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Swinging wildly between splurging and skimping, has PepsiCo India lost its way?

Over the past decade, the company has been losing or barely holding on to its market share in various categories 

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Published a month ago on Oct 23, 2020 Read
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August, 2014: A bunch of curious people watched Sachin Tendulkar quietly make his way through the lobby of the Taj Mansingh. The master blaster made brief stops to oblige fans with a picture or an autograph.

In one of the suites above, Indra Nooyi sat with members of her India team. As Chairman and CEO of PepsiCo, she had flown down for the 25th anniversary of the India business. A grand party would take place later that evening, though that was not really on her mind. The priority was to focus on a new idea, which had intrigued Nooyi, and Tendulkar was there with his confidantes to discuss the finer points. It had been less than a year since the cricketer had called it a day, but his popularity had remained intact, and Nooyi was aware of it.

The meeting started post lunch and it went on for a good two hours. For about a year, Tendulkar and his team had drawn up the idea of a milk-based protein fortified drink. PepsiCo India would launch the product with Tendulkar backing it. Nooyi listened intently and she was smitten by the proposition. At the end of the discussion, she delivered her verdict: “Let’s do it.” A month later Tendulkar was in the US to sign the formal agreement with Nooyi and the plan was to be in the market with Oats+Milk over the next year.

Narrating the story, a former PepsiCo official makes his disapproval of the whole deal apparent. He says all of this was being planned few months after the company reported a terrible year – it was deep in the red in FY14, with loss of Rs.2.8 billion. “To get into a new business in a really bad year did not seem like the right thing to do,” he says. 

It could be argued exactly the other way – that a crisis is the best time to look at a new direction, and the local leadership decided to head that way. Except, it was a difficult period for the company not just in terms of profitability; employees’ roles were being overhauled without their buy-in. Therefore, the product was launched three years after the idea was pitched by Tendulkar and it wasn’t sold too aggressively in the market. Oats+Milk bombed and was withdrawn in just a little more than a year. A company spokesperson says, “Continuous innovation is core to the company’s DNA and spans across business operations whether it is products, distribution or marketing. The Oats+Milk initiative provided PepsiCo India with a guidance to further strengthen focus on flavoured oats and not package it with milk.” 

PepsiCo’s approach to Oats+Milk is an illustration of its lack of persistence with its India strategy. This has cost it market share, revenue and profit. Since 2007, the business here has struggled with frequent management change, inconsistent strategies and erratic performance. A former senior executive says, “Almost every year, the company changes strategy. It’s not easy to work like that.” In FY19, net profit had plunged to a fifth of what it was a year before to Rs.350 million. In FY20, the company sold its bottling business in the south and west, which caused the profit to zoom to Rs.4.34 billion but, as the company spokesperson says, “On a like for like basis, normalised profit after tax showed a gain of 58%.” Even with that growth, net profit stood at Rs.570 million or a net margin of only 1.08%. 

Globally, when Nooyi wanted to change the focus of the company – from carbonated drinks (CSD) – to healthy foods and beverages – she seemed on point. In 2006, as PepsiCo’s newly minted chief executive, she was facing a changing market. In the US, an increasingly health-conscious population had begun to drop sugar-heavy foods from its diet. Obesity had been declared an epidemic in the country, schools were restricting the sale of snacks and drinks in their cafeteria and sugary drink makers were being nudged to do calorie-control in their products. 

 

In 2004, Morgan Spurlock’s documentary Super Size Me created waves. Nooyi rode the sentiment and changed PepsiCo’s vision from ‘Fun for you’ to ‘Performance with a purpose’. She faced stiff opposition from investors who wanted to split the company into two – beverages and snacks – and was even on the brink of being ousted or gently nudged to take a post outside, such as the president of the World Bank, but she held on. Over time, the revenue share of foods in the company has increased dramatically. It was a change seen in its India business too (See: More food than fizz).

But, in India, the overall story has not progressed well.

 

Promise falls flat
To understand why, we need to go back to 2010, according to a former senior manager at PepsiCo India. The market was one of the fastest-growing and the Purchase HQ was expecting big volume from here, even in carbonated soft drinks (CSD).The group’s biggest market, North America, was still limping back to normalcy after the 2008 crisis and all they needed to hear was a growth story from developing markets. “That sent the India management berserk,” he says. “They promised to sell a billion cases in two to three years and built plants around that. That was more than the size of the industry!” In two to three years, he says, it was apparent the target could not be met.

