Food And Beverage Industry In India Marketing Essay

India is one of the largest producers of food and dairy products. But when it comes to processed packaged food and beverages, the market is largely unorganized with huge growth potentials.

Continuous urbanization and changing consumer habits, has resulted in greater reliance of people on packaged foods and beverages. With the influx of major international players like Coca-Cola and PepsiCo, and efforts by large domestic players like Dabur and Parle Agro, the industry is getting more organized. As a result, the industry is generating more opportunities in sectors like marketing, supply chain, storing, warehousing, manufacturing, packaging and R&D.

One of the major players, in Indian subcontinent is PepsiCo, Inc. It entered in India in 1989 and established Pepsico India Pvt. Ltd. The liberalization of Indian economy in 1992 helped Pepsico expand its business in India. Currently Pepsico India Pvt. Ltd. has its headquarters in Gurgaon, Haryana. It has facilities for 38 bottling plants and three food plants in India to satisfy the Indian consumer demand.

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The company has recently faced some decline in profits and increase in the debts but these can be attributed its recent investments in growing Indian market but, overall the financial position of the company is robust and sturdy. The company has got strong laws governing the Intellectual Property and use of company’s resources, and is taking initiatives to improve the R&D. PepsiCo believes that R&D plays a crucial role for the growth of the business and to develops new products and technologies to meet consumer requirements in near future.

The major threat to PepsiCo is from the unorganized sector and the large multinational corporations like Coco-Cola Corporation, Pearl Agro etc. PepsiCo is offering substantial product differential by increasingly giving emphasis to health conscious trend, with increasing flavors and verities.

PepsiCo plans to invest $500 million in Indian market over the next few years in order to triple its revenues in the region. The investment will spread over half a dozen business areas such as manufacturing, R&D, agriculture, product development and market infrastructure.

It has taken many steps aimed at tapping the growing market by introducing new products, investing in development plans and Capital expenditure plans. Thus, overall, the company’s profile looks promising and ready to strengthen its roots.

Contents

PEPSICO

Food and Beverage Industry in India

India is one the largest fastest growing economies in the world with an average growth rate of 7%. With a population size of 1.21 billion it is one of most lucrative markets consumer products. Due to the increase in purchasing power of the people and urbanization of small cities the demand of processed food and beverages has grown manifolds in last few years. Currently the estimated size of the industry is $360 billion. The Ministry of Food Processing has divided the industry into the following areas: Dairy processing, Grain processing, Fish, Fruits & Vegetable processing, meat & poultry processing and lastly, Packaged goods such as beverages, snacks, processed/ready-to-cook foods. Out of these, packaged and processed food industry is estimated at a smaller US$70 billion. The domestic consumption of non-alcoholic beverages, which include tea and coffee, carbonated drinks and fruit-based drinks account for a little more than US$1.2 billion. And, with current CAGR of 20% it’s likely to touch US$2.3 billion by the year 2015. (Chibber, 2011)

At present, carbonated or aerated drinks valued at US$370 million contributed to 30% non-alcoholic beverages. Fruit based drinks and energy drinks valued at US $250 million and US$125 million makes for other 30%

Structure of the industry

Until 1992 reforms and liberalization of Indian economy, the industry was largely unorganized consisting of many small scale firms catering only to domestic market. In packaged food industry size only few organized firms existed with limited product like ketchup, flavors, jam and processed noodles etc. Post liberalization, with the influx of international brands and considerable change in food procurement chain, transportation, storing and warehousing the growth of the industry has been robust and steady. The evolution of innovative food processing capacity and the emergence of organized retail, changing consumption patterns with fast changing demographics and habits has fuelling the next growth trajectory for the food industry in India. With the proposed policy changes in Foreign Direct Investments (FDI) by Government of India for retail sector further accelerated growth is expected in the industry. (http://pepsicoindia.co.in/Download)

The major players in the industry are Dabur, Hindustan Unilever Limited, Coca-Cola, Pepsico, ITC Ltd, Parle Agro Products, Britannia India, Nestle India, Haldirams, Amul, Godrej Industries, Cadbury Schweppes, Future Group, RPG Enterprise etc. (http://www.ibef.org, 2012)

Marketing strategies of the company

Indian consumer market is mainly segmented on the basis of geography and demographic. Also the market is highly seasonal and predominantly urban. The products are relatively low cost with low margin but are sold in huge volumes. The marketing strategies are mostly product driven focusing on the masses. Also, innovative products to catering to regional tastes and the needs of niche consumers are been promoted, benefiting in growth of the industry. Most of promotions are done to increase the visibility of the brand. One of the most common practices is to offer the product in wide range package sizes and prices suiting the needs of diverse consumer segments. The promotions and advertisements done by the companies are often large with huge financial costs. The promotions are usually frequent and during popular TV shows, sports event at the peak hour with many celebrity endorsements. Other media like print, digital, banner and hoarding and event sponsorship are also used. (Vora)

