Pepsi-Cola International (incorp: Pakistan) (PCIP) is in the process of converting Pakistan’s bottling operations from a multiple-franchise model into a single-franchise model managed by Lotte Chilsung Beverage Co. The reorganisation is expected to result in an inflow of more than $500 million in Pakistan to purchase the operations of all Pepsi bottlers in the local market.
Lotte Chilsung has formed a local company called Lotte Akhtar Beverages incorporated in January 2018, in joint venture with the Akhtar group of business that owns the Lahore-based Pepsi bottler called Riaz Bottlers. Lotte Chilsung is Member Company of the Lotte group, and its Co-Chief Executive Officer, Mr. Young-Goo Lee, is a Non-Executive Director of Pepsi-Cola Products Philippines Inc. The firm is a Korean drink magnate and already has contracts to manufacture and distribute Pepsi’s carbonated drinks in China, the Philippines and Myanmar.
The ownership stake of PCIP, the local concentrate producer, in this reorganisation is unclear, though all over the world Pepsi usually contracts the manufacturing and distribution operations to franchisees instead of owning those operations. However, it is worth noting that the Business Unit President for PepsiCo International in Bangkok, Mohammad Qasim Khan, was a Non-Executive Director of Lotte Chemical Pakistan as of December 2017. He was first appointed to that board in September 2009.
According to Lotte Chemical Pakistan’s balance sheet, Mr. Khan is responsible for PepsiCo’s beverage and food businesses in Japan, Korea, Philippines and Pakistan. He has been with PepsiCo since 1986, serving diverse roles in Australia, New Zealand, Vietnam, Malaysia, Singapore, Thailand and the Pacific Islands.
Responding to BR’s query on operations reorganisation plans, the PCIP said: “PepsiCo is proud to be one of the largest food and beverage company in Pakistan and is focused on delivering sustainable long-term growth while leaving a positive imprint on society and the environment. Lotte Chilsung and Akhtar Group are PepsiCo’s partners since decades and have continued to produce world class quality products as mandated by PepsiCo’s global quality standards. Lotte Akhtar Beverages Pvt. Ltd is a Joint Venture (JV) between both these partners in Pakistan. The new JV will build on PepsiCo’s existing position in Lahore. We cannot comment on speculations related to mergers and acquisitions and future business plans.” The CEO of Lotte Akhtar, Ghazi Khan, was contacted but he was unavailable for comments.
Sources say that Lotte Chilsung has struck a deal for about $50 million for a 52 percent stake in the JV with Akhtar group. Other sources put the deal size in per case terms amounting to $2.5 per case; each case has about nine litres of carbonated drinks. The transaction does not reflect in 10MFY18 foreign direct investments figures reported by the central bank.
“Eventually, Lotte Chilsung will buy all the operations of all the franchisees in the country,” another source said on the condition of anonymity, adding that Sukkur Beverages is also in the process of being purchased by the Lotte group. “The combined deal size of all the acquisitions is expected to be around approximately $500 million, with all the transactions, to purchase at least the majority stakes, expected to be finalised by 2020,” sources said.
However, going by these estimates, and the fact that some of the other franchisees are bigger than Riaz Bottlers (see table of income taxes paid as a proxy for size), the combined deal size of acquisition is likely to be much higher than $500 million, if Chilsung eventually ends up in a hundred percent buy-out of all the franchisees in the expected timeline of 3 to 4 years.
According to industry insiders, a host of reasons may be behind Pepsi’s ongoing consolidation of local bottling operating. It includes ensuring quality control and consistency across the country, control of operations to be able to better respond to the highly competitive needs of Pakistan’s carbonated drinks market, and further investment towards capacity expansion.
In a November 2017-interview with Business Recorder, PepsiCo’s Vice President, Corporate Affairs for PepsiCo Asia Middle East & North Africa, Krista Pilot said that “Pakistan, for PepsiCo, is a priority market”, adding that the company and its bottling partners have invested heavily in new industrial infrastructure and up-gradation over the last five years.
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