With ambitious plans for overseas sales and continued growth abroad, PepsiCo, Inc. (PEP) is reorganizing and adding senior-level managers to capitalize on opportunities outside of North America.

Previously, Pepsi was comprised of PepsiCo North America (with its own three divisions – Frito-Lay North America, PepsiCo Beverages North America and Quaker Foods North America) and PepsiCo International. Once reorganized, Pepsi will be split into three units, each with its own chief executive officer, consisting of:

• PepsiCo Americas Foods.
• PepsiCo Americas Beverages.
• And PepsiCo International.

PepsiCo Americas Foods will include Frito-Lay North America, Quaker and all Latin American food and snack businesses, including the Sabritas and Gamesa businesses in Mexico. John Compton, currently CEO of PepsiCo North America and a 24-year company veteran, will become its chief executive.

PepsiCo Americas Beverages will include Pepsi-Cola North America, Gatorade, Tropicana and all Latin American beverage businesses. Massimo d’Amore, currently executive vice president of PepsiCo International, will become CEO of the unit.

PepsiCo International will include all PepsiCo business in the United Kingdom, Europe, Asia, Middle East and Africa. Mike White will continue his role as CEO of PepsiCo International, but will also assume global responsibility for two strategic corporate functions: procurement and information technology, including the company’s business transformation initiatives.

Nooyi’s Global Vision

Within the next five years, Pepsi is angling to sell as many gallons of soda and bags of snacks in its markets overseas as it does in North America, Pepsi Chief Executive Officer Indra Nooyi told Bloomberg News in an interview a week ago.

International revenue made up 37% of PepsiCo’s $35.1 billion total sales last year, and is advancing at four times the rate of the U.S. and Canada markets – thanks to such market-tailored products as crab-flavored Lay’s in China, and lentil snacks in India.

International revenue will help Pepsi reduce its reliance on the United States market, where it gets the majority of revenue, compared with only 30% for rival Coca-Cola Co. (KO). To that end, PepsiCo has acquired more than a dozen companies abroad since 2000. In the U.S. market, it now plans to market products to increasingly health-conscious consumers, reducing its reliance on sugar-laden soda and such high-calorie salty snacks as Fritos.

"I suspect it’s going to be somewhere around 2010 or 2012, in that area, where it might catch up,” Nooyi told Bloomberg. "At its current trajectory, around that time, you could see a potential catch-up."

PepsiCo trails Nestle SA in global snack and beverage sales, while Coca-Cola leads in worldwide soda sales.

Through the first nine months of this year, PepsiCo Americas Foods accounted for about 45% of the company’s revenues. PepsiCo Americas Beverages accounted for about 30%. And PepsiCo International accounted for about 25%.

Nooyi, the CEO, expressed confidence that the new organizational structure will deliver double-digit profit growth in the next few years.

"Given PepsiCo’s robust growth in recent years, we are approaching a size which we can better manage as three units instead of two," Nooyi said yesterday. "Creating units that span the North American and international markets, as well as developed and developing markets, allows us to better share best practices among our North America and international businesses, while providing valuable development opportunities for our senior executives."

Positioning for Growth, Battle

Pepsi’s management and corporate shuffle basically splits its food and beverage divisions in half in the Western hemisphere. Meanwhile, food and beverages are under the same roof for its Eastern hemisphere operations.

The division allows Pepsi to allocate more time and attention to its prime growth market – Asia. During the third quarter, PepsiCo International profits rose 22% on the back of double-digit growth in China, Russia, Pakistan and the Middle East. And it gives the company a better position in the next big battle ground in the never-ending cola war with Coca-Cola. 

Money Morning has extensively covered Pepsi and Coca-Cola’s Asian strategies – as well as their sugary sweet third-quarter earnings in which Pepsi’s profits were up 17% and Coca-Cola’s up 13%. [McDonald's Corp. (MCD) and Yum! Brands Inc. (YUM) also are engaging in a similar war for the coveted Asia market.]

Pepsi and Yum! are two of the globally focused U.S.-based companies that several of Money Morning’s experts have identified as opportunities investors might want to research further. Their business models for growth don’t involve just Asia, but will benefit from having a solid strategy for Asia, said Contributing Editor Keith Fitz-Gerald.

