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Pepsi suddenly scarce in Thailand after bottler breakup

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02/22/2013 | 02:33pm CET
Man holds a can of est soda he is drinking in Bangkok

The day after PepsiCo Inc's bottling deal in Thailand expired, its partner of 59 years launched its own soft drink that has knocked Pepsi off store shelves.

Serm Suk Pcl, backed by the billionaire owner of Thai Beverage Pcl, Charoen Sirivadhanabhakdi, said its new soda called "est" garnered 19 percent of Thailand's $1.8 billion cola market in just two months following its November 2 launch.

Pepsi's breakup with its bottler meant it also lost access to Serm Suk's vast distribution network, which delivers drinks to about 200,000 stores, restaurants and vending machines serving Thailand's market of 67 million people.

The two companies had a non-compete clause that expired when their contract ended on November 1. Pepsi has similar non-compete clauses with bottlers in other markets such as China, but the decision backfired in Thailand.

The following day, est hit the market, costing about the same as Pepsi and sold in the same bottles, with a red, white and blue logo reminiscent of Pepsi's. Pepsi declined to comment on whether it was pursuing any trademark violation claim.

"We did not deliberately set out to push Pepsi off the shelves but we have a very strong distribution network and if we stop distributing for one company, that company's products will disappear from the shelves," Pragnee Chaipidej, advertising manager at Serm Suk, said in an interview.

She declined to comment on similarities of est to Pepsi.

Thailand was one of the few countries where Pepsi's cola drink outsold arch-rival Coca-Cola Co's, but Coke caught up in 2011 and built a lead last year, according to data from research firm Euromonitor International.

Euromonitor's figures show Pepsi's share of the cola market dipped by 2.6 percentage points to 36.1 percent in 2012, compared with Coke's 40.1 percent. Est, a name that has no meaning in Thai but was intended as a play on superlatives such as "biggest" or "tastiest", debuted at 2.1 percent even though it was available for only two months of the year.

"We welcome competition, and short-term fluctuation in market share is not our barometer for success," said Jeff Dahncke, senior communications director at PepsiCo in Purchase, New York.

Pepsi has opened a $170 million bottling plant in Rayong, 179 kilometers southeast of Bangkok, which it said can produce enough drinks to serve every consumer in Thailand. It partnered with Deutsche Post AG's DHL for distribution. Dahncke said the first phase of distribution, which involves getting drinks into chain stores, was in place. The next phase is smaller mom-and-pop shops.

The Thailand trouble stands in contrast to PepsiCo's global performance, which has propelled its shares to their highest level since 2008. The company reported stronger-than-expected fourth-quarter results last week and raised its dividend.

Much of its recent success stems from a turnaround in its North American operations, which account for half of the company's global revenue, and strong growth in sales of food. The Middle East, Asia and Africa unit contributed only about 10 percent of total revenue in 2012. The company does not break out figures for Thailand.

Pepsi uses its own distribution for snacks in Thailand, so that business is unaffected. But its soft drinks aren't reaching the same market as they were before the Serm Suk partnership ended.

"What we have seen is a major drop in distribution and availability of Pepsi products," said Shakir Moin, Coca-Cola's marketing director for Southeast Asia.

Customers have also noticed Pepsi's absence from restaurant menus and store shelves, and this has become a hot topic of discussion on blog posts and social media.

"It's pretty much impossible to find a bottle of Pepsi these days," said Itiporn Lakarnchua who works for an English-language radio station in Bangkok, adding that est tasted "much sweeter and more peppery" than Pepsi or Coke.

THE BREAKUP

Pepsi has a long history in Thailand, entering the market in 1952 with Serm Suk at its side. But the relationship shifted in 2010 when Pepsi and its joint-venture partner Strategic Beverages launched a hostile takeover bid.

Pepsi's group failed to acquire the targeted number of shares and dropped the tender. ThaiBev's Charoen later bought Pepsi's stake.

By January 2011, Serm Suk's board was developing plans for how it might operate without Pepsi, according to documents filed with the securities exchange. Their exclusive bottling agreement was terminated in April 2011, and the two officially parted ways on November 1, 2012.

Serm Suk's "Future Business Plan" laid out two scenarios, one in which the company continued its Pepsi partnership, and one that envisioned a future flying solo, according to the filings.

Under the standalone scenario, the plan called for expanding its offering of non-carbonated drinks such as juices; building up the drinking water business; distributing more food and drinks - and making carbonated soft drinks under a different brand.

"There's a very good chance that est cola will become the number two cola brand in Thailand after Coca-Cola, pushing Pepsi to third place," said Pragrom Pathomboorn, an analyst at KGI Securities in Bangkok.

Pepsi declined to comment on why its non-compete clause expired immediately upon conclusion of the Serm Suk deal. It was not clear whether Coke or other companies also have non-compete clauses that run only through the life of the contract.

In China, where Pepsi has a bottling and distribution deal with Tingyi Holding Corp, it also included a non-compete clause that ends in 2050 when the contract does, according to terms of the agreement filed with the Hong Kong stock exchange. A Tingyi spokesman declined to comment.

In other major markets such as Russia, Pepsi's second largest, it uses its own bottling subsidiary. Dahncke said PepsiCo uses different distribution models to fit each location's economics and stage of development.

TRIP OR BLIP?

Distribution is the secret to Serm Suk's swift success in Thailand. With 200,000 outlets selling its products, it was able to quickly flood the market.

Thais are the biggest carbonated soft drink consumers in Southeast Asia, drinking on average 39.2 liters per year, more than four times the per capita consumption across Asia-Pacific, according to Euromonitor.

That helps explain why drinks companies are investing so heavily in this market.

Serm Suk spent about $10 million on a marketing campaign starring three Thai teen pop idols to introduce est, and has budgeted triple that amount for the full year. It plans to launch more flavored soft drinks later this year.

Pepsi's new plant is part of a $600 million investment that also includes new marketing campaigns and a partnership with Bodyslam, a popular Thai music group.

PepsiCo's Dahncke said the new bottling plant and DHL deal would soon get its soft drinks back into the hands of customers.

"This is a business model we use successfully in other markets around the world," he said. "There is a brief transition period to get our new system ramped up, but we are very much on track."

(Additional reporting by Pairat Temphairojana in Bangkok and Martinne Geller in New York; Editing by Emily Kaiser)

By Amy Sawitta Lefevre

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Financials ($)
Sales 2017 35 223 M
EBIT 2017 9 698 M
Net income 2017 7 018 M
Debt 2017 25 612 M
Yield 2017 3,11%
P/E ratio 2017 33,37
P/E ratio 2018 23,79
EV / Sales 2017 6,31x
EV / Sales 2018 7,21x
Capitalization 197 B
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Coca-Cola Company (The) Technical Analysis Chart | KO | US1912161007 | 4-Traders
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Number of Analysts 26
Average target price 48,7 $
Spread / Average Target 5,3%
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NameTitle
James Quincey President, Chief Executive Officer & Director
Ahmet Muhtar Kent Chairman
Kathy N. Waller CFO, President-Enabling Services & Executive VP
Eddie R. Hays Chief Technical Officer & Senior Vice President
Barry N. Simpson Chief Information Officer & Senior Vice President
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