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CORPORATE— PEPSICO Under Indra Nooyi PepsiCo wants to become a smarter and healthier food and

CORPORATE—PEPSICO

Under Indra Nooyi PepsiCo wants to become a smarter and healthier food and beverages company. Here’s the story on how India is at the vanguard of that transition.

SHAMNI PANDE

How India is Changing

PepsiCo

N ot even many in the senior tiers of PepsiCo Inc. know of a quiet coup the Indian unit of the foods and bev-

erages giant scored in December. At a meeting of the company’s top execu- tives at Purchase, New York, before

they headed out for Christmas holi- days, Indra Nooyi, Chairman and CEO, PepsiCo, placed a bright-coloured pack of tangy baked crackers on the table. The brand, Aliva, had been developed nearly 12,000 km away at Gurgaon and was crackling in the Indian snacks marketplace, since a

summer launch, selling at Rs 12 a pack. “Why can’t we do an Aliva, at a similar price, in our other top mar- kets,” Nooyi, 54, asked her key lieu- tenants of the latest product in PepsiCo’s fast-growing global foods portfolio. India was the lead market in the company’s sprawl for a product of

42 BUSINESS TODAY January 24 2010

RACHIT

GOSWAMI /www.indiatodayimages.com

RACHIT GOSWAMI /www.indiatodayimages.com PepsiCo’s Chadha at a Nimbooz bottling plant in Aurangabad, Maharashtra the

PepsiCo’s Chadha at a Nimbooz bottling plant in Aurangabad, Maharashtra

the Aliva kind and the first from a new baked-snack business unit formed early in 2009. Nooyi’s enthusiasm for Aliva has little to do with her years growing up in Madras (now Chennai), a city that relishes snacks from “thattai”, a lentil- based spicy wafer, to “poli”, a flat- tened bread with a jaggery-based fill- ing, to “murukku”, the salty, fried chickpea snack. It has roots in PepsiCo India shining the headlights for the $43-billion business she runs as it transforms from a sweetened, fizzy water company to one that sells healthier products (it is already ranked

second behind Nestle SA by revenues among food and beverage makers in the world). For certain, the global foods industry for some years now has sought to offer customers locally relevant tastes, flavours and ingredients. But seldom have international corporations rustled up brands for their mature western markets that have been brewed in a re- gional outpost lab. The man heading the outpost, in this instance—Sanjeev Chadha, Chairman, India region—calls the phenomenon “the shifting centre of the universe”. A decade ago, he says,

shifting centre of the universe”. A decade ago, he says, ● In Q3, best growth for
shifting centre of the universe”. A decade ago, he says, ● In Q3, best growth for
shifting centre of the universe”. A decade ago, he says, ● In Q3, best growth for
shifting centre of the universe”. A decade ago, he says, ● In Q3, best growth for

In Q3, best growth for PepsiCo worldwide came from India

Slew of indigenous products such as Aliva, Nimbooz, Kurkure launched

Idea and technology of Nimbooz used to launch a Hibiscus-based drink in Egypt

India is a low-cost- high-quality benchmark for other PepsiCo regions

The company has turned its entry obligations into a strategic advantage

January 24 2010 BUSINESS TODAY 43

GHOSH

SHEKHAR

CORPORATE—PEPSICO

“There has been interest in the Pepsi eco-system for local variants of Kurkure from South Africa to the UK”

GAUTHAM MUKKAVILLI, CEO—India Foods & President—India Region, PepsiCo India

Foods & President—India Region, PepsiCo India companies leveraged global mar- kets with existing brands

companies leveraged global mar- kets with existing brands and solu- tions; today they are turning to tech- nologies, processes and even prod- ucts across the spectrum from vari- ous markets. “The flip is not difficult to foresee,” he concludes. That inference lies in the series of

44 BUSINESS TODAY January 24 2010

successful products from India, a subsidiary halfway around the world for PepsiCo. In 2000, PepsiCo India, as the Gurgaon-headquartered Indian unit is called, developed Kurkure (the brand comes from the Hindi word for crunchy) from scratch to offer Indians a finger-food