And the more business they do outside the United States market, the more they will benefit from the falling dollar, which make U.S.-made goods cheaper for foreign consumers to buy. [Our research report, "Investments for a Weak Dollar World," is one of several research reports that list which U.S.-based companies follow this strategy and benefit in the face of falling greenback. The report is free of charge; please click here].

News and Related Story Links:

• Money Morning:
  Pepsi ‘Goes Red’ in China.

• Money Morning:
  Pepsi’s Stellar 3Q Gains Fueled By International Growth and Falling Dollar.

• Bloomberg News:
  Pepsi’s Nooyi says Overseas Sales May Catch U.S.

• Money Morning:
  Coca-Cola’s Big Third Quarter Highlights its Rivalry with Pepsi.

• Money Morning:
  McDonald’s Finds Unique Way to Beef up its Presence in India.

• Money Morning:
  Investments For A Weak Dollar World.

PepsiCo Inc. (PEP) ended its third quarter with big numbers – a 17% gain in net income, a 19% increase in earnings per share, and an 11% gain in revenue – largely because of its continually growing international presence.

The global beverage-and-food company has been ramping up operations in China, where Pepsi’s risky color change is gaining ground in its Olympic-sized cola war with Coca-Cola (KO).

Pepsi’s four main divisions all posted net revenue growth: Frito-Lay North America was up 6%, PepsiCo Beverages North America up 3%, Quaker Foods North America up 2%, and PepsiCo International up 22%, an impressive increase fueled by double-digit growth in China, Russia, Pakistan and the Middle East.

Overall, Pepsi reported net income for the quarter ended Sept. 8 of $1.74 billion, or $1.06 cents a share. That compares with net income of $1.49 billion, or 89 cents a share, for the comparable quarter a year ago.

And all this was accomplished even though the price of corn – a major ingredient of its soda and snacks – soared 21% this year on the Chicago Board of Exchange.

"Our third quarter performance was very strong, with double-digit revenue and operating profit growth," PepsiCo Chairman and CEO Indra Nooyi told the Wall Street Journal. "All of the company’s operating divisions successfully navigated through an environment of higher input costs in order to deliver balanced top- and bottom-line performance."

The Upside of the Falling Dollar

But underneath the numbers, the currency shift and diminishing value of the dollar has given Pepsi – and many other globally focused U.S. companies – a strong and steady tailwind. The dollar’s fall against currencies around the world is driving down the overseas prices of U.S. exports, and driving up export sales. That’s helped stabilize the U.S. manufacturing job base.

For Pepsi, "favorable foreign currency upsides allowed us to reinvest in several international markets in the quarter," Nooyi said in a company statement.

And the falling dollar opens many other doors for U.S. investors to profit. Not just riding the coattails of internationally moving American companies like Pepsi, Yum! Brands Inc. (YUM) and Exxon Mobil Corp. (XOM), but by investing in exchange traded funds (ETFs) and in foreign currencies gaining on the dollar.

News and Related Story Links:

• Money Morning Investment Analysis:
  Pepsi ‘Goes Red’ in China.

• Wall Street Journal:
  PepsiCo’s Net Climbs 16%.

• Money Morning Investment Analysis:
  Eleven Ways to Profit from the Falling U.S. Dollar.

Sometimes it’s better to invest in the hungry underdog than in the satisfied leader, and nowhere is that more clear than with Pepsi and Coke in China.

In a story that received only passing coverage here in the U.S. market, Pepsi recently ‘went red’ in China – as in Coca-Cola red.

As far as product-introduction strategies go, it’s one of the most brilliant I’ve seen in my two decades of doing business in the Asian markets. And the move speaks volumes about the massive potential that savvy U.S. companies see in China’s quickly emerging consumer market, since it’s such a risky move for Pepsi to make. But it’s the alluring risk-reward ratio we see here that makes this such an intriguing investment opportunity.

In case you missed the story, here’s what’s up.

The Olympics Aren’t the only ‘Games’ Being Played

As part of its big marketing push for the 2008 summer Olympics in Beijing, PepsiCo Inc. (PEP) adopted one of that country’s national colors in creating a red-themed can for sale exclusively in China. The special red can was just unveiled and the resemblance to the signature red cans of archrival Coca-Cola Co. (KO) is both uncanny and startling, according to people I’ve talked with who have seen it first hand.

The can is so striking, in fact, that Chinese shoppers picked up a ’sixer’ of Pepsi in their local WuMart by mistake when they were really after Coke.

