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Coke vs. Pepsi: Fighting for Foreign Markets Introduction 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. However, 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,

international marketing can be very complex. Many issues have to be resolved

before a company can even consider entering uncharted foreign waters. This

becomes very evident as one begins to study the international cola wars. The

domestic cola war between Coca-Cola and Pepsi is still raging. However, the

two soft-drink giants also recognize that opportunities for growth in many of

the mature markets have slowed. 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 in the

developing world, 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 to make Coke the

early bird in many of the major foreign markets. At the height of World War

II, Woodruff proclaimed that Awherever 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. In the intervening 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. This paper seeks to examine these

markets and the opportunities and roadblocks that lie within each. Coke and

Pepsi in Russia: 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 was a landmark agreement and gave Pepsi the first-mover 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. Also, Pepsi must counter trade its concentrate with

Russia’s Stolichnaya vodka since rubles are not tradable on the world market.

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), Coca-Cola sells for Rb450. For the economy size, Pepsi

sells 2 liters for Rb1,300, but Coca-Cola sells 1.5 liters for 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. Coke and Pepsi

in Romania: Romania is the second largest central European market after

Poland, and this makes it a hot battleground for Coca-Cola and Pepsi. When

Pepsi established a bottling plant in Romania in 1965, it became the first

U.S. product produced and sold in the region. Pepsi began producing locally

during the communist period and has recently decided to reorganize 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 symbol which

was once forbidden. Coke and Pepsi in The Czech Republic: The key to success

in the Czech Republic is for both Coca-Cola and Pepsi to increase the annual

consumption of soft-drinks. Per capita consumption of beer, the national

drink in the Czech Republic, exceeds that of soft-drinks by 3 to 1(165 liters

of beer per capita of beer versus 50 liters of soft-drinks). Both companies

are trying to increase their market share because distribution for both

products is no longer as limited as it was in 1989. Coca-Cola and Pepsi face

stiff competition from domestic producers, whose products are lower-priced.

Because of this, domestic producers have a market share of about 60%.

Coca-Cola and Pepsi each have a market share between 10%-25%. Another problem

in the Czech Republic is that many people think that Coca-Cola and Pepsi are

produced by the same company. Recently, Pepsi opened an office in Prague.

Coca-Cola, on the other hand, has been trying to convince local shop owners

to stock and circulate its product. The main apprehension may be that the

price of Coke is twice the price of locally produced colas and a little

higher than Pepsi. Coca-Cola has arrangements with 4 domestic bottling

companies and acquired a new plant in 1992 in which it has invested almost

$20 million. This may be one reason why Coca-Cola is closing in on Pepsi’s

lead in the Czech Republic. Coke and Pepsi in Hungary: Traditionally, Pepsi

held the lead in Hungary with a strategy of putting the infrastructure in

place, upgrading it, and then marketing to the consumer. Pepsi plans to

invest $115 million which includes acquiring FAU, an Eastern European

bottler. Because of this, Pepsi will have greater control over distribution

and quality. In May of 1993, Pepsi introduced Pepsi Light and had outdoor and

television advertising blitzes. Coca Cola, on the other hand, introduced Coke

Light in the beginning of 1993, but did not mention its product name during

the first few weeks of promotional advertising. Coca-Cola’s strategy was to

advertise internationally for Central Europe. Hungarians saw the ‘Always

Coca-Cola’ commercials, along with the rest of the world, in April 1993. In

1992, Coca-Cola lead Pepsi. In addition, Coca-Cola participates in counter

trade agreements with Hungary. Coca-Cola trades its concentrate for glass

bottles which are exported and then sold to bottlers. Coke and Pepsi in

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 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. Moreover, it has organized a distribution network to make sure

its products are widely available. This distribution network, which Coca-Cola

has spent a lot of money organizing, is extremely important to challenge

Pepsi’s market share and to maintain a high level of customer service. Also,

Coca-Cola, like Pepsi, signed counter trade agreements with Poland. Both

trade their concentrate for Polish beer. All of this has helped Coca-Cola to

close in on Pepsi’s lead in Poland. Conclusion on Eastern Europe: 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 (meeting local demand by increasing production

locally), acceptability (building brand equity), and afford ability (pricing

higher than local brands, but adapting to local conditions) are the key

factors for Eastern Europe. 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. Currently, it is difficult to say who

is winning the cola wars since the data from the relatively new market

research firms focusses 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. While both

companies have been in Eastern Europe for many years, the main task now is to

develop the market. Coca-Cola and Pepsi are in a dogfight, but both will end

up as winners. In the end, the ultimate winner will be the Eastern Europeans

who will have access to some of the world’s best soft drinks. Coke and Pepsi

in Mexico: The Mexican government recently freed the Mexican soft drink

market from nearly 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. 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

Grupo 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). With this in mind,

each company is undertaking strategic efforts designed to bolster 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 door 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. Coke and

Pepsi in 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 cities. 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 1996,

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 ploughing profits straight back into

expansion. They reason that any returns will not come until the next century.

Coke and Pepsi in Sandia Arabia: In Saudi Arabia, 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 the

desert kingdom. 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 began 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. Recently, it shipped some 20,000 red

coolers into Saudi Arabia over the last 9 months. 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 factory 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. Coke and Pepsi in 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 stalwart and longtime Gandhi

supporter, the Janata government demanded that Coca-Cola transfer its syrup

formula to an Indian subsidiary (Chakravarty, 43). Coca-Cola balked 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 the 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. Conclusion: The new battleground for the cola wars is

in the developing markets of Eastern Europe (Russia, Romania, The Czech

Republic, Hungary, and Poland), 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 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.

323


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