using rice, corn and lentil flour. Kurkure has gone on to become a blockbuster success with sales (it is a Rs 700-crore brand in India) rap- idly tick-tocking to as far as West Asia. “There has been interest in the Pepsi eco-system for local vari- ants of Kurkure from South Africa to the United Kingdom,” says Gautham Mukkavilli, CEO—India Foods and President—India region for PepsiCo. He expects that Quaker Oats (worth Rs 70 crore annual sales), intro- duced in end-2005, and Aliva, will be as big as Lays (the Pepsi flagship chips brand rakes in Rs 900 crore) and Kurkure eventually. Nimbooz, a packaged lemonade that uses no artificial flavours and fizz, launched in March 2009 is another hit from India. “We have already used the idea and technol- ogy of the product from India to launch Mirinda Karkedeh in Egypt which is a hibiscus-based drink,” says Saad Abdul Latif, CEO of PepsiCo for the Asia, Middle East and Africa regions, adding that some of the other markets under his ward are, too, looking to introduce Nimbooz variants. Several other options are in the pipeline, which PepsiCo will not talk about for competitive reasons, prompt- ing Nooyi to call her India offices “our biggest learning lab” (see interview on page 50). The obvious options are new flavours and pricing options for Lays, Kurkure and Aliva; already, Kurkure is available at Rs 2 for a 13-gm pack. “We have pilot-tested Kurkure as a chaat at some malls. The idea was to get chefs to offer a chaat that used our brand,” says Deepika Warrier, Marketing Director (for Foods), PepsiCo India of the plate of savoury snacks often doused in curd and sweet syrup.

T.S.R Murali, Executive Director— Technology, PepsiCo India, or “Doc” as he is called in-house, embodies the ways new tastes are developed at the company’s Gurgaon labs. For the latest flavour, “Lime and Masala Masti” of Lays, for instance, he looked at the ways consumers have potatoes at home. "The challenge is to offer a com- bination of popular familiar taste in an innovative, healthy manner,” he says of his team’s job. PepsiCo India’s production lines, too, have tweaks that go beyond just saving costs. The company, for in- stance, retooled a line based on the Reading Bakery System, a popular biscuit baking machinery brand, by adding a seasoning tumbler on the salty snack line. Result: flexibility in adding any flavour on any baked base. “Typically, manufacturers tend to add the flavours and seasoning with the dough, but ours seeks to add this to the product” in its final stages, says Mukkavilli. The learning came from the chips-making line where the flavour is the last stage of the process. In beverages, PepsiCo India is “experimenting with ginger and mint as an ingredient” as also looking at sachets and dry concentrates as a delivery option that customers can use to make a drink, according to Geetu Verma, Executive Director— Innovations—PepsiCo India. Erin Ashley Smith, a senior an- alyst tracking the consumer sector at Argus Research, US, thinks the strat- egy of distributed development makes sense. “I think there is op- portunity to take products from in- ternational markets and expand them into the US or other markets,” she said in an e-mail interview. Indeed, the tipping point might be right for Nooyi, a CEO unafraid of tack- ling change (she was the force at PepsiCo behind the $13.4 billion Quaker Oats buyout late in 2000), as she gets the multinational to taste an as- yet tantalising concept: “disruptive in- novations” trickling up from her

“disruptive in- novations” trickling up from her in competitively-priced products such as Aliva to drive
“disruptive in- novations” trickling up from her in competitively-priced products such as Aliva to drive
“disruptive in- novations” trickling up from her in competitively-priced products such as Aliva to drive
“disruptive in- novations” trickling up from her in competitively-priced products such as Aliva to drive
“disruptive in- novations” trickling up from her in competitively-priced products such as Aliva to drive
“disruptive in- novations” trickling up from her in competitively-priced products such as Aliva to drive
“disruptive in- novations” trickling up from her in competitively-priced products such as Aliva to drive

in competitively-priced products such

as Aliva to drive growth. “Just think about it…this would translate into

roughly 25 cents

PepsiCo’s India Chairman. He should know: some 37 per cent of PepsiCo India’s Rs 5,200 crore revenues (year to date until September 30, according to estimates) come from snacks and foods such as Kurkure and Aliva—a contribution second only to PepsiCo’s Walkers Snack Foods unit in the UK (outside of US). That chunky contribu- tion has already likely helped PepsiCo India overtake Nestle India as No. 1 among Indian branded and processed foods and beverages companies (the foods portfolio of Hindustan Unilever and ITC lag behind). The verdict is not out on this but a Mumbai FMCG analyst reckons the only player, if any, ahead of PepsiCo is United Spirits. In allowing regions such a free will to create, acquire and launch new brands, Nooyi is seeking to side- step a common problem that larger companies often tend to have—their inability to take risks. “My biggest learning on foods has been from my biggest mistake,” says Warrier, the marketing head, referring to a failed experiment of melding Lays chips with non-vegetarian flavours such as tan- doori chicken in 1999.

