SSC seals Pepsi divorce

Posted on April 30, 2011

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Rivals could profit during transition
Published: 30/04/2011 at 12:00 AM
Newspaper section: Business
Bangkok Post

Shareholders of Serm Suk Plc (SSC), the local bottler of Pepsi, yesterday voted unanimously to terminate the exclusive bottling contract and end the company’s 58-year relationship with the US beverage giant PepsiCo.
The decision paves the way for SSC to independently produce or distribute other beverages after the contract ends officially on April 1 next year.

Prior to the contract expiry, SSC will continue to handle Pepsi, Seven-up and Mirinda as well as other Pepsi trademarked beverages.

The transition period could create opportunities for rival Coke and new players such as the fast-rising Peruvian brand Big Cola to steal market share from Pepsi. Thailand has long been one of only a handful of cola markets in the world where Pepsi outsells Coke.

SSC directors faced repeated questions at a suspenseful four-hour meeting about plans for a new flagship product, but they gave no details. Pepsi products made up 70% of the company’s sales of 21.97 billion baht last year.

Pepsi executives declined to comment yesterday when contacted by Reuters.

Parinya Permpanich, SSC’s director of marketing and sales, said the company could not disclose any details given its legal obligations to Pepsi until next April.

“We have found many products that could generate similar profits to those we gain from selling Pepsi,” he said. “During this transition period, we will do our best as the Pepsi bottler and distributor and we will maintain our leadership in the cola drink segment until the last day we work for Pepsi.”

He said SSC’s legal team was studying the agreement to determine when the company might be able to start negotiations, possibly within six months, with new partners for other products.

“With our long experience in the beverage business, we’re confident we can start a new business on the day after the contract with Pepsi expires,” Mr Parinya said.

The Pepsi-Serm Suk relationship turned sour in April last year when a tender offer by the US company to acquire more shares in the local bottler failed. After that, SS National Logistics made a tender offer late last year and successfully bought a 32.62% holding.

SSC subsequently asked PepsiCo to amend the two sides’ contract to reduce the cost of drink concentrates by 9%. It also wanted flexibility to produce other beverages that would not compete directly with Pepsi.

But talks collapsed with each side accusing the other of making unreasonable demands. Pepsi proposed a deal under which SSC could not produce beverages with names related to orange, root beer, strawberry and cream soda.

Vararatana Jutimitta, managing director of Bualuang Securities, the financial adviser to SSC, said many companies had approached SSC to use the huge nationwide distribution network that it had built up over five decades.

Deunden Nikomborirak, a research director at the Thailand Development Research Institute, said the Pepsi-Serm Suk case provided a good lesson that partnerships could change any time.

“In my opinion, Serm Suk viewed that the concentrate cost was similar to a royalty fee it had to pay Pepsi. The fee is very high and unfairly calculated,” she said recently.

SSC said it spent 3.2 billion baht last year on concentrates.

Dr Deunden suggested Thai companies seeking similar agreements should study them carefully as they might be tied to unfair conditions and fees.

SSC shareholders yesterday also voted to appoint six board directors proposed by SS National Logistics.

PepsiCo through two affiliates owns 41.54% of Serm Suk but it was not eligible to vote on the contract cancellation.

SSC earned a net profit in 2010 of 467 million baht, up 32.3% from a year earlier. Its shares closed yesterday at 45.25 baht, up 25 satang.

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