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$5bn PepsiCo-Tingyi ‘behemoth’ = harder Chinese beverage market: Rabobank

By Ben Bouckley+

15-Nov-2012

PepsiCo’s tie-up with top Chinese beverage player Tingyi, given the green light in March, will significantly reduce growth opportunities for smaller market rivals, according to Martin Wu from Rabobank.

In his firm’s new industry note,Survival Handbook: Strategies for Success inChina’s Soft Drink Evolution’, Wu says that after the tie-up, success across different parts of China, and in different beverage subcategories, will require significant resources.

Elbow room for smaller players and newcomers in the Chinese market had been shrinking since the transformational Tingyi-PepsiCo alliance (19% market volume share, 2011, Euromonitor International) was lent final approval, Wu said.

“In order to profit, second-tier (or lower) players will need to partner with each other and pool resources, while focusing on specific subcategories, specific geographies or specific roles in the value chain,” the analyst wrote.

Even Danone, Nestlé will feel heat…

Even multinationals such as Danone, Nestlé and Uni-President (active in two or three subcategories with a market share of 3-5%) were under pressure from the big three top-tier players (Coca-Cola, Pepsi-Tingyi, Wahaha), Wu added.

“Rabobank believes that most significant impact of the alliance between Tingyi and PepsiCo will be felt by second-tier beverage players in China, as first-tier players have established advantages in brand equity, distribution network and supply chain.

While the ‘big three’ had massive resources, second-tier players had rich portfolios but more room to improve in branding, distribution and marketing, Wu said.

“They are frequently more vulnerable than third-tier players when facing the three majors, because third-tier players [Jia Duo Bao Group, Huiyuan: share, 1-3%] often avoid direct competition by dominating niche segments or specific geographies.”

Mergers or JVs were one way out for second-tier players and were likely to increase, Wu said.

Top global players such as Nestlé (which took a 60% stake in Xiamen Yinlu last year to gain distribution in lower-tier cities and gain a foothold in waters and RTD teas) could also react with further acquisitions, Wu said.

Top three fight pitched battle

Meanwhile,China’s top-tier players – Coca-Cola (16% volume share) Wahaha (7%) and Tingyi-PepsiCo – were fighting a pitched battle for leadership in the top beverage categories (CSDs, juice drinks, ready-to-drink (RTD) teas and water, Wu said.

All three companies were well-placed to grow given aggressive investment programmes, he added, citing Coca-Cola’s announcement in 2011 that it would spend $4bn in China on capacity infrastructure over three years.

However, resultant rising competition costs meant that expansion room for second- and third-tier beverage brands would be significantly reduced in the four subcategories outlined above, Wu wrote.

“Paradoxically, Tingyi’s joining with PepsiCo has shown that one response (even for the giants) is to form partnerships that focus on core capabilities in specific segments, specific geographies or specific parts of the supply chain,” the analyst said.

“The key is to find the right strategic partner – one that brings complimentary products, financial strength and local distribution capability,” Wu added.

Penetrating new subcategories

Another strategy involved investing in other beverage subcategories not in the agreement (herbal drinks, RTD teas and other local Chinese drinks), the Rabobank analyst said, although the market leaders were increasingly colonizing this ground too.

Taking herbal drinks, Wu pointed to 35% CAGR (compound annual growth) in volume terms from 2006 to 2011, with the category now one third the size of CSDs.

“Coca-Cola has been interested in this market for years, and has recruited specialists in herbal drinks and RTD teas with the aim of launching its own herbal product in the very near future,” Wu wrote.

“This shows Coca-Cola’s ambition of an all-out subcategory domination strategy for competing against Tingyi-PepsiCo.”

Wu said smaller “nimble-footed firms” could also survive by working with the top three firms to co-pack or distribute in specific parts of China due to local knowledge.

Euromonitor International data sent to BeverageDaily.com shows that the Chinese hot and soft drinks market was worth $62.422bn in 2011, while the global market as a whole was valued at $625.375bn.