COMPANY HISTORY:

Pepsico Inc., a multinational company, formed in 1965 with the merger of the Pepsi-Cola Company and Fruit-Lay, Inc. Pepsico Inc., since then has expanded from Pepsi to a broader range of food and beverages brands with the largest of which include acquisition of Tropicana in 1998 and a merger with Quaker Oats in 2001, which added the Gatorade brand to its portfolio. (http://en.wikipedia.org/wik)

Pepsico Inc. entered India in 1989 and established Pepsico India Pvt. Ltd. It entered India as an industry for food and agro-based products. Since its entry into India, it had already invested INR 18 billion by the year 2000.

In 1990, Indian government liberalized economy on account of severe foreign exchange crises, which helped Pepsico to expand its business in India. In 2002, Pepsico Inc. joined hands with Punjab Agro Export Corporation to process citrus fruits for its Tropicana project. By 2003, Pepsi’s soft drinks, snacks, fruit juices, mineral water business had established itself firmly in India.

It is one of the largest food and beverage industry in India with an investment of over $1 billion.

COMPANY SIZE:

Pepsico Inc., an American multinational food and beverage corporation headquartered in New York, United States, with interests in the manufacturing, marketing and distribution of grain-based snack foods, beverages, and other products.

As of January 2012, twenty-two of the PepsiCo’s product lines generated retail sales of more than $1 billion each and the company’s products were distributed across more than 200 countries, resulting in annual net revenues of $43.3 billion. Based on net revenue, Pepsico is the second largest food and beverage business in the world. (http://en.wikipedia.org/wik)

Currently Pepsico India Pvt. Ltd. has its headquarters in Gurgaon, Haryana. It has facilities for 38 bottling plants and three food plants in India to satisfy the Indian consumer demand. It presently employs 6400 people and provides indirect employment to almost 200,000 people through its production and distribution activities. (http://pepsicoindia.co.in/media)

GROWTH ANALYSIS:

Pepsico Inc., between 1970’s and 1990’s has expanded via acquisition of businesses outside of its core focus of packaged food and beverage brands. It concluded its disinvestments by 2007 and was followed by multiple large scale acquisitions, as Pepsico continued its expansion beyond snack food and beverage lines. In August 2009, Pepsico made a $7 billion offer to acquire the two largest bottlers of its products in North America: Pepsi Bottling Group and PepsiAmericas. (http://en.wikipedia.org/wik)

Growth for 2013 is expected to improve to sales growth of 4.5% and profit of 8.3% to $4.44 per share. (Fuhrmann, 2012)

Pepsico in India in a short period, it has grown to be one of the India’s largest and fastest growing food and beverage industry in the country. PepsiCo’s India’s growth has been guided by PepsiCo’s global vision of “Performance with Purpose”. This means, while businesses maximize shareholder value, they have a responsibility to all the stakeholders, including the communities in which they operate, the consumers they serve and the environment whose resources they use. (http://pepsicoindia.co.in/company)

Changes in the Environment of Industry:

With the growing GDP, the purchasing power of the people is also growing. People nowadays demand convenience and are willing to pay extra for it. As their work habits and lifestyles have changed, it’s now all about time, and the consumer would rather buy time than prepare food. With busier lifestyle of the people, smaller and more frequent meals are becoming common, resulting in higher demand for the packaged food and drinks. The people have become health conscious, so, nutrition is becoming an important consideration when purchasing food and drinks.

In 2003, allegations were made against the major player in the soft drinks industry for using harmful insecticides and pesticides in the soft drink. This lead to drop in sales of the soft drinks for some time, till the time the confidence in the minds of people was restored. The major players are diversifying its product portfolios both in the food, health and soft drinks segment in order to cater different customer segment. Celebrity endorsement has become a differentiating factor in the highly competitive industry.

Future Outlook:

The per capita consumption of the packaged food and drinks in India is expected to rise with the increase in the disposable incomes of the people. In India, tea is the only product which has a mature market. Other beverages such as carbonated drinks and functional drinks have been experiencing a consistent high growth rate.

With the women increasingly joining the work force and households becoming smaller, packaged food products and beverages will be in higher demand. With the increasing urbanization, there is increased acceptance and greater demand for packaged food and beverages product in India.