[WuMart, in case you were wondering, is one of China's largest retail chain operators - not unlike its Bentonville, Arkansas-based U.S. "mart" counterpart. Some things truly are the same the world over, it seems.]

Why is this red can saga such a big deal? The "blue storm logo" has been Pepsi’s global standard color-scheme, in use since 1996. Prior to that, a Pepsi can sported a signature red-white-and-blue color scheme that was all its own.

But Coke’s cans have been red for as long as I can remember. It’s important to understand that this ‘Coca-Cola red’ isn’t merely a color, or even a trademark – it’s an identity, and is one of the reasons Coke has emerged as a global consumer icon.

In announcing the red can, Pepsi said the move wasn’t aimed at Coke at all, but rather was Pepsi’s chosen way of showing support for China’s national Olympics team. Pepsi also said it got a lot of positive feedback from a survey of Pepsi drinkers who lauded the company for its "bold move," and for its demonstration of respect for its Olympic host.

Besides, Pepsi said that it has adopted a country’s national color for a promotion before (including, once, yellow for a special Brazil promotion). I’m sure that’s true. But in that case, Pepsi wasn’t fishing in another guy’s pond, like Pepsi clearly is with Coke in China.

Pepsi, of course, doesn’t see it that way.

"We are ‘going red’ for Team China," Leo Tsoi, Pepsi’s China marketing guru, said in an interview. "We wouldn’t be doing a program that is simulating the competitor [but has no other benefits, which this one clearly does have]."

Naturally, Coke is downplaying Pepsi’s actions as a form of flattery [in a display of seemingly forced glibness, a Coke spokesman responded to the announcement by saying: "Red? Great idea. Why didn't we think of that?]. And Pepsi has stated that the red cans will go away at the end of the year, which is why I suspect there hasn’t been a "cease and desist" rocket out of Atlanta yet.

[I have to confess, however, that I have my doubts about whether Pepsi will actually squelch this packaging promotion at the end of the year, if it ends up proving successful, as I suspect strongly that it will].

Playing by the Rules – China Style

Having watched many western brands enter the Asian markets over the years, my take is that Pepsi caught Coke absolutely flat-footed here. It would also appear that Coke has been ‘out-Chinesed’ by its top Western competitor, since Pepsi has seen how a number of products were marketed with a "wrapper" that mimicked a highly successful Western counterpart.

After all, we’re talking about the land of ‘Hondga’ Motorcycles, ‘Redberry’ communication devices and countless other brands that approximate their western counterparts through imitation that’s not identical but which is a little too close for comfort.

And the challenge is even greater in a product sector where the wares are essentially commodities, says Professor Eugene Fram, a well-known expert on global marketing.

Although Coke and Pepsi would argue that they’ve differentiated themselves from one another – and from any other rivals – via differences in taste, packaging and brand equity, Fram says studies show that carbonated drinks are actually ‘commodity’ products, meaning substitutions are easy and frequent, and buying decisions often revolve around product availability, price or even coupons.

"The so-called ‘Cola Wars’ have been going on for decades and decades – they’ve even been the subject of several Harvard Business School case studies," said Fram, the J. Warren McClure Professor of Research Marketing at the Rochester Institute of Technology College of Business in Upstate New York. "In cases such as that, it’s important for the product manufacturer to do whatever they can to differentiate themselves and to attract consumer attention – whether that’s through packaging," or through other strategies.

Given that, the risk may be worthwhile, Fram theorizes.

What I find really interesting in all this is that Western companies are supposed to "play by the rules," or at least that’s the implicit agreement between expatriates in the region which is what makes this all the more surprising and audacious.

Speaking of which, you’re probably asking why Pepsi would deviate from tradition and risk product confusion when everybody "knows" Coke is red and Pepsi is blue?

Well that, my friends, is the ultimate question, the ultimate risk and – as it turns out – the ultimate gotcha.

China: The New Consumer Frontier

In China there are 300 million consumers who don’t "know" anything about either soda brand, but who increasingly have the disposable income to find out.

[For another interesting perspective on the emerging Chinese consumer, click here, or at the link below, to read Money Morning Managing Editor Bill Patalon's article about his experiences reporting from China as a working business journalist. He called it: "The Baywatch Effect. It's an eye opener.]

In the eyes of China consumers, Pepsi might as well be the "red can drink" – essentially usurping Coke’s brand equity and market momentum – which makes the stakes all that much higher in China than in other more established markets.

