Pepsi is moving in on the Coke-dominated Yucatan peninsula while Femsa, the Coca-Cola franchisee, is planning to invest $600 million more for 3 new Coca-Cola plants next to Gemex’s Mexico City facilities. The parent companies have joined the battles as well. Coca-Cola has made a $3 billion long-term commitment to the Mexican market, and Pepsi has countered with a $750 million investment of its own. Another important country in the soda war is China. Coca-Cola originally entered China in 1927, but left in 1949 when the Communists took over the country.
In 1979, it returned with a shipment of 30,000 cases from Hong Kong. Pepsi, which only entered China in 1982, is trying to be the leading soft-drink producer in China by the year 2000. Even though Coca-Cola’s head start in China has given it an edge, there is plenty of room in the country for both companies. Currently, Coca-Cola and Pepsi control 15% and 7% of the Chinese soft-drink market respectively. The Chinese market presents unique problems.
For example, 2,800 local soft-drink bottlers, many of whom are state-owned, control nearly 75% of the Chinese market. Those bottlers located in remote areas have virtual monopolies (The Economist, 67). The battle for China will take place in the interior regions. These areas are unpenetrated as most of the foreign soft-drink producers have set up in the booming coastal c! ities.
China’s high transportation and distribution costs mean that plants must be located close to their markets. Otherwise, in a country of China’s size, Coca-Cola and Pepsi risk pricing their products as luxury items. In China, it is easier and politically safer to expand through joint ventures with local bottlers. It is expected that, in China, the company that wins the cola war will win based on the locations of their bottling plants and the quality of the partners they choose (The Economist, 67). Coca-Cola is bottled at 13 sites across China; five of these are state-owned.
Also, Coca-Cola owns 2 concentrate plants in China. By next year, Coca-Cola and its joint venture partners will have invested nearly $500 million in China. Pepsi is planning a $350 million expansion plan that will add 10 new plants. Both companies are dumping profits straight back into expansion.
Both companies have there sites clearly set on not seeing a return in profits until the next cent! ury. In Saudi Arabia, another important country, Pepsi is the market leader and has been for nearly a generation. Part of this is due to the absence of its arch-rival, Coca-Cola. For nearly 25 years, Coke has been exiled from this country. Coca-Cola’s presence in Israel meant that it was subject to an Arab boycott.
Because of this, Pepsi has an 80% share of the $1 billion Saudi soft-drink market. Saudi Arabia is Pepsi’s third largest foreign market, after Mexico and Canada (The Economist, 86). In 1993, almost 7% of Pepsi-Cola International’s sales came from Saudi Arabia alone. The environment in Saudi Arabia makes the country very conducive to soft-drink sales: alcohol is banned, the climate is hot and dry, the population is growing at 3.5% a year, and the Saudis’ oil-based wealth “make it the most valuable market in the Middle East” (The Economist, 86).
Coca-Cola, long known as “Red Pepsi”, has finally started to fight back. The battle for Saudi Arabia actually bega! n 6 years ago, when the Arab boycott collapsed and Coca-Cola began to make inroads into the Gulf, Egypt, Lebanon, and Jordan. The start of the Gulf War, however, temporarily stunted Coca-Cola’s growth in the region. Pepsi’s 5 Saudi factories worked 24 hours a day to keep the troops refreshed.
The most significant blow to Coca-Cola’s return to the desert, however, came at the end of the war, when General Norman Schwarzkopf was shown signing the cease-fire with a can of diet Pepsi in his hand. Coca-Cola aims to control 35% of the Saudi market by the year 2000. Coca-Cola, which plans to pour over $100 million into the Saudi market, is focusing on marketing to get there. Also, Coca-Cola put $1 million into sponsoring the Saudi World Cup soccer team.
This alone has doubled Coca-Cola’s market share to almost 15%. America’s Reynolds Company is among the investors looking to cash in on Coca-Cola’s return to Saudi Arabia. The company is among the investors in a new factor! y which, by 1996, will be producing 1.2 billion Coca-Cola cans per year. This equates to nearly 100 cans for every Saudi in the country.
