In 2003, Jagdeep Kapoor, chairman of Samsika Marketing Consultants in Mumbai (formerly Bombay), commented that “Coke lost a number ofyears over errors. But at last it seems to be getting its positioning right. ” Similarly, Ronald McEachern, PepsiCo’s Asia chief, asserted “India is the beverage battlefield for 2003. ” The experience ofthe world’s two giant soft drinks companies in India during the 1990s and the beginning of the new millennium was not a happy one, even though the government had opened its doors wide to foreign companies.
Both companies experienced a range of unexpected problems and difficult situations that led them to recognize that competing in India requires special knowledge, skills, and local expertise. In many ways, Coke and Pepsi managers had to learn the hard way that “what works here” does not always “work there. ” In spring 2003, Alex von Behr, the president of Coca-Cola India, admitted ruefully, “The environment in India is challenging, but we’re learning how to crack it. “
The Indian Soft Drinks Industry
In India, over 45 percent of the soft drinks industry in 1993 consisted of small manufacturers.
Their combined business was worth $3. 2 million dollars. Leading producers inc1uded Parle Agro (hereafter “Parle”), Pure Drinks, Modern Foods, and McDowells. They offered carbonated orange and lemon-lime beverage drinks. Coca-Cola Corporation (hereafter “Coca-Cola”) was only a distant memory to most Indians at that time. The company had been present in the Indian market from 1958 until its withdrawal in 1977, following a dispute with the government over its trade secrets. After decades in the market, Coca-Cola chose to leave India rather than cut its equity stake to 40 percent and hand over its secret formula for the syrup.
Following Coca-Cola’s departure, Parle became the market leader and established thriving export franchise businesses in Dubai, Kuwait, Saudi Arabia, and Oman in the Gulf, along with Sri Lanka. It set up production in Nepal and Bangladesh, and served distant markets in Tanzania, Britain, the Netherlands, and the United States. Parle invested heavily in image advertising at home, establishing the dominance ofits flagship brand, Thums Up. Thums Up is a brand associated with a “job weil done” and personal success. These are persuasive messages for its target market of young people ged 15 to 24. Parle has been careful in the past not to call Thums Up a cola drink, so it has avoided direct comparison with Coke and Pepsi, the world’s brand leaders. The soft drinks market in India is composed of six product segments: cola, “cloudy lemon,” orange, “soda” (carbonated water), mango, and “c1ear lemon,” in order of importance. Cloudy lemon and c1ear lemon together make up the lemon-lime segment. Prior to the arrival of foreign producers in India, the fight for local dominance was between Parle’s Thums Up and Pure Drinks’ Campa Cola.
In 1988, the industry had experienced a dramatic shakeout following a government warning that BVO, an essential ingredient in locally produced soft drinks, was carcinogenic. Producers either had to resort to using a costly imported substitute, estergum, or they had to finance their own R&D in order to find a substitute ingredient. Many failed and quickly withdrew from the industry. Competing with the segment of carbonated soft drinks is another beverage segment composed of noncarbonated fruit drinks. These are a growth industry because Indian consumers perceive fmit drinks to be natural, healthy, and tasty.
The leading brand has traditionally been Parle’s Frooti, a mango-flavored drink, which was also exported to franchisees in the United States, Britain, Portugal, Spain, and Mauritius.
Opening up the Indian Market in 1991
In June 1991, India experienced an economic crisis of exceptional severity, triggered by the rise in imported oil prices following the first GulfWar (after Iraq’s invasion ofKuwait). Foreign exchange reserves fell as nomesident Indians (NRIs) cut back on repatriation of their savings, imports were tightly controlled across all sectors, and industrial production fell while inflation was rising.
A new government took office in June 1991 led by Prime Minister Naras. imha Rao. Inspired by Finance Minister Dr. Manmohan Singh, the government introduced measures to stabilize the economy in the short term and launched a fundamental restructuring program toensure medium-term growth. Results were dramatic. By 1994, inflation was halved, exchange reserves were greatly increased, exports were growing, and foreign investors were looking at India, a leading Big Emerging Market, with new eyes. The turnaround could not be overstated; one commentator said “India has been in economic depression for so long that everything except the nake-charmers, cows and the Taj Mahal has faded from the memory of the world. ” For many years, the outside world had viewed the Indian government 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 availability” had specified that if an item could be obtained anywhere else within the country, imports of similar items were forbidden. As a result of this policy, India became self-reliant in its defense industry, developing both nuclear and space . rograms. In contrast, Indian consumers had little choice of products or brands, and no guarantees of quality or reliability. Following liberalization ofthe Indian economy in 1991 and introduction ofthe New Industrial Policy intended to dismantle complicated trade rules and regulations, foreign investment increased dramatically. Beneficiary industries included processed foods, software, engineering plastics, electronic equipment, power generation, and petroleum generation. A commentator observed, “In the 1970s and 1980s, it was almost antinational to advocate foreign investment.