,”

says Chadha,

such as tan- doori chicken in 1999. ,” says Chadha, smaller, regional posts to more ma-
such as tan- doori chicken in 1999. ,” says Chadha, smaller, regional posts to more ma-
such as tan- doori chicken in 1999. ,” says Chadha, smaller, regional posts to more ma-
such as tan- doori chicken in 1999. ,” says Chadha, smaller, regional posts to more ma-

smaller, regional posts to more ma- ture markets. As more and more con- sumers turn to tap water, impacting soda sales in the slowdown- plagued West, there is compelling logic

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For all other successes with locally- developed food products, PepsiCo India has the government here to thank—at least, partly—for being the envy of its peers. A condition that New Delhi set for the entry of the multinational into India in 1989 was that Pepsi (the name changed to PepsiCo in 2000) would operate through a joint ven- ture with the Punjab government and export goods worth half its turnover for 10 years. For the company, then, ex- ports came through farm produce. As a result, 10 years. For the company, then, ex- ports came through farm produce. As a result, 10 years. For the company, then, ex- ports came through farm produce. As a result, today, its strength in cultiva- tion of potatoes and paddy is proving to be the lynchpin for its unique solu- tions from India that, in turn, are prov-

to be the lynchpin for its unique solu- tions from India that, in turn, are prov-

January 24 2010 BUSINESS TODAY 45

CORPORATE—PEPSICO

ing to be potential game changers glob- ally. For instance, PepsiCo India is the coun- try’s largest corporate involved in potato contract farming and deals with 1,50,000 tonnes of the tuber worth about Rs 200 crore annually. After a series of successful initiatives around tomatoes, chillies, peanuts and rice, the company is now looking at oats cultivation possibilities in India—an effort that in the days ahead will feed its Quaker Oats portfolio. That self-reliance grew into Pepsi India’s DNA in the years since 1989 even though growth has been more driven by bever- ages in a market underpenetrated by fizzy water. The Indian unit has helped develop technologies that enable what is called direct seeding of rice, which eliminates holding wa- ter for paddy cultivation, thereby saving 30 per cent of water used in rice farming. That effort, under a social responsibility initiative, would have covered about 6,000 acres of rice farms in 2009 and saved an estimated five billion kilolitres of water (see No Paddy Pool, Dec. 13 issue). Nearly two-fifths of energy used at its various PepsiCo India plants comes from re- newable sources—typically, bio-mass and wind turbines. It has set up a wind-mill in Tamil Nadu and plans two more for generating captive power for internal use. “These are breakthroughs and nowhere else has the organisation managed to turn water positive, the way it has done in India,” says Chadha, who counts 2009 as the best year for PepsiCo’s mainstay beverages business that expanded 40 per cent in volumes in the September 2009 quarter from the previous year. The thrift extends into foods as well. Today, PepsiCo India sets up potato chips capacity at about 80 per cent cost com- pared to that of western countries at the same levels of quality. Throughput of pro- duction lines has been enhanced by up to one-fifth at marginal investments through suggestions that came up from shopfloor workers. A snacks plant at Sankrail near Kolkata has turned to rice husk as feed- stock for its energy needs reducing its dependence on petroleum by 75 per cent. The Indian consumer goods model of dependence on external distributors—bipo-

46 BUSINESS TODAY January 24 2010

PepsiCo’s India Talent Factory

A one-in-a-million incidence of a genius can be misleading in a population the size of India and China, the joke

goes. For, the two Asian giants will have a thousand geniuses each even by that thrifty measure. Still, the number

of Indians rotated through the Indian offices of PepsiCo to the rest of the enterprise and other companies is spectacular. Ramesh Vangal, the first CEO of Pepsi, as the company was called until early 2000, thinks the company's edge in India has clearly been its people. “As companies grow big, they become brittle and cannot handle change; but PepsiCo retains its agility because it has always recruited the best," he says. His focus on recruitment in

the mid- to late-’80s was to hire the best by paying the best, even if it meant changing the compensation structure in the country. "PepsiCo India, in fact, has been a significant provider of talent to not just its other offices worldwide, but also to the corporate world (at large)," says Rajeev Vasudeva, Partner, Egon Zehnder International. Examples: Former Head of Frito Lays in India, Manu Anand, has gone on to head the business in Thailand and Vietnam. George Kavoor, who used to head traditional trade operations in India, has become the Sales Director in

China. Chitra Talwar has gone as Vice President, Sales Operations to PepsiCo Inc. and Vipul Prakash as Director (flavours) to the US parent. The more visible splash has been in the way ex-PepsiCo high-fliers have badged themselves as movers and shakers of corporate India. Muktesh Pant, who headed food processing operations at Pepsi India in 1992, was hired by Reebok International as its global Marketing Head and is now the global Marketing Head at Yum! Restaurants International, the owner of Pizza Hut and KFC chains. Asim Ghosh, who retired in March 2009, as Managing Director of Vodafone Essar had moved to India as the Co-managing Director of Pepsi Foods in 1989 from Rothmans International. See the list above for more names. So, what makes PepsiCo India the prime hunting ground for managers? Role-playing opportunities that help its people handle a cross-section of functions, says Ashutosh Khanna, Partner at head-hunting firm Korn/Ferry International.

