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The Two Faces Of PepsiCo
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There are reasons behind VFO's UFO status. The concept has been frozen, but it goes through its share of iterations. It is more than an experiment, but less than a full-blown launch. Its intentions are clear, the portfolio is not. Importantly, PepsiCo is yet to make up its mind whether to call it a success, or wait till the trend crystallises.
The entity itself encompasses PepsiCo's burgeoning value snacks and value beverages portfolio. Value snacks include a factory-fresh range of vitamins- and minerals-enriched biscuits and salty snacks priced at Rs 2 and the existing Lehar portfolio of namkeens and chips in the range of Rs 2-55. It offers, in total, 45 stock-keeping units. The value beverages portfolio has a few products launched by NourishCo Beverages — PepsiCo's 50:50 joint venture with Tata Global Beverages — set up in 2010. Though the venture is still finding its feet, NourishCo already offers four products. That apart, Lehar will widen its portfolio of namkeens such as bhujia, nuts, wafers and puffs in smaller sachets with lower prices to reach out farther.
VFO is getting a disproportionate share of chairman Manu Anand's attention. That is because for the first time in PepsiCo's 23-year stay in India, it senses it has hit upon a high-growth engine that could cater to millions not served by its existing products. In the best case scenario, it could be the disruptive force to fuel the growth-starved MNC's emerging-market strategy. Remember, this is Lehar's second coming. First launched in 1996, it was relaunched in 2006.
It was a tumultuous 2011 for PepsiCo International, after all. It disappointed analysts and shareholders as net revenue rose 15 per cent, lower than the 34 per cent in 2010. This came with an announcement of 8,700 job cuts, representing 3 per cent of the workforce in February 2012. PepsiCo lost share in the US carbonated beverage market to Coca-Cola from 2008 through 2010. According to Rick Haffner, beverages industry manager at research firm Euromonitor International, PepsiCo plans to triple the size of its nutrition businesses by 2020. "This could be an integrating link between soft drinks and snacks. The strategy will be to develop a portfolio of nutritious soft drinks and snacks in a unified format," he says. This way, PepsiCo can leverage the strength of its snacks portfolio to offset its weak soft drinks business. "Coca-Cola will not be able to directly match this strategy," says Haffner.
That is precisely why VFO has PepsiCo all perked up. Its India portfolio neither emphasises on low pricing nor on micro-packaging (though both are critical). These are staid tactics to make consumer products affordable. Instead, PepsiCo has offered ‘value' in the form of minerals, vitamins and iron-fortified products. The nutrition portfolio is spread across Lehar and NourishCo with offerings ranging from snacks to beverages. The Rs 2 Lehar Iron Chusti — puffs the company claims are an iron substitute for adolescent girls in Andhra Pradesh — is accompanied by a Rs 2 pack of fortified glucose biscuits. In the value drinks portfolio, NourishCo launched the Rs 6 pack of Tata Gluco+, which is aimed to replenish mineral needs of those who work outdoors for long hours. In February, it expanded the packaged water portfolio by including Tata Water Plus.
As results of beverage test launches in Tamil Nadu and Maharashtra and Lehar Iron Chusti in Andhra Pradesh trickle in, PepsiCo is bold enough to say value foods will form 25 per cent of its food business revenue in three years. "It is early days yet. We are getting to our target. We are not on the same page as foods," says Anand. In doing that, its (in)famous duel with Coca-Cola seems passé as PepsiCo readies for guerrilla warfare, lane by lane, street by street. Sources say the company hopes to break even on its VFO investment by end 2012-13.
"The unorganised market for beverages such as nimbu paani and fruit-based drinks is above Rs 20,000 crore. In packaged ready-to-consume food, a fraction of snacks and beverages are branded now. The first mover who gets it right has a large market," says Pankaj Gupta, practice head for consumer and retail, Tata Strategic Management, a consultancy.
According to Tata Strategic Management, a tectonic shift is in the offing in India's consumption patterns. The consumption ‘pyramid' is expected to convert into a ‘diamond' by 2014-15, bulging at families that earn more than Rs 2 lakh per annum. "The bulge is not at the lowest income band. It is no longer a pyramid," says Gupta. Those just above the bottom will be the largest and most influential consumers. They will be the biggest target of consumer firms because spends on all kinds of food is as high as 50-65 per cent for families with income of
Rs 3.5-4 lakh per annum.
