Coke and Pepsi Learn to Compete in India

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Coke and Pepsi Learn to Compete in India Powered By Docstoc
					                   Coke and Pepsi Learn to Compete in India

This is a detailed and comprehensive case describing the market entry of two global consumer
product companies, PepsiCo and Coca-Cola Corporation into a Big Emerging Market (BEM),
India. It traces the history of the challenges encountered by these two companies in the developing
country environment of India from the late 1980s to the present time. Emphasis is placed on
lessons learned by the two companies as they adjust to competing in an unfamiliar and
rapidly-changing environment.

Key themes include:
   - the effects of the changing political scene resulting in the imposition of a non-standard
       domestication policy on foreign direct investors;
   - the need for foreign companies to adapt their marketing and competitive strategies to suit
       conditions in the Indian marketplace;
   - and the role of ‘glocalization’ policies across the marketing mix variables, but particularly
       in the case of promotional strategies.

Answers to Questions.
Q1. The political environment in India has proven to be critical to company performance
    for both PepsiCo and Coca-Cola India. What specific aspects of the political
    environment have played key roles? Could these effects have been anticipated prior to
    market entry? If not, could developments in the political arena have been handled
    better by each company?
A1.   The political environment of India has had a very significant impact in the way foreign
      businesses operate in the country. Both companies benefited from the opening up of the
      market in the early 1990’s and the relaxation of prior restrictive trade policies and rules
      foreign direct investment. The cap on the equity stake has been gradually lowered over the
      years, giving greater flexibility to foreign companies in terms of operation and profitability.

      The ouster of Coca-Cola in 1977 was probably the most damaging effect of traditionally
      restrictive rules governing foreign investment that the Indian government had. Until recently,
      the Indian government had a policy whereby no foreign company could own a majority
      equity stake (greater than 50%) in a venture/project in the country. Coca-Cola’s withdrawal
      from India was partly due to this reason, and partly due to the demand by the government to
      share its secret formula for the concentrate.

      Leaving the country on a non-cordial note with the government in 1977 had negative
      repercussions when Coca-Cola tried to re-enter. After being turned down on initial proposed
      joint venture with Godrej it finally reentered the Indian market in the early 90’s via a joint
      venture with Britannia Industries. This market entry was forced on Coca-Cola because its
      major competitor PepsiCo had already entered the Indian market in 1986. Entering later in
      the market had costs associated with it – (1) spending greater time, energy and money in
      building relationships with key government officials because PepsiCo had a headstart of
      about four years in the game; (2) spending maximum money on advertising to woo
      customers away from Pepsi’s substantial base in the cola market.

      PepsiCo had its own share of problems dealing with the Indian government in the initial
      years of its entry. Stringent conditions were imposed on foreign beverage manufacturers.
      Sales of soft drink concentrate to local bottlers could not exceed 25% of total sales for any
      new venture. This limit also included processing of fruits and vegetables by Pepsi Foods
      Ltd. (a joint venture launched by PepsiCo in India). At that time the government prohibited
      use of foreign brand names on products sold in India. As a result PepsiCo had to market its
      brands under the name of “Lehar Pepsi” (‘lehar’ meaning ‘wave’). Despite these strict
      regulations, PepsiCo was able to work with the government in order to establish an early
      presence in the country.

      When government opens up its market to foreign investors, it is always hard to know who
      will set the rules. It was the Congress party under the leadership of P.V. Narasimha Rao that
      allowed foreign investors into India. Given the instability at that time it was almost
      impossible to anticipate, for how long this government would be in power, which party
      would follow, or what policies or measures they might impose on foreign investment (FDI).
      Building a relationship with the major political parties was crucial for any foreign company
      trying to make its way in India. In this regard, both PepsiCo and Coca-Cola both did a
      tremendous job in keeping up with the numerous changes in the government (6 or 7 times)
      during the mid-1990’s. Now that the government is much more stable than 8-10 years ago,
      PepsiCo and Coca-Cola have less worries about lobbying in New Delhi, the capital city, and
      can concentrate more on running their business.

