Pepsi strives to be a solo company in China. To achieve this goal, it even forces its Chinese partners to quit with long-term loss.
An ordinary transferal notice and 73-million-yuan offer raised the concern of how Pepsi strived for the solo operation in China. As one of the biggest beverage giants in the world, Pepsi failed to see profits in most of its joint ventures in China. Can it endure such a long-term loss? Or it just wants to drive its Chinese partners away with that method?
In February 2011, a well-established state-owned company Beijing Yiqing Holdings Co, Ltd. (hereafter Beijing Yiqing) couldn’t endure the tiny profit and decided to transfer its 15% stakes of Beijing Pepsi Cola (a joint venture between Beijing Yiqing and Pepsi) with 73 million yuan (USD 11.08 million).
The transferal can not hide the financial datasheet: from January to October 2010, the revenue of the joint venture totaled 799.81 million yuan (USD 121.4 million) and the operating profit was only -74.28 million yuan (USD -11.43 million). This led to the guess about Pepsi purposely making loss and driving Chinese partners away.
Yi Xiangmei, vice president of Pepsi China Investment Co., Ltd, rejected the offer of interview. The company’s PR Department didn’t give direct reply either but issued an announcement, claiming the normality of this stock transferal.
Different Situations for Bottlers
Before this transferal, Beijing Yiqing had 50% stakes of Beijing Pepsi Cola. The other 50% stakes belong to Pesi China Investment Co., Ltd. The enduring loss is the main reason that this well-established state-owned company to sell the shares. Not only did the joint venture suffer loss in the first ten months of 2010, it lost 37.85 million yuan (USD 5.75 million) in the year of 2009.
This is not surprising at all. Early in 2008, Zhang Jingang, board chairman of Beijing Yiqing, says that the company was planning on quitting or giving up some enterprises with long-term losses, including their joint venture with Pepsi.
Feng Qi, researcher from China Brand Institute, says that the most lucrative department in Pepsi is condensed liquor factory, which is followed by franchisers. The least lucrative department is bottler.
An insider of Pepsi says that people usually call all the enterprises of Pepsi in China Pepsi China, which is actually divided into two parts. In 1981, Pepsi signed an agreement with Chinese government to build a bottler in Shenzhen, starting its investment in China. In 1995, Pepsi China Investment Co., Ltd was founded and headquartered in Shanghai, including 23 beverage companies (joint venture bottlers) in 21 cities of China, as well as many food makers.
Pepsi China Investment Co., Ltd never got rid of loss from foundation. The real lucrative unit is Pepsi China Co., Ltd registered in Guangzhou. It is a wholly foreign-funded company and is responsible for producing and selling Pepsi condensed soda drink (one bottler). The bottlers under the name of Pepsi had different fates. Pepsi even moved many employees of Pepsi China Investment Co., Ltd to Pepsi China Co., Ltd.
The insider says that Pepsi has two major profit sources in China: selling condensed drink and the bonus of joint ventures. Actually, the former takes a larger part. “The proportion is higher than 90%.”
Most of the joint venture bottlers cannot earn money. In 2008, apart from the bottlers in Nanjing, Shanghai and Wuhan, the other bottlers’ total gross profit was only 8 million yuan (USD 1.22 million). The net profit is too tiny to be counted after reducing tax and so on. This is different from Pepsi China Co., Ltd, whose annual profits reached even multi-million yuan.
Loss of Chinese Partners
Zhou Siran, an expert in the food industry, says that Pepsi saw a 25% increase in operating profit in Middle East, Africa and Asia in 2008. In the first half of 2009, Pepsi’s net revenue in these areas reached 2.296 billion US dollars and the operating profit reached 373 million US dollars.
Zhou Siran says that Pepsi took 45% of the soda drink market in 2010, only second to Coca Cola. In the juice market, Pepsi’s Tropicana also took the fourth place with 8% market share. As a beverage giant only second to Coca Cola, why does its joint venture bottler suffer long-term losses in China.
Prior to Beijing Yiqing’s transferal, another Pepsi’s partner in Shenzhen sold 5% shares of a joint venture company to Pepsi, not long after it sold 10% shares to Pepsi in 2006.
In November 2008, Pepsi spent 76.63 million yuan (USD 11.4 million) in acquiring the 64.1% shares of Fuzhou Pepsi Cola Co., Ltd from China City Limited. Meanwhile, Pepsi spent 16.5 million US dollars in acquiring Sichuan Pepsi.
According to Feng Qi, the Chinese partner of Sichuan Pepsi took the lead in boycotting the price increase of condensed drink, leading to a growing contradiction with Pepsi. This places both parties under endless disputes and lawsuits. Finally Pepsi stopped the supply of condensed drink to Sichuan Pepsi, which stopped its production for three years.
From then on, Pepsi strived to gain the control of bottlers in China. The most common way it took was to increase the price of original juice, resulting in the loss of joint venture bottlers. Once a bottler had loss, Pepsi immediately increased the investment, leaving a big hurdle for the Chinese partners to follow suit.
As Feng Qi says, the continuous loss of the joint venture bottlers put most of them under the complete control of Pepsi.
Pepsi Craving for a Solo Way
It is interesting to see that Pepsi’s bottlers managed and operated by Chinese partners have much better performance than the ones managed by Pepsi. For example, the bottlers in Shanghai, Wuhan and Nanjing contributed 76.5% of profits of all the joint venture bottlers in China. They are all managed and operated by Pepsi’s Chinese partners.
Compared to Pepsi, Coca Cola’s bottlers are in a much better situation. In 2009, two thirds of Coca Cola’s 30 bottlers in China saw the profits.
“Actually, soda drink enjoys the highest gross margin among all kinds of drinks. So it is strange that more than half of Pepsi’s bottlers in China suffer loss,” says an expert.
Maybe Pepsi is craving for going on a solo way. August 2009, Pepsi spent 7.8 billion US dollars in buying all the shares of its largest bottlers Pepsi Bottling Group and PepsiCo Americas. It seems that Indra Nooyi, board chairman of Pepsi, has decided to make Pepsi’s bottling business go on an independent way.