The Hindu Business Line : `Cola wars alive and kicking'

Catalyst brings readers extracts from a freewheeling conversation Pepsico President and CFO Indra Nooyi had with journalists from The Hindu group on her recent visit to Chennai.

"There isn't a product in India that is safer than Pepsi's products in India. Our products are safe," says a passionate Indra Nooyi, President and Chief Financial Officer, Pepsico International. Being an Indian, Nooyi says that she was deeply hurt by the allegation that the beverages manufactured by Pepsi in India had pesticide residues in them. "I am a chemist by my undergraduate degree and when the pesticide issue hit, I spent days at our laboratory poring over the scientific data in detail, because I was hurt that an Indian product was contaminated."

During her recent visit to Chennai, Nooyi, a Chemistry graduate from Madras Christian College and an MBA from IIM, Kolkata, met journalists from The Hindu group for a wide-ranging discussion on a variety of topics concerning Pepsi. Also present were Rajiv Bakshi, CEO, Pepsico India, and Abhiram Seth, Executive Director, Corporate Affairs & Exports.

Nooyi says Pepsico International views India as a market full of excitement and that the Indian affiliate forms an important aspect of the company's overall growth. She also calls Pepsico India a model Indian citizen.

"We have not only been good businessmen by bringing in FDI, we have also been outstanding citizens of India. We have not only brought in $700 million of FDI but also generated employment for over 60,000 people. We have been model citizens in all the States we operate. In the State of Punjab, for example, we came in on a counter-trade basis where we had to export stuff. But we didn't just export stuff, we worked with the farmers, tried to improve farming practices, improved the yield and made those farmers very efficient. In the last 10 years we exported more than Rs 2,300 crore of products."

She says that the company's most recent initiative is to grow citrus fruit in India. "Just a few weeks ago 22 farmers from Punjab went to Florida to see how we grow oranges. Our goal is to make Punjab a model citrus-growing area. So that as our business grows or the regions around India grow, we can export orange juice from India."

Excerpts from the hour-long question and answer session:

You say you are selling international quality in India. Are you still able to market it at a profit, whatever be the product?

The input costs here are lower too. For example, when we sell potato chips, we grow the potatoes here. We don't import anything. We bring the seed from overseas and help the farmers to grow the potatoes. Because we are sourcing locally, and following the quality standards and requirements as set by New York, we are still able to make an economic profit.

The reference is to Pepsi. All those standards (for Colas), the subject of so much controversy — they involved a cost. Are you still able to manage that and sell the product in a competitive market?

When it comes to quality testing, the one thing we don't talk about is making money. Because any problem that occurs in any country to the quality of our product impacts our brand globally. So, what we have done is institutionalise testing processes. So, even before coming into a country, we first ask `do we have the quality testing processes?' `Do we have input product testing, input raw material testing, in-process testing?' We have a third element called the market quality monitor. At random, we go to the market and pull out products from the shelves and go back to the laboratory and test it. It's part of our ongoing business model.

When the whole controversy broke out (pesticides), the allegation that was thrown our way was that the product that we sell in India was perhaps of inferior quality to anything we sell overseas. As an Indian, that bothered me enormously, because I could not imagine we could do something like that. We brought our products from several markets around the world, took them to a laboratory in Belgium and had it all tested. The Indian products met every one of the quality standards; in some cases, it was even better than some of the international products, even the US products, because for certain inputs, the stipulations in India are more stringent.

Obesity is a major health issue, particularly in the US. So, how is Pepsi positioning itself, or diversifying its portfolio?

Pepsico has three groups of products. The first is `Fun-For-You' products — such as Pepsi, Lays, Ruffles, or Fritos. We don't ask you to live on them.

The second group is the `Better-For-You' products. Those are where we take out a perceived negative from the product. If we take Lays and make baked Lays, as opposed to fried Lays, it will be a better-for-you product. Pepsi being launched as Diet Pepsi is a better-for-you product, because the sweetener has been substituted with an artificial sweetener.

The third group of products is the Good-For-You products, under which come products such as Tropicana or Aquafina.

Our goal is to have a 50:50 mix of the fun-for-you/better-for-you and good-for-you combination. We are not there as yet because the fun-for-you is still growing globally. We are about 65 per cent fun-for-you and 35 per cent better-for-you and good-for-you. The number of servings of products that we sell in the US has gone up, the calories have been going down. We offer products that span the whole range. Eat what you want, drink what you want.

China versus India

China is the bigger market. And no question, in beverages we are doing better in China in terms of profitability. And just last year, the growth rate in China has been higher than India. When China has a national policy on FDI, all the provinces get right in line. The market looks spectacular. The economy looks spectacular. It looks like a clean New York transplanted into China many times over.

