Cola majors bet on the fizz in India

Cola majors bet on the fizz in India
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First Published: Mon, Apr 09 2007. 02 56 AM IST
Updated: Mon, Apr 09 2007. 02 56 AM IST
Around four months ago, PepsiCo India Holdings Pvt. Ltd hosted a big party for its employees. According to a source close to the development who does not wish to be identified, this was a high-profile event to which staff from across the country was invited. The party was meant to celebrate the milestone of the company’s Indian operations finally breaking even and turning profitable. Officials at the company, however, insist that PepsiCo broke even some time back and that its business is now profitable at all levels.
PepsiCo’s rival Coca-Cola India admits it has just turned the corner. According to John Ustas, CEO, Hindustan Coca-Cola Beverages Pvt. Ltd, the bottling arm of Coca-Cola India, the operations turned cash positive last year, after a long time. The company’s consolidated losses in 2005 stood at around Rs1,000 crore.
India has been one of the most challenging markets for the world’s two largest soft drinks manufacturers. According to Datamonitor, a UK-based consumer research company, the carbonated soft drinks (CSD) segment, which accounts for the bulk of the revenue of both companies, grew at a compound annual growth rate (CAGR) of only around 1% between 1999 and 2006. An analysis by the agency revealed that the soft drinks industry in India, which includes CSDs, juices, water and other drinks, grew 6% from $3.15 billion (about Rs13,700 crore) in 2004 to $3.34 billion in 2006. Of this, the CSD segment grew from $1.31 billion to $1.32 billion.
Yet, the two companies are gung- ho about the Indian market and their growth prospects. “The overall environment for business (in India) looks very positive now. The economy is growing at a fast pace and so are incomes. Middle-class consumers have shed all guilt about consumption and after a long gap, rural markets are also looking up,” says Atul Singh, CEO, Coca-Cola India. Singh, a Coca-Cola veteran who has spent more than a decade in various global markets, including Europe and China, came back to India 15 months ago. When he took over the reins of Coca- Cola India in January 2006, the atmosphere, both within the company and without, was far from conducive. On the one hand, the pesticide controversy had derailed the business (Delhi-based non-governmental organization Centre for Science and Environment had alleged the cola drinks of both Coke and Pepsi contained pesticide residues). On the other, the company’s rural foray had flopped, and its CEO Sunil Gupta and almost the entire leadership team had quit.
Things are a lot better for Coca- Cola and Singh today. “The consumption environment, today, is absolutely right for an indulgence business like ours,” he says.
Singh’s counterpart at PepsiCo, Sanjeev Chadha, is equally enthusiastic, but a little circumspect. “I am quite optimistic about our growth in the near term. Given our past experience, I am a little cautious, too,” he says. Chadha is only three months old in the job, but is an old PepsiCo hand. Circa 1989, he was part of the start-up team of PepsiCo in India. “Last year (2006) was quite encouraging, and going forward, we expect the business to grow faster,” he adds.
The two companies are once again firming up their growth plans. They are launching new drinks within their existing portfolios as well as entering new segments and gradually trying to expand their footprint as well; the companies are also making fresh investments in new capacity building and marketing. Coca-Cola recently announced its foray into the juice segment with the launch of its Minute Maid brand and is likely to unveil at least two more drinks this month—one in the carbonated segment, and the other in a new category. PepsiCo has announced ambitious plans to launch traditional drinks such as nimbu-paani, aam-panna and several milk-based drinks over the next three years, besides adding new variants to its existing juice line-up under the Tropicana brand. Both companies are also talking about launching value-added water products. The two are trying to strengthen their distribution networks as well. Ustas claims to have doubled his workforce from 1,000 last year to 2,000 this year. “We have presence across around 9,00,000 retailers, but we soon expect to penetrate through to 15 million across the country,” he says. The plan will entail an investment of around $250 million. “This is in anticipation of high growth we expect over the next two to three years,” he adds. Though the private bottlers for both the companies say their plants are still not working at full capacity, the companies indicate they are looking at adding new capacities, too. (Plant capacities were increased when the two companies took the plunge into the rural markets, as they expected the demand to double. The rural strategy, however, failed miserably and both players had to reduce their production.)
Pepsi’s Chadha says the company will add new capacities in the juices and other non-carbonated drink segments. But in the midst of these expansion plans and new growth strategies, what is most surprising is the two companies’ firm focus on CSDs. Both Singh and Chadha insist that despite the launch of new healthy and alternative thirst-quenching drinks, CSDs will remain their bread and butter for the next three to four years. That flies in the face of prevailing logic.
Reports, not just from India but from across the globe, suggest that consumers are increasingly becoming health conscious and are turning away from CSDs to healthier alternatives. Recent media reports also suggest that the juices and non-cola segments are growing faster than CSDs. Singh and Chadha, however, maintain that consumers continue to drink CSDs and will keep doing so. “The rate of growth in juices and other non-carbonated drinks segments is higher because they are growing on a much smaller base,” points out Chadha. Singh says while the consumption of healthier options may increase, it may not necessarily happen at the cost of CSDs. According to Punita Lal, executive director, marketing, PepsiCo, CSDs contribute two-third to the total sales of the company and the rest comes from water, juices and other functional drinks. “This, at best, could become 50:50 over the next three to four years,” says Chadha.
Datamonitor’s analysis suggests that in the next three years, CSDs and water will account for around 87% of total soft drinks sales. “By 2010, the soft drinks industry is likely to grow to $3.8 billion and carbonates and water are likely to contribute 36% and 51% to it, respectively,” says Puneet Bansal, senior business analyst, Datamonitor. According to the firm, the fastest-growing category in the industry will be that of bottled water (likely to grow 3.5% CAGR between 2006 and 2010), followed by energy drinks (10.7% CAGR ). While Datamonitor doesn’t expect the juice segment to grow by much, it says CSDs will grow marginally, at around 1% CAGR over the next three years. “Growth in the juices category has been lower than the industry average and is also not expected to fare any better in future. And that’s mainly because Indians prefer fresh juices to packaged ones,” says Bansal.
Along with strengthening their CSD portfolio, the two companies have also upped their advertising and marketing budgets this year. While Pepsi invested heavily in the ongoing World Cup cricket in the hope of building on the consumer frenzy around the game (it also launched two limited editions for the event—Mirinda Sorbet and Pepsi Gold), Coca-Cola has spent generously on glitzy commercials filmed in exotic locales with Bollywood stars such as Akshay Kumar, Hrithik Roshan and Amir Khan. Put together, the two companies are likely to spend Rs150 crore on mainstream advertising, up from around Rs130 crore in 2006 and around Rs100 crore in the previous year. Coca- Cola, which had maintained a low-profile between 2003 and 2005 because of the problems it was facing, is likely to account for 50% of this. “The two companies’ fresh focus on increasing their share of voice is indicative of the fact that their confidence is back,” says the creative head of an advertising agency that handles one of the two accounts.
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First Published: Mon, Apr 09 2007. 02 56 AM IST
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