While Unilever did painstaking market research and branding
work, local competitors simply churned out flavors and put them in
supermarkets to see what sold at which prices, he said. Low prices
still really matter in China, especially for goods consumed in
private that don't confer any status.
PepsiCo's solution to the copycatting problem is to add a
hard-to-replicate ingredient or other product tweak, often at the
One product out of the R&D center is a Quaker dairy drink
with oats in it, launched in October. Consumers wanted a high-fiber
dairy drink but didn't enjoy the gooey texture of crushed oats. So
PepsiCo developed a technique to make roasted oats smooth to
Shank Hu, senior director for beverage technical innovation in
Asia, the Middle East and Africa, expects local brands to copy it
-- but without PepsiCo's know-how their products will be sticky.
"We protect our innovations -- there's always a secret ingredient,"
PepsiCo is doing well here: Snacks volume was up 15% in the
third quarter, the company says, while beverage volume also grew in
the double digits.
PepsiCo has worked hard on snacks in China and has a 4 % share
of that market, ahead of Nestlé, General Mills and
Kellogg's, according to
Euromonitor International. Rival Coca-Cola, which makes Sprite and
Minute Maid along with its signature drink, is China's No. 1
beverage maker -- it had a 15.7% share of that market in 2012,
compared with PepsiCo's 4.5%.
How PepsiCo does it
Across the street from PepsiCo's R&D center are farms growing
rice and canola. Despite the rural touch, it's a half-hour drive
from central Shanghai, since location is key for attracting talent
in a competitive market. The center has about 100 employees.
Experimentation starts in the massive kitchen (where the chef
recently prepared an Indian-Thai fusion vegetarian meal for
visiting PepsiCo CEO Indra Nooyi).
The chef's creations are sampled by local taste testers who were
hired for their discerning palates and then given training. Many
are local homemakers, Mr. Hu said.
A successful creation might go on to a lab to be turned into a
mass-market product. There's a lab to test products for chemicals,
and another stocked with microorganisms, including E. coli.
"Sometimes we deliberately contaminate products to see whether our
processes are good enough to kill it," Mr. Hu said. (That lab is
off-limits to visitors.)
Elsewhere, there's a 3-D printer for experimenting with
packaging shapes and sizes. Sizes vary by market based on customer
price expectations -- in China, the company tries to keep its snack
prices around 50¢.
The last step is a pilot manufacturing plant -- which, during a
recent visit, was churning out a mango drink being developed for
PepsiCo's R&D plant isn't just for China -- it's also the hub
for other Asian markets. A team from India came to Shanghai to
develop the mango drink, Mr. Hu said. That product was based on a
Tropicana product launched in China and several other Asian
markets. "Good ideas will go across to other markets" within Asia
and beyond, Mr. Hu said.
Another China product development that PepsiCo believes has
potential in other markets, possibly including the U.S., involves
packaging. In China, Stax potato chips come in the usual cardboard
tube, but inside that there's a plastic pull-out tray. The tray
stemmed from the insight that Chinese snackers don't like to get
their hands dirty when they eat -- and really, does anybody like
reaching into a greasy can?