It was a big blow. An estimated Rs.25 billion was invested towards meeting that impossible target. The Indian team was soon under pressure to cut costs and they decided the best way was to outsource the entire capex-heavy bottling operations to bottler Ravi Jaipuria’s Varun Beverages (VBL). The bottling operation for the north, which constituted nearly 60 million cases, was divested to the bottler for a consideration of Rs.11.58 billion clocking a one-time profit of Rs.4.22 billion in FY15.  “It was the biggest strategic mistake,” says the former senior executive quoted earlier.

For one, the deal favoured the bottler heavily. He explains with rough estimates: Before the bottling deal, if PepsiCo India was making a topline of Rs.200 per case (one case contains 24 bottles) and 30% margin or Rs.60, after the bottling was outsourced, the corresponding numbers came down to Rs.21 and Rs.16. That arithmetic looks great on paper in terms of operational profitability, except that the most significant costs sat outside this equation. While the bottler would take care of water, packaging and distribution, PepsiCo’s below-the-line costs including head office overhead, advertising and promotion could no longer be sustained with the shrunk overall profit.

On average, PepsiCo India sells about 450 million cases per year, including water and juices. Knocking off the water and juices, CSD alone would constitute about 300 million cases, which means revenue of Rs.6 billion and gross profit of Rs.4.8 billion going with the outsourced model. In the company-owned bottling model on the same 300 million cases, the company could clock revenue of Rs.60 billion and gross profit of Rs.18 billion. “We could make a gross profit of at least thrice as much in the company-owned model, so there was room to accommodate spends,” says the executive.

Leave alone head office and other administrative costs, advertising and promotional costs alone in FY15 stood at Rs.8.58 billion and even higher at Rs.9.20 billion in FY16, which have since been pared down to Rs.5.17 billion. “Globally, expenses are split 50:50 between the company and the bottler. In India, the company pays for everything – innovation, marketing and advertising,” the executive says. Not just that, the bottler is even sold the concentrate on credit and PepsiCo adjusts the cost over time. “You basically fund his working capital and he will repay you over time, it is a vicious circle of dependence,” he adds. 

The VBL spokesperson refutes this saying, “This understanding is not correct. PepsiCo does not pay anything towards working capital requirements.” But when asked specifically about PepsiCo’s paying VBL for the packaging moulds, for the bottler to move to full-depth crates, the spokesperson only responded with, “We have already moved to full-depth crates five years back”. 

VBL’s spokesperson adds that the two companies have had a mutually beneficial relationship since 1991. “PepsiCo, being a brand owner, develops the product portfolio and supplies concentrate, which it shall continue to do even after the transfer of bottling

operations. VBL, on the other hand, has committed huge resources by way of management bandwidth, organisation, distribution network and capital. It has created manufacturing facilities ahead of time,” he mentions.

PepsiCo India’s spokesperson, too, defends the bottling deal, saying it was done to “unlock the full potential of PepsiCo’s operating model in India. VBL is one of the most successful and largest bottler in the world.” 

The ‘mutually beneficial’ explanation does not reflect in the numbers though, which show VBL growing at an envious pace while PepsiCo India limps alongside. Between 2015 and 2019, VBL’s sales grew 114% ( Rs.34.08 billion to Rs.72.91 billion) while net profit increased 321% with ROE of 17.2%. PepsiCo India’s ROE has moved from -4.75% to 1.14% over the same period.

Undeterred by the reduced profit pool because of outsourced bottling, PepsiCo India splurged to a fault until FY16.

One former official cites the buying of IPL title sponsorship rights in 2013 for Rs.4 billion as an example. It was all part of the grand plan of selling a billion cases. “While the bosses were thrilled, the broader consensus was that we were in trouble,” he says. The HQ believed, despite reservations expressed by some executives, that cricket would give the brand the needed mileage. To make up for

this huge spend, they were asked to sell 30-40% more during the tournament. While they did manage to sell close to that target, they could not cover the huge investment. PepsiCo India decided to withdraw as the title sponsor in October 2015, two years before the deal was set to expire. Media reports said the decision was on account of the spot-fixing scandal.