Today the Prime Minister and Finance Minister are wooing foreign investors. ” Foreign companies that had successfully pioneered entry into the Indian market many decades earlier, despite all the stringen rules, quickly increased their equity stakes under the new rules ftom 40 percent to 51 percent. These long-established companies included global giants such as Unilever, Procter & Gamble, Pfizer, Hoechst, BAT, and Philips (ofthe Netherlands).
Coca-Cola and Pepsico Enter the Indian Market
Despite its huge population, India had not been considered by foreign beverage producers to be an important market.
In addition to the deterrents imposed by the government through its austere trade policies, mies and regulations, local demand for carbonated drinks in India was very low compared to countries at a similar stage of economic development. In 1989, the average Indian was buying only three bottles a year. This compared to per-capita consumption rates of II bottles a year in Bangladesh and 13 in Pakistan, India’s two neighbors. PepsiCo PepsiCo lodged a joint venture application to enter India in July 1986. It had selected two local partners, Voltas and Punjab Agro.
This application was approved under the name “Pepsi Foods Ud. ” by the government of Rajiv Gandhi in September 1988. As expected, very stringent conditions were imposed on the venture. Sales of soft drink concentrate to local bottlers could not exceed 25 percent of total sales for the new venture. This limit also inc1uded processing of fruits and vegetables by Pepsi Foods Ud. Robert Beeby, CEO of Pepsi-Cola International, said at that time: “We’re willing to go so far with India because we wanted to make sure we get an early entry while the market is developing. In May 1990, the government mandated that Pepsi Food’s products be promoted under the name “Lehar Pepsi” (“Iehar” meaning “wave”). Foreign collaboration rules in force at the time prohibited use of foreign brand names on products intended for sale inside India. Other examples of this policy were Maruti Suzuki, Carrier Auon, L&T HoneywelI, Wilkinson’s Wiltech, Modi-Champion, and Modi-Xerox. In keeping with local tastes, Pepsi Foods launched Lehar 7UP in the c1ear lemon category, along with Lehar Pepsi. Marketing and distribution were focused in the north and west around the major cities of Delhi and Mumbai.
An aggressive pricing policy on the one-liter bottles had a severe impact on the local producer, Pure Drinks. The market leader, Parle, preempted any further pricing moves by Pepsi Foods by introducing a new 250-ml. bottle that sold for the same price as its 200-ml. bottle. Pepsi Foods struggled to fight off local competition from Pure Drinks’ Campa Cola, Duke’s lemonade, and various brands of Parle. Aware of its difficulties, Pepsi Foods approached Parle in December 1991 to offer an alliance. Parle dec1ined the offer, choosing to stand its ground and continuing to fight to preserve its number one position.
The fight for dominance intensified in 1993 with Pepsi Food’s launch of two new brands, Slice and Teem, along with the introduction of fountain sales. At this time, market shares in the cola segment were 60 percent for Parle (down from 70 percent), 26 percent for Pepsi Foods, and 10 percent for Pure Drinks. Coca-Cola In May 1990, Coca-Cola attempted to reenter India by means of a proposed joint venture with a local bottling company owned by the giant Indian conglomerate, Godrej. The government of Rajiv Gandhi turned down this application just as PepsiCo’s application was being approved.
Undeterred, Coca-Cola made its return to India by joining forces with Britannia Industries India Ud. , a local producer of snack foods. The new venture was called “Britco Foods. ” In 1993 Coca-Cola filed an application to create a 100 percent-owned soft drinks company, Coca-Cola India. The arrival of Coca-Cola in the Indian soft drinks industry forced local small producers to consider extreme survival measures. The small Delhi-based company, Pure Drinks, tried to revamp its bottling alliance with Coca-Cola from earlier years, even offering to withdraw its own leading brand, Campa Cola, as an inducement to Coca-Cola.
