You are on page 1of 8

Coke vs Pepsi

Local and Global Strategies

Arijit Biswas Anindya Sen Domestic firms in India which once enjoyed the benefit of sheltered markets are increasingly facing competition from global giants in the 1990s. Whatever route Indian firms take to deal with competition from MNCs, it is imperative for them to keep track of global strategies of these firms. Often the strategies undertaken at the local level are only part of the global strategies, because it is difficult for any firm to allow significant differences in approach in different markets. After the second coming of the international varieties of Cola drinks, the market has witnessed a highprofile tussle between the global giants - Coca-Cola and PepsiCo. This tussle and the respective problems faced by the two firms in the Indian market are extremely instructive. This paper argues that the events in the Indian soft drinks market can only be explained with reference to the global fight between Coke and Pepsi and their respective global strategies. Moreover, these two firms are so dissimilar that their relative successes and failures can throw light on some of the important issues in industrial organisation. I Introduction DOMESTIC firms, in India which once enjoyed the benefit of sheltered markets are increasingly facing competition from global giants in the 1990s. Sheltered markets had once allowed Indian entrepreneurs to develop strong brands that have held their own against the onslaught of the MNCs. Some domestic firms have chosen the strategy of tie-ups with the MNCs. Others have tried to meet the competition head on. Whatever route Indian firms take to deal with competition from MNCs, it is imperative for them to keep track of global strategies of these firms. Often the strategies undertaken at the local level are only part of the global strategies, because it is difficult for any firm to allow significant differences in approach in different markets. A MNC is never a loosely-held holding company, where units can pursue their own strategies without reference to any central vision. The MNCs generally are headed by powerful CEOs who impose their own vision on the entire organisation. After Coca-Cola made its exit from the Indian market in 1977, there was a vacuum in the soft drinks market which was taken advantage of by Parle and Pure Drinks. Parle launched Thums Up and gained a substantial and robust market share. After the second coming of the international varieties of Cola drinks, the market has witnessed a high-profile tussle between the global giants - Coca-Cola and PepsiCo. This tussle and the respective problems faced by the two firms i n the Indian market are extremely instructive. PepsiCo gained asignificant first-mover advantage through Economic and Political Weekly its ability to gain early access to the market. Coke, after a couple of abortive attempts, seemed to have made an entry under ideal conditions in the market. However, it then faced dissensions within1 the ranks of its bottlers. Its manner of dealing with the bottlers seemed to lack Pepsi's finesse and India seemed to be one of the rare markets where Pepsi was holding its own against Coke and consolidating its position. This paper argues that the events in the Indian soft drinks market can only be explained with reference to the global fight between Coke and Pepsi and their respective global strategies. Moreover, these two firms are so dissimilar that their relative successes and failures-can throw light on some of the important issues in industrial organisation (10) - 'make or buy', 'diversification versus focus', 'domestic strength vs globalisation'. In the next section, we talk briefly about the histories of Coke and Pepsi. The third section points out the dissimilarities in the strategies pursued by the two companies worldwide. The fourth section summarises the strategies of the two players in the soft drinks market in the US. The fifth section reviews the experiences of these firms in the Indian market. In the sixth section we have clarified some salient features of the soft drink industry in India and finally we draw some conclusions in the last section. . its rival and a century later, still maintains the pioneering lead. Pepsi, 'The challenger', even now poses as the brash, young upstart and is fighting the cola was as the drink for the younger generation. The story of Coke: Coke was first prepared by pharmacist John Styth Pemberton in 1886. Initially, the beverage was introduced in Atlanta, Georgia, and was sold for five cents. In 1886, sales of Coke averaged nine drinks per day. In 1891, Atlanta entrepreneur Asa G Candler acquired complete ownership of the Coke business and in 1919, The Coca-Cola Company was sold to a group of investors for 25 million. In the past 112 years, Coke has embedded itself into American society. In 1994, the American consumption was more than 773 million servings of Coke, diet Coke Sprite, Fanta and other products of The Coca-Cola Company. The company's beverage products include bottled and canned beverages produced by independent and companyowned bottling and canning operations. The various products of the company are Coke, Coca-Cola classic, caffeine free Coca-Cola, caffeine free Coca-Cola classic, diet Coke (sold underthe trademark Coca-Cola light in many countries outside the US), caffeine free diet Coke, Cherry Coke, diet Cherry Coke, Fanta brand soft drinks, Sprite, diet Sprite, Mr PiBB, Mello Yello, TAB, Fresca, Barq's root beer and other flavours, Surge, Powerade, Fruitopia, Minute Maid flavours, Saryusaisai, II Aquarius, Bonaqa and other products Brief History of Coke and Pepsi Co developed for specific countries, including The world's soft drinks market is totally Georgia brand ready-to-drink coffees, and dominated by just two players: Coke and numerous other brands. The Minute Maid Pepsi. Coke, "The Real thing', more than Company, with operations primarily in the a century old, was born 11 years ahead of US and Canada, produces, distributes and 1701

