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Soft-drink giant learns tough lesson

The era for big multinational companies trying to buy something cheaply in Thailand is over, as there are now local conglomerates that can fight against them with the same money power.

Thai Beverage, the country’s largest brewer and distiller, last Friday reached an agreement to buy PepsiCo’s shares in Serm Suk for Bt15.4 billion.

The deal will shake up the US soft-drink giant’s operations in the Kingdom and will end its more than half-century ties with the Thai bottler.

The acquisition will benefit ThaiBev, as it will allow the local brewery and distillery giant to leverage Serm Suk’s efficient logistics and distribution systems to expand its portfolio of non-alcoholic products and broaden its logistics network, especially in dining outlets.

However, for PepsiCo, questions have been raised over its distribution plans in the Bt36-billion soft-drink market.

A beverage-industry source said PepsiCo had few options to retain its strong presence in the soft-drink industry, namely setting up its own bottling and logistics systems, finding another bottling partner to run the business or continuing its bottling contract with Serm Suk.

The best alternative for the cola giant is to continue working with Serm Suk, which has been providing bottling and distribution services for Pepsi products for 58 years, he said.

“It would take PepsiCo at least 10 years to build up its own bottling and distribution systems, especially for returnable bottles, which require its own feed and direct-selling with individual retail outlets. It is quite different from a general distribution system, which goes through agents and wholesalers,” the source said.

The source said 60 per cent of Pepsi-Cola soft-drink sales was from returnable bottles.

“I personally believe that PepsiCo will make a decision to negotiate and continue its business relationship with Serm Suk under a revised exclusive bottling appointment [EBA] contract, which would satisfy Serm Suk’s new shareholders. It will be back to the past when Serm Suk was 100 per cent owned by local shareholders,” the source said.

With the current EBA contract, Serm Suk needs to run the business at a high cost and low profit margin, as it has to pay PepsiCo a high price for cola concentrate. While all general advertising and marketing expenses have been split evenly by Serm Suk and PepsiCo, Serm Suk alone is 100 per cent responsible for trade marketing activities, the source said.

Another source said that in the short run, PepsiCo needed to rely on Serm Suk or other local bottlers to continue its soft-drink business in Thailand.

The heart of the soft-drink business is the distribution channel, and Serm Suk has a huge distribution network of more than 300,000 outlets, he said.

“I don’t believe that PepsiCo will leave the Thai market behind. However, they need to take at least five years to develop their own bottling and logistics facilities as well as to recover their business here,” the source said.

The dispute with Serm Suk seems to have been a good lesson recognised by PepsiCo, that the company should not borrow someone else’s nose to breathe if it wants to do business and grow in the long term.

However, PepsiCo said in a statement that it would proceed with its plan to develop alternative bottling and distribution options for its beverage business in Thailand.

“The company has a substantial development fund in place and will utilise this to replace the previous bottling and distribution operations with Serm Suk.

“PepsiCo has had a successful partnership with Serm Suk for many years.

We will continue to work closely with [it] until the conclusion of the exclusive bottling appointment in November 2012.

“This will ensure continuity of supply for our customers while PepsiCo establishes its new bottling and distribution operations.”

Source: The Nation

ThaiVest Editorial Team

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