I don't think India can ever get to that point — not in my lifetime. Because we have a democratic regime and everything has to go through a consensus process. Also, our core infrastructure is aged, and I am not sure we can replace all of them. But I think the growth of India will catch up with that of China in the next two or three years. The administration now is rolling out the welcome mat for FDI and that will yield in the long term.

As the consumption of these products (packaged foods) grows, the impact is felt by the local Governments, which don't have the resources to handle the waste. Do you have any resources to offer in terms of waste management?

We have something called a sustainability task force in Pepsico. The only goal of this task force is to look at areas where we can become even more responsible citizens of the community whether it is water, recycling, or worrying about waste. We worry about all these issues enormously.

Abhiram Seth:

PET bottles is one issue which invariably comes up. Few years ago, a recycler was not willing to pay more than Rs 5 a kg for the used PET bottles. Today, with the application area being strengthened by the awareness of the whole system of recyclables, which run in the country, whether it is newspapers or plastic, the price has gone up to Rs 18. Today you can't get PET scrap for the love of money. It is not reaching such a competitive situation where the price is moving on a continual basis. PET's downstream application areas are very effective. It is used for doing tapestries, polythene pillows and so on. You have to find downstream applications and once the commercial usage comes into place, things just flow. Because, when it becomes a raw material, it is always sought after and is always picked up. The other issue is water. On that front, if I say that the soft drinks industry is a marginal user compared to the total industrial water consumption, and the industry as such is a small user of the total water of the society, I don't think it is a plausible answer. People don't want to believe it, but factually, it is correct. The soft drink industry uses only 0.4 per cent of the water used by industry . That's a fact, but that's not material. I think the material issue is that water is the most visible part of our product, so on a mission mode, as a company, we have decided that we will create a positive water balance sheet and the work has already begun ...

If I have used 100 litres of water, I have to put back into the society 100 litres of water. So, as a corporation, this the desired end state, and work on this process has already begun. I think we should be able to complete our journey in three years' time.

What about the cost of water in terms of production? Is it the same level here as it is internationally?

Seth: The capital intensity system in water processing, which we employ in our plants, is definitely higher than many other countries. However, as far as the water availability is concerned, I would say we are somewhere in the middle. But I don't think water is such a significant element of cost anywhere in the world, including India. It is not the largest component of our cost structure.

After what happened with Coke in Kerala, obviously it shows that water is an important factor in the production of your products?

It is definitely the most critical and visible part of our product. I think what has happened in Kerala is an issue of sustainability. We are not shying away from it; we are saying okay, we have to take the challenge of putting back as much water we have used.

Through what technologies are you doing it?

Seth: There is rainwater harvesting, roof-water harvesting. We have got support from Pepsico Foundation to carry out studies about which terrain what would be the most efficacious method of dealing.

Bakshi: This is not a periphery concept. People who have done this study for us are TERI (The Energy Research Institute), which is a respectable organisation. We have done it around our Neelamangala plant in Bangalore, and drawn up a vision and some sort of a road map and TERI is helping us to implement the project. So, it is basically not a periphery vision. It is grounded in reality through a respectable organisation, which has experience in this field, and is going to help us implement it.

In a recent report in Financial Times, the Pepsico Chairman had referred to a worldwide consolidation of FMCG companies in context of the merger of Procter & Gamble and Gillette. Would we see Pepsi in a mega-merger or acquisition?

In fact, the P&G and Gillette merger has not triggered a series of mergers. Everybody thought that a series of merger would be announced, but that didn't happen. As far as Pepsico's perspective is concerned, we don't need to merge with anybody. We are doing fine. However, we have enormous financial resources in terms of borrowing capacities, we are conservatively managed by financial perspective, and if we thought we needed to make a major acquisition, we could do it. But the only problem is, today, there isn't a company out there which meets our financial and strategic strength. If that changes and if we can find some strategic logic to make a deal we will do it.

What happened to the cola wars?

The cola wars are alive and kicking. That's what makes us both great companies. We are constantly looking at a competitor and trying to outdo the competitor. And that's where the excellence comes from.

The cola advertisements have triggered a lot of dog-fighting. You are constantly fighting on the streets. How do you think you can come with some positive advertising?

There is so much fun to do that. Our advertising for Gatorade is not a dog-fight, neither are our Mirinda and 7up campaigns. When there is a dog-fight, that's where all the excitement comes. Because, as a consumer, you are looking at two sides and having a lot of fun. Some of the best advertising of Pepsi worldwide is in Pepsi India.

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