Pepsi In India- A Letter to Pepsi

In 1988, the New York office of the President of the multi-billion cola company PepsiCo received a letter from India. The company had been trying for some time to enter the Indian market without much success. The letter was written by George Fernandes, the General Secretary of one of the country's leading political parties, Janata Dal. He wrote, "I learned that you are coming here. I am the one that threw Coca-Cola out, and we are soon going to come back into the government. If you come into the country, you have to remember that the same fate awaits you as Coca-Cola.This development did not seem to be a matter that could be ignored. PepsiCo's arch-rival and the world's number one cola company, Coca-Cola, had indeed been forced to close operations and leave India in 1977 after the Janata Dal came to power. Even in the late 1980s, India had a closed economy and government intervention in the corporate sector was quite high.

Indian Market- lucrative Destination

However, multinational companies such as PepsiCo had been eyeing the Indian market for a long time for a host of Reasons. US, seemed to be reaching saturation levels, Globalization-the only option left. India -lucrative destination Vast population Offered a huge, untapped customer base. During the late 1980s, the per capita consumption of soft drinks in India was only three units per annum as against 63 and 38 for Egypt and Thailand respectively. Even its neighbor Pakistan boasted of a per capita soft drink consumption of 13 units. PepsiCo was also encouraged by the fact that increasing urbanization had already familiarized Indians with leading global brands. Given these circumstances, PepsiCo officials had been involved in hectic lobbying with the Indian government to obtain permission to begin operations in the country. However, the company could not deny that many political parties and factions were opposed to its entry into the country. It had therefore become imperative for PepsiCo to come up with a package attractive enough for the Indian government.

The Promises That Helped Pepsi Enter

In May 1985, PepsiCo had joined hands with one of India's leading business houses, the R P Goenka (RPG) group, to begin operations in the country. The company, along with the RPG group company Agro Product Export Ltd., planned to import the cola concentrate and sell soft drinks under the Pepsi label. To make its proposal attractive to the Indian government, PepsiCo said The import of cola concentrate would essentially be in return for exporting juice concentrate from operations to be established in the north Indian state of Punjab. In its proposal submitted to the Ministry of Industrial Development, company sources said that the objectives of PepsiCo's entry into India revolved around 'promoting and developing the export of Indian agro-based products and introducing and developing PepsiCo's products in the country. The government rejected this proposal primarily on Two grounds: I ) The government did not accept the clause regarding the import of the cola concentrate. 2) The use of a foreign brand name (Pepsi) was not allowed as per the regulatory framework. The association with the RPG group too ended at this juncture. Not willing to sit quietly on the issue, PepsiCo put forward another proposal to the government a few months later.

Another Proposal
The company knew that the political and social problems that plagued Punjab were an extremely sensitive issue for India in the 1980s. PepsiCo's decision to link its entry with the development and welfare of the state was thus a conscious one, aimed at winning the government over. The fact that Punjab boasted a healthy agricultural sector (with good crop yields in the past) also played a role in PepsiCo's decision. Reportedly, the new proposal gave a lot of emphasis to the effects of PepsiCo's entry on agriculture and employment in Punjab. The company claimed that it would play a central role in bringing about an agricultural revolution in the state and would create many employment opportunities.

----- Promises - Keep Some, Break Some

began by setting up a fruit and vegetable processing plant at Zahura village in Punjab's Hoshiarpur district. The plant would focus on processing tomatoes to make tomato paste. Since the local varieties of tomatoes were found to be of inferior quality,----------- imported the required material for tomato cultivation.

The company entered into agreements with a few big farmers (well-off farmers with large land holdings) and began growing tomatoes through the contract farming route (though the agro-climatic profile of Punjab was not exactly suitable for a crop like tomato, Pepsi had chosen the state because:
1) 2) 3) Farmers were progressive, Their landholdings were on the larger side, Water availability was sufficient. Initially,

Problems faced by Co. Pepsi

1) Convincing farmers to work with co. Experts interact extensively with the farmers to explain how they could benefit from working with the company. 2) Financial transactions with the farmers. When the company insisted on payments by cheque, it found out that as many as 80% of the farmers did not even have a bank account..!

India Liberalizes - A Boon For Pepsi

In the early 1990s, the Government of India was facing a foreign exchange crisis. The country was finding it extremely difficult to borrow funds from the international markets due to a host of problems on the political, economic and social fronts.
Organizations like the International Monetary Fund agreed to help the Indian government deal with the financial crisis, on condition that it liberalized the Indian economy.

As a result, the government decided to liberalize the economy. 2 most prominent features of the government's new economic policy.

The removal of the numerous restrictions on foreign trade and The increased role of private equity in Indian markets Pepsi benefited from the economic changes in many ways. The removal of various restrictions meant that it no longer had to fulfill many of the commitments it had made at the time of its entry. .

Pepsi Goes Farming - Finally

Though Pepsi attracted a lot of criticism, Many people felt there was a positive side to the company's entry into India. According to a www.agroindia.org article, -Pepsi's tomato farming project was primarily responsible for increasing India's tomato production. Production increased from 4.24 million tonnes in 1991-92 to 5.44 million tones in 1995-96. The company's use of high yielding seeds was regarded as one of the reasons for the increase in productivity in tomato cultivation during the same period. Commenting on the above issue, Abhiram Seth, [Seth, the company's Executive Director (Exports and External Affairs)] said, "When we set up our tomato paste plant in 1989, Punjab's tomato crop was just 28,000 tonnes, whereas our own requirement alone was 40,000 tonnes. Today, the state produces 250,000 tonnes. Per hectare yields, which used to be 16 tonnes, have crossed 50 tonnes." Pepsi was, however, not as successful in the chili contract farming venture that was started soon after the tomato venture stabilized...

