Health concerns choke cola mkts in West, Pepsi & Coke bet big on Indian mkt. As much as $13 bn
Prime Minister Manmohan Singh may be taciturn but is always politically correct. Every word is carefully weighed before it is uttered. It is impossible to make him say anything even remotely controversial. Recently, after taking over the finance portfolio, he said in an interview that strategic investors were still bullish on India and “the pessimism in the media and the markets is far more than reality”. And to bolster his claim, he cited Coca-Cola’s proposed $5-billion investment in the country over the next eight years. Thirty-five years after it was sent packing from India by George Fernandes, the belligerently socialist industry minister of the Janata Party government (1977-79), Coke is the flag bearer of World Inc.’s faith in India.
Coke and PepsiCo have already invested close to $4 billion in the country. This makes them one of the largest source of foreign investment in the country. The two plan to invest another $8-9 billion in the next few years. India’s cola economy has become huge. In the last one year, one billion cases were sold. No fewer than 10,000 trucks ferry fresh bottles to retailers and empty bottles to factories every day. All told, there are 93 cola factories across the country. Both Coke and PepsiCo have been dragged into serious controversies in the country — pesticides in their beverages, ground water depletion et cetera — and there is a buildup of opinion against sugared beverages, especially it being consumed by schoolchildren, yet they march on relentlessly.
That’s perhaps because India is the final frontier for the two cola giants. In the US, opposition to colas is at an all-time high. Twenty-nine years after Steve Jobs lured John Sculley, the president of PepsiCo, to Apple by asking him, “Do you want to sell sugared water for the rest of your life? Or do you want to come with me and change the world”, New York Mayor Michael Bloomberg has said he will ban super-size colas from the city’s restaurants, movie theatres and stadiums. Disney has said it will not run any ad for junk food during shows for children. First Lady Michelle Obama recently disclosed that the only beverages allowed at White House during meals are milk and water.
Worse damage came last month in Washington when, during the National Soda Summit, Todd Putman, a senior marketing executive with Coke between 1997 and 2000, declared that it took him 10 years to “figure out that I have a large karmic debt to pay for the number of Cokes I sold across the country”. Coke, he said, wanted to displace not just rivals but all beverages by going for “share of stomach”, and he was pleased when the sale graph of one of the “sodas” overtook that of milk. Advertising campaigns, he added, were tweaked to promote consumption amongst African Americans and Hispanics. Coke reacted swiftly and said “share of stomach” was no longer its strategy, 41 per cent of its products were low- or zero-calorie, and it did not market any product to children below 12. But the controversy refused to die down. Business for the cola majors is growing just 3-7 per cent in the US. China ought to have been the next logical stop. But strong local brands (of Tingyi ad Wahaha Group) have made it a tough market to crack for Coke and PepsiCo. As a result, their share is below 25 per cent in China.
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India is a different story altogether. The two lord it over the market for beverages which has grown at 16-20 per cent per annum in the last three years to become Rs 23,000-crore in size now. And the upside is substantial: the per capita consumption is just 12 bottles per annum — way below the global average of 90. “Our business,” says PepsiCo India CEO (beverages) Gautham Mukkavilli, “currently services less than a quarter of the Indian population and that too for less than 5 per cent of their food and beverage requirements. There is a large set of untapped consumers waiting to be served, commonly termed the ‘Next Billion’.” Cola is where telecom was ten years ago — all set to take off. If half of Indians can afford a mobile phone, Mikkkavilli argues, they sure can also buy cola. India, Coke Chairman & CEO Muhtar Kent recently said in an interview, “aspires to be among the top five countries in the entire Coca-Cola universe by volumes”. (It is currently ranked 7th.) For PepsiCo, India has already broken into the ranks of top five markets worldwide. Yet, the country accounts for only 4 per cent of the world market. Looked at either way, the opportunity for growth is huge in India for both PepsiCo and Coke.
The cola economy has churned out at least 20 billionaires, most of them bottlers. Some of them do business well in excess of Rs 1,000 crore! The biggest amongst them is Ravi Jaipuria. His RJ Corp started out as a bottler for PepsiCo 20 years ago and now straddles ice-cream (Cream Bell), restaurants, real estate and several other businesses. “Our association (PepsiCo and his) has gone beyond the country and we handle bottling in 10-12 markets,” says Jaipuria with quiet satisfaction. As many as 500,000 people are dependent for their livelihood on the cola business in India, directly and indirectly — almost half the number of people employed by the business process outsourcing industry, the poster boy of the new India.