Campa Cola’s brand share at the time was 10 percent. However, Coca-Cola had its sights set on a different partner, Parle. Among local producers, it was believed at that time that CocaCola would not take market share away from local companies because the beverage market was itself growing consistently from year to year. Yet this belief did not stop individuallocal producers from trying to align themselves with the market leader. Thus, in July 1993, Parle offered to sell Coca-Cola its bottling plants in the four key cities of Delhi, Mumbai, Ahrnedabad, and Surat.
In addition, Parle offered to sell its leading brands including Thums Up, Limca, Citra, Gold Spot, and Mazaa. It chose to retain ownership only ofFrooti and a soda (carbonated water) called Bisleri. As a result ofParle’s offer, two new ventures were set up to bottle and market both companies’ products. The marketing venture would provide advertising, media services, promotional and sales support. Parle’s chief, Ramesh Chauhan, was named Chairman and Coca-Cola staffed the Managing Director’s position. Parle held 49 percent of the marketing venture but took an equal 50 percent stake in the bottling venture.
Fast Forward to the New Millennium
Seasonal Sales Promotions-the 2000 Navrartri Campaign In India the summer season for soft drink consumption lasts 70 to 75 days from mid-April to June. During this time, over 50 percent of the year’s carbonated beverages are consumed across the country. The second-highest season for consumption lasts only 20 to 25 days during the cultural festival of Navratri (“Nav” means nine and “ratri” means night). This is a traditional Gujarati festival and it goes on for nine nights in the state of Gujarat, in the western part of India. Mumbai also has a significant Gujarati population that is considered part of the target market for this campaign.
As Sunil Kapoor, Regional Marketing Manager for Coca-Cola India, stated, “As part ofthe ‘think local-act local’ business plan, we have tried to involve the masses in Gujarat with ‘Thums Up Toofani Ramjhat,’ with 20,000 free passes issued, one per Thums Up bottle. (‘Toofan’ means a thunderstorm and ‘ramjhat’ means ‘Iet’s dance,’ so together these words convey the idea of a ‘fast dance. ‘) There are a number of (retail) on-site activities too, such as the ‘buy one-get one free’ scheme and lucky draws where one can win a free trip to Goa. (Goa is an independent Portuguese-speaking state on the west coast of India, that is famed for its beaches and tourist resorts. ) For its part, PepsiCo also participates in annual Navratri celebrations through massive sponsorships of “garba” competitions in se1ected venues in Gujarat. (“Garba” is the name of a dance, which is done by women during the Navratri festival. ) In 2000 Deepak Jolly, Executive Vice-President for PepsiCo India, commented: “For the first time, Pepsi has tied up with the Gujarati TV channel, 606 Part 6 Supplementary Material
Zee Alpha, to telecast ‘Navratri Utsav 2000 at Mumbai’ on all nine nights. CUtsav’ means festival. ) Then there is the mega offer for the people of Ahmedabad, Baroda, Surat, and Rajkot where every refill of a case of Pepsi 300-ml. bottles will fetch one kilo of Basmati rice free. ” (These are four cities located in the state of Gujarat. Basmati riee is considered to be a premium quality rice. After the initial purchase of a 300-ml. bottle, consumers can get refills at reduced rates at select stores. ) During the Navratri festival, both companies are extremely generous with giveaways in their sales promotions.
For example, in 2000 Pepsi Foods offered a free Kit Kat with every 1. 5-liter bottle and a Polo (hard candies like “Lifesavers”) with each 500-ml. bottle ofPepsi and Mirinda. The 2002 Summer TV Campaign In 2002 Pepsi Foods took the lead in the c1ear lime category with 7UP leading its category, followed by Coca-Cola’s Sprite brand. On March 7, 2002, it launched a new summer campaign for 7UP. This date was chosen to coincide with the India-Zimbabwe One-Day cricket series. The new eampaign slogan was “Keep It Cool” to emphasize the product attribute of refreshment.
A nationwide television advertising campaign was designed with the objectives of growing the category and building brand salience. The national campaign was to be reinforeed with regionally adapted TV campaigns, outdoor activities, and retail promotions. PepsiCo’s ad spending for 7UP was not comparable to the level invested in its flagship brand, Pepsi-Cola, because the c1ear lime segment in 2002 was minuscule, accounting for just 4. 5 percent of the total carbonated soft drinks market. This was equal to about 250-270 million cases.
