We haven't seen a slowdown in rural markets: PepsiCo India CEO Shiv Shivakumar

Invested in India for the last 26 years, PepsiCo currently offers 22 brands in the country, all of which are sourced, produced and marketed locally. In fact, 50% of these brands have a turnover of over Rs 1,000 crore. On the sidelines of the recently concluded Make In India week in Mumbai, Shiv Shivakumar, chairman and CEO, PepsiCo India Holdings Pvt Ltd, spoke to Ashish K Tiwari on why Make In India is critical for the country, PepsiCo's contribution to this initiative, overall consumer trends, company's brands, India specific innovations and initiatives, among others.

Q. What is your take on the Make In India initiative and how important is it for the country's food and beverage sector?
A. If you look at India's gross domestic product (GDP), 18% comes from agriculture, which is contributed by 46% of our entire workforce. So, we clearly need to move them up the ladder – into manufacturing and services. That's the most important reason why 'Make In India' is extremely relevant and very good for the country. But 'Make In India' sits at the centre of a value chain on supply side to demand side. We have 1.3 billion people eating, drinking, shopping, travelling etc., as a result of which demand side has never been a challenge. The bigger problem, however, is to ensure that the supply-side quality and facilities for the farmer improve. That's when you can have a very viable 'Make In India' programme in the food and beverage (F&B) sector.

Q. What is PepsiCo's contribution in this direction?
A. PepsiCo has been invested in India for the last 26 years. We currently have 22 brands – all sourced, produced and marketed in India – and 50% of these brands have a turnover of over Rs 1,000 crore. One of the things PepsiCo has been doing extremely well is transforming agriculture, and its best example is the 'Potato Programme' wherein we have invested in technology, worked with 34,000 farmers, giving them higher-yielding seeds and better remuneration. This has allowed the farmers make a significantly higher return from PepsiCo than anybody else. The same logic we now want to apply to all the categories be it foods, fruit juices, etc.

Q. There is a lot of focus on generating employment opportunities through manufacturing.
A. True. If you look at it at a broader level, for every one job that is created in manufacturing, there are multiple jobs created downstream thereafter. So, when you set up a plant and have one person working in it, you generate employment across logistics, warehousing, distribution, retail and so on. So, if X number of jobs are created in manufacturing, you can multiply that by eight or 10. This is true for the entire country and not just restricted food and beverage or PepsiCo.

Q. In your view, what are the key consumer trends in the overall F&B sector and what is PepsiCo's strategy here?
A. There are three drivers as far as the Indian consumer is concerned viz. aspirations, quality and right value. How does it play out when Indian consumers have very high aspirations around products they buy? It is through design, look and feel of the packaging of the products. On the quality front, whatever said and done, even the poorest of Indian consumer will never give up on the quality of products they buy. Most people think that cheap or low price is good in India. That's a misconception. No low-price brand is the market leader in any category because the Indian consumer values quality. That's why the strategy at PepsiCo is to ensure our products win against competition in the ratio of 60:40. In fact, a lot of efforts are being put to get superior products in the market. As for value, because we have a widely dispersed market, there are 41% and 42% of Indians who live in under $1 and $2 a day respectively, and there are millionaires and billionaires. So, we have a wide spectrum of people and getting the right value for your products becomes very important. The other thing I would say in food and beverage is that localisation is very important. A drink that is very popular in Pune may not be popular in Belgaum even-though the two locations are just 200-300 kilometres from each other. We are also seeing 'premiumisation' happening and the improvement in sensory delivery of the product is becoming very crucial.

Q. Any thoughts on the way digital and e-commerce is picking up in the market?
A. Digital is playing an extremely important role in 'shopping and scanning' as it gives consumers access to even the most premium brands. In fact, the e-commerce or hyper-local model is actually enabling all of this. Digital is no longer social media and includes consumer commentary, information, trust and shopping. Interestingly, more women are taking to it than men. Though e-commerce sales for FMCG are low right now, we have very clear ecosystem partnerships with the likes of Amazon, BigBasket, etc. and we are developing it further.

Q. There are concerns about growth slowing down in the rural markets on one side and build-up in local competition. Any comments?
A. We haven't seen a slowdown. As for competition, it has always been there and India is one of the most competitive markets in every category. The country adds between 500 to 1,000 food and beverage brands every year.

