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How India is changing PepsiCo

Under Indra Nooyi PepsiCo wants to become a smarter and healthier food and beverages company. Here's the story on how India is at the vanguard of that transition.

Shamni Pande        Print Edition: January 24, 2010

Not even many in the senior tiers of PepsiCo Inc. know of a quiet coup the Indian unit of the foods and beverages giant scored in December. At a meeting of the company's top executives at Purchase, New York, before they headed out for Christmas holidays, Indra Nooyi, Chairman and CEO, PepsiCo, placed a bright-coloured pack of tangy baked crackers on the table.

The brand, Aliva, had been developed nearly 12,000 km away at Gurgaon and was crackling in the Indian snacks marketplace, since a summer launch, selling at Rs 12 a pack. "Why can't we do an Aliva, at a similar price, in our other top markets," Nooyi, 54, asked her key lieutenants of the latest product in PepsiCo's fast-growing global foods portfolio. India was the lead market in the company's sprawl for a product of the Aliva kind and the first from a new baked-snack business unit formed early in 2009.

  • In Q3, best growth for PepsiCo worldwide came from India
  • Slew of indigenous products such as Aliva, Nimbooz, Kurkure launched
  • Idea and technology of Nimbooz used to launch a Hibiscus-based drink in Egypt
  • India is a low-costhigh-quality benchmark for other PepsiCo regions
  • The company has turned its entry obligations into a strategic advantage


Nooyi's enthusiasm for Aliva has little to do with her years growing up in Madras (now Chennai), a city that relishes snacks from "thattai", a lentilbased spicy wafer, to "poli", a flattened bread with a jaggery-based filling, to "murukku", the salty, fried chickpea snack. It has roots in PepsiCo India shining the headlights for the $43-billion business she runs as it transforms from a sweetened, fizzy water company to one that sells healthier products (it is already ranked second behind Nestle SA by revenues among food and beverage makers in the world).

For certain, the global foods industry for some years now has sought to offer customers locally relevant tastes, flavours and ingredients. But seldom have international corporations rustled up brands for their mature western markets that have been brewed in a regional outpost lab.

The man heading the outpost, in this instance—Sanjeev Chadha, Chairman, India region—calls the phenomenon "the shifting centre of the universe". A decade ago, he says, companies leveraged global markets with existing brands and solutions; today they are turning to technologies, processes and even products across the spectrum from various markets. "The flip is not difficult to foresee," he concludes. That inference lies in the series of successful products from India, a subsidiary halfway around the world for PepsiCo. In 2000, PepsiCo India, as the Gurgaon-headquartered Indian unit is called, developed Kurkure (the brand comes from the Hindi word for crunchy) from scratch to offer Indians a finger-food using rice, corn and lentil flour.

Kurkure has gone on to become a blockbuster success with sales (it is a Rs 700-crore brand in India) rapidly tick-tocking to as far as West Asia. "There has been interest in the Pepsi eco-system for local variants of Kurkure from South Africa to the United Kingdom," says Gautham Mukkavilli, CEO—India Foods and President—India region for PepsiCo. He expects that Quaker Oats (worth Rs 70 crore annual sales), introduced in end-2005, and Aliva, will be as big as Lays (the Pepsi flagship chips brand rakes in Rs 900 crore) and Kurkure eventually.

Nimbooz, a packaged lemonade that uses no artificial flavours and fizz, launched in March 2009 is another hit from India. "We have already used the idea and technology of the product from India to launch Mirinda Karkedeh in Egypt which is a hibiscus-based drink," says Saad Abdul Latif, CEO of PepsiCo for the Asia, Middle East and Africa regions, adding that some of the other markets under his ward are, too, looking to introduce Nimbooz variants.

Several other options are in the pipeline, which PepsiCo will not talk about for competitive reasons, prompting Nooyi to call her India offices "our biggest learning lab" (see interview on page 50). The obvious options are new flavours and pricing options for Lays, Kurkure and Aliva; already, Kurkure is available at Rs 2 for a 13-gm pack. "We have pilot-tested Kurkure as a chaat at some malls. The idea was to get chefs to offer a chaat that used our brand," says Deepika Warrier, Marketing Director (for Foods), PepsiCo India of the plate of savoury snacks often doused in curd and sweet syrup.