The c10udy lemon segment is more than twice this size, with 10 percent market share; carbonated orange drinks account for about 15 percent. 7UP was being sold in 250-ml. , 300-ml. , and 500-ml. bottles, and in 200-ml. bottles in southern states. The industry trend was pushing tC'”Iard 200-ml. bottles in order to increase frequency of purchase and volume of consumption. Pepsi Foods rolled out its Mirinda Lemon, Apple and Orange in 200-ml. bottles in the Delhi market, following similar market launches in Punjab and Uttar Pradesh in the previous year.
In the past, celebrity actors Amitabh Bachchan and Govinda, who are famous male stars of the Indian movie industry, had endorsed Mirinda Lemon. This world-famous industry is referred to as “Bollywood” (the Hollywood ofIndia based in Bombay). Both Coca-Cola and PepsiCo routinely keep c10se track ofthe success of their seasonal advertising campaigns in India through use of marketing research agencies. Coca-Cola has used ORGMARG, while Pepsi Foods has worked with IMRB. ORG-MARG uses its weekly “Ad Track” to study spontaneous ad recall among 1,000 male and female respondents aged 12-49 in 17 cities.
IMRB’s “Perception Analyzer System” surveys 15-30 year olds in four cities. Responses are sought on measures of likeability of the ad and intention to buy. Pepsi’s Sponsorship of Cricket and Football (Soccer) After India won an outstanding victory in the 2002 India-England NatWest One-Day cricket series finals, PepsiCo launched a new ad campaign featuring the batting sensation, Mohammad Kaif. Although he had been signed up a year earlier, Kaif had not yet figured in Pepsi ads. The spotlight had been on Sachin Tendulkar and Amitabh Bachchan, who are famous icons as a cricket player and a movie star, respectively.
Sachin Tendulkar is considered to be the best batsman in the history of cricket. He started his international cricket eareer at the age of 16, and now at age 29 he already figures in the list of top young billionaires in the eountry! Amitabh Bachchan has the distinction ofhaving being the leading superstar in the Indian movie industry for the last 30 years. Even now, at 60 years of age, he commands the highest name rating any star has ever received in Bollywood. PepsiCo’s line-up of other cricket celebrities includes Saurav Ganguly, Rahul Dravid, Harbhajan Singh, Zaheer Khan, v. V. S. Laxman, and Ajit Agarkar. Saurav Ganguly is presently the captain of the Indian cricket team. All of these players were part of the Indian team for the 2003 World Cup Cricket held in South Africa, where they performed superbly, reaehing the finals. They lost to Australia in the finals, but PepsiCo was able to capitalize on the overall team’s performance during the month and a half long tournament. Six months earlier, PepsiCo had taken advantage ofWorld Cup soccer fever in India, featuring football heroes such as Baichung Bhutia in their celebrity and music-related advertising communications.
These ads featured football players pitted against Sumo wrestlers. In addition, para football tournaments were held in selected cities. In 2003, similar sports-themed promotions took place, centered on PepsiCo’s sponsorship ofthe World Cup Series in cricket. During the two months of the Series, a new product, Pepsi Blue, was marketed nationwide. This was positioned as a “Iimited edition,” icy-blue cola sold in 300-ml. returnable glass bottles and 500-ml. plastic bottles. These were priced at 8 rupees (Rs) and Rs. 15, respeetively. In addition, commemorative, nometurnable 250-ml.
Pepsi bottles priced at Rs. 12 were introduced. (One rupee was equal to US 2. 08 cents in 2003. ) To consolidate its investment in the 2003 campaign, PepsiCo also featured a music video with other celebrity endorsers including the Bollywood stars Amitabh Bachchan, Kareena Kapoor, Abishek Bachchan (the son of Amitabh Bachchan) and Fardeen Khan, as weil as several crieketers. The new music video aired on SET Max, which is a satellite channel owned by Sony. This channel is popular among the 15-25 age group, mainly in the northern and western parts of India.