Doing Business on its Own Terms

The company's contract farming initiatives and its focus on improving Punjab's agricultural sector seemed to indicate that Pepsi had been working towards fulfilling its pre-entry commitments. However, the reality was quite different. In 2000, the company's exports added up to Rs 3 billion. The items exported included not only processed foods, basmati rice and guar gum. In fact, the company met the soft drink concentrate requirements of many of its plants worldwide through its Indian operations. Even by 2000, of its annual requirement of 25,000 tonnes of potatoes per annum, Pepsi got only 3,000 tonnes from its contract farmers. Given these figures, it would be interesting to see how it planned to achieve its objectives of meeting its complete requirement of potatoes through the contract farming route by 2004...

Business Environment

Economic Environment
GDP growth rate Trends- avg. 8%,2011-7.8% GDP Per Capita- $3400(2010 est.),$7400(2010)- CIA Factbook Agriculture: 15.7% Industry: 28% Services: 54.9% (CSO and Economic Survey,2009-10) Labor Force- 478.3 million (2010 est.)CIA Factbook country comparison to the world: 2

Inflation Rates-9.02-average rate in 2011

Unemployment Rates -9.4% (2010 est.)#,U.S-9.20%(June,2011)* Population below poverty line-37% Planning Commission (Tendulkar Committee)

Ease of doing business-134(2011),135(2010) out of 183 countries. World Bank Countries Ease of doing biz
# India Ministry of Labor *Bureau of Labor Statistics

Economic Indicators

 Comparison of countries http://www.globalfirepower.com/countriescomparison-detail.asp

A nation's ranking on the index is based on the average of 10 sub indices:

Starting a business - Procedures, time, cost and minimum capital to open a new business Dealing with licenses - Procedures, time and cost of business inspections and licensing (construction industry) Hiring and firing workers - Difficulty of hiring index, rigidity, difficulty of firing index, hiring cost. Registering property - Procedures, time and cost to register commercial real estate Getting credit - Strength of legal rights index, depth of credit information index Protecting investors - Indices on the extent of disclosure, extent of director liability and ease of shareholder suits Paying taxes - Number of taxes paid, hours per year spent preparing tax returns and total tax payable as share of gross profit Trading across borders - Number of documents, number of signatures and time necessary to export and import Enforcing contracts - Procedures, time and cost to enforce a debt contract Closing a business - Time and cost to close down a business, and recovery rate.

Economic Environment
Levels of income and its distribution Low income Lower middle income Upper middle income High income Per capita income(2010) $1005 or less $1006 - $3,975 $3,976 - $12,275 $12,276 or more.

 Limited Industrialization- High dependence on agriculture. High Birth rates Low Literacy Rates Heavy reliance on foreign aid. Political instability and unrest Excessive Unemployment and underemployment Technological Backwardness Excessive dependence on imports The vicious circle of poverty.
E.g.. Afghanistan,Guinea-Bisau,Bangladesh,Haiti,Kenya Third World Countries - Political rights and Civil Liberties

Low income Countries

Lower Middle Income countries

Early stages of Industrialization Expansion of consumer markets Availability of cheap and motivated Labor Force Domestic markets dominated with- clothes, batteries, tires, building material, etc. Post threat to the rest of the world through cheap labor E.g India Philippines, Indonesia, Morocco,etc.

Upper Middle Income countries

Less dependency on agriculture Occupational mobility of the people from agriculture to industry. Migration of people from rural to Urban areas-Urbanization. High Exports and rapid economic development. e.g.. Chile ,Colombia, Costa Rica ,Cuba ,Brazil,etc.

High Income countries

Service sector contributes more than 50% to the GNP. Development of information sector. Domination of scientists and professionals over Engineers and semi skilled workers. Face problems like pollution, excessive Urbanization, aged population, etc. e.g. Germany ,New Zealand, Greece ,Norway , Portugal ,etc. Classification of countries based on IncomeClassification of Countries on the basis of Income.docx

Basket Cases
Countries which are unattractive for investments and operations due to economic, social and political problems. Republics of former U.S.S.R best example. USA, Canada, Japan and European Economic Area represent 77% of worlds income.

Political and Legal Environment

Anti Trust litigation Environment protection laws Tax laws
http://www.taxrates.cc/html/argentina-tax-rates.html

Special Incentives Foreign Trade Regulations Attitude towards foreign companies Stability of Government

Corruption Perception Index: 87/178 (2010)

Competition Act
Prohibition of Anti Competitive Agreements (Global Lysine Cartel-5 firms-2 Japanese,2 S.Korea+1 U.S Archer Daniels Midland-Hi penalty imposed) Prohibition of Abuse of Dominance (Microsoft-IE, German Govt. asked Wal-Mart to lower prices) Regulation of Combinations
(Opposition of Merger of staples and Office Depot)

Competitive Advocacy