After all, according to marketing research conducted by RIT’s Fram, Chinese consumers are among the most fickle the world has ever seen but, in an interesting twist of irony, they are also among the most loyal if you can catch them.

And that’s really what this game is about…. catching customers who have never before seen let alone established pre-conceived notions about the Pepsi brand … or any other product for that matter.

And Pepsi, not Coke, was shrewd enough to realize it had to "shake things up" a bit in a market where Coke holds 51% of the soda market, to 30% for Pepsi, according to 2006 figures from the trade journal, Beverage Digest.

But the sales growth is enough to pop anyone’s lid. Coke last year sold 4.33 billion liters of carbonated drinks in China, a sales-volume jump of 70% over its results in 2000, according to market-researcher Euromonitor International and The Wall Street Journal. Pepsi sold 2.93 billion liters last year – 32% less than Coke but 93% better than it did in 2000.

In other words, Coke has nearly double the market share. But Pepsi has nearly double the growth rate. That makes Pepsi a hungry underdog if ever I’ve seen one.

So how do you latch on to your own personal Pepsi campaign when it comes to China?

Simple.

Take a page out of the same playbook and concentrate on the hoi polloi like Pepsi has.

Better yet, buy Pepsi (PEP) shares for the long haul.

Pepsi Cola is part of a global family of top-quality food-and-beverage brands that also includes Aquafina water, Lipton, Tropicana, Gatorade, Frito-Lay and Quaker Foods – all of which are excellent candidates for the quickly evolving Chinese consumer markets.

PepsiCo had total 2006 sales of $35 billion, and the company’s product portfolio has 17 brands that each generates at least $1 billion in annual sales. It’s also well diversified internationally. In its fiscal second quarter ended June 16, for instance, per-share earnings rose 16% to 94 cents – beating Wall Street’s estimate of 89 cents – thanks to an extremely strong performance abroad. Net profits climbed 13% to $1.56 billion.

The company reports its third-quarter results on Oct. 11.

Pepsi Chief Executive Officer Indra Nooyi seems to be very innovative leader. She’s always on the prowl for acquisitions that will "add value," and dismisses the big blockbuster deals unless they’ll do the same. So many executives love those deals because it makes them appear as a "Master of the Universe," and because they’re typically retired and living off their huge golden parachute by the time the deals have left the "successful" suitor in a shambles.

Nooyi has made healthy products and environmental initiatives a key plank of her corporate administration – but again, only where it makes sense. In April, Pepsi made the largest-ever corporate purchase of"renewable energy credits" – enough to offset all electricity used in PepsiCo plants.

Although Pepsi is the world’s No. 2 soft-drink company, Coca-Cola has at times found itself having to play from behind. In June, for instance, Coke said it would buy VitaminWater-maker Glaceau for $4.1 billion, a move that was viewed as Coke playing catch-up to Pepsi in the non-cola drinks realm.

But it’s definitely Pepsi’s very clear commitment to winning in China that gets our vote.

Other good examples of companies doing the same thing include MGM and Dubai, which are both running hard to attract the burgeoning middle class.

By the way, before we wrap up, just in case you want to see for yourself what Pepsi’s red can looks like, here’s a Pepsi Ad for its China Olympics Campaign, Featuring the Change From Blue to ‘Red.’

News and Related Story Links:

• WSJ.com:
  Pepsi Steps Into Coke Realm: Red, China.

• Video TV Ad:
  A Pepsi Ad for its China Olympics Campaign, Featuring the Change From Blue to ‘Red.’

• BrandWeek.com:
  Pepsi Seeing Red in China.

• Professor Eugene Fram:
  The J. Warren McClure Professor of Research Marketing.

• Rochester Institute of Technology:
  The E. Philip Saunders College of Business.

• Money Morning Investment Analysis:
  The Baywatch Effect: Can China’s Growth Help Gold Prices Triple?

• The Wall Street Journal:
  PepsiCo to Webcast Conference Call and Slides on Third-Quarter 2007 Earnings [on Oct. 11 at 11 a.m.].

• The San Diego Union-Tribune:
  PepsiCo 2nd-Quarter Profit Rises, Boosts Full-Year Earnings Forecast.

• Money Morning Investment Analysis:
  Here’s Why MGM is a High-Profit Play on China.