PepsiCo’s midlife crisis in India
New Delhi: Falling sales, rising competition, changing customer preferences...You name it. Squeezed from all sides, American food and beverage giant PepsiCo Inc. is struggling to find its feet in India, 28 years after it first stepped into the country.
PepsiCo India Holdings Pvt. Ltd, maker of a range of foods and beverages including Kurkure, Quaker Oats, Pepsi and Gatorade, ended fiscal year 2017 (FY17) with a revenue of Rs6,540 crore, its filings with Registrar of Companies (RoC) show, less than its 2012-13 figure of Rs6,994.8 crore. The decline also shows up on market share data provided by independent research agencies, confirming PepsiCo has been losing fizz in India.
The company, however, says it has been transforming its product portfolio in one of the world’s fastest growing markets for packaged goods, aiming to “Change the Game” by building a portfolio that has “Something for Everyone”.
As Indians shift to healthier options such as fruit juices, PepsiCo India has failed to check the falling sales of its core carbonated beverages in the past five years. Its fruit juice brand Tropicana did not gain market share, while its snack brands such as Kurkure and Lay’s continued to slip and the company’s efforts to crack India’s breakfast market with Quaker Oats saw limited success.
On top of this, PepsiCo India now has to contend with a leadership transition, after the 9 October resignation of D. Shivakumar, its chairman and chief executive officer (CEO), who will leave the company on 31 December.
Shivakumar’s exit did not surprise many. “It’s obvious. The company failed to grow in one of world’s fastest growing markets (for packaged consumer goods) and it is still making losses,” said an analyst with a management consulting firm, seeking anonymity.
Shivakumar had joined in December 2013—about a month after PepsiCo chairperson and CEO Indra Nooyi announced a $5.5 billion investment in India by 2020.
Financially, FY14 was not a good year for the American soft drinks maker.
For FY14, PepsiCo India reported a loss of Rs280 crore, against a profit of Rs17.6 crore in the previous year, its RoC filings show. Revenue growth too fell to 3.1% in FY14 from 14.8% a year ago.
In FY15 it managed to reduce the loss to Rs177 crore but just a year later it jumped to Rs538 crore after it restructured bottling operations in India.
Not just this. After many years, PepsiCo India reported a decline in revenue that year, down 18% to Rs6,626 crore from Rs8,130 crore in FY15.
The company, however, claims the results are not comparable. “Our 2015-16 reported financial metrics are not strictly comparable versus the prior year due to timing of franchising activities and one-time impacts from changes in accounting practices. On a like-to-like comparable basis, we have grown our net revenue with momentum across our portfolio in this period. We have also improved our operating profit margins in this period and continue to focus on improving profitability through strong cost productivity measures,” said PepsiCo India chief financial officer and vice-president (finance) Rajdeep Datta Gupta.
In the year ended 31 March 2017, the company reported revenue of Rs6,540 crore, majority of which came from non-carbonated beverages and packaged food.
In contrast, Hindustan Coca-Cola Beverages Pvt. Ltd that accounts for two-thirds of Coca-Cola’s business in India, reported an 11% growth in revenue to Rs9,472 crore in FY17.
According to Datta Gupta, PepsiCo India’s growth in the second half of FY17 was impacted “on account of some macro headwinds, but business momentum has been recovering over the last three quarters. We are confident that we are well-positioned for growth in India, which is a key emerging market for PepsiCo.”
While it is yet to file detailed results with RoC, it is estimated that the company managed to lower its loss to around Rs150 crore in FY17.
The key reason behind this loss reduction is severe cost-cutting. During the past three years, PepsiCo India saved an estimated Rs1,500 crore of costs, part of which it “invested back in quality enhancement”, according to a company executive who did not want to be named.
Shivakumar declined to comment for the story.
Falling market share
Since 2013, almost every PepsiCo product has lost market share in India. According to market research agency Euromonitor International, PepsiCo’s flagship snack brand Lay’s lost share from 8.1% (retail value) of India’s savoury snacks market in calendar year 2013 to 4.4% in 2017.