Coca-Cola’s Lifestyle Advertising In 2002 and 2003, Coca-Cola India used a strategy of”building a eonnect using the relevant local idioms,” according to Rajesh Mani, Regional Marketing Manager. The ad strategy, developed by Orchard Advertising in Bangalore, was based on use of “gaana” music and ballet. (“Gaana” means to sing. ) The first ad execution, called “Bombay Dreams,” featured A. R. Rahman, who is a famous music director. This approach was very successful among the target audience of young people, increasing sales by about 50 percent. It also won an Effi Award from the Mumbai Advertising Club. Note: Even though the name ofthe city has been officially changed from Bombay to Mumbai, loeal people still continue to use Bombay. ) 2003 saw the launch of a second execution of this regional strategy in Chennai (formerly Madras), called “Chennai Dreams. “
This ad featured Vijay, a youth icon who is famous as an actor in the regional movies of south India. The campaign targeted consumers in Tamil Nadu, located in the southern part ofthe country. Thomas Xavier, Executive Creative Director of Orchard Advertising, commented that the success of the ad was due to insight into needs of the target market. We were c1ear that the need of 607 Cases 1 An Overview the hour was not for an ad film, but for a Tamil feature film in 60 seconds. ” In 2002 Coca-Cola India worked hard to build up a brand preference for its fiagship brand, Coke, among young people in rural target markets. The campaign slogan was “thanda matlab Coca-Cola” (or “cool means Coca-Cola” in Hindi). Coca-Cola India calls its rural youth target market “India B. ” The prime objective in this market is to grow the generic soft drinks category and to develop brand preference for Coke.
The “thanda” (“cold”) campaign of 2002 successfully propelled Coke into the number three position in rural markets. The urban youth target market, known as “India A,” includes 18-24 year olds in the major metropolitan areas. In 2003, the urban youth market was targeted with a campaign developed by McCann Erickson. The TV ad ran for 60 seconds and featured actor Vivek Oberoi with Aishwarya Rai. Both are famous as Bollywood movie stars. Aishwarya was the winner of the Miss World crown in 1994 and became an instant hit in Indian movies after deciding on an acting career.
This ad showed Oberoi trying to hook up with Rai by deliberately leaving his mobile phone in the taxi that she hails, and then calling her. The ad message aimed to emphasize confidence and optimism, and a theme of “seize the day,” according to Shripad Nadkarni, Vice-President of Marketing for Coca-Cola India. The 2003 campaign used a variety of media including television, print, outdoor, point-of-sale, restaurant and grocery chains, and local promotional events. “While awareness of soft drinks is high, there is a need to build a deeper brand connect” in urban centers, according to Sharda Agarwal, Director of Marketing for Coca-Cola India. Vivek Oberoi-who’s an up and coming star today, and has a wholesome, energetic image-will help build a stronger bond with the youth, and make them feel that it is a brand that plays a role in their life, just as much as Levi ‘s or Ray-Ban. ” Coca-Cola’s specific marketing objectives for 2003 were to gro. v the per-capita consumption of soft drinks in the rural markets, and to capture a larger share in the urban market from competition and increase the frequency of consumption there, according to Ms. Agarwal.
It was expected that a new “affordability plank” in the advertising strategy, along with introduction ofa new 5-rupee bottle, would help to achieve all of these goals. The “Affordability Plank” In 2003, Coca-Cola India dramatically reduced prices of its soft drinks by 15 percent to 25 percent nationwide, in order to encourage consumption. This followed an earlier regional action in North India that reduced prices by 10-15 percent for its carbonated brands, Coke, Thums Up, Limca, Sprite and Fanta. In other regions such as Rajasthan, western and eastern Uttar Pradesh, and Tamil Nadu, prices were slashed to Rs. for 200-ml. glass bottles and Rs. 8 for 300-ml. bottles from the existing Rs. 7 and Rs. 10 price points, respectively. These price reductions were in keeping with Coca-Cola’s goal of enhancing affordability of its products, bringing them within arm’s reach of consumers and thereby promoting regular consumption. Given the very low per-capita consumption of soft drinks in India, it was expected that price reductions would expand both the consumer base and the market for soft drinks.
PepsiCo was forced to match these price reductions, leading PepsiCo’s Asia chief to conclude: “India is the beverage battlefield for 2003. Another initiative by Coca-Cola was the introduction of a new size, the “Mini. ” This was expected to increase total volume of sales and account for the major chunk of Coca-Cola’s carbonated soft drink sales, according to Rajesh Mani, Regional Marketing Manager for Coca-Cola India. The price reduction and new production launch were announced together by means of a new television ad campaign for Fanta and Coke in Tamil. Lowe Chennai created the ad concept, with executions by Primary Colors for Fanta and Rajiv Menon Productions for Coke.
