Pepsi: Low Price, High Potential

Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The battle between Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP) has long since reached a standstill on American soil. The companies continue to compete, no doubt, but each company’s market share has been more or less set by now. New brands of beverages, along with acquisitions, like Pepsi’s buyout of Frito-Lays, have changed the numbers, but the balance remains.

So while competitor Coca-Cola owns a larger part of the market share in America, Pepsi has always been, and will continue to be, a valuable buy. In this industry, being second is still a big deal. But the second-in-command in soda has done anything but given up on the international battles to be had.

Which makes last week’s news of Pepsi’s move in the Chinese market all the more encouraging for the company. Pepsi won approval from China’s Ministry of Commerce to sell its bottling operations there. In exchange, the company will receive a 5% share in Tingyi-Asahi Beverages (Cayman Islands), with the option to up that portion to 20% if it’d like in 2015.

Tyingi is the buying partner that will take over Pepsi’s operations. The partnership is encouraging for both companies, as each seeks to grow in the emerging Chinese market, which features over a billion possible consumers and plenty of room for growth.

Now, the partnership is nothing new for Pepsi. The food and drink conglomerate has its hands in more than one operation in more than one country. Currently, it controls 22 brands that bring in over $1 billion annually ¾ including some very popular names. Tyingi is certainly less familiar to the average consumer, especially in the West, but the alliance means that Pepsi has an already established partner looking for growth in China.

And China may be the biggest piece in the puzzle of the future. With Coca-Cola currently dominating that platform, Pepsi looks to capitalize on what will be the largest beverage market in the world by 2015. The agreement brings some of the world’s most popular soft drinks to the market, as well as Tyingi’s Master Kong brand, which includes China’s top-selling line of tea. It’s no secret how important tea is to the Chinese and their ancient culture ¾ so Pepsi stands to benefit from both cross marketing and brand association.

PepsiCo Chairman and CEO Indra Nooyi described the alliance’s benefits as, “By leveraging the complementary strengths of each company, we'll be able to significantly enhance our beverage business in China, reach millions of new consumers throughout the country, and create value for Tingyi and PepsiCo shareholders."

Pepsi, despite being ranked 4th in sales in the Chinese beverage market, was still doing well. Last year, sales were up 13% and all accounts had Pepsi continuing the rising trend. The Tingyi agreement, spurred on now by the recent government approval, will only help the company grow. And the option to expand the alliance in 2015 only gives Pepsi more comfort going forward. By this time, China will have surpassed the United States as the largest beverage market in the world, and Pepsi can capitalize on such with a 20% share in a key contributor to that market. Tyingi’s products, combined with Pepsi’s products like its namesake soft drink, Gatorade, and Tropicana.

I’m aware that it can be a gamble to bet strong on foreign markets. It’s impossible to predict, in full, the cultural ties that Chinese consumers might consider when purchasing their soft drinks. But, I think, Pepsi needs to take the risk. Certainly, it’s been wise in buying, and creating, great brands that have expanded its portfolio outside of soft drinks ¾ Frito Lay’s for example. But its days of reaping great success in America may be over. And for every larger corporate client they gain, they could just lose another to Coca-Cola

China represents another investment Pepsi is willing to make. It is, after all, a soft-drink company with a soft-drink name and it wants to continue down the path. The only way to do this is to bet big on emerging markets like China, Brazil and India. It’s estimated that Pepsi has already spent more than $1.6 billion in China (and yet, Coca-Cola has still spent more). So, investments like the deal with Tingyi make sense in its plan moving forward.

As an investor, it’s always encouraging to see partnerships take place ¾ especially when both companies have a track record of success. Tingyi has been on the rise ever since it began operations in 1992. It has become one of China’s leading food and beverage providers. Its lead brand, as mentioned, is Master Kong ¾ found by a 2011 study to be the second most valuable brand name in all of China (after Sony), which is no small feat in a country of a billion.

PepsiCo cannot sit back and hope emerging markets will choose its brand over Coca-Cola or other competitors. Coca-Cola has made significant investments abroad, we know this. Dr Pepper Snapple Group (NYSE: DPS), perhaps the third competitor in the mix, only makes things worse for PepsiCo. Dr. Pepper Snapple only sells in the U.S., Mexico and Caribbean, and the sales from its international times go the company that owns those rights Coca-Cola. The success of Dr. Pepper and Snapple brands abroad work directly against Pepsi. Not to fear, though, these brands haven’t fared nearly as well as Pepsi’s main line or Gatorade. And none of Dr. Pepper Snapple’s line comes anywhere near the ballpark of Master Kong’s success.

Experts are already behind Pepsi for 2012, and I’d have to agree. It comes in cheaper than buying Coca-Cola and beats it out on several other measures of return profit. I’m a fan of buying PepsiCo right now ¾ based on the initiative it’s showing to attack the emerging markets and its commitment to hooking in these new consumers. While Coca-Cola may do better this year ¾ having a strong foothold in China already, Pepsi will be a cheaper buy and a chance for a bigger profit. 

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