Sofa Wars Essay, Research Paper

The soft-drink battleground has now turned toward new overseas markets. While once the United States, Australia, Japan, and Western Europe were the dominant soft-drink markets, the growth has slowed down dramatically, but they are still important markets for Coca-Cola and Pepsi. Globalization has become an important word in the 90?s and Eastern Europe, Mexico, China, Saudi Arabia, and India have become the new “hot spots.” Both Coca-Cola and Pepsi are forming joint bottling ventures in these nations and in other areas where they see growth potential. As we have seen in the Japanese video dealing with Coke?s business in class, international marketing can be very complex. As I begin to examine the international soda wars this will become very evident. The domestic cola war between Coca-Cola and Pepsi is still raging, as we clearly know. However, these two soft-drink giants also recognize the opportunities for globalization in many of the international markets. Both!

Coca-Cola, which sold 10 billion cases of soft-drinks in 1992, and Pepsi now find themselves asking, “Where will sales of the next 10 billion cases come from?” The answer lies overseas, where income levels and appetites for Western products are at an all time high.

Often, the company that gets into a foreign market first usually dominates that country’s market. Coke patriarch Robert Woodruff realized this 50 years ago and unleashed a brilliant ploy or in a way a very simple global strategyto make Coke the early bird in many of the major foreign markets. At the height of World War II, Woodruff proclaimed that ?Wherever American boys were fighting, they’d be able to get a Coke.@ By the time Pepsi tried to make its first international pitch in the 50s, Coke had already established its brand name and a powerful distribution network.

During the last 40 years, many new markets have emerged. In order to profit from these markets, both Coke and Pepsi need to find ways to cut through all of the red tape that initially prevents them from conducting business in these markets.

One key movement for the soda wars occurd in Europe in 1972, Pepsi signed an agreement with the Soviet Union which made it the first Western product to be sold to consumers in Russia. This landmark agreement gave Pepsi the first advantage. Presently, Pepsi has 23 plants in the former Soviet Union and is the leader in the soft-drink industry in Russia. Pepsi outsells Coca-Cola by 6 to 1 and is seen as a local brand, similar to Coke?s reputation in Japan. However, Pepsi has also had some problems. There has not been an increase in brand loyalty for Pepsi since its advertising blitz in Russia, even though it has produced commercials tailored to the Russian market and has sponsored television concerts. On the positive side, Pepsi may be leading Coca-Cola due to the big difference in price between the two colas. While Pepsi sells for Rb250 (25 cents) a bottle, Coca-Cola sells for Rb450. For the economy size, Pepsi sells 2 liters for Rb1,300, but Coca-Cola sells 1.5 liters fo!

r Rb1,800. Coca-Cola, on the other hand, only moved into Russia 2 years ago and is manufactured locally in Moscow and St. Petersburg under a license. Despite investing $85 million in these two bottling plants, they do not perceive Coca-Cola as a premium brand in the Russian market. Moreover, they see it as a “foreign” brand in Russia. Lastly, while Coca-Cola’s bottle and label give it a high-class image, it is unable to capture market share.

Another country in the hot battleground for Coca-Cola and Pepsi is Romania. When Pepsi established a bottling plant in Romania in 1965, it became the first US product produced and sold in the region. Pepsi began producing locally during the communist period and has recently decided to reformat its organization structure and retrain its local staff. Pepsi entered into a joint venture with a local firm, Flora and Quadrant, for its Bucharest plant, and has 5 other factories in Romania. Quadrant leases Pepsi the equipment and handles Pepsi’s distribution. In addition, Pepsi bought 500 Romanian trucks which are also used for distribution in other countries. Moreover, Pepsi produces its bottles locally through an investment in the glass industry. While the price of Pepsi and Coca-Cola are the same (@15 cents/bottle), some consumers drink Pepsi because Pepsi sent Michael Jackson to Romania for a concert. Another reason for drinking Pepsi is that it is slightly sweeter than !

Coca-Cola and is more suited for the sweet-toothed Romanians. Lastly, some drink Pepsi because, in the past, only top officials were allowed to drink it, but now everyone can. Coca-Cola only began producing locally in November 1991, but it is outselling all of its competitors. In 1992, Coca-Cola saw an increase in Romania of sales by 99.2% and outsold Pepsi by 6 to 5. While Pepsi preferred to buy its equipment from Romania, Coca-Cola preferred to bring equipment into Romania. Also, Coca-Cola brought 2 bottlers to Romania. One is the Leventis Group, which is privately owned. Coca-Cola has invested almost $25 million into 2 factories. These factories are double the size of the factory Pepsi has in Bucharest. Moreover, Coca-Cola has a partnership with a local company, Ci-Co, in Bucharest and Brasov. Ci-Co has planned an aggressive publicity campaign and has sponsored local sporting and cultural events. Lastly, Romanians drink Coke because it is a powerful western symb!

ol which was once forbidden.

Finally as far as European markets are concerned there is Poland. Poland with a population of 38 million people, is the biggest consumer market in central and eastern Europe. Coca-Cola is closing in on Pepsi’s lead in this country with 1992 sales of 19.5 million cases versus Pepsi’s sales of 26.5 million cases. The main problems in this area are the centralized economy, the lack of modern production facilities, a non-convertible local currency, and poor distribution. However, since the Zloty is now convertible, Coca-Cola realizes the growth potential in Poland. After a company called Fiat, Coca-Cola is now the second biggest investor in Poland. Coca-Cola has developed an investment plan which includes direct investment and joint ventures/investments with European bottling partners. Its investments may exceed $250 million, and it has completed the infrastructure building. Coca-Cola has divided Poland into 8 regions with strategic sites in each of these areas. It has o!

rganized a distribution, which Coca-Cola has spent a lot of money organizing, extremely important to challenge Pepsi’s market share and to maintain a high level of customer service. All of this has helped Coca-Cola to close in on Pepsi’s lead in Poland.

Both Coca-Cola and Pepsi are trying to have their colas available in as many locations in Eastern Europe, but at a cost which consumers would be willing to pay. The concepts which are becoming more important in Eastern Europe include color, product attractiveness visibility, and display quality. In addition, availability, acceptability, and afford ability are the key factors for Eastern Europe. Basically if you think about it, the four bottom line practices of managers and companies are being practiced, Quality, Cost, Innovation, and Speed. Both companies hope that their western images and brand products will help to boost their sales. Coca-Cola has a universal message and campaign since it feels that Eastern Europe is part of the world and should not be treated differently.

As for the rest of the world, Mexico is another large factor in the soda wars. Mexican government recently freed the Mexican soft drink market from 40 years of price controls in return for a commitment from bottling companies to invest nearly $4.5 billion and create nearly 55,000 jobs over the next 7 years, which many feel was a result of NAFTA. Naturally, Mexico has become another battleground in the international cola wars. In Mexico, Coca-Cola and Pepsi command 50% and 21% of the market respectively. The cola war is especially hot here because the per capita consumption of Coca-Cola and Pepsi exceeds that of the United States (Murphy, 6). Mexico is the only soft-drink market in the world that can make this claim. The face off in Mexico is between Gemex, the largest Pepsi bottler outside the United States, and Femsa, the beer and soft drink company that owns the largest Coca-Cola franchise in the world. Femsa, however, may be at a disadvantage. Despite being part of !

the conglomerate group Vista, Femsa lacks financial punch because it plays only a small part in the conglomerate’s overall interests. The challenge in Mexico is to win market share through distribution efficiency (Murphy, 6). Keeping this in mind, each company is undertaking strategic efforts designed to sustain their shares of the Mexican market. 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.

“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.