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Jacob Augustine Coke and Pepsi Learn to Compete

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Coke and Pepsi Learn to Compete in India: Case Analysis 1

Pepsi entered into the Indian beverage market in July 1986 as a

joint venture with two local partners, Voltas and Punjab Agro, forming

“Pepsi Foods Ltd.” Coca-Cola followed suit in 1990 with a joint venture

with Britannia Industries India before creating a 100% owned company

in 1993 and then ultimately aligning with Parle, the leader in the

industry. As both companies would soon discover, “competing in India

requires special knowledge, skills, and local expertise…what works

here does not always work there.” (Cateora & Graham, 2008, p. 604).

In this article, I will analyze the primary obstacle to Pepsi and Coca-

Cola’s success, discuss their strategies to cope with the issue, and

ultimately propose my own suggestions to improvement.

Major Obstacle: Political / Legal Environment

The primary barrier to Pepsi and Coca-Cola’s entry into the

Indian market was its political / legal environment as a result of its

history. First, despite the liberalization of the Indian economy in 1991

and introduction of the New Industrial Policy to eliminate barriers, such

as bureaucracy and regulation to foreign direct investment, India still

had a strong history of protectionism, dating back most recently to its

economic policies following the Gulf War. India’s past promotion of

“indigenous availability”1 depicts its affinity toward local products. In

fact, the idea of protectionism in industries where India had a


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comparative advantage can be seen as early as the 1920’s. Britain and

India used “discriminating protection” to ward off German and Belgian

competitors in the steel industry. (Rothermund, 1993).

Due to India’s suspicion of foreign business stemming from past

history, both Pepsi and Coca-Cola received alien status upon entry to

the Indian market. 2


The two corporations were required to follow many

laws, designed as obstacles to impede foreign business. For example,

sales of soft drink concentrate by Pepsi to local bottlers could not

exceed 25% of total sales. Also, foreign businesses were not allowed to

market their products under the same name if selling within the Indian

market. (E.g. Lehar Pepsi) Most controversial was the agreement Coca-

Cola was forced to sign to sell 49% of its equity in order to buy out

Indian bottlers. “This response might have been acceptable if

investment rules in India were clear and unchanging, but this was not

the case during the 1990’s.” (Cateora & Graham, 2008, p. 608).

As St. Augustine said, “an unjust law is no law at all.” Because of

the lack of consistency in the legal environment, there was a greater

importance placed on lobbying the politicians. As Coca-Cola soon

discovered though, when there was a change in the oversight of the

Foreign Investment Protections Board (FIPB), all previous lobbying

became useless. Lack of solid institutions gives way to corruption. In


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fact, India has still not ratified the OECD designed to combat

corruption.

Coke and Pepsi’s Controls

Due to the external nature of the political and legal environment

of operating in India, much of the problems were out of Coca-Cola and

Pepsi’s control. Even if the two were to have performed a more

extensive environmental analysis, many of the problems would not

have been forecasted. Government situations are dynamic and

inconsistent where there is not a strong foundation of law. Thus, Pepsi

and Coca-Cola focused on the following controllable aspects3:

1. Price: Coca-Cola reduced prices nationwide by 15-25% to

make them affordable and easy to get access to. Pepsi introduced

returnable glass bottles for customers to recoup costs.

2. Product: Coca-Cola and Pepsi launched different product

lines to appeal to the Indian consumer tastes. They started with

product lines that were already available, such as cola, fruit drinks, and

carbonated water. Then, when the market was “ready”, they launched

other lines, such as bottled water (Coke- Kinley and Pepsi-Aquafina)

and clear lime sodas (Coke-Sprite, Pepsi-7 Up).

3. Promotion: Both Coca-Cola and Pepsi adapted to the local

market with promotions. They promoted heavily during the Navrarti

festival. Pepsi gave away a kilo of Basmati rice with every refill of a
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case of Pepsi. This is an effective strategy to blend the old (rice) with

the new (Pepsi). Coca-Cola gave away vacations to Goa, a famous

resort in India.

Further, they teamed up with influential figures in Indian pop-

culture to promote their products. Pepsi launched an ambitious

marketing campaign sponsoring Cricket celebrities and athletes from

the World Cup. Coca-Cola launched its Lifestyle Advertising Campaign

as a method of building brand loyalty among its target markets: “India

A” (18-24 year old urban youth) and “India B” (rural youth). They used

a music director and an actor to promote the project. Most importantly,

they tried to create a connection between local idioms and their

products so that they would stick. The use of celebrities is a powerful

marketing tool across cultures to promote products.

