I don’t usually pay much attention to sponsored articles in the Chinese media, but one such announcement today trumpeting a new contract win by PepsiCo (NYSE:PEP) and Taiwan’s Tingyi (OTCPK:TCYMY) caught my attention due to the implications for the Chinese beverage market, most notably for industry leader Coca Cola (NYSE:KO). The article, known in the west as an “advertorial,” appeared in the English-language China Daily and touted a major new deal for Pepsi and Tingyi to supply drinks for Shanghai’s new Disneyland, which will open in 2015.
Other media also reported on the deal (English article), which to my knowledge is one of the first major contract wins for Pepsi and Tingyi since they formed an alliance in early 2012 (previous post). The few reports I’ve seen on that tie-up since then focused mostly on cooperation in back-end manufacturing and logistical issues like product bottling. This is one of the first announcements on the sales front, which could auger a serious challenge to Coke’s dominance in the local beverage market.
Both Pepsi and Coke have traditionally excelled in carbonated soft drinks, with Pepsi’s China best-sellers including its namesake beverage as well as 7UP and an orange drink bearing the Tropicana brand. By comparison, Tingyi has excelled in more traditional non-carbonated beverages like tea and fruit drinks, mostly bearing the local Master Kong name. Coke tried to get a better foothold in the fruit drinks area in 2010 with a bid to buy local market leader Huiyuan (OTC:CYUNF), but that deal was ultimately vetoed by China’s anti-monopoly regulator.
Against all that backdrop, let’s look at the latest reports, which say Pepsi and Tingyi will become the primary drink suppliers to Disney (NYSE:DIS) when it opens its long-awaited theme park in Shanghai next year. The new tie-up marks a major shift for Disney, which has had an exclusive alliance with Coke over the last 25 years for its other global theme parks. A Disney spokesman said there were no current talks to end the Coke alliance at any of Disney’s other 11 theme parks and 44 resorts around the world.
It’s probably safe to say there was intense lobbying behind the scenes between Coke and Pepsi to get this contract. The Tingyi connection was almost certainly a major attraction for Disney, since many Chinese — especially older consumers — prefer Master Kong-style tea beverages and fruit drinks to western-style soft drinks, which have a history in China dating back just over the last 30 years.
Pepsi and Tingyi first announced their tie-up in late 2011, in an agreement that saw the former hand over its China bottling operations to the latter. I said at the time that the deal looked good for Pepsi, which not only got rid of a money-losing bottling operation but also gained an important new local partner that better understood China’s market and local consumer preferences. Tingyi also has much better sales channels through its various products, which include China’s most popular brand of instant noodles.
This new Disney announcement has big implications for the broader China beverage market, which is worth about $70 billion annually. Coke is currently the clear market leader with about 15.7 percent share, while Pepsi is well behind with 4.5 percent. I’ve previously said Pepsi needs to improve its marketing in China, which is far less aggressive than Coke’s. This new Disney announcement appears to show that Pepsi may finally be getting that message, and I do expect we could start to see the company’s Tingyi alliance start to bear some fruit with significant market share gains over the next 2 years.
Bottom line: Pepsi’s win of a deal to supply drinks to the new Shanghai Disneyland is the first major fruit of a 2-year-old tie-up with Tingyi, and could auger bigger gains in the market over the next 2 years.