June 26, 1999

markets principally juice and juice-drink products, including Minute Maid brand products; Five Alive brand refreshment beverages; Bright and Early brand breakfast beverages; Bacardi brand tropical fruit mixers (manufactured and marketed under a license from Bacardi and Company); and Hi-C brand ready-to-serve fruit drinks. The 'most admired company' of the US at present is worth $ 17 billion. The story of Pepsi- Cola: Pepsi-Cola was created in the late nineties by pharmacist Caleb Bradham, and Frito-Lay Inc was formed by the 1961 merger of the Frito Company, founded by Elmer Doolin in 1932, andtheHW Lay Company, founded by Herman W Lay, also in 1932. PepsiCo Inc was founded in 1965 by Donald M Kendall, president and chief executive officer (CEO) of Pepsi-Cola and Herman W Lay, chairman and CEO of Frito-Lay, through the merger of the two companies. Herman Lay is chairman of the board of directors of the new company; Donald M Kendall is president and CEO. The company from its inception had concentrated on the diversified portfolio of products. With sales of $ 510 million and 19,000 employees, the products of the new company were Pepsi-Cola(formulated in 1898),Diet Pepsi, Mountain Dew, Fritos brand corn chips, Lay' s brand potato chips, Cheeotos brand cheese flavoured snacks, Ruffles brand potato chips and Rold Gold brand pretzels. In the year 1984 with a move to consolidate core busineses, PepsiCo was restructured to focus on its three businesses: soft drinks, snack foods and restaurants. Transportation and sporting goods busi nesses were sold off. At present, PepsiCola products are available in nearly 150 countries and territories around the world. Snack food operations are in 10 international markets. At present, PepsiCo is a $ 22 billion company with approximately 1,40,000 employees worldwide.

and Wal-Mart. All of Coke's profits come from beverages. PepsiCo depends on drinks for 41 per cent of its income. Globalisation: In the US, the most important market, Pepsi comes a close second with a market share of 33 per cent compared to the 40-41 per cent of Coke. But, Coke dominates in the other markets leading to a wide gap in the market shares around the globe. Coke holds 33 per cent of the world market while Pepsi holds only 10 per cent. Coke generates 71 per cent of its revenue in international markets; PepsiCo derives 71 per cent from the US market. Coke earns more than 80 per cent of its income abroad, PepsiCo over 80 per cent in the US, whereas the shares in the world market of Coca-Cola and Pepsi are 46 per cent and 21 per cent, respectively. Make or buy: PepsiCo has long had a tradition of owning a major percentage of its operating entities. It owned over 50 per cent of its restaurants worldwide. In the soft drinks arena, again, it owns half its bottlers, Coke owns none. PepsiCo's policy of ownership of enterprises involved large capital expenses. It had piled up huge debts. From 1994 onwards, Roger Enrico started refranchising company-owned restaurants. As a result, company ownership dropped to 45 per cent in 1996. Earnings were comparable to that from companyownership, but no large investments were needed. Finally, in 1997, Enrico decided to sell the entire restaurant division to Tricon Global Restaurants for a one-time payment of $4.5billion.It was also decided to sell its*food distribution company and focus on its core beverage and snack food businesses. Forbes questioned this decision, pointing out that over the past five years PepsiCo's restaurant revenues overseas have grown at 22 per cent compounded, far higher than its revenue growth in beverages or snack foods. Performance: PepsiCo's price/earnings Ill ratio of 23 is way below Coke's 36. Over Global Presence: Dissimilarities many years, PepsiCo put emphasis on Coca-Cola and PepsiCo exhibit marked increasing revenues, while Roberto dissimilarities in their global operations. Goizueta, Coke's erstwhile CEO, focused Diversification: PepsiCo has on return on investment and stock prjjces. increasingly diversified into restaurants Foraine and Forbes seem to be unanimous and snacks, while Coca-Cola has focused in their assessment that while Pepsi on soft drinks. PepsiCo's snacks operation concentrated on celebrity advertising and is in Frito-Lay and its restaurant business 'blow-out marketing campaigns', Coke includes Pizza Hut, Taco Bell and KFC. concentrated on investing in infrastructure It has 30,000 units in the restaurant busi- - like bottling plants and trucks. According ness, considerably more than McDonald's toMukteshPant,formerexecutivedirector 22,000. Moreover, Coca-Cola has a work- of PepsiCo's operations in India, "Soft force of 33,000, PepsiCo one of 4.80,000. drinks are much less about branding than The latter is the world's third largest logistics", i e, getting products within arm's corporate employer, after General Motors reach of the customer.

IV The Soft Drink Industry Scenario in US The soft drink industry in the US is not different from that in any other country with respect to the 'players' involved in the business. The major components of the industry consist of the concentrate manufacturers, bottlers and the sales and distribution network of the companies. The role and responsibilities of each of them are different: the major activity taken up by the concentrate manufacturers relates to the production of the basic product which is bottled by the bottling plants TABLE I: MARKET SHARE OF COKE AND PEPSI

(Per cent) Top 10 Markets US Mexico Japan Brazil East-Central Europe Germany Canada Middle East China Britain Coke 42 61 34 51 40 56 37 23 20 32 Pepsi 31 21 5 10 21 5 34 38 10 12

Source: Andrew Conway, Morgan Stanley.


Country US Mexico Brazil Philippines Thailand Sri Lanka Indonesia India

Per Capita Consumption (in bottles) 700 506 165 130 75 23 6 3


(Per cent) Parameters Coke Pepsi 500 cr 300 cr 2,400 11 15 4,000

Total current investment in India 250 cr New investments 2400 cr No of employees 140 No of owned bottling plants No of franchisees 53 No of fountains 1,500


