PepsiCo Opens China R&D Center as Competition Heats Up With Coke

PepsiCo Inc. (PEP), the world’s second- largest soft-drink maker, opened its largest research center outside the U.S. in China today, as it seeks to boost sales in the world’s most populous country and the Asian region.

The facility, on which the company has spent $40 million to $45 million, will help tailor beverage and snack food brands to Asian taste buds and develop new products for China and the region, Purchase, New York-based PepsiCo said in a statement today.

The soft-drink maker has opened new factories and sought to expand its distribution footprint in China over the past year to narrow the gap with market leader Coca-Cola Co. (KO) PepsiCo, the maker of Tropicana juice drinks and Lay’s potato chips, announced a bottling tie-up with Tingyi (Cayman Islands) Holding Corp. (332) last November. PepsiCo is seeing market share gains from the deal, Greater China Chairman Tim Minges said in Shanghai today, without elaborating.

The new facility in Shanghai is part of PepsiCo’s 2010 plan to invest $2.5 billion in China in food and beverage businesses over a three-year period and expand current offerings such as sour plum flavored Mirinda and Quaker Oats made with wolfberry, the company said today.

“China is a critical part of our global strategy, our growth engine and it makes absolute sense that we do as much of our innovation close to the Chinese consumer and the Asian consumer on the ground,” Mehmood Khan, PepsiCo’s chief scientific officer, said at a press briefing in Shanghai today.

Billion-Dollar Investment

Coca-Cola said last year it was investing $4 billion with its Chinese bottling partners in the world’s second-largest economy over three years to build more bottling plans, buy trucks, expand distribution infrastructure and add coolers.

PepsiCo Chief Executive Officer Indra Nooyi is counting on sales in China and the Asia Pacific to drive earnings in emerging and developed markets, after group profit growth slowed last year.

The beverage and soft-drink manufacturer opened its first drinks plant in China last month with Tingyi, the maker of “Master Kong”-branded instant noodles and beverages. PepsiCo also started production at its sixth and latest food manufacturing facility in Greater China in Wuhan on July 10.

The partnership with Tingyi should help improve PepsiCo’s margins in its beverage business when the alliance is “up and running” in 2014, Nooyi told analysts on a conference call last month.

Under the Tingyi deal, PepsiCo transfers equity interests in its bottling operations in China to Tingyi beverage subsidiary Tingyi-Asahi Beverages Holding Co. In exchange PepsiCo receives a 5 percent stake in Tingyi-Asahi, with an option to increase that to 20 percent by October 2015.

Market Share

The beverage alliance is designed to boost PepsiCo’s soft- drink market share in China where the Purchase, New York-based company was the fourth-largest producer with 4.9 percent share last year. Coca-Cola and Tingyi led sales with 15.8 percent and 13.1 percent of the market in 2011 respectively, data from London-based researcher Euromonitor International show.

The partnership between PepsiCo and Tingyi would create China’s largest beverage company, one with a 1.5 to 1.6 relative market share versus the next largest competitor, 57-year-old Nooyi has said.

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

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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