Q2. Timing of entry into the Indian market brought different results for PepsiCo and
    Coca-Cola India. What benefits or disadvantages accrued as a result of earlier or later
    market entry?
A2. Timing of entry is a crucial element in the future growth and prosperity of a global company.
    In the case of India, Coca-Cola had had a presence since 1958 though in a very small way.
    PepsiCo did not enter India until 1986. The advantage of earlier entry was lost when
    Coca-Cola had to exit the Indian market in 1977.

      Coca-Cola re-entered in the early 1990’s, about 4-5 years after PepsiCo. By that time
      PepsiCo had accumulated knowledge about local market conditions, understood the
      sentiments of the local people, was creating a solid distribution network, and had
      established a strong lobby with the government in New Delhi. With its early entry PepsiCo
      had more time and greater opportunity to promote its main brands, like Pepsi Cola and 7UP
      and to capture substantial market share. In the case of Coca-Cola, they quickly realized that
      competing with Pepsi in terms of market size would not be possible if they relied solely on
      their main brands. As a result, Coca-Cola felt obliged to buy an already established brand
      “Thums Up” from Parle Industries at a hefty price, and aggressively market this brand in
      order to keep up with Pepsi in terms of market share.

      On the advertising front, PepsiCo learned to adapt its advertising campaign to the hearts and
      minds of the Indian people well in advance of Coca-Cola. PepsiCo successfully used
      celebrity endorsements to reach out to the Indian youth, the main market segment for
      carbonated drinks. Soon after entry, PepsiCo realized that cricket, movies and music were
      the very passions of the Indian masses. They recruited major cricket, movie and music stars
      to endorse their brands. On the other hand, Coca-Cola for a long period of time after its
      second entry into India tried to work with a standardized global advertising approach. This
      was a major mistake for the company because sales did not reach levels expected for the
      huge advertising expenditures. Later on they completely revamped their advertising
      campaigns to reflect strategic approaches used by PepsiCo.

      Overall the cost of later entry into the Indian market for Coca-Cola proved to be very
      expensive. In 2001 the company had to write off a loss of $400 million accumulated since
      its return in 1993. India is one of the few markets in the world where Coca-Cola lags behind
      PepsiCo in terms of market size and total sales.

Q3. The Indian market is enormous in terms of population and geography. How have the
    two companies responded to the sheer scale of operations in India in terms of product
    policies, promotional activities, pricing policies, and distribution arrangements?
A3.   To capture the huge market that India has to offer, both Coca-Cola and PepsiCo have
      consistently tailoring their strategies to meet local needs and tastes.

      Both companies market a range of brands, in a range of bottle sizes. This is critical given
      the low purchasing power of most of the people in India (more so in the rural areas). In fact
      the 200ml bottle is very popular in rural areas owing to its low price. Bottle sizes range
      from 200ml, 250ml, 300ml, 500ml, 1 liter, to 2 liters. Both Coca-Cola and PepsiCo have
      marginally increased the sweetness level in their products for the Indian market. In order to
      serve the Indian consumers’ taste both companies have now extended their brand lines into
      the bottled water market as well. The range of bottle sizes in the bottled water market is
      even greater than for carbonated drinks. This market has also seen fierce competition in
      terms of advertising, sales, promotions and pricing.

      Both companies actively associate with cricket, movies and music, three of the main drivers
      of the Indian sports/entertainment industries. Celebrity endorsements are a common means
      for both companies if relating to ordinary people. Both also sponsor regional/local festivals.
      Sponsorship of college festivals and rock shows in major metropolitan cities has also
      worked well for both companies. Since a major target market in India is the young college
      crowd, promoting their brands in colleges fits in very well with their overall strategy.

      The tough competition between Coca-Cola and PepsiCo shows up in the lower pricing
      planks used by both companies, along with promotion of smaller bottles at very affordable
      prices. Price competition is not only restricted to the carbonated drinks sector but also
      affects the bottled water market. With the low purchasing power of people in the rural sector
      of India, pricing becomes a crucial part of the overall strategy for both these companies.