Soft Drink Manufacturer Parle Pepsi Pure Drinks Others

Percentage Market Share (before entry of Coke) 60 20 15 5


Economic and Political Weekly

June 26, 1999

mostly independents - and subsequently sold through the established distribution set-ups of the respective companies. Incidentally, a lion's share of the total sales of the product of most of the companies is through fountain-sales which seems to be the most popular outlet in the US. The 'soft drink giants' of the industry continuously formulate strategies for the promotion of their product through these outlets in order to increase sales. Some of the salient features of the US soft drink industry which are worth noting are discussed below. Independent bottlers and exclusive and perpetual territories:Fromincept\on,Coke used networks of independent bottlers to bottle and market their products. Independent bottling began with the CocaCola Company and was emulated by other companies, including PepsiCo. Under the Coke franchise agreements, the bottlers agreed to invest in a plant and equipment In such a condition as will be sufficient to meet satisfactorily the demands of the business in the territory therein referred to, and to increase such investment in said business as the demand for Coke in bottles in the said territory may require. The bottlers also agreed to purchase syrup from the Coca-Cola Company and not to sell substitutes or imitations. The parent bottHng franchiser agreed to furnish sufficient syrup for bottling purposes to meet the bottlers' requirements in the territory. The bottlers were given rights over exclusive territories in perpetuity. The most credible explanation for evolution of independent bottlers is the value of CSDs relative to shipping costs and the use of returnable (and breakable) containers, soft drink bottling required local manufacturing and a substantial local delivery system. Independent bottling arose primarily because it was not possible to create an effective organisation for operating a vertically integrated company with hundreds of geographically separated manufacturing and local delivery operations, given the primitive transportation and communications systems of the time and the lack of sophisticated financial and management controls. Although CocaCola and Pe psi-Cola are premier marketing companies, the fundamental competitive advantage that allowed them to compete" so effectively probably lay in their ability to operate through a very cumbersome distribution system. The granting of exclusive and perpetual territories was required to balance the relationship between the CM and its bottlers, as well as to minimise sources of significant disputes. Absent exclusive

territories with protection against termination, the bottlers were subject to potential opportunistic behaviour by the CM, because the bottlers' assets were specific to the CM, but the CM's assets were not specific toeach individual bottler. Exclusive territories and long-term contracts substantially reduced such risks, thus providing the necessary incentives for bottlers' investments in specific assets. Perpetual, rather than long-fixed-term, contracts may have been used to dispense with the renegotiations required by fixedterm contracts, because renegotiations of the basic contract may have impaired an otherwise fragile system of agreements. In 1904, 10 years after Coca-Cola was first bottled and one year after Pepsi-Cola was incorporated, Pepsi began the development of its bottling system. The contractual relationship between Pepsi and its independent bottlers mimicked Coke (exclusive, perpetual territories)^ with one important difference: Pepsi's franchise agreements also gave its bottlers exclusive, perpetual rights to fountain sales. The provision proved to be a significant impediment to Pepsi's ability to compete successfully with Coca-Cola in the fountain channel. , The movement towards a captive bottling system: In the US, the Coca-Cola Company and PepsiCo are the major corporations and their businesses have flourished due to the incredible increase in the per capita consumption of soft drinks. Changes in the industry and in the external environment have stimulated new strategies. The two companies have developed successful new products and packages, and manage many more products and package types than they did earlier. The introduction of these new products have led to major success forthe companies. Despite these successes, most new products or new packages fail and this low success rate has important implications for the nature of the relationship between CMs and their bottlers. To gauge consumer reaction at the least possible cost and to minimise losses if the new version fails, most products are test-marketed during their development. For an effective testmarketing, what Coca-Cola and PepsiCola did was that they picked a bottler, not a market, because a particular test market is not possible unless the bottler in that area operates. Given the bottlers' perpetual, exclusive territories, the ability of CMs to influence recalcitrant bottlers to participate in test-marketing or other aspects of product introductions is limited. Often Coca-Cola and Pepsi-Cola had to undergo complex negotiations to obtain

the co-operation of recalcitrant bottlers. Problem might be generated due to the spillover effects arisirtg out of the bottlers' actions; to overcome this, Coca-Cola and Pepsi-Cola have increasingly found it easier to introduce new products and packages in markets in which the company owns the bottlers. The most important change in the bottlers'competitive environment has been the dramatic increase in promotional activity. The new marketing strategies required even more sophisticated use of advertising, particularly, television, with a greatly increased pace of change of promotions. The bottlers' promotional environment is much more complex because of its parent CM's constantly changing national advertising and promotional campaigns-campaigns that work best when co-ordinated with local promotional activities. Coca-Cola and Pepsi-Cola constantly strive to devise adverti sing campaigns that best each other. But the ultimate success of these campaigns often depends on the co-operation of the bottlers in implementing the campaign in their territories. Bottlers must co-operate by arranging media spot coverage in their territory and by implementing promotions and pricing for their customers that build on the timing and theme of the national advertising campaign. Failures in bottler co-operation can significantly impair the success of a major advertising campaign, especially when the bottler involved has a media market that spills over into adjoining bottlers' territories, or when the bottler's full effort is necessary to create a targeted promotion for a major supermarket chain or fast-food franchiser. Another problem with promotions is the effective co-ordination is typically required over large (multi-territory) accounts. On some occasions, manufacturers have been forced to make special concessions to recalcitrant bottlers to obtain participation. A significantly larger portion of most bottlers' business is now with the customers who are larger than the bottlers. In the last two decades the size of large retail and fountain accounts has increased substantially. The increasing importance of large accounts covering several bottlers' territories is a major source of increased spillovers. This calls for standardisation of terms between the CMs and all relevant bottlers. And because of the bottlers' contracts and the anti-trust law governing resale price maintenance, aCM must order its bottlers to adopt a common pricing strategy. The sophistication of the large soft drink retailers has also markedly increased, partly