T.S.R Murali, Executive Director— Technology, PepsiCo India, or "Doc" as he is called in-house, embodies the ways new tastes are developed at the company's Gurgaon labs. For the latest flavour, "Lime and Masala Masti" of Lays, for instance, he looked at the ways consumers have potatoes at home. "The challenge is to offer a combination of popular familiar taste in an innovative, healthy manner," he says of his team's job.

PepsiCo India's production lines, too, have tweaks that go beyond just saving costs. The company, for instance, retooled a line based on the Reading Bakery System, a popular biscuit baking machinery brand, by adding a seasoning tumbler on the salty snack line. Result: flexibility in adding any flavour on any baked base.

"Typically, manufacturers tend to add the flavours and seasoning with the dough, but ours seeks to add this to the product" in its final stages, says Mukkavilli. The learning came from the chips-making line where the flavour is the last stage of the process. In beverages, PepsiCo India is "experimenting with ginger and mint as an ingredient" as also looking at sachets and dry concentrates as a delivery option that customers can use to make a drink, according to Geetu Verma, Executive Director— Innovations—PepsiCo India.

Erin Ashley Smith, a senior analyst tracking the consumer sector at Argus Research, US, thinks the strategy of distributed development makes sense. "I think there is opportunity to take products from international markets and expand them into the US or other markets," she said in an e-mail interview. Indeed, the tipping point might be right for Nooyi, a CEO unafraid of tackling change (she was the force at PepsiCo behind the $13.4 billion Quaker Oats buyout late in 2000), as she gets the multinational to taste an asyet tantalising concept: "disruptive innovations" trickling up from her smaller, regional posts to more mature markets.

As more and more consumers turn to tap water, impacting soda sales in the slowdownplagued West, there is compelling logic in competitively-priced products such as Aliva to drive growth. "Just think about it…this would translate into roughly 25 cents...," says Chadha, PepsiCo's India Chairman. He should know: some 37 per cent of PepsiCo India's Rs 5,200 crore revenues (year to date until September 30, according to estimates) come from snacks and foods such as Kurkure and Aliva—a contribution second only to PepsiCo's Walkers Snack Foods unit in the UK (outside of US).

That chunky contribution has already likely helped PepsiCo India overtake Nestle India as No. 1 among Indian branded and processed foods and beverages companies (the foods portfolio of Hindustan Unilever and ITC lag behind). The verdict is not out on this but a Mumbai FMCG analyst reckons the only player, if any, ahead of PepsiCo is United Spirits.

In allowing regions such a free will to create, acquire and launch new brands, Nooyi is seeking to sidestep a common problem that larger companies often tend to have—their inability to take risks. "My biggest learning on foods has been from my biggest mistake," says Warrier, the marketing head, referring to a failed experiment of melding Lays chips with non-vegetarian flavours such as tandoori chicken in 1999.

Hungry for Less
For all other successes with locallydeveloped food products, PepsiCo India has the government here to thank—at least, partly—for being the envy of its peers. A condition that New Delhi set for the entry of the multinational into India in 1989 was that Pepsi (the name changed to PepsiCo in 2000) would operate through a joint venture with the Punjab government and export goods worth half its turnover for 10 years. For the company, then, exports came through farm produce.

As a result, today, its strength in cultivation of potatoes and paddy is proving to be the lynchpin for its unique solutions from India that, in turn, are proving to be potential game changers globally. For instance, PepsiCo India is the country's largest corporate involved in potato contract farming and deals with 1,50,000 tonnes of the tuber worth about Rs 200 crore annually. After a series of successful initiatives around tomatoes, chillies, peanuts and rice, the company is now looking at oats cultivation possibilities in India—an effort that in the days ahead will feed its Quaker Oats portfolio.

That self-reliance grew into Pepsi India's DNA in the years since 1989 even though growth has been more driven by beverages in a market underpenetrated by fizzy water. The Indian unit has helped develop technologies that enable what is called direct seeding of rice, which eliminates holding water for paddy cultivation, thereby saving 30 per cent of water used in rice farming. That effort, under a social responsibility initiative, would have covered about 6,000 acres of rice farms in 2009 and saved an estimated five billion kilolitres of water (see No Paddy Pool, Dec. 13 issue).

