Food focus keeps PepsiCo going, but Coke struggles amid pandemic

The good news for PepsiCo is that the foods segment has normalised much faster to pre-pandemic levels than beverages.

One of the things Covid-19 has brought into stark relief is the contrasting strategies of PepsiCo and Coke in India and how the differences have had a bearing on their performance during the pandemic.

One big change is that PepsiCo is now less of a cola or a beverage company and more of a foods major.

Declaring the financial results a few weeks ago for Q3 of 2020, PepsiCo CEO Ramon Laguarta announced that despite a slow revenue growth of 2 per cent in emerging and developing markets, India bucked the trend, showing a high single digit growth as compared with double digit decline in both beverages and foods in Q2.

This, despite the fact that its beverage volumes in India declined by double digits in the same period, clearly suggesting that the food business rocked as the lockdown eased.

Food revenue matters much more for the company’s revenues and margins than beverages.

For Coke, however, which does not have a food business to bank on, Q3 2020-unit case volume declined by 10 per cent in Asia Pacific in its company-owned bottling plants, driven by India and South Africa (it was down 36 per cent in Q2).

But overall, the decline was much lower at 4 per cent in the region and again this was attributed to India and Japan. (It was 18 per cent in Q2 mainly because of India.)

The inference is simple: While Coke’s percentage decline in beverage volumes is far lower than its rival and demand take-off has improved over the previous quarter, it does not have a food business to give it a kick start to recovery.

According to analysts, soft drinks now account for only 20 per cent of PepsiCo’s revenues as against 59 per cent in 2015.

The rest comes from food. The good news for PepsiCo is that the foods segment has normalised much faster to pre-pandemic levels than beverages.

The fact is that soft drinks missed a large part of their peak season (April-June account for 50 per cent of volumes) sales when the country came to a standstill.

If they are taking longer to normalise, it is because on-the-go and restaurant sales are limping very slowly towards their earlier levels.

Industry estimates indicate that volumes for the whole year for beverages will be down to a third of last year.

PepsiCo’s asset light strategy in beverages has also helped.

Two years ago, it sold off its remaining company-owned bottling plants in south and west India to Ravi Jaipuria, transforming itself into a seller of mainly soft drinks concentrate.

The strategy reduced revenues but improved margins profitability.

Its normalised profit after tax went up by 58 per cent in FY20 over the previous year, though revenues went down from Rs 6,200 to Rs 5,264 crore in the same period.

PepsiCo banked heavily on foods and built capacity on its own, mainly from the remaining portion of the $2.2 billion it committed to India by 2022.

The strategy has also helped in shoring up margins as, according to industry experts, they are 10-20 per cent higher than beverages, which work on low margins and high volumes.

“We are committed to doubling our snacks business in India by 2025.

"In fact, we have increased our investment in our greenfield snack plant in Uttar Pradesh from Rs 500 crore to Rs 814 crore.

"We have additionally proposed to set up a greenfield manufacturing plant in Assam and expand our capacities in our West Bengal and Maharashtra plants,” said Ahmed ElSheikh, president, PepsiCo India.

Currently, its own manufacturing units take care of 70 per cent of its food production (the rest is done by co-packers), which include Lays, Kurkure, and Quaker Oats among others, say analysts.

So what is Coke doing? Clearly one big move has been the push towards juice volumes and using more Indian fruits even for sparkling beverages, such as limes in Sprite or local oranges in Fanta.

It also introduced a range of juices in the Minute Maid category with Indian fruits such as pomegranates.

Analysts point out that its volumes from juice products has gone up from 35 per cent to 40 per cent in the last three years, while the rest has been from other beverages.

The margins in juices are higher. Coke also tested flavoured milk and smoothies in the market but they failed to get much traction.

Coke has also brought in imported products like the fizzy drink Rani Float.

It is also rationalising its bottling business.

Its share of the company-owned bottling company has gone down from 66 per cent of volumes to 54 per cent.

A Coke India spokesperson, while not sharing numbers, said: “We have just completed the re-alignment of four non-contiguous and fragmented territories in the north, which has opened more avenues for business growth and local investments.”

But the rationalisation has raised questions among Coke watchers.

Is it also moving towards a more asset-light structure like its rivals?

Or will its strong company-owned bottling business be the platform for launching big new products?

Photograph: Carlo Allegri/Reuters