Many industries have come to rely heavily on Coke and PepsiCo for business. For instance, 3 per cent of the country’s sugar production is consumed by the two cola makers. “Ten per cent of our direct sales come from the beverage companies,” says Kishor Shah, director and CFO of Balrampur Chini, the country’s second-largest sugar maker. “They are one of our most important bulk customers.” Similarly, Hindustan National Glass sells huge volumes to both Coke and PepsiCo. “We derive 10 per cent of our business from the cola companies,” says Senior Vice-president Vinay Saran. “And in the last few years business has been growing.”
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And now they want to go deeper by getting closer to the consumer, devising lower price points and some innovative marketing. Thus, PepsiCo India CEO Manu Anand wants to have a bottling plant every 200 km, which will bring down the freight costs. He also wants to come out in pack sizes of Rs 5, a strategy used with disastrous effect by Coke many years ago — though volumes shot up, the losses too mounted; the strategy was jettisoned quickly. To make sure that he doesn’t end up in the same cul-de-sac, Anand is experimenting with paper cups to sell cola. The response, he says, has been great but these are still early days. Coke wants to expand at the bottom of the pyramid through cola powder sold in sachets. It has already launched Fanta Fun Taste, which needs to be emptied into a glass of water, for Rs 5. “There are 700 million people who live in villages. We need them to taste beverages and one way is to go through the powder route,” Coke CEO Atul Singh says.
There is also some innovation at play. Coke is experimenting with refrigeration alternatives which can work even when there are long power outages. It has already developed a solar refrigerator but the high costs could limit its usage. “Prior to this, we had introduced eutectic coolers that minimise the use of electricity,” says Singh. Coke executives say that in five years, at least 70 per cent of its 3 million retail outlets should have some kind of cooling equipment so that they can offer the product chilled.
Colas may not have a long life in India. Sooner or later, public opinion is likely to build up against them. “There are many challenges, the key being the perception that carbonated beverages are not healthy. The issue of depleting ground water continues to dog them. And the two have gone into unnecessary cola wars,” says Arvind Singhal, chairman of Technopak Advisors. While it is early to say that colas are headed the same way as cigarettes (health warning on packs, curbs on advertising, restriction on areas where you can sell, heavily taxed), Coke and PepsiCo need to hedge their risks. Realising this, both have launched non-aerated beverages (PepsiCo Tropicana, Coke Minute Maid). What they need to do is bring down prices by sourcing heavily from within the country.
So, two years ago, Coke flew in over 10,000 saplings from Sucocitrico Cutrali, the largest producer of oranges in the world, in Brazil. Now the saplings, which were grown in a greenhouse at Jalgoan in Maharashtra, are being shifted to orchards in the state. If the pilot project works out as planned, the oranges will be used for making 100 per cent pure juices. Coke hopes that eventually it will not have to import orange concentrate as it does now from as far away as Florida in the US and Brazil to make Minute Maid Orange. It has also focused its attention on mangoes. Though mango drinks are hugely popular, only 12 per cent of the country’s produce is worth processing into pulp. So Coke has, along with Jain Irrigation, developed technology to double the productivity of mango plantations. “Instead of mango trees of 18-20 feet, we have developed trees which are only 8-10 feet. They take less land space, so we can plant double the number of trees in the same space,” says a Coke executive. The investment in this project alone is $2 million.
PepsiCo, which is a big player in the snack food market with brands like Kurkure, Lays, Cheetos and Uncle Chipps, is working with over 24,000 farmers across nine states, a bulk of whom are marginal farmers with a holding of one acre or less, to source high-quality potatoes. “PepsiCo provides 360-degree support to the farmer through assured buy back of their produce at pre-agreed prices, quality seeds, extension services, disease control packages, bank loans, weather insurance, and the latest technological practices.” says a PepsiCo executive.
Will the party continue uninterrupted? Or will a Putman-like confession stir up public opinion here too?
Viveat Susan Pinto & Ajay Modi contributed to this article
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