Pepsi, trying to fight off the Coca-Cola onslaught, has responded with deep discounting. Now on to one of the largest economic growing markets in the world, India. Coca-Cola controlled the Indian market until 1977, when the Janata Party beat the Congress Party of then Prime Minister Indira Gandhi. To punish Coca-Cola’s principal bottler, a Congress Party strong and longtime Gandhi supporter, the Janata government demanded that Coca-Cola transfer its syrup formula to an Indian subsidiary (Chakravarty, 43). Coca-Cola refused and withdrew from the country. India, now left without both Coca-Cola and Pepsi, became a protected market.
In the meantime, India’s two largest soft-drink producers have gotten rich and lazy while controlling 80% of the Indian market. These domestic producers have little incentive to expand their plants or develop the country’s potentially enormous market (Chakravarty, 43). Some analysts reason that the Indian market may be more lucrative than the Chinese market. India has 850 million potential customers, 150 million of whom comprise t! he middle class, with disposable income to spend on cars, VCRs, and computers.
The Indian middle class is growing at 10% per year. To obtain the license for India, Pepsi had to export $5 of locally-made products for every $1 of materials it imported, and it had to agree to help the Indian government to initiate a second agricultural revolution. Pepsi has also had to take on Indian partners. In the end, all parties involved seem to come out ahead: Pepsi gains access to a potentially enormous market; Indian bottlers will get to serve a market that is expanding rapidly because of competition; and the Indian consumer benefits from the competition from abroad and will pay lower prices. Even before the first bottle of Pepsi hit the shelves, local soft drink manufacturers increased the size of their bottles by 25% without raising costs. In conclusion, the new battleground for the soda wars is in the developing markets of Eastern Europe, Mexico, China, Saudi Arabia, and India.
With Coca-Cola’s and Pepsi’s investments in these countries, not only will they increase their sales worldwide, but they will also help to build up these economies. These long-term commitments by both companies will raise the level of competition and efficiency, and at the same time, bring value to the distribution and production systems of these countries. Many issues need to be overcome before a company can begin to produce its goods in a foreign country. These issues are of the marcoenvironment (see Appendix, page 2) which include political, social, economic, operational, and environmental topics which must be addressed. When companies like Coca-Cola and Pepsi effectively analyze and solve these problems to everyone’s liking, new foreign markets can translate into lucrative opportunities in the long run. Currently, it is difficul! t to say who is winning the cola wars since the data from the relatively new market research firms focuses on major cities.
Pepsi had a commanding 4 to 1 lead in 1992 in the former Soviet Union. Without this area, Coca-Cola has a 17% share versus Pepsi’s 12% share in the soft drink industry. Coca-Cola and Pepsi are in a dogfight, but both will end up as winners as the continue to expand globally, using the basic management skills consisting of: continued effort for total quality, trying to be the most efficient and cost affective, a continued effort to innovate their products, and finally speed, get their product on the shelves first and keep it there.
Works Cited
- “A red line in the sand”, Economist, October 1, 1994, p.
- 86. Chakravarty, Subrata N. ” How Pepsi broke into India”, Forbes, November 27, 1989, pp. 43-44. Clifford, Mark. “How Coke Excels”, Far Eastern Economic Review, December 30, 1993- January 6, 1994, p.
- 39. “Coke v Pepsi”, The Economist, January 29, 1994, pp. 67-68. DeNitto, Emily. “Pepsi, Coke think international for future growth”, Advertising Age, October 3, 1994, p. 44.
- Murphy, Helen. “Cola war erupts in Mexico”, Corporate Finance, May 1993, pp. 6-7. “Selling in Russia: The march on Moscow”, The Economist, March 10, 1995, pp. 65-66.
- Winters, Patricia and Scott Hume. “Pepsi, Coke: Art of deal-making”, Advertising Age, February 19, 1990, p. 45.