      Due to its early entry into the country PepsiCo has developed a much broader distribution
      network than Coca-cola. PepsiCo was able to reach deep into the villages of India much
      before Coca-Cola started to seriously think about it. Coca-Cola has followed suit and has
      considerable presence in the rural sector as well. Vital to this strategy was the already
      established network for “Thums Up” which Coca-Cola took over in the late 1990’s. On the
      whole, both companies have had to make serious adaptations in their distribution strategy
      from what they used in the developed markets of US and Europe. Reaching out to the rural
      sector has been a great challenge given the poor infrastructure throughout rural India.

Q4.   “Global localization” (glocalization) is a policy that both companies have implemented
      successfully. Give examples for each company from the case.
A4.   The concept of glocalization plays a very important role in making or breaking of the brand
      in India. It is very clearly shown in the promotional campaigns of both PepsiCo and
      Coca-cola in India.

      PepsiCo’s strategy to promote their main brand under the name “Lehar Pepsi” (“Lehar”
      meaning ‘wave’ in Hindi) worked very well in connecting with the Hindi speaking people in
      India. Although the new brand name was required by the Indian government, PepsiCo
      continued with it even after such requirements were removed. The effect of glocalization
      can be seen in all promotions. Apart from summer sales the second highest sales period is
      during the festival of Navratri (‘nav’ means nine and ‘ratri’ means nights), which is mainly
      in the west part of India. This is a traditional Gujarati festival that goes on for nine nights
      while people dance and have fun.

      PepsiCo also came up with several offers during the “Garba” (‘dance’) festival. For
      example a refill of 300ml fetches one kilo (close to 2.2 pounds) of premium quality rice.
      PepsiCo also tied up with other companies for various promotional offers. For example free
      Kit-Kats were given away with every 1.5 liter bottle or a pack of Polo (hard mint candies)
      with each 500ml bottle of Pepsi and Mirinda. Pepsi is one of the biggest sponsors of cricket
      tournaments around the world in order to build awareness and preference among target

      Coca-Cola’s strategy of “think local – act local’ is prominently seen in its campaigns for the
      Navratri festival. The “Thums Up Toofani Ramjhat” message is synonymous with having
      fun while dancing. A lot of on-site promotional activities take place simultaneously, like
      offering exotic trips with the purchase of a bottle of Coke.

      The soft drinks slugfest has taken another interesting turn, with both Coca-Cola India and
      PepsiCo claiming better recall and higher ratings for their respective `ads of the season'.
      While PepsiCo's biggest ad in 2003 featured Amitabh Bachchan (a very powerful celebrity)
      and Sachin Tendulkar's (a popular cricket star) flying kites. Coca-Cola's most popular
      commercial for Summer 2002 was Aamir Khan's (a film star) `thanda matlab Coca-Cola'
      act in a pedestrian Mumbai restaurant. The first ad execution, called “Bombay Dreams”
      with A.R. Rahman (a famous music director), was so successful among the young target
      audience that it increased the sales by 50% for Coca Cola.

Q5. Some analysts consider that Coca-Cola India made mistakes in planning and managing
    its return to India. Do you agree? What or who do you think was responsible for any
A5.   Re-entry for Coca-Cola in India was not easy. It had to face a tough time when its
      application of an initial proposed joint venture with a local bottling company was turned
      down by the government headed by Rajiv Ghandhi. In contrast, PepsiCo’s application for
      entry through a joint venture was approved easily. Later Coca-Cola made its entry by
      joining forces with Britannia Industries (a local snack producer). In 1993 Coca-Cola filed
      an application to create a 100% owned soft drinks company. In July 93 it bought bottling
      plants from Parle in the key cities of Delhi, Mumbai, Ahmedabad and Surat and bought
      Parle’s leading brands, Thums Up, Limca, Citra, Gold Spot and Maza. Parle held 49% of
      marketing venture but took an equal 50% stake in the bottling venture.

      The later entry by Coca-Cola in the Indian market had its own costs in terms of requiring
      greater advertising expenditures. To make matters worse Coca-Cola was forced to disinvest
      under the new government policy passed in 1996, regulating all new soft drink investments.
      Coca-Cola agreed to sell 49% of its equity to Indian partners within two years. The
      company requested an extension to sell its equity by 2007 with the hope that it would be in
      a much stronger financial position to seek a higher amount for its disinvestments. The
      request was turned down by the government of India on Oct, 2001.