Both agencies are based in Chennai. The 30-second Fanta spot featured the brand ambassador, actress Simran, well-known for her dance sequences in Hindi movies. The ad showed Sirnran stuck in a trafiic jam. Thirsty, she tosses a 5-rupee coin to a roadside stall and signals to the vendor that she wants a Fanta Mini by pointing to her orange dress. (Fanta is an orangeade drink. ) She gets her Fanta and sets off a chain reaction on the crowded street, with everyone from school children to a traditional “nani” mimicking her action. (“Nani” is the Hindi word for grandmother. Rajesh Mani commented that the company wanted to make consumers “sit up and take notice. ” This was accomplished “by using a local star, with local insight, because Tamil Nadu is a big market for Fanta. “
A New Product Category
In order to encourage growth in demand for bottled beverages in the Indian market, several producers have launched their own brand in a new category, bottled water. This market was valued at 1,000 Crore in 2003. (I Crore = 10,000,000 Rupees, US$I = Rs48, so 1,000 Crore = US$0. 2083 million. ) Coca-Cola’s brand, Kinley, was introduced in 2000.
Ogilvy and Mather designed a two-ad television campaign. By 2002 Kinley had achieved a 28 percent market share and was being produced in 15 plants. The biggest ofthese are located in Mumbai, Delhi, Goa and Bangalore. In 2003 it was planned to double bottling capacity by adding another 10 to 15 production plants. These would be a combination of company-owned plants, franchisee operations, and contract packing companies. The Kinley brand of bottled water seils in various pack sizes: 500 ml. , 1 liter, 1. 5 liter, 2 liter, 5 liter, 20 liter, and 25 liter.
The smallest pack was priced at Rs. 6 for 500 ml. , while the 2-liter bottle was Rs. 17. The current market leader with 40 percent market share is the Bisleri brand, owned by Ramesh Chauhan, who is the CEO of Parle. Pepsi Foods’ brand is Aquafina with about II percent market share. Aquafina is produced in six company-owned or franchised bottiing plants in Roha (Maharashtra), Bangalore, Kolkata (formerly Calcutta), and New Delhi. Facusing on metropolitan areas, Pepsi Foods’ ad campaign uses both television and outdoor media, and is managed by HTA, Pepsi Foods’ agency.
Other competing brands in this segment include Bailley by Parle, Hello by Hello Mineral Waters Pvt. Ud. , Pure Life by Nestle, and a new brand launched by Indian Railways, called Rail Neer.
Coca-Cola’s Attempts to “Crack” the Indian Market
By 2002, Coca-Cola owned 30 bottling plants, 10 franchisees, and held a 56 percent market share of the national soft drink market in India. Yet despite creative and locally responsive marketing efforts and a total investment of some $840 million to build its distribution and manufacturing infrastructure, Coca-Cola had reported losses in India since its return here in 1993. In 2001 the company 608 Part 6 Supplementary Material had written off a loss of $400 million. Total accumulated losses were estimated to be over 2,000 Crore (US$OAI66 million). To make matters worse, in January 2002 the company was ordered by the government to seil 49 percent of Hindustan Coca-Cola Holding Pvt. Ud. (HCCHPL), the wholly-owned holding company for all Coca-Cola operations in India, to Indian investors. This move by the government followed action taken by Coca-Cola in 1996 when it had requested and received government permission to increase its investment in the Indian market.
Under the new governmental policy passed that same year affecting all new soft drink investments, Coca-Cola had agreed to seil 49 percent of its equity to Indian partners within two years. This time limit had been extended once already, but arequest for a second extension to 2007 was turned down on October 3, 200 I. Coca-Cola was hoping that by 2007 it would be in astronger financial position and would receive a better return on its forced disinvestment. The government’s response to the company’s second request was that “entry conditions cannot be changed. This response might have been acceptable if investment rules in India were cIear and unchanging, but this was not the case during the 1990s when implementation of government rules had been inconsistent. Some companies, like Coca-Cola, were required to reduce their equity in order to allow Indians into the industry. At the same time, other companies-like Philips (of the Netherlands), Carrier (of the United States), and Cadbury-Schweppes (ofBritain)-were being allowed to buy back most of their outstanding shares and would likely delist their shares altogether, effectively making their Indian operations wholly owned subsidiaries.
This was the status that Coca-Cola was being forced to give up. Local market analysts commented that there is no apparent logic behind these government policies, other than to allow local investors to become bargain hunters at the expense of Coca-Cola. Coca-Cola responded by trying to maintain some control over its operations. It applied for government approval from the Foreign InvestmeJ)~ Promotion Board (FIPB) to deny voting rights to its new Indian shareholders.