Nearly two-fifths of energy used at its various PepsiCo India plants comes from renewable sources—typically, bio-mass and wind turbines. It has set up a wind-mill in Tamil Nadu and plans two more for generating captive power for internal use. "These are breakthroughs and nowhere else has the organisation managed to turn water positive, the way it has done in India," says Chadha, who counts 2009 as the best year for PepsiCo's mainstay beverages business that expanded 40 per cent in volumes in the September 2009 quarter from the previous year.

The thrift extends into foods as well. Today, PepsiCo India sets up potato chips capacity at about 80 per cent cost compared to that of western countries at the same levels of quality. Throughput of production lines has been enhanced by up to one-fifth at marginal investments through suggestions that came up from shopfloor workers. A snacks plant at Sankrail near Kolkata has turned to rice husk as feedstock for its energy needs reducing its dependence on petroleum by 75 per cent.

The Indian consumer goods model of dependence on external distributors—bipolar compared to the traditional bottler model that cola companies earlier swore by—too held out lessons for PepsiCo in other parts as well. "India has constantly provided solutions. When we started, we emulated Hindustan Lever's (now called Hindustan Unilever) distribution model involving the third party. This was something new to the organisation and was subsequently introduced in other Asian markets," says P.M. Sinha, the second head at Pepsi India. Mukkavilli, the foods head at PepsiCo India today, for instance, credits his early years in India for successfully implementing a third-party distribution structure in Vietnam when he moved there in 1998.

Elsewhere in the PepsiCo empire, every little act of enterprise at the Indian unit is being carefully noted and recorded for future application: "We tend to normalise costs and benchmark them against India's P&L (profit and loss account). It has among the best cost efficiencies and there are many innovative solutions at every step of the manufacturing process to improve productivity and efficiency," says Latif, to whom Chadha and the India team report to. An information technology sales platform developed at PepsiCo India has been adopted in the parent's other Asian markets.

Eat Healthy, Eat Merry
PepsiCo's global board of directors meeting was recently held in India, which is testimony to the scorching pace the market has registered. The idea was to apprise the board members— including Colgate Palmolive Chairman and CEO Ian Cook; Daniel Vasella, Chairman and CEO of Novartis AG; and Zurich Financial Services' CEO James Schiro—of the rash of growth in market innovations that were stemming from this region and, perhaps, also setting the stage to the idea of sourcing brands from such markets.

PepsiCo's increasing thrust on its India unit coincides with the parent's shift to healthier products tracking changing consumer choices and its losing cola battle globally to its arch-rival Coca-Cola. All through the last 15 years, PepsiCo, led by former CEOs Roger Enrico and Steve Reinemund (Nooyi took over in October 2006) was quick to build on the insight that consumers were opting for non-carbonated beverages.

It established Aquafina and Gatorade that came along with the Quaker Oats acquistion in water and sports drinks as global leaders. In that sense, the footwork and body language have been consistent. PepsiCo has made no bones about its intention to keep diving deeper into nutritious and healthier choices, even by snapping up disparate businesses across different parts of the world: a joint venture with Almarai, the Gulf's largest dairy company to invest in dairy and juice processors, in 2009, followed by an agreement to buy out Amacoco in Brazil, the largest coconut water company. That intention is not swept under the carpet in India either. "We are open to mergers and acquisitions; but do not depend on this for our growth. Our portfolio and new launches offer us enormous opportunities," says Chadha.

To be sure, India is among markets where the growth in carbonated drinks is rocketing. In fact, the growth story in beverages is that the company, despite trailing Coca-Cola in overall market shares, has actually outgrown the rival in volume percentage terms in each of the last three quarters—narrowing the gap between their beverage revenues (Coca Cola India's revenues was some Rs 4,000 crore in 2008.)

"The fact is that India trails even Pakistan in per capita consumption of packaged beverages; hence there is a huge headroom for growth in the business," says Mukkavilli. Together with ambitions of moving its business more towards the "centre of the plate", that opportunity in its main business could well see PepsiCo top Rs 40,000 crore revenues in India by 2020, its 10-year aim. But, if all play by Nooyi's script for the Indian unit on the global stage, that will be the epilogue to the PepsiCo India story of the tail wagging the dog.

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