Pepsico Inc. (PEP), the world leading retailer of soft drinks and snacks has inked a deal with China's Ministry of Agriculture to improve farming practices in the nation. The company’s initiative is a step toward boosting its Snacks and Foods Segment by procuring raw materials easily and at affordable rates.
The retail giant will work with the Chinese government to build ‘demonstration farms’ and promote the best farming practices among China's farmers. The farms will use advanced irrigation, fertilization and crop management techniques and aspire to raise income levels and living standards of farmers throughout the country.
This venture on the part of the company comes as a huge support for China's 12th Five-Year Plan. The government of China has been promoting sustainable agriculture in this new era, for which several policies have also been formulated.
Pepsi is one of the world’s leading agricultural enterprises. Every year Pepsi grows and uses more than 4 million tons of potatoes, 0.6 million tons of oats and 3 million tons of oranges and other fruits and vegetables. The retail giant employs more than 20,000 people in China for its farming activities.
Pepsi has been involved in agricultural activities in China since 2008 and has invested $31 million for agricultural purposes alone. In May 2010, the soft drinks maker had announced that it plans to invest an additional $2.5 billion in China by 2013. This is over and above the $1 billion investment announced in 2008.
Pepsi also endeavors to achieve water management efficiencies in China as bulk of the farming activities in the country depends on massive supplies of watery. The efforts to achieve these goals in China include switching from ‘flood’ irrigation to ‘drip’ and ‘pivot’ irrigation. These technologies have the potential to cut water usage by as much as 50 %, according to PepsiCo China's Sustainability Report 2011.
The efforts of Pepsi, supported by the retailer’s proven expertise in crop plantation and irrigation, have benefited more than 10,000 rural Chinese households and proved to be a win-win solution for local farmers and the company.
However, the company lags behind its close competitor Coca Cola Company (KO) with respect to investment in China. The beverage giant announced that it will pump $4 billion into the country between 2012 and 2014.
The investments will be spread out over three years, beginning in 2012 and raise Coca Cola's total investment in China between 2009 and 2014 to $7 billion. Coca Cola, based in Atlanta, opened five new facilities in China between 2009 and 2010. This year it has already come up with one and plans to break ground for the second and third one soon.
A strong new product pipeline, robust international sales and on-going productivity enhancement initiatives are all positives for PepsiCo. However, we are concerned about Pepsico’s vulnerability to currency translations, and the apprehension that the company could face an inflationary impact of approximately $1.4 billion to $1.8 billion.
Currently, we prefer to be ‘Neutral’ on the stock. Furthermore, Pepsi holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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