 

Perhaps the spending could have been justified if they could earn more, by gaining more volume or charging a premium on the products. But, over the years, PepsiCo and Coca-Cola have seen their market share stagnate (See: Fighting to grow). According to Euromonitor International, from Rs.128 billion in 2015, the overall CSD market has grown to Rs.143 billion in 2018. The cola majors now pay 40% of their income as taxes, 5-10% to the distributor and 25% to the trade, leaving them with 10%. They could have protected their turf and margins through product innovation but that’s easier said than done in CSD. 

A former company official says innovation is tough in this vertical because there is only a three-month window to drive sales of any new product. PepsiCo had an additional burden to deal with. “Once PepsiCo India outsourced the bottling business, innovation just stopped,” he says. Coca-Cola does better than PepsiCo India in this regard because 65% of its CSD business comes from its own bottling operations, while PepsiCo gets 0%.

There was always the juices and packaged-water business, to build volume. But here too, PepsiCo India has had to deal with aggressive competition. 

In juices, PepsiCo’s brands fell behind because of pricing and limited flavours. Dabur, with its Real brand, offered massive discounts to take on PepsiCo’s Tropicana. Dabur offered its variants 10-12% cheaper than Tropicana’s initially, and had 50% more flavours. Dabur launched variants specific to the Indian market (litchi and pomegranate being some of them) while Tropicana’s bitter orange juice was perfect for other markets but not for the sweet-loving Indian palate. In 2019, Real’s market share was 56% while Tropicana’s had fallen to 24%. Both have lost market share to other brands such as ITC’s B Natural, but Real has ceded less ground than Tropicana.

 

The bottled-water brand Aquafina, which contributes 6% to PepsiCo India’s revenue, hasn’t helped matters much, but that’s also because of the nature of the business. Ramesh Chauhan, the grandmaster of the Indian soft drinks industry who sold Thums Up to Coca-Cola in the mid-1990s along with Limca, Gold Spot and Maaza, gives himself a moment when asked why Aquafina is not having it easy. “This is a high-volume business with low margins. It is not a model that may always make the multinationals comfortable,” he reveals. 

Chauhan, Bisleri International’s chairman knows the industry like the back of his hand and says over the past decade, this market has exploded with over 5,000 players. His Bisleri brand is the largest player with 20% share, while PepsiCo’s Aquafina has 8%. “This is the only product that we make. All our time and energy goes into this,” he adds. The market dynamics notwithstanding Coca-Cola’s Kinley has done better than PepsiCo’s Aquafina — the former’s market share at 16% is double the latter’s (See: Slow evaporation). 

 

Oversell, under-deliver
Just as PepsiCo India had overestimated its capability to win in the CSD market, its ambitious target for the foods business also proved hard to hit. A former company official recalls a Town Hall in 2011. It was an annual affair held at Gurgaon, a stopover for Nooyi who timed her India visits to the December Carnatic music fest in her hometown Chennai. Nooyi is known to be a music buff. Business teams were presenting their plans for the year and she listened intently, only intervening to drive home the importance of higher volume and greater market share.

When the foods team presented their target, even the most optimistic employees were surprised. The team was promising Nooyi 25% growth even though the best years saw no more than half of that. The number was never achieved. In FY13, the segment grew 14%. “We grew far less than was projected,” says the former official. But, pressure on performance must have mounted and in FY14, the segment grew 25%. That was the only year when the company saw growth upwards of 20%. Since FY12, the foods business has grown at CAGR of 8%. 

Foods is a tough business for a multinational to crack in India anyway. PepsiCo has had to contend with many new and cost-efficient regional players. “The global strategy is in direct contradiction with what is happening in the Indian market. Adapting an American strategy in India does not work. The way to succeed here is to tailor products for the Indian market,” says the former official. 

In chips, for example, Lay’s had to deal with local brands such as Balaji Wafers. The latter is a much faster-growing Rajkot-based company run by Chandubhai Virani – its revenue shot up 58% between FY15 and FY19, growing from Rs.12.46 billion to Rs.19.72 billion. During this period PepsiCo India’s chips and namkeen business grew at 11%. Virani’s desi chips promised much greater value for money – Lay’s was offering a 12-gm pack for Rs.5, while Balaji was offering 18 gm.

The advantage local players have is their unbeatable cost models. If PepsiCo (or any of its peers) spends around 10% of sales on selling and distribution, Balaji spends an unbelievable 0.33%. Those familiar with Virani’s operation say he spends nothing on warehousing since the distributor is parked right next to his three factories in Rajkot, Valsad and Indore. Once the snacks get off the production line, they are almost ready to hit the stores. By contrast, a large company, including PepsiCo, will have a distribution chain with a super stockist and then a wholesaler, before reaching your neighbourhood store.

