Capitalizing on the Chinese Market's Growth Potential

Capitalizing on the Chinese Market's Growth Potential

China, with a population of more than 1.35 billion people, is the biggest market with the most potential for consumer goods companies around the world. That's why food and beverage players like Coca-Cola and PepsiCo have been investing heavily to expand their businesses in the Chinese market.

Ongoing business expansion in China
Coca-Cola, the global carbonated soft drink maker, recently opened its 43rd plant in China and its first plant in Shijiazhuang, Hebei. This bottling plant cost around $106 million in invested capital and handles both sparkling and still beverage lines, which include Coca-Cola, Fanta, and Sprite. More production lines will be added in the next several years to serve the growing rate of consumption.

According to chairman and CEO Muhtar Kent, China was the "third-largest global market, growing at double-digits." Thus, Coca-Cola has committed around $4 billion to this market in the three-year period of 2012-2014. This plant is part of this investment plan. More investment will go towards the expansion of facilities and distribution and the development of new beverage products. The company decided that it would not pursue growth via acquisitions because it sees a lot of potential for organic growth in this market.

In the period of 2012-2020, Coca-Cola expects non-alcoholic ready-to-drink industry volume to experience 10% compounded annual growth, as the global middle class population increases by 325 million people. In the third quarter, Coca-Cola managed to deliver 9% volume growth in the quarter, driven by a 8% rise in sparkling beverages. The good growth in China was supported by the company's popular "Share a Coke" marketing campaign. Looking forward, Coca-Cola pinpointed four main strategic actions in China: revitalization into sparkling business, provincial segmentation, expansion into adjacent categories, and realignment of the route-to-market.

PepsiCo strengthens its business in China via strategic partnerships
PepsiCo has also invested a lot of money to expand its food & beverage business in China. By the end of this year, the company's total investment will reach more than $2.5 billion. As a part of the total investment package, at the end of 2012 a new R&D facility was opened in Shanghai, which serves as the center for product innovations across Asia. The new R&D facility was equipped with an advanced culinary center and test kitchens so that PepsiCo can tailor suitable products for local tastes.

Emerging markets, including China, have served PepsiCo well. In the third quarter, PepsiCo experienced 9% organic revenue growth in developing and emerging markets, supported by the double-digit revenue growth of the Chinese market. Organic snacks enjoyed a 15% surge in volume in China, and organic beverage volume had similar double-digit growth.

While PepsiCo focuses on innovation, its manufacturing, distribution and sales in China were taken care of by its strong strategic alliance with Tingyi Holding, one of the leaders in the food & beverage industry in China. Since 2012, Tingyi has added more than 35 manufacturing lines to produce both carbonated and non-carbonated drinks for PepsiCo in the Chinese market. Indra Nooyi, PepsiCo's chairman and CEO, commented, "Our alliance with Tingyi has been a game-changer for our business in China, as it fuels success by expanding our geographic footprint while driving speed and efficiency in our 'go-to-market' system-action plans for reaching consumers and being more competitive."

Mondelez also considers China to be the most important market
Although PepsiCo holds the second position in the global soft drink market, most of its operating profit comes from the food business. In the third quarter, while the PepsiCo Americas foods segment generated more than $1.4 billion in profit, the PepsiCo Americas beverages segment generated profit around $843 million.

Consequently, activist investor Nelson Peltz has urged PepsiCo to merge with Mondelez International and spin off its beverage business to unlock potential shareholder value. Mondelez has a global leading position in the food business in many emerging markets, including China. The company also claimed that China was the single most important opportunity for business expansion.

Irene Rosenfeld, Mondelez's chairwoman and CEO, has pointed out three opportunities in China. First is to keep investing in Oreo and the biscuits business. Second is to expand distribution and outlet coverage into tier three and four cities. The third is the "white space" opportunity of offering new products, like its recent launch of Stride Gum in China.

My Foolish bottom line
China is still an extremely fertile marketplace for all consumer goods companies. Coca-Cola, PepsiCo, and Mondelez have well-established positions, good economies of scale, strategic partnerships, and strong brand awareness. They could all grow much larger in the Chinese market over the long run.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of Coca-Cola and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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