Two days ago, PepsiCo announced the US $705 million acquisition of Be & Cheery, which drew huge attention and raised heated discussions. Regarding the acquisition that has raised so much attention that made it one of the most-researched topics on Sina. Many are still wondering:
Why did PepsiCo make this transaction and what is the story behind it? What are plans for the operation of Be & Cheery in the future, and in which areas will the two companies have synergies? After investing in Wugu Mill and acquiring Be & Cheery, will PepsiCo keep an eye on other potential acquisition opportunities in the future?
With all these questions unanswered, in the evening of February 24th (Beijing time), Foodinc exclusively interviewed Ram Krishnan, CEO of PepsiCo Greater China, who is now in the United States.
Now we can move on to what PepsiCo Greater China’s CEO shared with us.
Complementary to PepsiCo from product to channel
"It took us almost a year from the first-time contact to the final agreement. This is part of the regular process. The transaction is not yet completed, and we still have to wait for confirmation by the regulatory authorities for approval, which we are hoping to get in the next four or six months." Krishnan told Foodinc over the call.
Talking about the start of this acquisition, he said that this is a mutual-agreed conversation. "They were looking for partners for the next avenue of growth, and we are looking to see how we can expand our product portfolio beyond the snacks portfolio we are playing in," he continued, this is basically an agreement reached in a mutual-agreed conversation “with demands from both sides".
"What we like about Be & Cheery is that they have multiple products that complement our products. They have nuts, dried fruits, meat snacks, baked goods and confectionary that are predominantly sold online – complementary to our product portfolio and our channel strategy.” Krishnan told Foodinc, "Lots of ways are very similar to why we invest in Be & Cheery but their products portfolio is obviously more nutritious focused and so complementary.”
Krishnan also mentioned that after the acquisition of Be & Cheery, coupled with PepsiCo’s multiple advantages in terms of scale and leadership in the snack food industry, PepsiCo can provide more delicious products to more Chinese consumers through both online and off-line channels. “It is an important step for PepsiCo to become China’s leading food & beverage company,” He added.
Krishnan mentioned that the acquisition is also a continuation of the company's “in China, for China, with China” strategy. "We hope to steadily expand our business and investment in China." According to him, PepsiCo and its partners have invested almost $ 48 billion for the last ten years.
Be & Cheery will be an independent business unit
Krishnan told Foodinc that, because Be & Cheery is complementary to PepsiCo in portfolios and channels, PepsiCo plans to let it operate as an independent business unit of PepsiCo in the future and continue to be run by the existing management team. “It will continue to be run by the existing management team who have demonstrated really an exceptional track record of growth,” he said.
When talking about the synergies between the two companies after the transaction is completed, Krishnan pointed out their opportunities in three aspects--products, consumers, and channels--to Foodinc.
“First, there is already synergy based on our product portfolio. We play in potato chips and other snacks. They have all of these other categories we don’t play in such as nuts, meat, baked foods, etc. The synergies will make us a scaled food business in China.
Then from the consumer’s standing point, consumers between PepsiCo and Be & Cheery can satisfy all of their demands for snacking because there’re the breadth of a portfolio that we're offering to the consumers.
Third, the synergy of customers and retailers. Historically they are being very strong on e-commerce and PepsiCo is historically strong with the offline retail and o2o business that we built and between these two businesses we truly become China’s leading food and beverage company with only channel retails. So those would be the synergy,” Krishnan noted.
“Once we get the deal closed and then we will jointly walk through what is our future channel strategy.” he said.
Foodinc noticed that the two companies also have significant differences in supply chain. Currently Be & Cheery mainly adopts an OEM model, whereas PepsiCo operates multiple factories and has kept building new factories and expanding capacity in recent years.
When being asked if PepsiCo will build new factories or production lines for Be & Cheery, he told Foodinc that it’s still too early to make a decision.
“we’ll look based on the demand whether it makes sense to add couple more manufacturing plants. But we have to see the growth, we have to get more understanding of their manufacturing footprint and see whether we want to invest more but historically they always invested very much into China especially in the manufacturing sector to serve our Chinese consumer, because all of our supply chain is done locally in China for the Chinese consumers,” he said.
To learn from Be & Cheery
Krishnan believes that Be & Cheery will bring valuable experience to PepsiCo. “Be & Cheery’s leadership team led by Chairman Chu has demonstrated great understanding of the e-commerce channel, and how the channel’s grown.” Krishnan told Foodinc. It reflects that Be & Cheery has been able to leverage consumer-directed data from online channel to innovate for consumer needs and build a very diverse portfolio that can help support the growth.