Economic and Political Weekly

June 26, 1999


because of the power of modern information technology. For example, scanners now giveVelailers great control over food products and knowledge of the movement of individual products of their shelves. Consequently, supermarkets and over-sophisticated customers have much more say in the retail promotion of the grocery products such as CSDs. Also, new customers have become prominent, including fast-food franchisers, mass merchandisers, convenience stores, drug stores, gasoline service stores and large companies that provide CSDs to their employees at work. Price discounting has been a major weapon in the Cola wars. In some areas, more than 90 per cent of the volume is sold at a discounted price. The evergrowing sophistication of all customers, particularly the larger ones, has increased disadvantages of independent bottling. The seller without a similar sophistication in sales and promotion analysis is bound to have disadvantage. While many independent bottlers have quickly adapted to this change in sophistication, others have been slow to respond to this increased sophistication. All these changes required bottlers to become larger, more sophisticated, and more efficient and led to a major consolidation of the bottlers. The number of bottling plants in the industry has fallen. Individual bottling operations became much larger, bottlers developed cooperative canning and plastic bottle manufacturing operations and large independent multi-franchise operations (MFOs) were formed. Coke and Pepsi started creating captive distribution organisations by acquiring some of their larger independent bottlers. Some of these transactions were in excess of $ 1 billion. Coca-Cola formed Coca-Cola Enterprises (CCE) as a publiclyowned bottling operation with the parent holding a 49 per cent interest. Rather than forming a separate publicly-traded corporation forits captive bottling, PepsiCo enlarged and revamped its 'bottler of last resort', Pepsi-Cola Bottling Group (PBG), to manage its captive distribution operations, in addition to acquiring many of their independent bottlers. Coke (through CCE) and PepsiCo now each bottle about 50 per cent of their total bottled sales and have a minority equity interest of about 15-20 per cent in independent bottlers that account for about another 20 per cent of sales.ThusPepsi-ColaandCoca-Colaeach own or have an equity interest in bottlers selling about two-thirds of their volume. The move to captive distribution by CocaCola and Pepsi-Cola has stimulated antitrust concern.

Transaction cost theory has developed the factors of likely importance in determining the nature of a vertical relationship, one possibility being vertical integration. Modern transaction cost theory has highlighted the role of asset specificity in the determinants of vertical integration. Both the CM and its independent bottlers were required to make substantial relationship-specific investments. The bottler had to invest in CSD-specific equipment and in the CM brand-specific capital, mostly through the development of the local market, but also to some extent in physical capital. The CM also made investments in bottler-specific and brand-specific assets. A captive distribution system may greatly economise on those costs relative to independent distribution because the employee-distributoris much more subject to the direction of the manufacturer than an independent distributor, particularly if the independent distributor is protected from termination. Economies of scale in bottling, at the plant and multiplant levels, have greatly increased in recent years. Thisdevelopment has made it easier to run a captive bottling operation, as the number of separate bottling plants required for national distribution has been decreased drastically. To the extent that there are economies of scale in management, the relative disadvantage of captive distribution from added managerial resources is reduced. The effect on the incentive of the employees, relative to independent business relations, is unclear. A largerscale operation'may find it more difficult to instill the right incentives in its employee-distributors than asmaller-scale one. Alternatively, a larger-scale firm provides more opportunity for advancement than a smaller-scale operation, which may result in enhanced incentive-compatibility between the operation and its employees. There also occurs the problem of spillovers in the independent bottling system. The problems of assessing the contributions made to joint profitability by the CM and the independent bottlers are exacerbated when one4 bottler's action affect other bottlers. Botlers often advertise in media that reach beyond their territory. Also, many customers wish to purchase ahd promote in an area larger than any other bottler's territory. Introduction' of new products and packages is another important source of spillovers. Independent distribution is a disadvantage when the success of a manufacturer's strategies depends on effective timing and execution requiring

the co-operation of distributors. A manufacturer with captive distribution need not negotiate with its distributors to introduce a new product, package, or promotional campaign. For a manufacturer with a strategy that requires timing and execution through the distribution system for successful implementation, independent distribution will be a disadvantage, particularly if the manufacturer must negotiate with a large number of independent distributors. The Indian Soft Drink Industry Scenario

The companies have continued to wage their war in India. Coke, with the strategic move of buying out Parle, gained a huge market share overnight. But Pepsi is sparing no efforts to gain a larger share of the market. The potential in the Indian market is tremendous. The Indian market is roughly more than Rs 1,200 crore; moreover, the per capita consumption of three bottles in India is lagging way behind the US's astounding 700 bottles per capita consumption. Both Coke and Pepsi have rightly realised that the immediate priority is in expanding the market by increasing the growth rates. The Indian market averaged a growth rate of 2.5 per cent between the years 1984-92. From 1992, when the Cola war took a serious turn, the growth rate has almost doubled. Last year the market grew by 20 per cent in volume term, with estimated sales of 140 million cases (one case = 24 bottles of 300 ml each) - up from 115 million cases in 1994. In 1977 a change in the government at the centre led to the exit of Coke which preferred to quit rather than dilute its equity to 40 per cent in compliance with the provisions of FERA. The first national cola drink to emerge was Double Seven. In the meantime, Pure Drinks, Delhi, on Coke's exit switched over to Campa Cola, and, by the end of 1970s, Campa Cola was practically alone i n the cola market. Thums Up was introduced by Parle in the beginning of 1980s, followed by Thril by Mcdowells and Double Cola by Double Cola Manufacturing Company (DCMC) - an NRI-run outfit with its plant at Nasik. An additional dimension to the Indian soft drink industry was that of fruit drinks which was valued at Rs 40 crore and among the brands in the market, the leader was Park's Frooti with about 40 per cent of the market share. The other players in this segment who have posed challenges


Economic and Political Weekly

June 26, 1999;

