Pepsi's Indra Nooyi Focuses on China

If you're the CEO of a big American company, chances are you are traveling to China at least once a year. Indra Nooyi, the chairman and chief executive officer of PepsiCo (PEP), is taking the standard China trip to a new extreme. The Pepsi boss is on a 12-day trip to China, visiting not only the usual destinations for a CEO—Beijing and Shanghai—but also the western cities of Chongqing and Xian as well as rural Inner Mongolia where Pepsi, maker of Lay's and other snack foods, operates China's largest potato farms.

Why devote so much time to one country? Nooyi says she wants to demonstrate how important the mainland is to Pepsi. "China represents our single largest opportunity today outside the U.S.," she says. "It's going to remain that way and will extend that lead." Last year, Pepsi announced that it plans to invest $1 billion in China, part of an effort to keep pace with the expansion of archrival Coca-Cola (KO), which in 2008 said it will invest $2 billion over three years in its Chinese operations. Pepsi has a third of the market for carbonated soft drinks, compared with Coke's half, but it does have the top-ranked cola. "The opportunity is so enormous," says Nooyi.Chinas economy, hurt by the global recession global recession, certainly has its share of problems. Still, it remains one of the world's fastest-growing economies, and middle-class Chinese consumers are natural targets for Pepsi. Nooyi, born in the southern Indian city of Chennai, says it's important for her and other executives to have a better feel for the country. "What are its issues?" she asks. "What makes it tick?"

Although she typically has visited China three or four times a year, Nooyi says, she didn't have the answers to those questions. "Every time I come to China, I'm in and out of conference rooms," she says. "I didn't get a good sense of China."

Crash Course on China

So Nooyi decided she was going to try something different by spending two weeks in the country. To get ready, she launched in January a China seminar at Pepsi headquarters in Purchase, N.Y., with different university professors and other academics visiting the office and teaching Nooyi about China's history, economy, and politics. Last month, before leaving for Asia, she had Henry Kissinger visit to give the final class. "I didn't want to come here clueless about what was going on," she says.

While she has been in China, Nooyi has taken part in some typical news events. She opened a Pepsi factory in Chongqing that the company says is one of the greenest in the country. On July 1 she announced that Pepsi would contribute $5 million to co-sponsor the U.S. pavilion at the Shanghai Expo, the World's Fair the city is putting on next year.

This trip she's keeping to a minimum the number of meetings in conference rooms, instead focusing on "a lot more experiential learning" through visits to markets, homes, and schools. In Shanghai, she says, she went for a stroll through the narrow alleys of old neighborhoods "to see how people lived before the whole place [was] Westernized." She also has met with university students to hear their thoughts about Pepsi and other foreign brands.

What has she learned from speaking to young Chinese? "They actually like foreign brands," she says. "They view foreign brands as a mark of safety." Naturally, the Pepsi boss says Chinese youth are especially fond of Pepsi. "They view Pepsi as an aspirational brand and felt it was very much in touch with the youth," she says.

What Soda Habit?

For all of China's potential, though, both Pepsi and Coke face some big challenges in the country. Relatively few Chinese have the habit of downing a cold soda on a hot summer's day: Per capita consumption of soft drinks in China last year amounted to just 35 eight-ounce servings, compared with 789 in the U.S. and 125 worldwide. While that's a problem, it also means there's "huge potential for additional growth in the market," says John Sicher, editor of trade publication Beverage Digest.

Whether that growth will benefit fizzy drinks is another issue. Many middle-class Chinese consumers, like their American counterparts, are steering clear of sweet sodas and favoring more natural drinks. "The market's mutating there like everywhere else—and to the detriment of carbonated soft drinks," says Nick Hahn, a former Coke executive who works for Vivaldi Partners, a New York consulting firm.

Like Coke, Pepsi is trying to expand its juice business in China. "Non-carbs are becoming a bigger and bigger factor here," says Nooyi. And like Coke, Pepsi is trying to develop new drinks locally, using ingredients from traditional Chinese medicine. For instance, Pepsi has introduced a drink with dates and wolfberries; another has extract from chrysanthemums. Not your typical soft-drink flavors, but Nooyi says they have potential. "I'm sitting here in the office and just chugging them," she says. "The taste is terrific."

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