Q. And a lot of them also die down at the same speed...
A. That's an important observation. My view is that if you just brand a commodity in plastic pouches, it becomes a brand. It is a different matter altogether whether it's a trade or a consumer brand. So, India has always been a very high brand-conscious market. And consumers always look for aspiration, quality and price in making a choice.

Q. Companies are focusing big time on small packs. How big a play it is in the overall beverage space?
A.Actually, that's true for most categories and not restricted to beverages alone. In the FMCG space, around 50% to 60% of every product category in India is sold below Rs 10. That's also because of the way salaries are and the way we go and buy from retail. The phenomenon is true for both urban and rural markets.

Q. What kind of investments can be seen towards enhancing manufacturing plants?
A.We have four existing manufacturing facilities in Maharashtra alone, including the newly-launched unit in Nanded called the Citrus International plant. We continue to invest to ensure we get a lot more of the local fruit to be used in the variety of juice products.

Q. Could you share a bit on local sourcing by PepsiCo?
A. We do local sourcing across the product range. And if you look at it, 95% or more of whatever we produce here is locally sourced. While I don't have details off-hand, I can tell you that all of fruits, potato, sugar, rice, corn and a lot of mangoes is locally sourced.

Q. What is your view on the disruption in distribution by new-age businesses?
A.You will continue to see different business models. I go back to my earlier comments on the entire value chain. The demand side is much bigger than the supply side and when they look behind, they say why do I need to go to the retailer or modern trade? Is there another way of doing things? The power is truly in the consumers' hands digitally and that's the reason you are seeing disruptions in business models. What digital does is that it disaggregates the number of people who serve you. But fundamentally, it aggregates the information to the consumers who choose the best value and make the purchase decision from where they desire to buy it from. Luckily for FMCG categories, you have the MRP in marking and the float in terms of retailer margins, etc. So, it's much more applicable in the area of electronics. There will never be one route to the consumer and companies will have to react and manage it tactfully. All of e-commerce today is just $16 to $17 billion and likely to go up to $100 billion in 2020.

Q. But there is disruption also happening in the traditional supply-chain with business-to-retailer models that are connecting brands directly with the kirana stores. Does it mean distributors will now be under pressure to survive?
A.Traditional distribution won't go away and will continue. I think you will have a range. For instance, when modern trade came in 20 years ago, it didn't lead to death of retailers. In fact, their numbers kept on increasing and we have today 9 million-odd selling FMCG products. So it's not that they died. My view is that there will be co-existence and it is not about the format but the efficiency of the format. We make the mistake that the small guy will die, but if he is efficient, he will always have a role to play. Distribution works on the efficiency and the value delivered to the consumer as opposed to big, small or whatever you call it.

Q. Could you tell us about any innovations PepsiCo is doing for India?
A.We are also launching an innovation called 'Bullet Cooler' that is made for India, particularly for retailers in rural India where electricity is a big issue. The traditional way (in rural areas) has been using water-filled earthen pots to cool beverages in absence of electricity. While a normal visi-cooler takes 20 hours to cool, our simple innovation takes just four hours. We are currently doing a pilot with 1,000-odd coolers. The equipment will be distributed extensively in smaller outlets in Tier III, IV and beyond markets to ensure PepsiCo gets good market penetration and drive consumption of cold beverages as opposed to warm drinks at outlets in rural India.

Q. Any plans to enter milk-based products?
A. Not right now. Our portfolio is fairly balanced and includes carbonated soft drinks (CSD), fruit juice-based beverages, oats and water. So, there isn't really a need to get into milk-based products at this stage.

Q. How is the business growth like from cola and non-cola beverages?
A. See, both the colas and non-colas are growing and I can't say that one is at the expense of the other. However, the fruit-based drinks are definitely growing the fastest. Besides, I think that India still has a lot of headroom for growth across the range of both CSD and juice-based products.

Q. Do you also export from India?
A. We export a bit of products from the Kurkure brand portfolio. This apart, raw mango is also exported to be used by other PepsiCo units in other countries.

Q. FMCG companies are focusing a lot on health products. Anything PepsiCo is doing in the niche products category, especially diabetes?
A. While we don't have anything specific to cater to diabetic consumers, one of our best offerings in the health and wellness space is Quaker oats. On the beverages front, we have a product called 7UP Revive, which is an isotonic drink and a very different offering. It sits in the hydration space offering vitamins and electrolytes to keep the body stay active. Even the Tata Gluco+ range of products would sit in the healthy beverages category.