SHAMNI PANDE

Param Uberoi CEO, Pernod Ricard, South Asia Sanjay Nandrajog, CEO, Farm Fresh, Bharti Harit Nagpal, Commercial Capability Director, Vodafone, Europe Lloyd Mathais, Chief Marketing Officer, Tata Teleservices

HEAD-HUNTED OUT

Prem Kumar, CEO, China Foods Mannu Bhatia, Director, US Varun Berry, Country Manager, the Philippines Achal Agarwal, COO, China Beverages

INTERNALLY HIRED

VIVAN

MEHRA

CORPORATE—PEPSICO

lar compared to the traditional bottler model that cola companies earlier swore by—too held out lessons for PepsiCo in other parts as well. “India has con- stantly provided solutions. When we started, we emulated Hindustan Lever’s (now called Hindustan Unilever) dis- tribution model involving the third party. This was something new to the organisation and was subsequently introduced in other Asian markets,” says P.M. Sinha, the second head at Pepsi India. Mukkavilli, the foods head at PepsiCo India today, for instance, credits his early years in India for suc-

for instance, credits his early years in India for suc- “We benchmark against India’s P&L. It

“We benchmark against India’s P&L. It has among the best cost efficiencies and many innovative solutions”

SAAD ABDUL LATIF, CEO of PepsiCo for the Asia, Middle East and Africa regions

cessfully implementing a third-party distribution structure in Vietnam when he moved there in 1998. Elsewhere in the PepsiCo empire, every little act of enterprise at the Indian unit is being carefully noted and recorded for future application:

“We tend to normalise costs and benchmark them against India’s P&L (profit and loss account). It has among the best cost efficiencies and there are many innovative solutions at every step of the manufacturing process to improve productivity and efficiency,” says Latif, to whom Chadha and the India team report to. An information technology sales platform developed at PepsiCo India has been adopted in the parent’s other Asian markets.

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PepsiCo’s global board of directors meeting was recently held in India, which is testimony to the scorching pace the market has registered. The idea was to apprise the board mem- bers—including Colgate Palmolive Chairman and CEO Ian Cook; Daniel Vasella, Chairman and CEO of Novartis AG; and Zurich Financial Services’ CEO James Schiro—of the rash of growth in market innovations that were stem-

48 BUSINESS TODAY January 24 2010

ming from this region and, perhaps, also setting the stage to the idea of sourcing brands from such markets. PepsiCo’s increasing thrust on its India unit coincides with the parent’s shift to healthier products tracking changing consumer choices and its losing cola battle globally to its arch-ri- val Coca-Cola. All through the last 15 years, PepsiCo, led by former CEOs Roger Enrico and Steve Reinemund (Nooyi took over in October 2006) was quick to build on the insight that consumers were opting for non-carbonated bev- erages. It established Aquafina and Gatorade that came along with the Quaker Oats acquistion in water and sports drinks as global leaders. In that sense, the footwork and body language have been consistent. PepsiCo has made no bones about its intention to keep diving deeper into nutritious and healthier choices, even by snapping up disparate businesses across different parts of the world: a joint venture with Almarai, the Gulf’s largest dairy company to invest in dairy and juice processors, in 2009, followed by an agreement to buy out Amacoco in Brazil, the largest co- conut water company. That inten- tion is not swept under the carpet in

India either. “We are open to mergers and acquisitions; but do not depend on this for our growth. Our portfolio and new launches offer us enormous opportunities,” says Chadha. To be sure, India is among markets where the growth in carbonated drinks is rocketing. In fact, the growth story in beverages is that the com- pany, despite trailing Coca-Cola in overall market shares, has actually outgrown the rival in volume per- centage terms in each of the last three quarters—narrowing the gap between their beverage revenues (Coca Cola India’s revenues was some Rs 4,000 crore in 2008.) “The fact is that India trails even Pakistan in per capita consumption of packaged beverages; hence there is a huge headroom for growth in the business,” says Mukkavilli. Together with ambitions of moving its busi- ness more towards the “centre of the plate”, that opportunity in its main business could well see PepsiCo top Rs 40,000 crore revenues in India by 2020, its 10-year aim. But, if all play by Nooyi’s script for the Indian unit on the global stage, that will be the epi- logue to the PepsiCo India story of the tail wagging the dog.

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