Coke and Pepsi Learn to Compete in India

Submitted by Ankita Sharma B-50 Debashrita Sarkar B-38 Jhumur BattaB-34 Natasha Mohan CNaveen Negi B-46 Sumit Kapoor B-43

BRIEF SUMMARY OF CASE CONTENT: 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. -

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 1990s 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-Colas 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 90s 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 Pepsis 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-1990s. 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. As far as anticipation prior to entering the market is concerned, India after suffering a huge setback in late 80s and early 90s, was not in a position to throw tantrums. With the New Economic Policy in place, the World hoped for a reformed, easily accessible new market. But India, in order to balance between protecting itself and opening up its economy had to take some tough decisions, which were not what was anticipated.