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PepsiCo Increases Its Exposure to China With a $705 Million Purchase

By Leo Sun – Feb 28, 2020 at 8:10AM

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The packaged foods giant significantly increases the size of its Chinese business by buying a major snack maker.

PepsiCo (PEP 1.22%) recently agreed to buy Hangzhou Haomusi Food, also known as Be & Cheery, from Haoxiangni Health Food for $705 million. The company is one of China's largest snack makers, and it sells a wide range of nuts, dried fruits, meat snacks, baked goods, and confectionery.

Be & Cheery operates an asset-light model by mainly selling its products on China's e-commerce platforms instead of brick-and-mortar stores. Ram Krishnan, CEO of PepsiCo Greater China, stated that the brand is "highly complementary" to its business, and supports its plans to continue growing "in China, for China, with China."

Krishnan stated that Be & Cheery would boost PepsiCo's direct-to-consumer capabilities in China and that it could tap the brand's innovation and insights to drive the growth of its other products in China. Be & Cheery chairman Haoqun Qiu also noted that PepsiCo's strong brand, "route-to-market capabilities," and global supply chain would help it reach more consumers.

This acquisition isn't surprising since PepsiCo often expands its portfolio by buying popular regional brands. However, the acquisition notably boosts its exposure to China as the country struggles with an economic slowdown, an unresolved trade war with the U.S., and a coronavirus epidemic. Let's dig deeper to determine if it was the right time for PepsiCo to buy a major Chinese company.

Assorted nuts and dried fruits.

Image source: Getty Images.

How much revenue does PepsiCo generate in China?

PepsiCo doesn't disclose its revenue from China separately. Instead, the country is included in its APAC (Asia Pacific, Australia, New Zealand, and China) segment, which grew its revenue 4% annually to $2.92 billion, or 4% of its total sales, in fiscal 2019.

In a recent interview with CNBC, CFO Hugh Johnston disclosed that PepsiCo generated less than 2% of its total revenue from China -- which suggests that the country accounts for nearly half of its APAC business. During last quarter's conference call, CEO Ramon Laguarta noted that its Chinese business was "growing very well."

Be & Cheery generated 5 billion yuan ($713 million) in revenue last year. Therefore, the takeover could increase the size of PepsiCo's Chinese business by nearly 50%, and the total size of its APAC business by about 24%. It could also boost the size of PepsiCo's Chinese business from 2% to 3% of its annual revenue.

A single percentage point might not seem significant, but it matters to a company that's consistently generated low-single-digit organic sales growth over the past five years:

YOY growth

2015

2016

2017

2018

2019

Organic revenue

5%

3.7%

2.3%

3.7%

4.5%

YOY = Year-over-year. Source: PepsiCo annual reports. *Constant currency basis.

PepsiCo expects to generate 4% organic sales growth in 2020. Adding a major Chinese snack maker to its portfolio could keep that momentum going after it laps the acquisition and adds Be & Cheery to its organic sales figures in 2021.

Why PepsiCo isn't worried about the macro headwinds

PepsiCo's is buying Be & Cheery at a significant discount at less than one times last year's revenue. Haoxiangni Health Food reportedly wanted to divest the business to focus on the growth of its jujube (Chinese date) business as the country's macro headwinds intensified.

Boxes in a warehouse.

Image source: Getty Images.

However, PepsiCo likely isn't too worried about the economic slowdown or the coronavirus (officially known as COVID-19) outbreak, for two reasons. First, PepsiCo already has an established manufacturing and logistics framework across China, and it can leverage that scale to squeeze out higher margins than Haoxiangni from Be & Cheery's products.

The coronavirus crisis also hasn't hurt PepsiCo's Chinese business yet. It's already reopened most of its Chinese plants, and demand for snacks and beverages should remain stable -- even throughout this or future viral outbreaks.

Furthermore, e-commerce sales should remain steady throughout the crisis as consumers shun brick-and-mortar businesses and order more products online. That's why PepsiCo repeatedly emphasized the strength of Be & Cheery's direct-to-consumer and e-commerce channels in its press release.

The bottom line

PepsiCo's acquisition of Be & Cheery is a smart move that could boost its Chinese revenue without significantly throttling its margins. Investors shouldn't worry about PepsiCo's increased exposure to China since it could benefit the company over the long run after the macro headwinds finally dissipate.

 

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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