as a young brand through engaging celebrities as its spokesperson and the slogan “Dare for Pepsi”. These nearly drew Pepsi on a tie with Coca Cola in the sales in China. However, Pepsi ignored the holistic distribution of other product lines while Coca Cola carried out two measures.
The first measure was to improve the Sprite brand, which has beaten Coca Cola and Pepsi Cola and won the champion in the soda drink market.
The second measure was to develop more non-soda drinks. More juice, milk and water products have been added into Coca Cola’s product portfolio. Meanwhile, Master Kang increased the number of its tea and water products. In comparison, Pepsi still held onto the soda drink and was not willing to improve its juice products. “For a beverage market, an early comer is hard to be caught up by its competitors if its market share in a certain area exceeds 50%,” said a practitioner in the beverage industry.
“Apart from its soda drinks, Pepsi had no products that can help the com- pany earn profits in China,” said a source close to Pepsi. Pepsi had no Innovation Center in China and the development of new products was outsourced to a third party. A new product could come out every eight years. In comparison, Coca Coal launched the Minute Maid Pulpy for the Chinese consumers in 2004. After gaining a big success in China, Coca Cola spread this product to the world.
“Pepsi saw a tiny increase of its share in the Chinese food market, but it was offset by the decrease in the beverage market. The new products of Pepsi only had changes in the test without great innovation. Its ability of innovation even pales in front of the Chinese local brands,” said Joy Huang, an analyst from Euromonitor. The statistical data shows that Coca Cola’s Minute Maid took 2.7% of the beverage market in China in 2010, ranked No. 9 among all brands. In com- parison, Pepsi’s Tropicana only accounted for 0.5% of the market, 25th place in China.
“Pepsi has a big and complicated product line in China but could not find a profit source. In comparison, Coca Cola is always able to launch products that the market likes and thus has established a lot of branded products,” said Chen Jing, an analyst of soft drink industry from Agricultural Consultant& BOABC.
As a long-term runnerup who always misses high profit margin, can Pepsi turn the situation around with capital operation? The result may not be so optimistic.