to Parle are Godrej (with Jumpiri) and Ahmedabad-based Pioma industries' Rasna Cola-Cola. Set up in 1949, by 1978, Parlejed the Indian soft drinks market with a share of 33 per cent. Gold Spot and Limca were the clear winners, and later, Thums Up also started contributing to its growth. Thus, Parle touched a market share of around 60 per cent in 1990. However, with the arrival of Pepsi, Parle's share decreased to 53 per cent and Pepsi quickly attained a market share of about 20 per cent. Till 1990, Parle's chief rival was Pure Drinks which was steadily losing out to Parle. After the arrival of Pepsi, the market share of Pure Drinks further deteriorated. This was mostly because Pure Drinks had a smaller number of bottling plants and a limited distribution network - exactly the same reason why Pepsi could not do much against Parle. Parle had 60 bottlers against Pepsi's 20 and 2.1 lakh retailers against Pepsi's 1.5 lakh. Before 1992, the Indian soft drink industry had not grown fast mostly due to high excise duties and government encouragement of fruit drinks over carbonated drinks. Though Limca was the largest selling brand of bottled soft drink in India, from consumers' point of view 'Cola' was the most popular flavour. It accounted for about 40 per cent of the market. 'Lime' and 'Lemon' drinks followed with about 30 per cent, and 'Orange' drinks had only about 20 percent of the marketshare. Carbonated soft drinks accounted for the rest 10 per cent. From 1984 to 1992, the Rs 1,200 crore Indian soft drink industry grew at an average of 2.5 to 3 per cent the highest being 12.4 per cent during 1984-85. Pepsi had begun its efforts in the mid1980s, but only in 1990 it was able to make an entry in the Indian cola market. In early 1985, a proposal with the RPG group was rejected by the then government. This involved the export of fruit juice concentrates from Punjab in return for the import of cola concentrates. The deal offered was a 3:1 exim ratio. The revised proposal made by Pepsi also met Jots of resistance. The strongest oppositioi|to the proposal came from the food ancK civil supplies ministry which argued that India should be promoting fruit juices, not carbonated soft drinks. Opposition also came from the CSIR, one of whose laboratories developed its own soft drink flavours. After more than five years of acrimonious battles, Pepsi was finally launched in India in June 1990. The project was promoted by PepsiCo, Punjab Agro Industries Corporation (PAIC) and Voltas.

Later on July 21,1993, after a bitter phase of negotiations lasting nearly 6 months, Pepsi bought over Voltas' entire stake of Rs 35.5 crore in Pepsi Foods for Rs 49 crore. This meant that Pepsi now controlled as much as 92 per cent of PFL's-present equity of around 105 crore. Pepsi's Indian operations were expected to break even in 1997. It is engaged in seven areas of operation - beverage manufacturing, bottling, backward integration for vegetables and fruits, upgradation of food processing, exports and export-led activities. Pepsi had a very significant first mover advantage in the Indian market. It did not have the condition of divestment of 49 per cent equity in downstream ventures attached to it when it received permission to invest in India. Pepsi had obtained the government approval for its downstream ventures prior to the FDI guidelines that made Indian equity holding mandatory. Thus, in its original clearance, Pepsi was not only allowed to hold 100 per cent equity in its holding company but was also allowed to carry out bottling and marketing operations. The government approval, moreover, had allowed Pepsi to carry out acquisition of assets to expand its business in the country. Pepsi used this clause in its approval to buy out 100 per cent stake. in some of the domestic bottling companies including its high profile buyout of Gujarat Bottling Company, the former Coke franchisee in Ahmedabad. Industry ministry sources have clarified that while Pepsi would be required to seek fresh government approval if it picks up shares in domestic bottling companies as part of its portfolio investment, it does not need such approval if the assets are acquired for expansion. There was now a triangular battle between Parle, Pepsi and Pure Drinks. Pepsi launched 250 ml bottles in June 1990 to capture the 250 ml bottle-market of Thums Up (launched in November 1989). As a response, Thums Up ran ads downgrading Pepsi's taste and declared that it was a fast drink. Thums Up entered the brand war totally with blind taste test ads. Thums Up launched Double Maha Cola, the 500 ml bottle, to prove that bigger is better in cola wars and was again first to introduce 'takeaway' 250 ml bottles for the first time in the Indian cola market. Pepsi got into more trouble when six months after its launch it caught government's attention regarding its commitments. Soon after, a show cause notice was issued to the company for prima facie violation of the conditions stipulated in the letter of -intent with regard to the

production of soft drink concentrate. Coca Cola came back to India after 16 years when it was launched on October 24,1993, at Agra. Coca-Cola was initially wooed by the Godrej group. Great Eastern Shipping and the Britannia Industries Ltd, led by Rajan Pillai. In March 1991, it signed an MOU with BIL and this proposal was accepted by the Chandrasekhar government. But relationship between the two companies turned sour over the exportoriented clause and finally on June 23, 1993, Coca Cola got the permission to enter the country with a 100 per cent unit in India. On September 22, 1993, the company bought out the Parle brands. The industry, prior to 1990, was witnessing sluggish growth rates (CAGR: around 5 per cent) with two domestic players: Parle and Pure Drinks. The entry of the cola giants, Coke and Pepsi, led to a rapid expansion in the size of the market (CAGR for the first half of the 1990s: around 20 per cent). Coke's acquisition of Parle has turned the market into a duopoly. Also not only the market size is increasing, there is also a shift of consumer preference between the different soft drink segments. Whereas in 1990, cola was accounting for a third of all soft drinks sold, today it accounts for well over a half. Thus, the present Indian soft drink market can be at best described as a duopoly. The major players being only Coke and Pepsi, both have sufficient monopoly power over the consumers. However, soft drinks have a fairly high price elasticity of demand which ensures that producers must strike a fine balance between prices and sales volumes. Both companies have decided to peg prices similar to the other's products and try to gain market share through vigorous promotional activities.