Company’s Operational Analysis

Marketing and Operation:

PepsiCo spends high amount on advertisement to reinforce its product by promotion and quickly make the customer aware about their new products. To enter in the different segments of consumers, it created different verticals in the functions like sales, marketing, operations and distribution. PepsiCo constantly looks for acquisition in emerging markets. It has created the point of difference from their competitors by providing unique taste to its product to suit Indian market needs and also provides the product in lower price compared to its competitors. Pepsi has segmented the market based on income level and tried focus on level 1 and level 2 (Exhibit 1) customers and focused on the age group of 15-30.

Pepsi mainly sends out the goods from its plants to retailers directly, from where, they are distributed to small retailers to generate its sales volume. It also helps them to reduce the long journey in poor roads. The increase in use of vending machine helps to decrease the number of refilling. The increase in sales is due to the expansion of super/hyper markets in India.

Financial Analysis:

Based on the financial statement of the year 2011 of PepsiCo India the operating revenue increased by 23.63%. That is 3,360.85 tens of millions to INR 4,155.14 tens of million. There is 1.62 % change in operating income, it was increased to INR 246.81 tens of million from INR 242.88 tens of million. But the Return on Assets (ROA) went down by 0.02% from 2.79% and Return on equity also went down by 0.04%. Compare to the last year the net profit margin fell by 0.01% from 1.89%. The Debt to Equity ratio was 169.96% compared to 156.98% of last year but the current ratio went up to 2.07 from 1.97 compared to the previous year. (Refer Exhibit 2 for details) (http://www.securities.com/Public)

Legal Operations:

Using Trademarks and Intellectual Property: The intellectual property of the company is an invaluable asset and must be used properly. No one is allowed to use the trademarks or intellectual property of the company without proper authorization and license agreement that has been approved by Law Department.

Email, Internet and other Information System: The PepsiCo’s information technology must be used only for the business operations of the company and must comply with the Information Security Policy and Acceptable Use Standards. It is not a usual practice to monitor the employee’s use of company’s information systems. (http://pepsicoindia.co.in/Download)

R&D Analysis:

PepsiCo has taken many initiatives to improve its R&D capabilities and recently opened a R&D department in Germany and Co. Cork, which will support both Europe and other markets where PepsiCo operates. PepsiCo knows that R&D plays a crucial role for the growth of the business and to develop new products and technologies to meet consumer requirements in near future. PepsiCo always focused on the outcomes which will help them to get more good ideas and create more good jobs. (http://www.idaireland.com/news-media, 2012)

Industry Analysis and Growth plans

Worldwide, in the year 2010, top ten soft drink companies, including, PepsiCo, Nestle, Coca-Cola and Suntory Holdings, accounted for 52.3% of overall sales with PepsiCo holding 11.5% share. (Exhibit 3)

In India, however, it holds 24.2% market share. (Exhibit4)

(Eleanore Alexander, 2011)

The Indian beverage and food industry is estimated to grow at a CAGR of about 7.5% during 2009-2013. Introduction of organized retail, innovative food processing methods, changes in consumer consumption patterns and fast changing demographics; has ensured exponential growth. Specifically, the Indian non-alcoholic drinks market is expected to grow at CAGR of 15% during this period. (Anonymous, 2011)

PepsiCo plans to invest $500 million in Indian market over the next few years in order to triple its revenues in the region. The investment will spread over half a dozen business areas such as manufacturing, R&D, agriculture, product development and market infrastructure. (Pande, 2010)

It has taken many steps aimed at tapping the growing market by introducing new products, investing in development plans and Capital expenditure plans.

(*Source: Bloomberg, IMAP)

PepsiCo introduced following products as per their expansion plans:

It launched PureVia (a zero-calorie sweetener) using Setvia, a natural herbal, to cater to health conscious customers.

PepsiCo recently acquired Brazilian coconut-water manufacturer Amacoco Nordeste Ltd. to cater to increasing customer inclination towards it.

Pushing hard in healthy snack options by expanding baked snack brand Aliva from four variants to six new variants.

Eliminating almost all trans fats from their U.S. product portfolio and any of their global products. In India, they have 40 percent reduction in saturated fat in leading products (by using blended rice bran oil) such as Kurkure namkeen snacks and Lay’s potato chips.

