By Keith Fitz-Gerald
Sometimes it's better to invest in the hungry underdog than in the satisfied leader, and nowhere is that more clear than with Pepsi and Coke in China.
In a story that received only passing coverage here in the U.S. market, Pepsi recently 'went red' in China – as in Coca-Cola red.
As far as product-introduction strategies go, it's one of the most brilliant I've seen in my two decades of doing business in the Asian markets. And the move speaks volumes about the massive potential that savvy U.S. companies see in China's quickly emerging consumer market, since it's such a risky move for Pepsi to make. But it's the alluring risk-reward ratio we see here that makes this such an intriguing investment opportunity.
In case you missed the story, here's what's up.
The Olympics Aren't the only 'Games' Being Played
As part of its big marketing push for the 2008 summer Olympics in Beijing, PepsiCo Inc. (PEP) adopted one of that country's national colors in creating a red-themed can for sale exclusively in China. The special red can was just unveiled and the resemblance to the signature red cans of archrival Coca-Cola Co. (KO) is both uncanny and startling, according to people I've talked with who have seen it first hand.
The can is so striking, in fact, that Chinese shoppers picked up a 'sixer' of Pepsi in their local WuMart by mistake when they were really after Coke.
[WuMart, in case you were wondering, is one of China's largest retail chain operators – not unlike its Bentonville, Arkansas-based U.S. "mart" counterpart. Some things truly are the same the world over, it seems.]
Why is this red can saga such a big deal? The "blue storm logo" has been Pepsi's global standard color-scheme, in use since 1996. Prior to that, a Pepsi can sported a signature red-white-and-blue color scheme that was all its own.
But Coke's cans have been red for as long as I can remember. It's important to understand that this 'Coca-Cola red' isn't merely a color, or even a trademark – it's an identity, and is one of the reasons Coke has emerged as a global consumer icon.
In announcing the red can, Pepsi said the move wasn't aimed at Coke at all, but rather was Pepsi's chosen way of showing support for China's national Olympics team. Pepsi also said it got a lot of positive feedback from a survey of Pepsi drinkers who lauded the company for its "bold move," and for its demonstration of respect for its Olympic host.
Besides, Pepsi said that it has adopted a country's national color for a promotion before (including, once, yellow for a special Brazil promotion). I'm sure that's true. But in that case, Pepsi wasn't fishing in another guy's pond, like Pepsi clearly is with Coke in China.
Pepsi, of course, doesn't see it that way.
"We are 'going red' for Team China," Leo Tsoi, Pepsi's China marketing guru, said in an interview. "We wouldn't be doing a program that is simulating the competitor [but has no other benefits, which this one clearly does have]."
Naturally, Coke is downplaying Pepsi's actions as a form of flattery [in a display of seemingly forced glibness, a Coke spokesman responded to the announcement by saying: "Red? Great idea. Why didn't we think of that?]. And Pepsi has stated that the red cans will go away at the end of the year, which is why I suspect there hasn't been a "cease and desist" rocket out of Atlanta yet.
[I have to confess, however, that I have my doubts about whether Pepsi will actually squelch this packaging promotion at the end of the year, if it ends up proving successful, as I suspect strongly that it will].
Playing by the Rules – China Style
Having watched many western brands enter the Asian markets over the years, my take is that Pepsi caught Coke absolutely flat-footed here. It would also appear that Coke has been 'out-Chinesed' by its top Western competitor, since Pepsi has seen how a number of products were marketed with a "wrapper" that mimicked a highly successful Western counterpart.
After all, we're talking about the land of 'Hondga' Motorcycles, 'Redberry' communication devices and countless other brands that approximate their western counterparts through imitation that's not identical but which is a little too close for comfort.
And the challenge is even greater in a product sector where the wares are essentially commodities, says Professor Eugene Fram, a well-known expert on global marketing.
Although Coke and Pepsi would argue that they've differentiated themselves from one another – and from any other rivals – via differences in taste, packaging and brand equity, Fram says studies show that carbonated drinks are actually 'commodity' products, meaning substitutions are easy and frequent, and buying decisions often revolve around product availability, price or even coupons.
"The so-called 'Cola Wars' have been going on for decades and decades – they've even been the subject of several Harvard Business School case studies," said Fram, the J. Warren McClure Professor of Research Marketing at the in Upstate New York. "In cases such as that, it's important for the product manufacturer to do whatever they can to differentiate themselves and to attract consumer attention – whether that's through packaging," or through other strategies.
Given that, the risk may be worthwhile, Fram theorizes.
What I find really interesting in all this is that Western companies are supposed to "play by the rules," or at least that's the implicit agreement between expatriates in the region which is what makes this all the more surprising and audacious.