Brand synchronisation: Pepsi: Despite being a global brand, Pepsi has built its success on meeting the Indian consumers' needs, particularly in terms of making the brand synchronise with localised events and traditions. Instead of harping on its global lineage, it tries to plug into ethnic festivals in different parts of the country. For example, in Chennai, where it was in No 3 position, it offered free bottles of Pepsi with Idli and in Calcutta it started sponsoring cricket tournaments; in Delhi, it linked its brands with Holi offering sachets of colours with Pepsi Cola. Pepsi is using national campaigns which offer large discounts on other products to Pepsibuyers as well as local events. Coke: Instead of creating a bond with the customers through small but high-

Economic and Political Weekly

June 26, 1999


impact events, Coke chose to associate itself with national and international mega-events like the World Cup Cricket 1996 and the Olympics 1996. But neither enabled it to rise above the high-spending mass-media advertisers. Its association did not endear itself to young people, the largest consumers of soft drinks. Also missing from its marketing strategy were sustained campaigns. Its occasional bursts of activities did not run either long or effectively. Empowerment: Pepsi: One of the strongest weapons inPepsi' s armory is the flexibility allowed by its parent company to its employees in making independent decisions. Every manager and sales persons has the authority to take whatever steps he/she feels will make consumers aware of the brand and increase the sales and consumption. As a matter of fact, it provides budgets to people within which to work. No questions are asked as to what they do. What is important to the parent company is the performance and results. Coke: Flexibility is the weapon that Coke, fettered as it is by the need for approvals from Atlanta for almost everything, lacks. In the past, this has shown up its stubborn insistence on junking the franchisee network it has acquired from Parle, in its dependence on its own feedback mechanism over that of its bottlers and in its headquarters-led approach. Its trading promotions have followed a predictable pattern offering fat margins to its retailers for a limited period of time without exploring the alternatives that might increase the level of involvement for the seller as well as the consumers. Recently Coke has begun to value variety and has introduced discounts to restaurants and even display contests as part of its new promotions. Price: Pepsi: It has consistently wielded its pricing strategy as an invitation to sample, aiming to turn trial into addiction. It launched the 500-ml bottle in 1994 at Rs 8 versus Thums Up's Rs 9. Its 1.5 litre bottle followed Coke into the market place at Rs 30 - Rs 5 less lhan Coke's. Pepsi raised the price once consumption stabilised, counting on the habit to compensate for the lack of a price-benefit. It could continue with lower price positioning due to the fact that in the soft drink industry the retailers rarely pass on the company the price advantages gained by them from the consumers by selling competing brands at the same price and pocketing the discounts. Coke: Initially Coke mimicked Pepsi by introducing 300 ml cans at an invitation

price of Rs 15 before raising it to Rs 18. When it realised that the brand did not hold enough attraction to fork out a premium from the consumers, it introduced a lower-priced, similar-sized version to gain consumers.

Pepsi's main strategy in India is to own its bottli ng plants (company owned bottling operation - COBO). The company's bottling operations are underPepsiCo India Holdings, a wholly-owned subsidiary of PepsiCo International. It planned to expand the number of its bottling plants, both owned and contract suppliers, from 28 at the end of 1996 to at least 36 in 1997. It hoped to achieve a turnover of Rs 700 crore. Forty-five per cent of Pepsi' s bottlers are company-owned, the rest being franchisees. Pepsi indulges mainly in direct distribution to retailers and resorts to indirect distribution only in certain areas. In some routes, Pepsi has appointed what are called as 'fat dealers' who function like wholesalers. This is done by the company in those areas which are recently included in their routes, especially if Coke was already operating in the area. The logic behind appointing fat dealers is to tap the untapped market and once market share is gained, to start distributing to retailers directly. Other reasons for appointing fat dealers are to gain routes which are not profitable for direct servicing and where the fat dealer can provide credit and help financially deficient small players. Fat dealers are given targets and are given discounts accordingly. In contrast to Pepsi, Coke operates through franchisees (franchisee owned bottling operation - FOBO). Only recently it is trying to take over the bottling plants formerly owned by independent bottlers. It wants to set up an integrated bottling system in India. This is being vigorously opposed by the independent bottlers who would have to sell 51 per cent of their equity to Coke and participate in a joint venture. Coca-Cola was offering $ 5 per crate to bottlers to buy them out. Bottlers allege that the company offered a much higher |jrice of $ 13 per crate to bottlers in Pakistan. Under clause 1(1) of the agreement of Coca-Cola with its bottlers, the company authorises the bottler and the bottler undertakes to prepare and package the beverages in authorised containers and to distribute and sell the same under the trademarks, but only in and throughout the territory which is defined and described to it. That is, the bottler can sell and

distribute the beverages only in the territory which has been defined and described by the company. Clause 6 of the agreement restricts the bottler to sell and distribute the beverages only to retail outlets or final consumers in the territory. The obvious intention of this clause is to eliminate the possibility of other companies buying Coke's beverages and selling it under different trademarks. Clause 17(a} forbids the bottler from taking up business activity in any manner in any other beverage products except those prepared underthe authority of CocaCola. Clause 17(e) prevents the bottler from engaging in the manufacture of any kind of cola beverages for a period of two years in the event of termination of agreement. _ _ As a result of such clauses, Business Age reported that 23 cases of unfair and restrictive trade practices have been initiated against the company with the MRTP commission so far. In urban areas, the 8 to 10 per cent of total sales of Coke is through area market contractors (AMCs) who are equivalent to big retailers and they supply the soft drink to smaller retailers and other outlets. In the village areas, Coke uses so-called distributors for the sales. A striking feature in the logistics of Coke is that the AMCs supply material directly using trucks but in case of inaccessibility to retail outlets due to location-constraints, supply is made through autorickshaws also. Unlike Pepsi which has taken the more capital-intensive route of owning and running its own bottling factories alongside those of its franchisees, Coke operates only through FOBO. Coke supplies its soft drink concentrate (the secret potion) to its bottlers around the globe. To reduce loading time and enable faster disbursement of crates, Coke has introduced special A-frame (the inside of the truck has a structure resembling the alphabet A and the crates are stacked against it). The trucks also give the company permanent hoarding space on their sides and backs. Also, as the industry competition is strong, dealer push at the point of purchase is an important factor for sales. The retailer often can play manufacturers against each other to obtain favourable deals. To avoid this situation both Pepsi and Coke, incorporate a high degree of standardisation with respect to the price waterfall elements (i e, the various types of discounts offered), though there are differences in the timing. Innovation in availability is something that both Coke and Pepsi can lay claim to. While Pepsi


Economic and Political Weekly

June 26, 1999

introduced the concept of fountain outlets in India, Coke introduced the Push-cart.