“What helps us is that they have used consumer data online to figure out what products to innovate and what new categories to enter, and that is part of why they started up as nuts category, and now they have grown into dried meat, dried fruit, meat snack, baked goods and confectionary. All of that is based on consumer data that they have got from direct to consumer business.” said Krishnan.
Krishnan noted that PepsiCo wants to learn from Be & Cheery on data-led innovation and flexible outsourcing. “They have been very successfully in building capabilities in flexible manufacturing and sourcing. They are able to adjust that based on changing consumer trend.” added Krishnan.
Krishnan stated that PepsiCo wishes to learn from the experience. “The goal is to invest more in consumer-led and digital capabilities, to share lessons learnt,” he concluded, “so that we can grow together and grow Be & Cheery to the next level and bring more innovation and high-quality products to consumers in China.”
Investing in strategic categories to grow faster
Foodnic introduced before that the acquisition of Be & Cheery has been the second time that PepsiCo has "shot"(invested) in the Chinese food industry in about half a year. On July 26 last year, PepsiCo announced that it will invest approximately US $ 131 million (about RMB 900 million) in China to acquire 26% of the issued ordinary shares of Natural Food International Holding Ltd, becoming the second-largest shareholder behind Natural Food's founders Gui Changqing.
"Why do we do this? First and foremost, our Chairman & CEO Ramon Laguarta has made expending and growing in International markets as top priority for PepsiCo, and China is one of the important international markets for PepsiCo to grow.” said Ram Krishnan, CEO of PepsiCo Greater China. We have done very well, and we have grown double digit for the many number of years. But we feel that we can grow even faster. That’s why we were looking for the partnerships in Be & Cheery and Natural food.”
He said that both investments sit in very strategically important categories for PepsiCo in snack and nutrition.
Listed in HK, Natural Food is China's second largest natural health food company with a focus on grain-based premium nutrition powder. “Natural Food has its data-led direct-to-consumer based business model and Eastern-based portfolio and the investment in Natural Food will advance PepsiCo's journey to become China's leading consumer-centric food and beverage company.” Ram Krishnan said.
"Therefore, in many ways, the rationale behind the investment is very similar to the reason we bought Be & Cheery. However, Natural food’s products focus more on the nutrition side, so this is also complementary." He said. In addition, Natrual Food remains completely independent from Pepsi's business, "It's run by the founder's team, and we're just the second largest shareholder."
Localization and growth opportunity
Ram Krishnan told Foodinc that localization has always been important for PepsiCo. "We always believe that in order to win the Chinese market, we must become a local company. Therefore, we have been doing business as a local company does since the first day." He said, for example, that all PepsiCo China’s suppliers are local suppliers.
He has repeatedly stated that PepsiCo believes in the long-term prospects of the Chinese market and is committed to long-term investment and development in China, when he talked about PepsiCo’s China strategy and the impact of the coronavirus outbreak.
"This is also one of the reasons we have started investing in China since China's reform and opening up," he said. As the raise of the China's middle class, and more high-end consumers in tier 4, 5 and 6 cities, I believe that PepsiCo has many opportunities in China to achieve our long-term growth.
In addition, he also said that the Chinese market and Chinese consumers are changing so fast and thus PepsiCo needs to ensure that they are always consumer-centric and their products and brands can meet consumer demand. "I think this is the biggest key to win the market, and we are investing here to help us achieve that goal," he said.
Despite investing in two local companies in a short period of time, the multinational food giant believes that the biggest growth opportunity is still from internal, but also said they are open to external acquisition opportunities.
"Our primary focus is to drive organic growth of our business (Note: Organic refers to the way of non-acquisition of assets). If there is an opportunity to further accelerate growth through mergers and acquisitions, we will do so. But mergers and acquisitions are not the purpose, our goal is to meet as many Chinese consumers’ demand as possible. " Ram Krishnan said.
For potential merger and acquisition opportunities, Ram Krishnan said that PepsiCo China is willing to conduct dialogue and communication, but the focus is still on promoting the organic growth of the existing business. He also said that the company does not currently have a particular focused area but will "always follow consumer demand." "We just announced to acquire Be & Cheery. Upon the completion of the transaction, we will focus on accelerating the development of both parties’ business," he said.
"If there is an opportunity in the product portfolio to help achieve our goals, no matter is an external acquisition or other means, we will look at it. But our goal has always been to grow our business organically. Over the past decades in China, we have built a huge workforce with real local talent. We hope to invest in them and invest in our business development, "he said.