      These problems were not predictable and were a function of the changing policies of the
      government at that time. But, analysts believe that Coca-Cola could have done better. First,
      in entering India the second time it was considerably behind PepsiCo’s entry. PepsiCo’s
      head start allowed it to create obstacles for Coca-Cola’s smooth entry and growth in India.
      One can also argue that Coca-Cola did a relatively poor job in managing relationships with
      key people in government. It had its initial joint venture project application turned down. A
      better focus on lobbying with the government was needed by Coca-Cola executives, given
      the well known bureaucratic nature of the Indian business world. Also, Coca-Cola took
      more time to adapt to the local market in terms of their advertising strategy. This was
      surprising given that the company had previously operated in India. The blame can only be
      put on the Coca-Cola executives responsible for marketing the product in India. The huge
      loss that the company had to write off suggests poor financial management by the Indian
      division of the company. On the whole, critical environmental factors plus some marketing
      and financial blunders committed by the Coca-Cola executives can be said to be the leading
      causes of dismal performance of the company in its initial few years in India.

Q6.   Which of the two companies do you think has better long-term prospects for success in

A6.   A definite answer to this question is difficult and calls into question the assumptions and
      anticipations about strategy, structure and performance of both companies. Based on the
      past experience of over 10 years for Coca-Cola and over 15 years for Pepsi, PepsiCo
      appears slightly ahead in the race. PepsiCo saw an opportunity in entering the Indian market
      after Coca-Cola had to withdraw in 1977. It quickly worked on the opportunity and utilized
      the advantages that it got from being first to enter the Indian market. In the 90’s PepsiCo
      was also more proactive vis-à-vis Coca-Cola in terms of learning about the local
      preferences, adjusting to the local needs, targeting the right segment with the right
      marketing and promotional weapons. Till now Coca-Cola can be said to have taken a more
      reactive or “follow the leader” strategy for the Indian market. After a huge investment in
      advertising it had to copy Pepsi’s strategy of endorsing big celebrities in order to reach the
      common people. Entering later than Pepsi had costs, causing Coca-Cola to write off a huge
      loss for the Indian office.

      Although PepsiCo seems to have an edge as far as the Indian beverage market is concerned,
      it is difficult to predict which one of these two companies will stand to do better in the long
      run. Coca-Cola is back on track according to analysts and should be able to recover its
      losses in the next 10 years of operations in India. In terms of market share Pepsi and
      Coca-Cola are almost equal with slight fluctuations from year to year. Long-run
      sustainability will depend on how these two companies manage their Indian operations in
      terms of the broader global operations that they have. How PepsiCo and Coca-Cola can use
      their Indian operations to compete in the global marketplace is probably what will decide
      which one outshines the other.

Q7. What lessons can each company draw from its Indian experience as it contemplates
    entry into other Big Emerging Markets?
A7.   An important element for the long-term success of Coca-Cola and PepsiCo depends on how
      they can transfer learning from one market to another, particularly Big Emerging Markets
      (BEMs). This is where both companies can utilize their Indian experience, as for example in
      Pakistan or China. Adaptation to local culture, tastes, and preferences is a critical
      requirement. This necessitates changes to product, packaging, promotions
      (advertising/marketing), and distribution in order to meet local demands.

      Relationship building at all levels is another key lesson that both Pepsi and Coca-Cola can
      learn from India. For whatever reason Coca-Cola failed in building a strong relationships
      with the government of India in the 1970’s. Some of Coca-Cola’s present worries can be
      traced back to this failure which gave an opportunity to its arch-rival.

      Of all the elements of the marketing mix, pricing seems to be most critical in BEMs where
      the greater part of the population suffer from low purchasing power. The future for global
      companies worldwide may not lie in targeting high earning people rather the billions of the
      people at the bottom-of-the pyramid (BOP). How to devise strategies to target this huge
      sector should be an opportunity and an important lesson for both PepsiCo and Coca-Cola
      from their Indian experience. Finally, having a good exit strategy is a lesson that both these
      companies should keep in mind while working in politically unstable countries.
      Coca-Cola’s exit in 1977 from India is the perfect example where having such an exit
      strategy could have worked well for the company.

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