Search For A Growth Engine
The search for what would be VFO began in early 2010. PepsiCo and Boston Consulting Group (BCG) got together to identify the growth engine of the future, and zeroed in on the Rs 3,000-4,000 crore salty snacks category. The industry is split 70:30 between traditional namkeens and western salty snacks such as wafers and chips. While PepsiCo's Lay's range had a dominant share of the western salty snacks category, its share of namkeens was minuscule. BCG did not work on the beverage strategy, which has been devised between PepsiCo and Tata Global Beverages. The team laid out a business plan for the value foods business that would be an intrepid experiment by MNC standards. The idea was vetted by PepsiCo brass at its headquarters in New York, including CEO Indira Nooyi herself. And VFO was born in October 2010.
The PepsiCo-BCG team identified two major trends. First, there is a movement from unbranded to branded among mid- and low-income consumers due to increasing affluence. Second, there is a trading down among high income consumers, who look for quality at affordable prices.
But the crucial finding was that incremental changes in PepsiCo's existing organisation and structure was not the answer. It needed a new business model in procurement, manufacturing, distribution, sales and marketing — different from how things were being done. According to BCG, trying to do this in-house would have been sub-optimal. The culture, practices and approach to doing business would not be consistent with the required model. So the team recommended a separate entity, drawing talent and support from the mother company.
MNCs have tried local strategies in the past but VFO is different. It is unlike Hindustan Unilever's Wheel launch to take on Nirma. It is also unlike Coca-Cola's Sunfill, which struggled to stay afloat at a Rs 1 price point when it entered in 2001. The product was pulled out in 2004 and relaunched in 2011. VFO is an independent PepsiCo within PepsiCo. "With the cost structures we have for the ‘A' business, it was impossible to get into this opportunity. We had to spin it off. It has very different codes from what we do at Pepsi-Frito Lay. The codes are: be entrepreneurial; behave like a local player; think on your feet; go by gut, not research; low cost and profit margins," says Anand.
Lean And Mean
Early bird results have enthused the firm, says Anand. What began as an experiment 18 months ago is rolling out as product launches. Iron Chusti is being test-marketed in two districts of Andhra Pradesh while Tata Water Plus was launched in 20 towns in Tamil Nadu. Gluco+ was test-marketed in Maharashtra and launched in Tamil Nadu. The number of stock-keeping units have been strengthened to 45 in snacks and six in beverages. "They can put products in the market in a third of the time (that PepsiCo takes). But then, they do it small. So even if they fail, they react quickly, pull back, correct it," explains Anand. If the company takes 10-12 months to launch a Frito Lay product, VFO launches snacks in three months.
What helped in delivering such speed to market was an intensive study of rivals such as Haldiram's and Rajkot-based Balaji Group. Owned by Chandrubhai and his three brothers, Balaji has over the past 10 years built one of the largest chips and namkeens brands — Balaji namkeen. Its 60-70 per cent market share in Gujarat is courtesy localisation of products and a local distribution network with access to 700,000 retail outlets in three states. Balaji sells 7.5 million packs a day.
Taking the cue, PepsiCo founded VFO with 4-5 distribution levels, against Frito Lay's 6-7, for quick decision-making. This ensures high retailer margins. The VFO salesmen were also spared the onerous task of business generation, research and feedback. They cover 50 outlets a day, a challenge for any consumer firm. "As there is little writing, there is absolutely no complication. They cut the invoice, drop the stock and move on," says Sudipto Majumdar, CEO of Lehar Foods India.
Even the 40-man VFO is structured differently. "Within the organisation, we have a direct reportee in every function: sales, finance and HR. They, at best, have 3-4 people under them. "Between me and the last mile, there would be three. This would be five in any other organisation," says Majumdar who, like any local entrepreneur, shuns power point presentations and works on the good old Excel and notebooks.
At NourishCo's Gurgaon office, Ashok Namboodiri, chief of marketing and sales, explains the value proposition: "Be it process, product, packaging, the in-built model is to drive down costs. We are not in the business of creating mega assets when it comes to plants. Manufacturing is outsourced. We believe there are operating efficiencies."
