PepsiCo India, in the past few years, has been gradually moving towards the franchise model. It recently announced that it has even sold off its company-owned bottling operations in the South and West to long-standing franchise partner RJ Corp. PepsiCo India from now on will only own its snack operations and of course will have custody of its concentrates and the marketing of all its brands in India.
This certainly is a more profitable way of doing business as Pepsi will get rid of huge operation costs, which will now be part of the P&L of its franchise partner, and the company can focus better on growing the brand in India. However, a large number of industry observers feel that PepsiCo should have thought about this at least 10 years ago when the business was registering healthy numbers.
Right now, it seems to be a distress sale. Market share of the various beverage brands of Pepsi have been crashing rapidly in the last five years. Its beverage brands have not just been losing out to Coke but also to Indian brands such as Parle Agro and Dabur. "For a brand of Pepsi's stature to go for 100 per cent franchise means their situation is bad," says the owner of a leading beverage company.
"Pepsi has a bigger challenge to handle and that is to win over the consumers whose interest to consume carbonated beverages has been on a rapid decline," adds Former Dabur COO, now Venture Partner at Fireside Partners, Kannan Sitaram. In fact, both Pepsi and Coke have been focusing on reducing their sugar content and are also looking at healthier beverages, but have not been particularly successful. In fact, Coke in India is still riding on the success of Thumps Up and Maaza which it bought from Parle Agro. "Indians are moving faster to healthier alternatives, but not completely towards natural as they are expensive. So, one has to guide them from moving from synthetic towards natural by coming up with options, which are neither completely synthetic nor fully natural. I don't think Coke and Pepsi have really understood the Indian consumer psyche," explains a beverage industry expert.
As PepsiCo India moves towards a compete franchise operations in India, there are talks of talent restructuring. The franchise partner may not want to retain a lot of the company's expensive talent. "In fact, a lot of the good talent may not want to be associated with the franchise partner as they don't like to be on franchise pay rolls," says a HR professional. But in a heterogeneous market like India, can PepsiCo afford not to have control over the sales and distribution team? Most of the markets where Pepsi has franchise operations are either small or homogenous, but India is diverse. "In an environment like India there is immense value if one can control the entire value chain, from the brand to manufacturing to sales and distribution," agrees Kannan.
Though PepsiCo has always been a franchisee operation in the North and East, the landscape of the western and southern markets are quite different from the north and east and it will take a while for the franchise partner to create demand, says the beverage industry expert.
So, what really went wrong with Pepsi? In fact, Coke and Pepsi, both are equally facing the brunt of waning consumer interest for carbonated beverages, but why is it that Pepsi is in deeper trouble? India certainly is not priority for PepsiCo, say marketers. "They never understood Indian consumer's needs. They only listened to global diktats. Now that the business hasn't performed, selling it to a franchise is the easiest way out," says this beverage industry veteran.