4. Channels of distribution: Production plants and bottling

centers were strategically

placed in large cities all around India. More were added as demand

grew, along with new product lines. In Coca-Cola’s case, the JV with

Parle provided access to its bottling plants and its products. By forming

partnerships, both Coca-Cola and Pepsi were able to get initial access

into the market.

5. Research: It seems that prior research into general market

demand may have been the most overlooked aspect by Coca-Cola and
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Pepsi. India has not ever been considered a lucrative market for the

soft drink industry. In 1989, Indians per capita were consuming only

three bottles per year. One might question the risk-reward analysis

that both companies partook in. Why enter a high-risk

political/economic market where there is a very little proven track

record of success in beverages?

However, both Pepsi and Coca-Cola did succeed in continuing to

research emerging trends and implementing them. Pepsi created

smaller bottles to keep up with the trend of high frequency/ high

volume consumption. Coca-Cola launched the “minis” in an effort for

higher volume. Both met trends in demand with new product lines.

(E.g. bottled water).

Also, both Coca-Cola and Pepsi kept a close watch on the

advertising campaign effectiveness, through research of likeability of

the ad and intention to buy. This measure ensured that advertising

dollars were being strategically allocated and not wasted.

Suggestions

Despite many of the failures both Pepsi and Coca-Cola

experienced due to the unforeseen external environment, including the

boycott placed on American and British Goods following the Second

Gulf War in 2003, the following methods could have been implemented

to improve success in the Indian market.


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To begin, both companies should have focused more on

education of its products. What are the benefits? Why is bottled water

so valuable in an environment with such poor drinking water? The

market still hasn’t taken off so they need to penetrate harder. In 2003,

India’s annual consumption rate was still a meager seven per person.

Specifically, Pepsi spent very small amounts on its 7UP marketing

campaigns in India due to its relatively low market size (4.5%).

Advertising dollars should be pumped more freely and strategically if

they want to see a return on investment.

Second, target markets should be defined more specifically.

Coca-Cola separates its markets as “India A” and “India B” as defined

above. This is too broad and lacks focus. We can differentiate

demographics by gender, race, age, language, interests, job, location,

etc…

Third, Coca-Cola entered the market at a poor time because they

had to agree to abide by all of the Foreign Investment Laws of that

year. To avoid having to sell its 49% stake though, Coca-Cola should

have agreed to set up greenfield bottling units instead, as Pepsi did.

Further, Coca-Cola lost valuable market share by entering the

beverage market after Pepsi. By the time Coca-Cola was fully owned in

1993, Pepsi had already amassed a 26% market share.


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Next, Coca Cola made a mistake in trying to get out of its

promises. “Why doesn’t this multinational set an example by fulfilling

its own commitment? They went into this with their eyes open.”

(Cateora & Graham, 2008, p. 608). Coca-Cola already made the

mistake by entering into the contract they did. By continuing to apply

for extensions and attempting to deny voting rights for the Indian

stake, Coca-Cola was only tarnishing its public image and destroying

its relationship with the government. When entering into a foreign

market, maintaining a good relationship with the host country’s

government is crucial.

Finally, both Coca-Cola and Pepsi should have been proactive

regarding oversight (e.g. environmental responsibility). Coca-Cola

created the advisory board to regain the public’s credibility only after

its reputation was already tarnished with the allegations of pesticide

residue. The bad press spiraled into more bad press after the activist

group in California got involved. This could have been prevented with

measures in place. Both companies should have been ready for a

health scare after 1988 when it was discovered that BVO, an essential

ingredient in locally produced soft drinks, was carcinogenic.

In conclusion, the case involving Pepsi and Coca-Cola’s entry into

the Indian market provides key lessons for future managers looking to

invest overseas. While many events are external and thus out of the
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manager’s controls, there are many active approaches we can take to

help ensure success in the foreign market. For example, we need to

research the market and trends ahead of time. And we should be fully

aware of the history, geography, political, and legal considerations.

Only then can we succeed in our quest to “glocalize”—(i.e. adapt our

strategy to the local culture).

References

Cateora, Philip R., and John Graham. International Marketing. 13th ed.

New York: McGraw-Hill

Higher Education, 2008.

Rothermund, Dietmar. An Economic History of India: From Pre-Colonial

Times to 1991. 2nd ed.

New York: Routledge, 1993.


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Footnotes
1
Principle of indigenous availability: If a product could be obtained

anywhere in the domestic market, imports were made illegal.


2
Alien status: From an outsider’s perspective, it can be seen as an

exploiter and receive prejudiced or unfair treatment at the hands of

politicians, legal authorities or both. (Cateora & Graham, 2008, p. 13).


3
See Exhibit 1-3 on page 10 (Cateora & Graham, 2008) for a look at

the different forces/levels in international marketing. Most aspects are

external and thus beyond the control of managers.