According to KS Narayanan, ex MD of McCain Foods India and now an independent advisor to food and beverage companies, local snack players focusing on select geographies close to their manufacturing centres manage to build critical mass in concentric circles. “As their products travel less, they are able to offer significantly better value and that could be 50-100% more grammage per pack. Besides, there is more stock freshness, which is a critical element in food,” he explains. Virani has restricted his presence to western and central India, making him a strong regional player. It is estimated he has at least 60% market share in Gujarat. This regional play also allows companies like Virani’s to localise their products, in terms of flavours, better. Balaji Wafers has 25 flavours in all, compared to a dozen from Lay’s. The PepsiCo spokesperson counters that they have focused on regionalisation in Lay’s and Kurkure, such as launching a wafer-variant of the former to “become the perfect companion to traditional sambar rice and rasam rice” and launching Kurkure Masala Munch with gingelly oil “to build greater relevance in the southern market”. 

 

Powerless strategy
Given the tough competition that it had to face in almost all its businesses, profitability had always been elusive at PepsiCo India. FY13 was an exception but that soon took a turn for the worse. Taking note of falling profitability of the India business in FY14, the HQ scrambled to protect itself. That led to the entry of HUL and Nokia veteran D Shivakumar. 

In January 2014, when Shivakumar took over as PepsiCo India’s chairman and CEO, the company was caught between the devil and the deep sea. On one hand, it had spent generously on building capacity and advertising that didn’t deliver on their promise and, on the other, it had products that were struggling to bring in additional revenue. The only choice, therefore, was to cut costs. He did that by bringing it down by Rs.14 billion between FY14 and FY18, at Rs.4 billion a year.

 

The company carried the albatross of “a deeply bloated cost structure”, with the IPL and celeb endorsement spends forming the largest chunk, according to another former senior manager.  “IPL killed the profitability of the business. It was decided in Purchase and originally HQ was supposed to pay. But after a few months they said, India has to bear it,” he shares. In FY17, after IPL was dropped, advertising expenses were slashed from Rs.9.2 billion to Rs.4.97 billion (See: Spendthrift no more).

From being deep in the red – with a loss of Rs.2.8 billion (FY14), the company posted a profit only four years later, in FY18.

With pressure to run the knife deeper into expenses, to make the business more profitable, PepsiCo India decided to pursue the Power of One strategy more aggressively since 2014. The strategy had been adopted by the company globally in 2010.  In India, this push was met with deep resistance. “They just rammed it (the strategy) down our throats,” says an ex-PepsiCo official.

Power of One was adopted in 2014, to integrate and better utilise the resources of both verticals, with key functions such as operations, marketing, R&D and legal brought under common heads. The CSD vertical was largely seasonal, with maximum sales during the three to four summer months, so its resources (such as sales staff) would largely idle during the other months. So, the strategy made logical sense. It was extended to distributors too, that they would sell beverages and foods in geographies the company was strong in.

An official who was in the team leading this strategy explains, “India has 10 million outlets, out of which 2.2 million sell CSD while 7 million sell chips. Food outlets are more than beverage outlets, and in quick service restaurants and theatres, they are sold together. Therefore, integration would help in better distribution of both.” In India, which has a complex and unorganised retail market, the strategy was intended to increase business volume.

Critics of the strategy say that the business culture of both verticals were different, so the integration created friction. They say, food was run with higher level of conservatism and it was always a case of “earn before investing” while beverages was “always in investment mode.” One former employee says, “At the ground level, we ended up having a highly demotivated sales team and attrition at that level just shot up 3-4x.” Even at the head office level, the new hierarchy did not go down well, especially for those who came from the food business. Many senior people saw their roles shrink. “It became quite political after that,” says an insider.

Supporters of the strategy acknowledge the discontent it caused but peg it to misplaced pride. “The only people who objected to Power of One were those who had spent their entire life in either foods or beverages and did not want to change their way of thinking to suit both. People felt they had lost their turf,” says the insider. However, the company spokesperson says, “We firmly believe that it (Power of One) helps our brands in both categories continue to be stronger together.”