The company disagrees: “Lay’s has been growing double digits quarter on quarter,” said a spokesperson at PepsiCo India, but did not provide numbers to back up the claim.
Interestingly, nearly 15 months ago, PepsiCo India kicked off an internal project to transform Lay’s with the aim to grow in the hyper-competitive savoury snacks market in India that has an estimated 3,200 contenders. Under this, PepsiCo extended the brand, included a premium variant, increased grammage (weight of chips in a packet), cut costs in supply chain and manufacturing by increasing capacity utilization, among others.
Lay’s was not alone. According to Euromonitor, the market share of PepsiCo’s corn puff brand Kurkure dropped to 3.1% (retail value) in 2017 from 4.4% in 2013, despite its efforts to boost sales through extensions. In May 2016, PepsiCo—that had been selling Kurkure corn puffs since 1999—extended the brand to other salted snacks including navratan mix, chilli chatka, khatta meetha mix and aloo bhujia, hoping to counter home-grown Haldiram Foods International Pvt. Ltd, its biggest competitor in the snacks segment, that has been selling these products since 2003.
PepsiCo’s other snacks brands Lehar, Uncle Chipps and Cheetos, which never had sizeable share in India’s savoury snacks market, also slipped, according to Euromonitor data.
The trend is similar for carbonated beverages. Its flagship Pepsi lost share to touch 13.4% (retail value) in calendar year 2016 from 14.9% in 2013, according to Euromonitor data. Its carbonated drinks brands Mountain Dew and 7UP gained market share, while Mirinda’s declined.
“Carbonated beverages makers are struggling globally. In India, the government has also been taking a tough stance against the cola makers by increasing tax. Plus, there are campaigns by home-grown firms like Patanjali Ayurved Ltd against carbonated beverages,” said a Mumbai-based analyst who tracks food and beverage companies.
The story is no different for its flagship fruit juice brands Tropicana and Slice. Tropicana’s market share dropped from 10.2% in 2013 (retail value) to 8.8% in 2016 and Slice slipped marginally from 15.6% in 2013 to 15.4% in 2016, according to Euromonitor.
“In fruit-based beverages, Pepsi could not keep pace with Dabur India Ltd’s Real, and other brands like ITC Ltd’s B Natural and Patanjali’s juices came into the play. Besides, there are ethnic beverages such as the ones made by companies like Hector Beverages,” said an executive in a competing firm, asking not to be named.
PepsiCo India, however, claims that its zero sugar cola Pepsi Black is witnessing rapid growth, outpacing all other low-sugar products in the market. Its sports drink Gatorade, launched in 2004, has also been growing with a dominant 82.4% market share in 2016 up from 80.1% in 2013, but the water brand Aquafina saw its market share decline from 11.1% in 2013 to 9.9% in 2016.
While the company’s sales were falling and its products were losing market share to fast paced competition, PepsiCo India was attempting to move to an asset-light structure.
In November 2014, about a year after Shivakumar joined, PepsiCo India sold its entire company-owned bottling operations in north and east India to Varun Beverages Ltd, a firm owned by Ravi Jaipuria, aiming to save costs through increased operational and supply-chain efficiencies.
Jaipuria, who now controls bottling of more than 50% of PepsiCo India’s beverage portfolio, has himself entered the food and beverages market, and is readying for a portfolio expansion to cross $5 billion revenue by 2020 from around $1.6 billion in 2016, Mint reported on 17 August 2016. Jaipuria declined to comment on PepsiCo India.
Since Shivakumar joined PepsiCo India in December 2013, he was working on making the organization lean. He didn’t do it by reducing headcount but by enhancing efficiency, reducing wastage, cutting down time lapses in supply chain and inventory, among others.
During these three years, PepsiCo India shifted to larger distributors to cut down the number to 160. The inventory was also reduced from 15 to 4 days. About three- fourths of PepsiCo India’s inventory is now managed by its vendors and it has cut down warehousing by close to 40%. Moreover, the organization moved to become “lean” by filling up around 83% of jobs internally.
