As the food and beverage industry faces a persistent decline in carbonated drink sales in Indonesia that is sending Pepsi out of the market, competitor Coca-Cola is expanding its operations in the country.

The famous American carbonated soft drink Pepsi will no longer be available in Indonesian stores and restaurants in the near future as its producer is to sever relations with its local partner, food giant Indofood CBP (ICBP), on Thursday.

In an official statement on Monday, publicly listed ICBP said its subsidiary, Anugerah Indoofood Beverage Makmur (AIBM), had decided to not renew its latest five-year agreement with PepsiCo Inc.

“AIBM and PepsiCo agreed to not extend the exclusive bottling agreement for commercial reasons,” ICBP spokesperson Gideon A. Putro said in the statement, which was published on the Indonesia Stock Exchange (IDX) website.

Under the agreement, AIBM held the exclusive rights to produce, sell and distribute all non-alcoholic drinks using PepsiCo’s brands, including Pepsi, Mirinda, 7Up and Mountain Dew.

The news about AIBM and PepsiCo discontinuing their partnership has been circulating for months and employees were reportedly informed in advance about the decision.

Indonesian Food and Beverage Association (GAPMMI) chairman Adhi S. Lukman said the move was expected since sales of carbonated drinks have continued to decline in the past few years.

“Soda beverage sales in Indonesia have declined by about 1 percent to 2 percent annually over the past five to six years,” he told The Jakarta Post over the phone.

The decline in carbonated drink sales in Indonesia was driven by a shift in consumer behavior that currently opts for other flavored and sweetened drinks like tea or coffee, as well as rising awareness about health-related issues.

Bucking the trend, however, Pepsi’s competitor Coca-Cola just recently launched an additional US$24 million production line in Pasuruan, East Java for affordable small sparkling package (ASSP) bottles that are expected to reduce plastic waste and promote sustainable packaging in Indonesia.

The ASSP production line will enable Coca-Cola Amatil Indonesia to produce 42,000 bottles per hour, adding to an existing capacity to produce 130,000 preforms — small plastic tube which is the early stage of bottles — in the Pasuruan factory. The factory, which accounts for 30 percent of Coca-Cola Amatil’s production in Indonesia, has the capacity to store 40.3 million bottles.

“Production from Pasuruan will be distributed throughout East Java, Bali and East Indonesia,” Coca-Cola Amatil Indonesia president director Kadir Gunduz said on Oct. 2, seeing an increased demand for food and beverage products in Southeast Asia’s largest economy.

The Pasuruan factory is the second ASSP production line in Indonesia, with the first opening in Cikedokan, West Java, in 2017, which was itself Coca-Cola's second ASSP factory in the world. Overall, Coca-Cola Amatil currently runs eight manufacturing facilities in Sumatra, Java and Bali with about 10,000 employees, having invested more than $379 million since 2014 to support operations in Indonesia.

Coca-Cola Amatil Indonesia produces a wide range of beverage products apart from Coca-Cola, namely Sprite, Fanta, Frestea products, Minute Maid fruity drinks, Ades mineral water and Schweppes.

Given the backdrop, restaurants across Indonesia could well shift their Pepsi menu item to Coca-Cola, as was planned by publicly listed Sarimelati Kencana, which operates the Pizza Hut restaurant chain across Indonesia.

“We’ll gradually replace Pepsi drinks in our restaurants with drinks from the Coca Cola brands until the end of this month,” Sarimelati Kencana operatings and marketing director Jeo Sasanto told the Post.

Jeo said that Pizza Hut had heard about the Pepsi exit in August, giving the company time to prepare a strategy to keep the supply of carbonated drinks flowing for the restaurant’s customers.

For ICBP, the end of its partnership with PepsiCo would not affect the company’s revenues, as the beverage business only contributed 4.4 percent to the company’s total revenues in the first half of this year, said Samuel Sekuritas analyst Suria Dharma.

“ICBP’s main support still came from the company’s noodle business, which contributed 65.9 percent of its revenues,” Suria wrote in a research note on Oct. 2.

Backing this analysis is the fact that ICBP saw revenues and net profits surge by 13.7 percent and 19.1 percent respectively in the January to June period this year from the same period a year ago to Rp 22.1 trillion ($15.61 billion) and Rp 2.73 trillion, despite a 10.3 percent loss in the company’s beverage business in the same period.