Pepsi: The Indian Challenge Case Analysis

History of Pepsi

Pepsi-Cola was first created by a pharmacist in New Bern, North Carolina, named Caleb
Bradham in the late 1890s. After two major bankruptcies, the company was bought out by
Charles Guth, the CEO of Loft (a chain of stores that sold candy, ice cream, soft drinks, and light
lunches). Over the following years, Pepsi-Cola continued to gain popularity on Coca-Cola’s
domestic market. In 1965 – PepsiCo was founded by Donald Kendall (CEO of Pepsi-Cola) and
Herman Lay (CEO of Frito-Lay). In 1975, the brand achieved its first market share lead over
Coca-Cola. By 1987, Coke and Pepsi have 40% and 30% shares of the US market, respectively.
During this time, soft drinks contributed 32% and restaurants 27% to its total operating profits.
Before entering India, Pepsi had so far been available in 150 countries, it contributed to 23% of
global sales – 15% of its profits came from outside the US.

India’s Market

During this time, Limca was the largest selling brand. Cola was the largest selling flavor,
accounting for 40% of the market share, followed by lemon drinks with 31% (more popular in
metros) and orange drinks had about 19% of the market share. In 1977, a change in India’s
government led to the exit of Coca-Cola. The first national cola drink to pop up was Double
Seven. Thril by Dowells entered the market in mid-80s. The Indian soft drinks industry was
estimated to be Rs. 90 million. In 1978, Parle led the Indian soft drinks market and reach to 70%
by 1990, whereas its rivals’ (Pure Drinks) share had been declining from 28% in 1978 to 21% in
1987.

India’s Regulation

Until the liberalization of 1991, India was largely and intentionally isolated from the
world markets, “to protect its fledging economy and to achieve self-reliance”. Foreign Direct
Investment was restricted by barriers like upper-limit equity participation, restrictions on
technology transfer, export obligations, and government approvals. These restrictions ensured
that the FDI averaged only around $200M annually between 1985 and 1991 (a large percentage
of which came from foreign aid, commercial borrowing and deposits of non-resident Indians).
Any foreign investment had a lot of political sensitivity to it and by the time PepsiCo began its
negotiations, the upper cap on equity-holding for foreign investors was only 40% of an Indian
enterprise. India’s policy in 1980s has served as a double-edged sword – as on one side it has
abled individual firms to become highly efficient and competitive in international waters using
their own R&Ds, while on the other hand, it created stagnation in technological development.

Timeline

 1977 – As Coca-Cola departs India, PepsiCo sees an opportunity in India.

 1985 – Pepsi prepares the first initial proposal for entry.
o A joint-venture with R.P. Goenka group, which involved export of fruit juice
concentrates from Punjab in return for the import of cola concentrates and offered
a 3:1 export/import ratio.
o This proposal was rejected.
 1985 – Pepsi prepares the second proposal.
o Joining with Tata industries and Punjab Agro Industries Corporation and included
an initial investment of $15 million, a potato and grain based processing unit, and
a fruit and vegetable processing unit.
o Pepsi would have an equity holding of 39%, PAIC would have 20%, and Voltas
would have 24%.
o Imports would be Rs. 3.7M and exports a minimum of Rs. 19.4M over a 10 year
period. Benefits and advantages of proposal includes better market for rice, wheat
and fruits, creation of 25,000 jobs in Punjab and 25,000 more in other parts,
technology for better utilization of fruit production by prevention wastage.
 1988 – India and Pepsi reach an agreement with conditions.
 1990 – Pepsi begins production of snack food.
o The new PM of minority government announces to re-examine the Pepsi
agreement – the US government threatens to impose trade restrictions but Pepsi
lobbies for India and gains goodwill.

Pepsi’s Deal
While concessions from Pepsi may seem unfavorable, the following points make it seem like a
good bet. Pepsi would only have domestic competition in soft-drink industry, 40% max cap of
foreign ownership. Pepsi also had great potential due to the low per-capita consumption of soft-
drinks, the dense population, size and purchasing power of the middle class, and an estimated
$300 million/year market in near future. Pepsi would benefit from these concessions;

 Even though soft-drink sales will be capped, Pepsi has other avenues like processed food,
fruit-juices and its chain restaurants like KFC and Pizza hut.
 Pepsi would have to invest in concentrate manufacturing in a larger scale. Since there
was a good demand for soft-drinks in/around India, 75% of the concentrate export can be
achieved with the complements of other concession that $150 million exports needed to
be achieved.
 Even on the philanthropic front, Pepsi would set up agricultural research center – and this
would feed into the processed foods business of Pepsi.
o The deal also mentions setting up fruit and vegetable processing plants, which
would enable Pepsi to fulfill its other social commitment of providing
employments. These plants would also enable better usage of production with the
land being so fertile and farmers looking for different avenues in farming seeing
that income from wheat was falling.