PepsiCo Looks To Battle Coca-Cola In Rural India

Beverage wars in India have long been dominated by PepsiCo (NYSE:PEP) and Coca-Cola. Since 2007, Pepsi’s carbonated soft drinks (CSD) market share in the country has fallen by four percentage points to 36% in 2012. On the other hand, Coca-Cola’s share has risen from 57% to 61% during the same period. Following the announcement by Coca-Cola to invest $5 billion in India, Pepsi has also announced a $5.2 billion investment, as part of its 2020 vision for the country. ^[1] With a rise in rural spending, Pepsi will look to turn its fortunes and compete with Coca-Cola to grab the maximum share of this growth.

We estimate a $87 price for PepsiCo, which is around 5% above the current market price.

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Untapped Potential of Rural India to Drive Growth

To Pepsi and Coke, the world’s second most populous nation has a large growth potential, due to a low per capita consumption of beverages. The figure stood at approximately 4 liters, compared to a much larger 167 liters in the U.S. ^[2] Also, around 70% of the Indian population resides in rural areas, where beverage sales have historically been low (around 19% of soft drinks off-trade volumes). But as the Indian economy looks to recover from a decade-low of ~5% GDP growth in fiscal 2013, consumer spending in rural areas seems to be improving. While companies dependent on urban spending have grown by ~9% in the quarter ending June this year, those dependent on rural sales have surged by over 15%. ^[3]

Amid the economic slowdown in the country in 2012, the beverage industry grew by an impressive 23% year on year to $7.3 billion. Although the GDP growth rate for fiscal 2014 is expected to fall short of 5%, the outlook for this market in the next few years remains positive. ^[4] Pepsi plans to more than double its production capacity in India by 2020, and will look to target underdeveloped cities and towns. In fact, independent small shop owners still account for the maximum share of beverage sales in India due to deeper penetration, particularly in the rural areas. Pepsi plans to unlock the potential of India, by investing in the development of distribution channels and infrastructure.

Stiff Competition With Coca-Cola In India

Although Pepsi entered India before Coca-Cola, the latter has been able to capture more than 60% of the CSD industry and one-fourth of the overall beverage market in the country. Consumers in the developing countries are generally more price sensitive, especially in the rural areas, where the magnitude of price is important. Owing to this, in February last year, Coca-Cola slashed the price of its returnable glass bottles from 10 rupees (INR) to 8 rupees (16 cents to 13). In a bid to strengthen its opposition, Pepsi has also followed suit by announcing a similar price cut in September this year.

Demand for a stronger cola and lemon drink in India had led to Coca-Cola’s acquisition of local brands Thumbs Up and Limca from Parle Agro in 1993. Both these brands have since garnered considerable popularity and together constitute around 22% of the CSD market presently. ^[5] Pepsi Atom, which was launched earlier this year to rival Coca-Cola’s Thumbs Up, has failed to generate any significant sales. In order to benefit from the growth opportunities in India, Pepsi will have to diversify its portfolio based on local taste and requirement.

Some of the steps taken by Pepsi to cater to the regional preferences and consumer spending behavior of the country could positively impact its market share. In cities such as Mumbai and Bangalore, Pepsi’s flagship juice brand Tropicana is now available in a powdered form in sachets at a reasonable price of 10 rupees (16 cents). The company also launched Nimbooz Masala Soda in North India, and revived its Duke’s Masala Soda brand keeping in tune to local taste. Coca-Cola has also revamped its RimZim Masala drink to compete with Pepsi in this category.

Even though Coca-Cola has a lead in the Indian soft drink industry, Pepsi has a considerable market share of over 20%. ^[6] The anticipated overall growth of this market along with a rise in rural spending should boost Pepsi’s top line in the next few years.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. “Pepsi to invest more than $5 billion in India“, November 2013, bloomberg.com [↩]
2. Coca-Cola full report [↩]
3. “Smaller cities drive consumer spending“, October 2013, timesofindia.com [↩]
4. “Soft drinks in India“, July 2013, euromonitor.com [↩]
5. “A rough summer“, July 2013, businesstoday.com [↩]
6. “PepsiCo India head quits“, June 2013, wsj.com [↩]