PepsiCo Inc plans to invest $2.5 billion in China over the next three years to expand its presence in a major, growing market where its drinks lag behind rival Coca-Cola Co .

The spending, announced on Friday, comes in addition to the $1 billion investment the soft drink and snack food giant announced in 2008 that will be completed this year.

Emerging markets, particularly China, are critical growth engines for soft drink makers, which have experienced sluggish sales in recent years in the saturated U.S. market.

Consumer Edge Research estimates that China will drive about 25 percent of global soft drink industry volume over the next five years.

PepsiCo's new investment will go to new manufacturing facilities, a significant scaling up of research and development, expanded agricultural development and brand-building initiatives.

Coke already has a strong lead in China's nonalcoholic beverage category. In 2008, Coke held a 15.7 percent share of China's total soft drink market while Pepsi had a 7.2 percent share, said Consumer Edge Research Chief Executive Bill Pecoriello. That includes all nonalcoholic drinks, such as tea, juice and water.

Coke has made bigger strides in rural China and has a wider variety of drinks and flavors, while Pepsi has focused more on cola drinks and urban areas, he said.

It's very important for them to catch up because China is going to be the biggest growth driver of the global soft drink market over the next five years, by far, Pecoriello said.

Pepsi shares fell 2.1 percent on Friday while Coke shed 0.7 percent.


PepsiCo currently operates 27 beverage and food plants and five farms throughout China and employs more than 20,000 people. It plans to open 10 to 12 new plants to manufacture soft drinks, noncarbonated beverages and snacks, and will install additional production lines in existing facilities.

PepsiCo will open plants in the provinces of Fujian, Gansu, Henan and Yunnan in the next two years.

PepsiCo CEO Indra Nooyi, who was in Shanghai to visit the Shanghai Expo, has been vocal about her plans to grow in emerging markets like China, India, Russia and Brazil as well as investing in healthier products.

The company will broaden its portfolio of Chinese-designed and developed products. It already sells products tailored to the Chinese market, such as Tropicana Guo Bin Fen juices and Cao Ben Le drinks inspired by traditional Chinese medicine, along with Lay's potato chips in cool cucumber and crispy prawn flavors.

PepsiCo said it would build a research and development center in China to develop products for all of Asia.

It will open five new farms for potatoes and oats with advanced irrigation technology. PepsiCo already has farms in China, including a pilot farm in Baotou, Inner Mongolia.

(Reporting by Jessica Wohl in Chicago and Nivedita Bhattacharjee in Bangalore; Editing by Prem Udayabhanu and Steve Orlofsky)