Also, there were efforts to make the organization asset-light where possible. It has cut down costs in the supply chain and started using artificial intelligence for predictions and forecast. At present, PepsiCo India’s product placement across the supply chain is mainly determined by technology and machines, not humans.
According to two people in the bottling business who did not want to be identified, PepsiCo India has been weighing the option to divest more to go “asset-light and reduce capex”. Out of 38 bottling units of PepsiCo India, 24 are owned by franchisees at present and the company is likely to sell the remaining to franchisees over a period, said the people cited above.
PepsiCo India declined to comment on possible divestments.
Like its parent, PepsiCo India has been trying to promote beverages that are not carbonated, snacks that are more suited to local tastes and other packaged products that are marketed as healthy.
This came as part of PepsiCo’s strategy to transform its portfolio, shifting focus from “Fun-for-You” products, such as carbonated beverages and snacks to health and nutrition. Chairperson and CEO Nooyi has been vocal about the shift and is steering the company towards a purpose-driven future that makes healthier products, empowers employees and encourages environmental responsibility. Health and nutrition as a category accounted for more than 25% of PepsiCo’s global revenue in 2015.
“We are doing every bit of it in India,” Shivakumar said in an interview to Mint on 25 January.
Shivakumar’s primary mandate was to execute the transformation in India by intensifying focus on health and nutrition, reducing sugar content in its beverages including carbonated drinks, and ensuring that the company is equipped to tackle challenges in the foreseeable future.
“The PepsiCo it was in India in 2011-12 had to change,” Shivakumar said in one of his earlier interviews to Mint.
While the change in product mix was part of the company’s global strategy, Shivakumar turned to localization to make those products work in India. The company tweaked some of them with ingredients and flavours to suit local preferences.
In the past three years, PepsiCo India has launched one new product in each quarter—or a total of 17 in beverages, snacks and nutrition—extended the water portfolio, launched energy drink Sting, and reduced sugar and calories in some of its products.
“Our portfolio transformation journey in India began with the introduction of 7UP Nimbooz, followed by 7UP Nimbooz Masala Soda (with 5% lemon juice) in 2013 and its subsequent, continuing national scale up, 7UP Revive—India’s first hydrotonic drink (adding to our functional hydration portfolio), introduction of portion control with mini cans (150ml) starting with Pepsi and now available in 7UP, Mountain Dew and Mirinda and the introduction of New and Improved 7UP with reduced sugar in Gujarat last year and Tropicana Essentials this year. We have also expanded the Himalayan portfolio with Sparkling and Orchard Pure,” PepsiCo India said in a statement.
Besides the change in product offering, the firm has also started leveraging new trade channels like e-commerce, and forming partnerships with restaurants like Burger King and theatre chains like PVR Cinemas. In India, PepsiCo moved from the market share game to focus on expanding markets for each segment, said the PepsiCo India executive quoted earlier.
“The innovations stage gate process is one of the six key processes introduced in the company. We have introduced a lot of rigour in the innovation process, starting with strong consumer fundamentals. We then market these innovations to customers ahead of time and every four months we have a deep dive into the lessons from the innovations we have launched,” Shivakumar told Mint earlier.
PepsiCo has also tweaked its branding exercise. The focus shifted from its core carbonated beverages brands to food products and juice brand Tropicana. Even its chillers now come with Tropicana branding, unlike the Pepsi one earlier.
“We have been on a journey of transforming our portfolio and are moving ahead rapidly on our journey of making the India business future ready, with a strong focus towards nutrition and scaling up our go to market system,” said CFO Datta Gupta.
The company has also changed the way it used to engage celebrities for marketing and advertisements. During Shivakumar’s tenure, the company cut down celebrity engagement by around 70% in India. Instead of spending on celebrity endorsements, PepsiCo India started engaging with sources of authority, as the company describes, for each product segment that it terms healthy.
For Quaker, it got on board chef Vikas Khanna, and partnered with cricketer Sachin Tendulkar for Quaker’s value-added dairy range and P.V. Sindhu for sports drink Gatorade. “Consumers are looking for trust and commitment from brands. This has been a trend that we had identified a few years back and have been moving towards driving authenticity and partnering with sources of authority,” said a PepsiCo India spokesperson.