NourischCo too considers the value segment a critical mass. "Of the Rs 700 crore turnover we expect in the next 4-5 years, a key chunk will come from the value portfolio. Also, being able to service lanes-bylanes is critical; so, last mile connectivity is one of the key needs we are working on right now," says Namboodiri.
Battles with products at the low end of the value chain are won only by sticking to price points convenient to the consumer. "It is very critical. At Rs 2 a pack (Lehar Iron Chusti puffs and biscuits), you have to be cheaper on the rupees per kilo basis," says Majumdar. NourishCo's Gluco+, for instance, was evolved by working backwards from the Rs 5 price point (it is now priced at Rs 6). "We said, let us work back to what will it take to make it," says Anand.
Critical to target pricing is zero advertising and fully-outsourced production and distribution. "Value players invest money in things other than advertising," says Majumdar. Contract manufacturing helps PepsiCo replicate local competencies such as taste, flavour and product look state-wise. Namkeen is so state-specific that there is nothing like a national namkeen. Every state has its own form of Bikaneri bhujia. "You do not want to tinker with it. But you need to get the price point right," says Majumdar. He adds: "We are leveraging existing assets and that is how we are getting better prices. If we ask someone to set up a plant for us, it has a cost. We have to keep fixed costs low, as we are talking of wafer-thin margins."
A week into NourishCo's launch of Tata Water Plus, Namboodiri explains the differentiators of the value foods business. "Here, cost would be important, but only partly. You have to look at your ability to push in huge volumes through this kind of distribution architecture. You should be able to manage it effectively." He points out the opportunity that the lack of value players has thrown for Gluco+. "Beverage firms' contribution to the sub-Rs 8 price point is minimal when compared to biscuits or shampoos where it's upwards of 30 per cent," he says.
Gupta draws a quick comparison. "At a low price point, scalability is possible when you have a model: where the products are supplied, the distribution coverage is there, and the extent of support for the brand in a micro market," he says. "Then, you have to find ways of replicating that micro-market across geographies. So low–price is easier to do. Low-cost might have trickier elements of distributed manufacturing, which comes with problems of managing a supply chain, outsourcing and maintaining quality."
PepsiCo's asset-light model, however, has an inherent disadvantage. It may spare the company the trouble of investing capex in company-owned manufacturing plants and distribution, but it also keeps its margins low. PepsiCo's margins from the value foods business are one-third its primary business of beverages and Frito Lay. Incidentally, the two biggest and most successful players — Haldiram's and Balaji — invest heavily in their own plants and are fully integrated with their own or dedicated distribution networks. Balaji's plants cost around Rs 200 crore and have a capacity of 500,000 kg of namkeens and 500,000 kg of chips a day. The biggest, Haldiram's, has six plants in and around Delhi and one in Rudrapur, Uttarakhand, servicing the northern and eastern markets. It also boasts of a company-owned-and-operated distribution network of 37 super stockists and more than 4,500 distributors covering both North and East.
So, while an asset-light model may have been good to kickstart business, PepsiCo may have to rethink its strategy once volumes rise.
As it arms itself with a wider portfolio of namkeens under value snacks and beverages, some of its adversaries — Balaji and Bikano in the west, Haldiram's in the north and MTR in the south — are known. But the bulk of local rivals are unknown entities with strong regional presence. For instance, in drinks, it will duel as much with local players as it will with 200-odd seasonal brands that are relaunched for 3-5 months of the summer, year after year.
"We know well how this market works. We know the pulse of the consumer. It is very local," says A.K Tyagi, president of Haldiram's FMCG business, sitting in an office brimming with statues of Hindu deities in one of the company's sprawling manufacturing facilities in Noida.
With an annual turnover of Rs 3,000 crore for its consumer and restaurants business, Haldiram's claims to have an enviable 70 per cent share of the namkeens market. In snacks, it claims a 15 per cent market share through products such as Taka-Tak (chips), Whoopies and Haldiram's wafers. Tyagi says the company has targeted doubling of both the production capacity and market share for the chips business to 30 per cent in 5-8 years.
It is a model that Majumdar is aiming at. "It is a conscious effort to replicate what local players do in a 300-km radius in terms of operation, structure and spends," he says. "If we want to replicate the value player then we should have state-wise organisations."