Speaking of which, you're probably asking why Pepsi would deviate from tradition and risk product confusion when everybody "knows" Coke is red and Pepsi is blue?
Well that, my friends, is the ultimate question, the ultimate risk and – as it turns out – the ultimate gotcha.
China: The New Consumer Frontier
In China there are 300 million consumers who don't "know" anything about either soda brand, but who increasingly have the disposable income to find out.
[For another interesting perspective on the emerging Chinese consumer, click here, or at the link below, to read Money Morning Managing Editor Bill Patalon's article about his experiences reporting from China as a working business journalist. He called it: "The Baywatch Effect. It's an eye opener.]
In the eyes of China consumers, Pepsi might as well be the "red can drink" – essentially usurping Coke's brand equity and market momentum – which makes the stakes all that much higher in China than in other more established markets.
After all, according to marketing research conducted by RIT's Fram, Chinese consumers are among the most fickle the world has ever seen but, in an interesting twist of irony, they are also among the most loyal if you can catch them.
And that's really what this game is about…. catching customers who have never before seen let alone established pre-conceived notions about the Pepsi brand … or any other product for that matter.
And Pepsi, not Coke, was shrewd enough to realize it had to "shake things up" a bit in a market where Coke holds 51% of the soda market, to 30% for Pepsi, according to 2006 figures from the trade journal, Beverage Digest.
But the sales growth is enough to pop anyone's lid. Coke last year sold 4.33 billion liters of carbonated drinks in China, a sales-volume jump of 70% over its results in 2000, according to market-researcher Euromonitor International and The Wall Street Journal. Pepsi sold 2.93 billion liters last year – 32% less than Coke but 93% better than it did in 2000.
In other words, Coke has nearly double the market share. But Pepsi has nearly double the growth rate. That makes Pepsi a hungry underdog if ever I've seen one.
So how do you latch on to your own personal Pepsi campaign when it comes to China?
Take a page out of the same playbook and concentrate on the hoi polloi like Pepsi has.
Better yet, buy Pepsi (PEP) shares for the long haul.
Pepsi Cola is part of a global family of top-quality food-and-beverage brands that also includes Aquafina water, Lipton, Tropicana, Gatorade, Frito-Lay and Quaker Foods – all of which are excellent candidates for the quickly evolving Chinese consumer markets.
PepsiCo had total 2006 sales of $35 billion, and the company's product portfolio has 17 brands that each generates at least $1 billion in annual sales. It's also well diversified internationally. In its fiscal second quarter ended June 16, for instance, per-share earnings rose 16% to 94 cents – beating Wall Street's estimate of 89 cents – thanks to an extremely strong performance abroad. Net profits climbed 13% to $1.56 billion.
The company reports its third-quarter results on Oct. 11.
Pepsi Chief Executive Officer Indra Nooyi seems to be very innovative leader. She's always on the prowl for acquisitions that will "add value," and dismisses the big blockbuster deals unless they'll do the same. So many executives love those deals because it makes them appear as a "Master of the Universe," and because they're typically retired and living off their huge golden parachute by the time the deals have left the "successful" suitor in a shambles.
Nooyi has made healthy products and environmental initiatives a key plank of her corporate administration – but again, only where it makes sense. In April, Pepsi made the largest-ever corporate purchase of"renewable energy credits" – enough to offset all electricity used in PepsiCo plants.
Although Pepsi is the world's No. 2 soft-drink company, Coca-Cola has at times found itself having to play from behind. In June, for instance, Coke said it would buy VitaminWater-maker Glaceau for $4.1 billion, a move that was viewed as Coke playing catch-up to Pepsi in the non-cola drinks realm.
But it's definitely Pepsi's very clear commitment to winning in China that gets our vote.
Other good examples of companies doing the same thing include MGM and Dubai, which are both running hard to attract the burgeoning middle class.
By the way, before we wrap up, just in case you want to see for yourself what Pepsi's red can looks like, here's a Pepsi Ad for its China Olympics Campaign, Featuring the Change From Blue to 'Red.'
News and Related Story Links:
Pepsi Steps Into Coke Realm: Red, China.
- Video TV Ad:
A Pepsi Ad for its China Olympics Campaign, Featuring the Change From Blue to 'Red.'
- Professor Eugene Fram:
The J. Warren McClure Professor of Research Marketing.
- Rochester Institute of Technology:
- Money Morning Investment Analysis:
The Baywatch Effect: Can China's Growth Help Gold Prices Triple?
- The Wall Street Journal:
- The San Diego Union-Tribune:
PepsiCo 2nd-Quarter Profit Rises, Boosts Full-Year Earnings Forecast.
- Money Morning Investment Analysis:
Here's Why MGM is a High-Profit Play on China.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.