Pepsi is focusing on better relationship management with retailers to beat Coke. VI The Soft Drink Industry Today

Gaining assurance from the retailers: At present, Coke operates through a Pepsi supplies the necessary cooling equip- system of franchise bottlers. It has 53 ments to retailers which has adirect impact bottling units partitioned amongst 26 on sales and distribution of Pepsi. Also companies. Each of these bottlers earlier by doing so Pepsi assures that the retailer was doing business with Parle's Ramesh becomes an exclusive Pepsi outlet and Chouhan, before he sold off his soft drink does not stock Coke brands or any other brands to Coke. As per agreement signed brand of soft drinks in those equipment. between Coke and these bottlers, the former Further, he stocks a minimum 10 crates supplies them with the soft drink conof Pepsi products and guarantees a mini- centrate, which they bottle and then mum sale of 700 to 1,200 crates per annum. distribute in their respective territories. In The ideas behind supplying chilling a move to strengthen its position in the equipment to retailer are threefold. Indian market as well as reduce, if not - The retailer saves on his working capital eliminate completely, its conflicts with its by investing in equipment supplied at bottlers. Coke plans to set up two bottling below market rates, by the company. This companies. Promoted by Coke South Asia earns the company his gratitude and hence Holdings, it will own all the bottling loyalty. facilities that the company currently holds -The retailer's working capital is blocked in the country. Under the new plan, the in with acompany because of the additional bottlers will cease to remain independent deposits required so he pushes more Pepsi entities; instead, depending on geoproducts to get an adequate return on his graphical location, they will be merged into either of the mega bottling companies. investment. -Another idea behind taking compulsory Considering the huge potential of growth additional deposits is to ensure that the of the Indian market, Coke wants toexpand chilling equipment is not used to chill the the market by 40 per cent per annum, as against existing growth levels of 20 per competitor's products. The credit-issue: Though Pepsi is cent. As a move towards that direction, aggressive in providing most of the sales Coke is offering bottlers an equity stake promotional activities, they lag Coke in in the two new bottling companies and not pro vidingcreditfacilities to the retailers also a seat in the special advisory committee and due to this they are currently losing to assist the mega bottling companies on out to Coke in certain regions in India. its strategy in India. Pepsi feels that it cannot afford to give Coke has the plan to take its bottling credit to the retai lers si nee it is yet to know companies public in India and then recoup the retailers well. However, Pepsi allows all the investments it has made in the retail agents to give credit to selected retail country so far. Coke presumes that the outlets, only for 6-8 hours. ownership of bottling units will do away On the other hand, Coke has been offer- with the fear about the prospect of any of ing credit. Coke offers, in certain places, its bottlers defecting to competitor Pepsi. credit for even more than two weeks and It also anticipates that it will provide the thus captures the outlets. Coke can afford company a fair deal of flexibility and to do this since it has been in this business control over bottling, the same advantages for quite some years (Parle earlier) and that are enjoyed by its competitor Pepsi. knows its dealers well. Coke also has cap- Thus, once it owns the bottling units, it tured 70 per cent market share in Calcutta. would be easier for Coke to transfer the The incentive-issue: Coke is also pro- bottling technology to India. And more viding performance-based incentives to importantly, if Coke were to put its money retailers. These incentives were, not in in expanding operations, the cost of funds monetary form, but Coke had "given would be far less than if the Indian bottlers watches, clocks and other articles to the did, simply because capital can be cheaper retailers. Thisactually served dual purpose: abroad. But there lies an element of emotion One, they were motivating the retailer to since most of the 26 bottlers have been perform better, the other was the clocks in the trade for over 20 years. Since Coke and other decorative articles served as needs bottlers as much as bottlers need promotional articles. Whereas, understand- Coke, if Coke forms a bottling company, ing that in order to work effectively with it must be able to convince the bottlers that retailers, it is imperative that the company their capital employed will definitely deliver better service than its competitor, multiply, perhaps faster than its present

rate of accretion. It should also be able to provide some sprt of a safety net to the bottlers if the bottling company fails to achieve its pledged profitability. And finally, Coke must assure the bottling companies that they will remain active participants in the business, and not degenerate into passive shareholders. Squeezing margins is Coke's main weapon, whereas the bottlers intend to use the political weapon. Many of them have been making representations to the government and lobbying with members of parliament to put pressure on Coke. They have been talking about launching a new soft drink to take on both Coke and Pepsi. By early 1999, Coke should have at least 50 percent of its bottling operations under its belt, wishes Coca-Cola India president and CEO. The multinational soft drinks company has already acquired several bottling plants in India and hopes to bring 20-25 of its 50 bottlers under its wing by next year. This, translated into real terms and pegged to the current market output level, means that the company will directly control 65 million cases of the total 130 million. Coke is now stressing that bottlers with a shorter term perspective should either sell their plants to the company or entej into a joint venture arrangement. Coke is entering into dialogue with its bottlers to thrash out their plans and the company's expectations, based on its current strategy of building on and managing its existing capacities more conceitedly. In a strategic decision signifying the importance of its Indian operations, CocaCola India has been upgraded as a separate business division, reporting directly to the headquarters of the Coca-Cola Company at Atlanta. The new division would also signify less bureaucracy since its needs were earlier routed through the Bangkok office and would improve accountability, responsibility and autonomy of Coke. The restructuring was also necessitated by the high volumes involved in the Indian market and its future growth prospects. Operating as a division will now allow the company to manage its business with more autonomy. The company has undertaken new marketing initiatives, which includes launching its products in Bangalore and Guntoor in the south and the 'get refreshed' promotional campaigns for its Limca and Thums Up brands, which have been identified as new growth vehicles. (Pepsi had also restructured its Indian operations by creating a separate division - PepsiCo India.) Coca-Cola India has firmed up a Rs 100 crore investment programme for its first

