Did you know how much sugar a 350 ml can of cola has? About 40 grammes. Just a glass of your favourite fizz can take your intake above the 30g daily limit prescribed by NHS.
But who cares? Especially in India, where the per capita soft drink consumption is still a tenth of what it is globally. These are still aspirational products for a majority of the country, and there’s ample headroom for growth before woke (or consensus health-conscious) headwinds take over.
And with this lifestyle change that India witnesses, here’s your chance to make some bucks for yourself - exposure to one of the world’s largest consumer brands!
Varun Beverages (VBL) is a critical player in the beverage market and the largest PepsiCo franchisee (outside the USA).
VBL manufactures and distributes a wide variety of carbonated soft drinks and non-carbonated beverages, such as bottled water, under PepsiCo’s trademarks.
Pepsi, Mountain Dew, Seven-Up, Mirinda Orange, Sting, Tropicana, Gatorade, Evervess and Aquafina bottled water are all manufactured and sold by VBL.
How does it work?
VBL has a symbiotic relationship with PepsiCo.
Pepsi owns the trademarks of all its brands and products. It makes formulations - concentrates that give beverages the taste that they need. It also invests in R&D around products and packaging. And it invests in branding and marketing (ATL)
VBL sets up and runs production facilities. Basically make bottles, and add all the ingredients together. It then manages sales and distribution, and BTL marketing.
If Pepsi does well, so does VBL. And if VBL does well, so does Pepsi.
Why Will VBL Do Well?
There are several drivers for VBL to do well over the next few years. Here are a few that can make you money while people consume more packaged beverages:
Structural growth levers
Like every other aspirational product, India’s per capita consumption of soft drinks is just a tenth of that in developed markets. As India moves higher on the development scale, more people will consume more packaged beverages
While carbonated drinks have long existed, there is increasing awareness about the harmful effects of excessive sugar consumption. However, brands are well aware of that and have successfully diversified product portfolios, and so has PepsiCo. With that VBL has been seeing much higher growth in non-carbonated drinks (juices and dairy products) than carbonated drinks
Compared to other markets, India’s product width is still nascent. Newer products have been seeing greater acceptance in the market, and product innovation (or introduction) to has a long road ahead
VBL is a giant
VBL accounts for ~85% of PepsiCo’s beverage sales in India and is present in 27 states and 7 UTs. It sold 45 crore cases in India in 2021. FYI, 1 case is equal to 5.678 litres of beverage divided into 24 bottles of ~237 ml each. Do the math!
Over the last 5 years, VBL’s sales volume has gone up at a 20% CAGR, and this has no reason to slow down going forward
VBL has a distribution network of 3 million outlets and has built its vast network up over the last two decades
Headroom in under-penetrated geographies
While North and Northeast have been core territories for VBL, it has acquired South and West from Pepsi, where room for improvement is massive
Immense growth is seen in under-penetrated territories like MP, Orissa, Bihar, Jharkhand and Chattisgarh
VBL has just started building its presence internationally and has franchisees for the territories of Sri Lanka, Nepal, Morocco, Zambia and Zimbabwe
New products driving growth
Pepsi has always been at the forefront of investing in new products, and this continues to drive new opportunities
Investments in variants of established brands (7UP Nimboz Masala), juices (Tropicana), and even new products (CreamBell) have led to a successful increase in volumes
VBL also launched an energy drink called Sting in 2017, which is now competing with international brands. It has been doing exceptionally well, growing in volume by 2.9x YoY, and now accounting for 7.2% of the company’s domestic sales
Doubled Already; What Next?
in 2Q 2022, VBLs revenue doubled, led by strong volume growth and improvement in realisation. Going ahead, it expects double-digit volume growth, as seen in the past.
The stock has been a massive outperformer. As of October 23, 2022, it is up 83% in the last year, and 263% over the previous three years.
We added it to the Socially Responsible Investing portfolio in June 2022, and since then the stock is up 30%.
However, given the continued strength in business, and all the levers the company has to keep the momentum going, it can very well continue to perform well in the future as well.
To get a piece of the action, head over to our Socially Responsible Investing portfolio, and invest in Varun Beverages!