Cocacola Pepsico Case Study 1s6130

COCACOLA-PEPSICO 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 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 t venture with Godrej it finally reentered the Indian market in the early 90’s via a t 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 t 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. Ans2:* The political environment have played key role as follow:

- Indian government viewed as unfriendly to foreign investors. Outside investment had been allowed only in high-tech sectors and was almost entirely prohibited in consumer goods sectors. The “Principle of indigenous available” If an item could be obtained anywhere else within the country, imports of similar items were forbidden. This made Indian consumers had a little choice of products or brands and no guarantees of quality or reliability.

- Indian Laws, the government mandated that Pepsi’s products be promoted under the “Lehar Pepsi” name. For Coca-Cola, they attempted to enter into Indian market by ing with Parle and became “Coca-Cola India”

Some of these effects may have been anticipated, especially foreseeing the corruption within Indian government. Taking that into more proactively might have helped Coca-Cola avoid hardships in the past. As far as the contamination issues goes, that might not have been so easy to anticipate. Both companies held their own when trying to prove their products were within safe limits compared to other food products.

They could developments in political arena; Coke could agreed to start new bottling plants instead of buying out Parle, and thus wouldn’t agreed to sell 49% of their equity.* 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 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 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 ions 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 of market size and total sales. Q3. The Indian market is enormous in of population and geography. How have the two companies responded to the sheer scale of operations in India in 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 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 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 consumers. 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 mistakes? 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 t 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 t venture was approved easily. Later Coca-Cola made its entry by ing 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 of requiring greater advertising expenditures. To make matters worse Coca-Cola was forced to disinvest under the new government policy ed 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 t 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 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 India? 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 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 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 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.