On the whole, there was nagging unhappiness over changed and diminished responsibilities across teams. It was terrible timing. This was unfolding just as the Nooyi-led transformation, of turning PepsiCo into a food and beverages company, was gaining momentum in other markets. In India, insiders say the overriding sentiment was of disillusionment and exhaustion, and the local marketing team did not care enough to push their new line of products.

Attempts to tweak products and create better consumer proposition have not been able to change the overall growth trajectory. A former PepsiCo India marketing manager says, in 2016, the company “corrected Lay’s value by putting in more chips to counter the charge of ‘more air in the bag”. Lay’s began giving 15 gm for Rs.5. “Since then, it really grew.” 

But several other new launches did not take off. For example, the 2017’s Oats+Milk that was one-of-a-kind and Quaker’s oats variants, such as masala and lemony veggie mix, in response to Saffola’s veggie twist, peppy tomato and so on. By FY19, Quaker revenue was approximately Rs.1.6 billion while a brand like Saffola was making Rs.1.7 billion, despite having made a late entry. 

Under the Quaker brand, a ready-to-cook breakfast series, such as for idli, dosa, upma and khichdi, was also launched in 2017. If PepsiCo India had Tendulkar for Oats+Milk, this time it roped in chef Vikas Khanna, along with whom the range was developed. This was an attempt to gain a foothold in the nutrition business. Like Oats+Milk, it was not scaled up, instead it was withdrawn in a year, in 2018.

Though, Power of One was a sound strategy, it created huge turbulence within and impacted the company’s ability to win in the market. 

 

Missing links
While the company was struggling with internal disagreement, there was also annoyance among company officials over Pepsi’s confused brand messaging. Last summer, Pepsi aired a campaign targeting college goers, but it showed 54-year-old Salman Khan talking about “swag”. The campaign also featured Tiger Shroff at some point. But Pepsi’s image in India had never been that of a macho man. So, this seems a bit off-key.

Veteran adman Arvind Sharma, who spent years on Coca-Cola’s brands, is quick to link Pepsi with youth, fun and coolness. “They are walking into Thums Up territory by taking the macho positioning, which will only end up hurting the Pepsi franchise,” he says. “Coca-Cola and Thums Up have never swayed from the core messaging for years now. One still sees Coke as a brand around the family in a Diwali campaign while Thums Up has been true to the adventure, macho story. This consistent messaging has helped retain its equity among its core consumers,” he adds.

Anuja Chauhan, former executive creative director of JWT, who has worked on the Pepsi account for years, says, “There is a clear disconnect between the Salman Khan ad and what Pepsi is meant to be. At its core, Pepsi is about youthful irreverence. Salman is certainly not youthful and that contradicts what the brand stands for. The swag is no more than a superficial approach to the brand and it takes away the core proposition.”

There is another more fundamental problem. What was seen as cool earlier is not cool anymore. A former senior management official elaborates, “PepsiCo is playing the 1990s game of cool but the business is not cool anymore because of sugar and other things.” He adds, the problem with PepsiCo India is that there is “too much of storytelling and no accountability for performance. There has been no innovation in soft drinks except sugar-free. It is a declining market and any numbers of Salman Khans won’t help.” 

 

PepsiCo India’s market share in CSD currently stands at 30%, down from a peak of 33% in 2016, but the muddled positioning and declining market is a cause for worry in terms of future growth. In juices, Tropicana has already lost market-share from 36% in 2015 to 24% in 2019 (See: Bittersweet). Water is also on a losing streak. After Nooyi left the company in 2018, the focus is back to soft drinks and chips, says the earlier quoted former PepsiCo India manager. 

Through FY14 till FY20, the company sold its entire bottling operations to VBL. Net sales for the beverage segment stood at Rs.13.4 billion for FY20. The sale of bottling operations has given the management a one-time boost, but it also means the room for accommodating below-the-line costs will be limited in the future. 

The lockdown this year offered little respite. A former senior manager, quoted earlier, predicts that FY21 will be a “washout” because 80% of sales happen in April to June. Profitability remains weak but, more than fixing that, PepsiCo needs to once and for all figure out where it wants to play. The next obvious question then would be does it have a strategy to win?The lockdown this year offered little respite. A former senior manager, quoted earlier, predicts that FY21 will be a “washout” because 80% of sales happen in April to June. Profitability remains weak but, more than fixing that, PepsiCo needs to once and for all figure out where it wants to play. The next obvious question then would be does it have a strategy to win?

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