Pepsi introduced their latest drink aimed at health conscious customers. Pepsi Next is a “right mix of cola flavor and a blend of sweeteners to closely mimic the taste curve is a regular cola.” (Morefield, 2012)

They have developed a plan to introduce fortified biscuits and snacks at affordable rates to address iron deficiency anemia. Last year they expanded their Sangareddy and Mahul production facilities in India, creating 5,000 direct and indirect jobs. (IMAP, 2010)

As per company’s annual report, “We increased our investment in emerging markets’ selling and delivery systems by putting more coolers in the market and adding route and distribution capacity ahead of growth in India, China, Russia and other countries. Notably, our India business grew at about 2.5 times India’s real GDP growth rate.” (Author, 2010)

The company recently took another major step in order to expand in terms of volume as part of promotional offers. It cut the price of 600 ml PET bottles to INR 25 from INR 28. However, its rival Coca-Cola has decided not to follow this strategy. (Bhushan, 2012)

Porter’s five forces analysis

As shown in Exhibit, Porter’s five forces help to analyze an industry taking care of various influencers. The five forces are: (Exhibit 5)

Threat of substitutes: Soft drink industry offers substantial product differentiation. However, substitutes like bottled water, sports drinks, tea etc. are increasingly getting popular with health conscious trend. With increasing flavors and varieties, these products pose a strong threat to the industry.

Threat of new entrants: Coca-Cola and Pepsi Co dominate the soft drink industry. In addition, the industry is fully saturated and minimal chances of growth making it extremely difficult for new players to start competing. Moreover, huge fixed costs are needed and thus new entrants cannot compete without economies of scale. Therefore new entrants do not create significant threat.

Bargaining power of suppliers: Suppliers of bottling equipment and packaging hold no power. Companies mostly own the majority of the bottling and hence suppliers do not hold much bargaining power. For sugar and additives suppliers, since there are a lot of them, soft drink manufacturer can shift supplier leaving almost no bargaining power with suppliers.

Bargaining power of buyers: The buyers mainly include large grocers, restaurants and stores. The soft drink companies distribute products to these stores, who later resale to the consumers. Different levels of bargaining power exist with discount stores having a lot of it due to large demand whereas restaurants ordering low volume fail to have any bargaining power.

Intensity of existing rivalry: Carbonated software industry is a huge industry. Currently few competitors exist and hence it allows multiple firms and producers to prosper.

Overall analysis from the point of view of a summer intern in PepsiCo India:

The compounded annual growth of more than 7% and the population size of more than 1.21 billion, India is one of the most promising markets for the food and beverage industry. With the current trend, the industry is estimated to grow to $360 billion by 2015. The industry at large is still unorganized with huge opportunities in retailing, supply chain, marketing and R&D sides. With the proposed FDI and influx of international players, the sector will be witnessing exponential growth in its organized sector. This will also allow the expansion of the sector in the rural area which is largely untapped. Currently the organized market employes more than 2 million people and this sector has been given high priority by govt. of India. The major players like Dabur, Coca cola, PepsiCo, and Parle are already investing huge amount in both infrastructure and intellectual talent to capitalize the increasing market share.

PepsiCo is one of the largest players in the food and beverage industry with its presence in more than 200 countries. Within its 20 years of operation in India the company has grown by many folds. With the new relaxes norms in FMCG industry, PepsiCo is aggressively investing in the Indian markets. Sensing the chances of increasing market share and performing better by catering to new niche markets, it plans to invest more than $500 million in coming years. The company is also looking forward to diversify its product portfolio either by starting newer products or by acquisitions along with initiatives at improving its supply chain and other manufacturing services.

Financial data also looks promising with 23.63% revenue growth and 1.62% operating profit increment. Though, other financial ratios like ROA, ROE and margins have fallen compared to previous year, it is actually infected by the huge investment company is making into Indian market. As per CEO Indira Nooyi, the company plans earned highest profit worldwide from Indian sector in Q3 of 2010.

Thus, it is quite evident that PepsiCo India is a market leader. Gradually but steadily, it is closing the gap with rank one player, Coca-Cola. The company looks very promising for learning and developing market understanding. As an intern, this offer would help me apply my ideas backed with the theoretical knowledge gained at my MBA program. With company paying specific attention to various business fields like supply chain, infrastructure and sales, this job will help me learn all these aspects and not limit my learning a particular domain. I look forward to this offer as a chance to ensure a final placement in PepsiCo India to give a kick start to my professional carrier.

EXHIBITS

Exhibit 1: Breakdown of Indian population by income

Exhibit 2: Companies Annual reports

Exhibit 3: Worldwide soft drink market

Exhibit4: Soft drink industry in India

Exhibit5: Porter’s Five Forces

http://www.maxi-pedia.com/web_files/images/Michael_Porter_Five_Forces_Model.png