Pepsi: Innovating and Generating Growth in Emerging Markets

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Pepsi (NYSE: PEP) almost tripled its business from $8 billion in 2006 to $22 billion in 2011 annual net revenues in emerging markets. In 2012, Pepsi is also looking for growth abroad, removing the need to rely solely on sluggish developed markets; without forgetting to continue the process of innovation in these developed markets as well. They are creating new and unique products and getting into new niche markets in developed countries. Let's take a look at two new exciting possibilities for the company in Japan and China.

Product innovation in Japan:

Want to add more fiber to your diet? Lower cholesterol and block out fat? Apparently Pepsi wants to help customers combat obesity and is pushing their new product, Pepsi Special, in Japan. Pepsi Special will contain "dextrin" which is said to block fat by preventing the digestive system from absorbing it. The fiber molecule dextrin is the main ingredient in Pepsi's new cola that the Japanese government has now deemed "food for specific health use." Pepsi is entering a market for dextrin soda that was formerly occupied solely by Japanese brand Kirin Mets Cola.

Kirin Mets Cola gained clearance by the Japanese government for being a "food for specific health use" first, and according to the company, they topped 50% of their annual sales goal in just two weeks- selling 1 million cases. The dextrin soda market in Japan could be lucrative for Pepsi, and they are entering it when there is only one serious competitor.

Setting up and strengthening shop in China:

On Nov. 12, Pepsi opened its largest resource center in China, in a move to continue their focus on emerging market growth. The company is aiming at Coca-Cola's (NYSE: KO) throat in China, looking to steal some market share away by forming a strategic alliance with Chinese company Tingyi. If successful, the deal should boost Pepsi's market share in the soda business in China significantly. According to Bloomberg, the partnership will create the largest beverage company in China, with a 1.5 to 1.6 lead in market share. PepsiCo Chief Executive Officer Indra Nooyi commented on the partnership, stating:

"Between us, we will basically cover the entire country and have over 70 plants between the two of us in China... So I think going into 2013 and forward, this business is going to look very, very good."

Sales in China should help generate and drive earnings for Pepsi, and the new partnership increases their Chinese footprint significantly.

Conclusion:

Pepsi may have found a new niche market in Japan that will provide them a new and unique potential source of growth. If Pepsi Special catches on in Japan, it could be huge in the United States. If people think they are able to drink cola and be healthy at the same time, it is likely that they will drink more of it then unhealthy regular soda- especially if it tastes the same. Even more so if it is touted as something that will help with obesity, which is a big time problem in the U.S.

Pepsi's new cola also has the potential to skirt around government regulators like Michael Bloomberg, who want to curb obesity by banning soda- specifically sugary drinks over 16 ounces. Pepsi may have the next big thing on their hands, and I wouldn't be surprised if Coca-Cola came out with a competing product if the dextrin soda becomes a hit and doesn't have potential side effects that could hurt the dextrin fiber's reputation as a "health" ingredient.

The company is also expanding their operations in China, which will help Pepsi further capitalize on emerging market growth in the future, as well as continue to remain competitive with Coke. At the end of their last quarter, the company reported a decline of 13% in emerging and developing market net revenue. This was primarily due to "beverage refranchisings in China and Mexico" and this decline should turn into an increase in future earnings as business gets settled in these countries and begins to pick up- especially in China.

Valuation wise Pepsi looks fairly valued, especially when considering its dividend yield, which is slightly over 3% and capable of generating a good stream of income.

 


Jharry1 owns shares of The Coca-Cola Company. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend The Coca-Cola Company and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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