Economic and Political Weekly

June 26, 1999


company-owned bottling plant in the state of Karnataka. Simultaneously rrival Pepsi is also pressing ahead with its Rs 25 crore expansion1 plan in the state, spearheaded by its proposal to launch carbonated fruit' juice-based beverages. According to the company, the only stumbling block in this move is the high rate of excise. It is also setting up a research and development (R andD)centreatNeelamangalainKarnataka. Pepsi has already acquired 12 acres of land adjacent to its greenfield project set up about a year ago. This land would mainly be used for R and D activities in horticulture. Part of this investment would also be employed to set up other infrastructural facilities like carriage trucks and the necessary cold-chain, etc. Initially, however, the company would develop new varieties of potatoes and tomatoes for use in its snack foods business - operated through a separate company, christened Frito-Lay India. Later, there are plans to extend the activity to other fruits which may be used to prepare carbonated fruit juice-based beverages. The Neelamangala bottling plant spread over an area of five acres, has lines to bottle fruit juices. Presently, the company manufactures and sells two mango-based beverages, namely, 'Slice' and 'Mangola". While the former is a revenue grosser worldwide, the latter was acquired by Pepsi from the Mumbaibased Dukes. But Pepsi's archrival Coke has no immediate plans to foray i nto products outside aerated soft drinks like Coke, Fanta, Thums Up, Limca, etc, unlike that of Pepsi. Coke had already acquired a 20 acre plot to set up a greenfield plant near Bangalore. Part of the investment would also be used in setting up the plant, to acquire machinery and chillers andfor establishing other infrastructural needs like carriage trucks, etc. This bottling plant would be Coke's third company-owned bottling plant in the country. Coke has the approval of the Foreign Investment Promotion Board (FTPB) to set up four investing companies for equity investment in downstream bottling units. Coca-Cola India's restructuring plan is one year ahead of schedule and the consolidation of the company's bottling operation would be complete by the end of 1999. The company expects to own and operate at least 25 COBOs by the mid-1999. Around 15-20 bottlers would enter equity joint ventures, with Coke commanding a majority stake in them. The remaining 5-7 bottlers, based mainly in north India, would continue to work as the soft drink major's franchise bottlers. The equity investments in the bottling companies were being made by

two companies set up for the purpose, namely, Hindustan Coqa-Cola Bottling North-east and B harat Coca-Cola Bottling South-west. By year 2003 the company would divest 25 per cent to the Indian public, implying it would end up being owners of 51 per cent equity. Most of the bottlers were, however, opposed to the move. VII , Conclusion With two of the largest three players in the world market already in India with their global brands, a shake-out has occurred as they confront the local players. The results of such a shake-out are very likely to be in favour of global players. Almost all the strategies the local players can think of are likely to be imitable and a global player is likely to beat them on their own turf. With Coke and Pepsi continuing their thrust on cola, the Indian market after attaining maturity is almost resembling the US market where cola has two-thirds market share. In a bid to tap the homeconsumption demand, the multinationals have come out with bigger bottles and cans. The growth rate of the Indian soft drink market has already jumped_ considerably. Assuming the trend continues the market size is likely to be around 500 million cases 5 years from now due to the facts that: -India has immense latent demand with its 15 crore strong middle class. -The per capita consumption of Indians is lower than even Pakistan and Bangladesh. -The firms are pursuing this latent demand with increased vigour. With the leading brands in the soft drink industry already in India, the country, has become a part of the global market. These companies are using sponsorship of local and international events to market their products. They have increased ad spends and roped in local celebrities. They have also introduced global standards, systems and procedures to the industry.

With all the changes mentioned becoming industry norms, the cost of entry had become higher unlike the past when it used to be a low capital business. In their quest for new markets and higher volumes these new multinational players in the Indian soft drink market have raised the entry barriers, improved and expanded the distribution systems, gobbled up or driven out the smaller players and truly globalised the industry. It may be worth noting that the strategies adapted by both the titans are fairly commensurating with the strategies adopted by them for living up to the trends of globalisation. The only difference that is important to observe is that the strategy pursued by Coke in India for having COBOs is contrasting with their strategies .. of growth in other global markets where it has totally concentrated upon FQBOs. So it may be due to this reason of drifting from the conventional mode of operation that Coke had encountered lot of problems regarding legal and other marketing issues. On the other hand, PepsiCo has followed the strategy for operations similar to what they indulge in other global markets: operations mainly through COBOs. The nonoccurrence of problems, faced by Coke, for PepsiCo can be attributed to their earlier experience and expertise in the global .markets and sticking on to those in the Indian market also. It strengthened its position by setting upanothersubsidiary, Pepsi Co India Holdings, as an investment vehicle. References
Annual Reports of 1997-98 of Coca-Cola and Pepsi. Chaturvedi, Mukesh: Coca-Cola: Welcome Back1., Eureka Publishers. Muris, Scheffman and Spiller (1992): 'Strategy and Transaction Costs: The Organisation of Distribution in the Carbonated Soft Drink Industry', Journal of Economics and Management Strategy, Vol 1, No 1, spring. Several issues of Business Today, Business India, Financial Express, Business Standard, Times of India, Economic Times and Fortune.

SPAN (1996): 'Pepsi's Participation With Farmers', October/November.

for the Attention of Subscribers and Subscription Agencies Outside India

It has come to our notice that a large number of subscriptions to the EPW from outside the country together with the subscription payments sent to supposed subscription agents in India have not been forwarded to us. We wish to point out to subscribers and subscription agencies outside India that all foreign subscriptions, together with the appropriate remittances, must be forwarded to us and not to unauthorised third parties in India. We take no responsibility whatsoever in respect of subscriptions not registered with us.


Economic and Political Weekly

June 26, 1999