Again the government response was that the company had to abide by the legal provisions that were applicable on the date of its original foreign investment in the country. Since all equities back in 1996-1997 mandatorily had voting rights, it was considered normal that Indian shareholders in this case should receive voting rights. The Indian government in May 2002 turned down Coca-Cola’s request for a waiver of the disinvestment rule. Making things even more difficult for Coca-Cola at that time was a change of oversight of the FIPB, ftom the Ministry of Industry to the Department of Economic Affairs.
This change would require Coca-Cola and other foreign companies to build new relationships with bureaucrats, rendering past lobbying efforts useless. Local business observers faulted Coca-Cola for trying to obtain repeated waivers of the disinvestment rule, pointing to the favorable expectation of oversubscription for shares in the company’s initial public offering. One commentator said “This is in no way a priority industry, and when it (Coca-Cola) was permitted to do business in India, it was with the condition that it will dilute a 49 percent stake after five years.
Foreign companies keep on saying that in India promises are not fulfilled. Why doesn’t this multinational set an example by fulfilling its own commitment in this particular issue? ” Another stated unsympathetically, “They went into this with their eyes open. ” The Indian government had originally stipulated the 49 percent disinvestment clause as a condition for its agreement to allow Coca-Cola to buy out local Indian bottlers when the company first entered the market, instead of setting up greenfield bottling plants, as Coca-Cola had initially proposed.
In contrast to Coca-Cola, PepsiCo had entered India in a different year under a different set of rules. Moreover, it was not held to a disinvestment rule because it had opted to set up several greenfield bottling units. Coca-Cola India initiated its compliance with the government disinvestment rule in February 2003 by following the private placement route. It agreed to place 49 percent of equity from its wholly owned subsidiary Hindustan Coca-Cola Holdings Pvt. Ltd. (HCCHPL), worth $41 million, in its bottling subsidiary Hindustan Coca-Cola Beverages Pvt. Ud. (HCCBPL).
HCCBPL runs the bottling plants originally taken over from local Indian bottlers incIuding Parle. Of the 49 percent equity placed by HCCHPL, 10 percent was placed in Hindustan Coca-Cola Beverages (HCCB), in favor of employee and welfare trusts.
The Second Gulf War
During spring 2003, as a result ofthe attack by the United States and Britain on Iraq, a call was launched by the All-India AntiImperialist Forum to boycott purchases of American and British goods. The boycott targeted specifically Pepsi, Coca-Cola, and McDonald’s as a protest against the “unjust” war.
The Forum’s president is Justice V. R. Krishna Iyer, a former judge ofthe Indian Supreme Court. The Forum’s general secretary, S. K. Mukherjee, said, “We give a call to all peace-loving people ofthe world and India to rise up in protest against the imperialist aggression against Iraq .. .” Within two weeks of the announcement of the boycott, sales of Coke and Pepsi in the southern Indian state of Kerala plummeted 50 percent. Members of the Forum included more than 250 nongovernmental groups. These went on “shop-to-shop” campaigns to persuade retailers not to stock American products.
They visited hornes in Kerala, presenting the same plea to consumers. Other items on the boycott list incIuded toothpaste, soap, cooking oil, and cosmetics. Retailers feared a public backlash ifthey stocked items on the boycott list. In place ofbrand name items, retailers were asked to promote local substitutes such as an herbaI product in place of toothpaste and mango juice instead of colas. Sunil Gupta, vicepresident ofHindustan Coca-Cola Beverages, cornmented that this action would hurt not only the Kerala region. “We have one million retail suppliers of our products (in India).
In the event of a boycott, it is the Indian economy that will be hit. “
Learning Some Hard Lessons
In 2002 Coca-Cola’s overall sales reached $940 million and company products accounted for more than halfthe soft drinks market. A three-year cost-cutting program had brought dramatic results, reducing the company’s payroll by 23 percent. Eight outdated plants, inherited from the Thums Up purchase, were cIosed. Local purchasing policies brought savings of 57 percent on import duties. Coca-Cola’s weil known but poorly supported Thums Up brand was reinvigorated with an infusion of$3. million spent on advertising and distribution. Market share for Thums Up, which had slipped from more than 60 percent of carbonated beverage sales down to a puny 15 percent, was regained. Within a year, Thums Up ranked second nationwide. Coke still trailed its archriyal Pepsi, however, with a market share ofonly 16. 5 percent versus 23. 5 percent. 609 Cases 1 An Overview Compared with per-capita consumption rates in other Big Emerging Markets, India’s rate was still very low in 2003 at seven (8 ounce) servings per person.