In 2015, the company withdrew from sponsoring domestic cricket tournament Indian Premier League (IPL). In 2012, it had committed Rs396.8 crore as title sponsorship of IPL for five seasons between 2013 and 2017.
PepsiCo India, however, had in 2016 signed a four-year contract with the Board of Control for Cricket in India to become the ground sponsor for all One-Day International and Test matches to be played in the country. The company plans to promote its sports drinks brand Gatorade on the ground.
Go healthy, go premium
During the past decade, PepsiCo has set its eyes on India’s breakfast market with Quaker Oats, with the agenda of making Indians eat “healthy” breakfast. Starting with oats, the company extended the brand to Indian breakfast items such as upma and poha, and later launched ready-to-cook idli, dosa and khichri. But Quaker Oats is still a small brand in India, and it did not gain market share. According to Euromonitor, Quaker Oats has a 9% market share (value) in 2017, a marginal drop from 9.1% in 2013.
In May, PepsiCo further extended Quaker Oats to enter the Indian dairy market— one of the toughest for a foreign multinational to break into.
“The company is embarking on nutrition. There’s demand for food that is healthy and nutritious. And, it’s a consumer-driven demand backed by changing lifestyle, double-income families, single households and more women joining the workforce. Consumers are willing to buy packaged food as long they get healthy and nutritious products,” Shivakumar had said in his January interview.
To ensure profitability, said the PepsiCo India executive cited above, the firm is focusing on premium variants of each key brands. “The target is to occupy maximum shelf space,” the executive added.
For the premium variants, PepsiCo is trying to leverage new trade channels for sales. “E-commerce and modern trade have been at the forefront of our effort to premiumizing our portfolio with products like Lay’s Maxx, Doritos, Tropicana Essentials,” PepsiCo India said in a statement. At the entry level, the company will continue with the magic price points like Rs10, Rs15 and Rs20, mainly in the packaged food space, it added.
Snacks is a growing category for PepsiCo globally. Its revenue increased 1.3% for the quarter ended 9 September, with snack volume rising 3.2% backed by Frito-Lay, Doritos and Cheetos, offsetting a 3.4% drop in beverage volume, according to the company’s statement announcing the results for the quarter.
The architect’s exit
The Mumbai-based analyst quoted above believes the results of initiatives undertaken by Shivakumar will be visible in the coming years. “The company has undergone a massive transformation (in terms of products and cost structuring). Results don’t come overnight,” added the analyst.
The American company did note Shivakumar’s role in the transformation of the Indian entity. Commenting on his exit, Sanjeev Chadha, CEO (Asia, Middle East and Africa), PepsiCo, said in a statement on 9 October, “Shiv has been instrumental in leading the transformation journey for the company. Notably, he has been a key driver for portfolio transformation and helped develop our nutrition business, launching winning innovations with our Quaker and Tropicana brands. Under his leadership, we also deepened consumer engagement with our flagship brands.”
PepsiCo India’s trade partners agree: “PepsiCo has changed under Shiv. Shiv is quick, he and his team engages with partners to make things beneficial for both. PepsiCo even tweaked strategy for the e-commerce channel based on our insights,” said Hari Menon, co-founder and CEO of online grocery store Bigbasket.com.
Agreed Rajeev Varman, CEO of Burger King India Pvt. Ltd. “There’s a shift in PepsiCo’s culture during the past three-and-a-half years. The change is such that PepsiCo even lets us experiment with their beverages to build our products or combos. While Shiv is extremely result oriented, relationship always gets the priority,” he said.
No matter what PepsiCo India’s partners say, Shivakumar is leaving a difficult pitch for his successor Ahmed El Sheikh, earlier senior vice-president and general manager for PepsiCo Egypt and Jordan, who took over as CEO on 1 November.
With falling market shares and revenue that’s at a five-year low, the non-Indian CEO has a formidable task ahead.