But competition is snapping at his heels. If PepsiCo has identified salty snacks as a business to be in, so have ITC, Britannia, Parle and Perfetti — all of whom have entered the business in the past 12 months. Each with what it considers is a differentiated product proposition and price point, backed by strong marketing. Though most operate in the Rs 10-30 price bracket, the Rs 2-5 price points have hardly seen takers. For PepsiCo, thus, sustaining the price point and keeping competition away will be all important. "We saw a huge opportunity in organised salted snacks. So in 2008, we entered the chips category," says B.K Rao, group product manager, Parle Products. Parle's portfolio comprises Full-Toss, Monaco chips and Parle chips, while the namkeen portfolio (such as moong dal and aloo bhujia served at price points of Rs 5, 10, 20 and 30) is being test-marketed in Madhya Pradesh, Chhattisgarh and Maharashtra.
"Salty snacks is an impulse-driven category. It is also prone to expandable consumption. Superior research and development, an ability to leverage scale, procurement process and the need to manage costs are the essential levers that play a large part in the success of any player entering the category," says Kaushika Madhavan, partner at consultancy firm AT Kearney. "Small players won't have the scale plus process sophistication and marketing savvy."
So how does PepsiCo plan to fight this battle? "We are looking at all-India (launches). We were in 5-6 states (with Lehar products) in the past year. We will be adding 10 more states this year," says Majumdar. "We roughly launched 25 new products in one and a half years." The product expansion will accelerate further. "It has to be salty and it has to be namkeens and local flavours. But boundaries are not cast in stone. We could re-define boundaries may be two years down the line," says Majumdar.
Learning From VFO
Almost every month, CEOs of the snacks and the NourishCo business meet to share learnings and best practices, and discuss ways to collaborate within VFO. To effectively leverage its own capabilities as well as those of the parent company, NourishCo is integrating at the back-end with Lehar's snacks business and reaching out to the market in a test-market phase.
|ASHOK NAMBOODIRI, CHIEF, MARKETING & SALES, NOURISHCO "Our in-built model is to drive down costs everywhere" (BW pic by Bivash Banerjee)|
"We picked up a couple of geographies and pilots where we went in with both the product portfolios: in Maharashtra with Gluco+ and in Tamil Nadu with the Lehar snacks portfolio. We looked at the hub-and-spoke distribution of products through an intermediary. Then, we tried to optimise return on investment for the channel intermediary by combining the portfolios," says Namboodiri. He explains that the experiment was at a test-market level. "These are all experiments. We have a conventional full-scale beverage model and we should really bear about 50 per cent in terms of operating costs. That is a good benchmark in terms of distribution," says the NourishCo top executive.
What the two organisations also share between them is consumer data and insights, as both reach out to the same target audience. Majumdar also gets by with help from Frito Lay, "So, on the R&D front, if I am launching a product and my team is struggling to get the nuances for a new product right, we take leads from the R&D team at Frito Lay," says Majumdar. "Another area of leverage is purchase. For example, we go and speak to all vendors and get the right partners for commodities such as oil and film."
An ideal situation would be if the two could ride the same distribution or logistics, saving substantially between them. But that is not necessarily feasible. "With salty snacks, you go once a week to replenish stocks of retailers. In beverages, it could be daily or three times a week. Besides, the structure and composition of the trucks is substantially different," says Majumdar.
Even in PepsiCo International, there are few countries where both the snacks and beverage organisations deliver products from common trucks. "We will continue that work and try and see how that value bit can come together," says Majumdar. Whether this value proposition will help PepsiCo expand its forte in food and beverages will depend on multiple factors such as distribution, pricing and consumer acceptance. But as Rama Bijapurkar, market strategist and author, notes, "MNCs are guilty of ‘corporate imperialism' (a term used by C.K. Prahalad). They (MNCs) are usually particular about using a uniform global strategy across all markets. The assumption has always been that this ugly duckling will one day become a beautiful swan. (India) is never going to become like any other place because uniform patterns of evolution do not exist. You will have to develop strategy for this market," says Bijapurkar.
Will the strategy will be disruptive for the market? Maybe not. But will it be disruptive for PepsiCo? Maybe, yes.
(This story was published in Businessworld Issue Dated 16-04-2012)