This compared with 14 in Pakistan, 89 in China, 278 in South Africa, 471 in Brazil, 1,484 in Mexico, and 1,404 in the domestic U. S. market. Coca-Cola India’s Director of Finance, N. Sridhar, stated confidently, however, “We have turned a corner. ” In a similar vein, Jagdeep Kapoor, chairman of Samsika Marketing Consultants in Mumbai, concluded “Coke lost a number of years over errors. But at last it seems to be getting its positioning right. “
Contamination Allegations and Water Usage
Just as things began to look up, an environmental organization claimed that soft drinks produced in India by Coca-Cola and Pepsi contained significant levels of pesticide residue. Coke and Pepsi denied the charges and argued that extensive use of pesticides in agriculture had resulted in aminute degree of pesticide in sugar used in their drinks. The result of tests conducted by the Ministry ofHealth and Family Welfare showed that soft drinks produced by the two companies were safe to drink under local health standards.
In an attempt to regain pub1ic trust and credibility after allegations of pesticide contamination incited angry consumers in Bombay to smash thousands of Coke bottles in 2003, the company formed an advisory board 1ed by a former Indian Cabinet Secretary to oversee Coca-Co1a’s practices in India. Coke also appointed a former Chief of the Supreme Court to lead an advisory body called the India Environment Counci1, which will guide Coca-Cola India’s socia1-responsibi1ity practices. The Coca-Cola Company and PepsiCo hoped the creation of the advisory boards and the purity tests conducted by the Indian government will put to rest consumer fears.
After all the bad press Coke got in India over the pesticide content in its soft drinks, an activist group in Ca1ifornia 1aunched a campaign directed at U. S. college campuses accusing Coca-Cola of India of using precious groundwater, lacing its drinks with pesticides and supp1ying farmers with toxic waste used for fertilizing their crops. According to one report, aplant that produces 300,000 liters of soda drink a day uses 1. 5 million liters of water, enough to meet the requirements of 20,000 peop1e. The issue revo1ved around a bottling plant in P1achimada, India.
Though the state government granted Coke permission to bui1d its plant in 1998, the company was obliged to get the 10cally elected village council’s go-ahead to exp10it groundwater and other resources. The village council issued the required licenses to Coke in 1998 and 2000 but did not renew permission in 2002, claiming the bottling operation had dep1eted the farmers’ drinking water and irrigation supplies. In 2003 Coke’s plant was closed until the corporation won a court ru1ing allowing them to reopen.
The reopening ofthe plant and the activities ofthe activist group 1ed to severa1 colleges in the United States and even in Europe to ban or stop renewing their contract with Coke. Hundreds of peop1e in the United States called on Coca-Cola to close its bottling plants because the plants drain water from communities throughout India. They contended that such irresponsible practiee robs the poor of their fundamental right to drinking water, is a source oftoxie waste, causes serious harm to the environment, and threatens the peop1e’s health.
QUESTIONS
The political environment in India has proven to be critical to company performance for both PepsiCo and Coca-Cola India. What specific aspects ofthe politica1 environment have p1ayed key ro1es? Cou1d these effects have been anticipated prior to market entry? Ifnot, could deve10pments in the politica1 arena have been handled better by each company? 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?
The Indian market is enormous in terms of population and geography. How have the two companies responded to the sheer sca1e of operations in India in terms of product po1icies, promotional activities, pricing po1icies, and distribution arrangements? “Global10calization” (glocalization) is a policy that both companies have implemented successfully. Give examp1es for each company from the case. Some ana1ysts consider that Coca-Cola India made mistakes in planning and managing its return to India. Do you agree? What or whom do you think was responsib1e for any mistakes? . How can Pepsi and Coke confront the issues ofwater use in the manufacture oftheir products? How can they defuse further boycotts or demonstrations against their products? How effective are activist groups like the one that 1aunched the campaign in Ca1ifornia? Should Coke address the group directly or just let the furor subside, as it sure1y will? Which ofthe two companies do you think has better long-term prospects for success in India? What 1essons can each company draw from its Indian experience as it contemplates entry into other Big Emerging Markets?
