1. Case Study on Pepsi
Sagar Singh8-Jun-13 1Sagar Singh

2. • Caleb Bradham, a New Bern, N.C.
pharmacist, created Pepsi-Cola in the late
1890s.
• In 1965, PepsiCo, Inc. was founded by
Donald M. Kendall, president CEO of
Pepsi-Cola and Herman W. Lay, CEO of
Frito-Lay, through the merger of the two
companies.
• In 1987 Coke & Pepsi have 40.3% & 30.2
% of the U.S market respectively.
• Had an image of soft drink
manufacturer and marketer.
• Apart from Pepsi cola co. and Pepsi cola
International, it had six other divisions
which had given it a commanding
presence in Food Business.
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3. • Soft drinks contributed 32 % & the restaurants 27 % to the total operating
profits in 1987 .
• Pepsi Co. acquired KFC chain in 1986, with this Pepsi became the owner of
the world’s largest restaurant chain which also includes Pizza hut and Taco
Bell with a total of nearly 16500 outlets in 1987.
• Pepsi had so far made inroads in 151 countries - 150 before India.
PepsiCo
23% of global sales
15% of profit from outside US
Looking for market expansion
Early in advantage in Myanmar
&
Vietnam – 90’s strategy
Coco-Cola
47% of global sales
80% profit from outside US
Presence in profit high
markets,
faster sales growth
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4. • Limca was the largest selling brand, cola
was the largest selling flavor accounting for
40 % of the market share Lemon drinks
followed cola with 31 % and orange drinks
had only 19 %.
• Lemon drinks were more popular in Metros.
• In 1977 a change at a centre led to the exit
of the Coca cola.
• Pure drinks, Delhi switched over to Campa
Cola after coke’s exit and by the end of
seventies, it was only Campa cola in the
Indian cola market.
• In 1980 another cola drink, Thumps Up was
launched by Parle but was objected by Pure
Drinks to its being called a cola drink.
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5. • The first national cola drink to pop up was
Double Seven.
• Thrill by Mc Dowell's in mid eighties and by
the late eighties there was Double cola which
entered the market with the USP of an
American Cola.
• The Indian soft drinks industry was
estimated to be worth Rs 900 crores.
• In 1978 Parle led the Indian soft drinks
market, in 1983 its market share was 43%,
44% in 1987 and in 1990 it reached to 70%
whereas its chief rivals Pure drinks ‘ share
had been declining in 1978 it was 28% , in
1983, 22% and in 1987 it was 21%.
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6. • International Trade used to constitute only 6% of
GDP in 1985
• Until the liberalization of 1991, India was largely
and intentionally isolated from the world markets,
“to protect its fledgling economy and to achieve self-
reliance”.•
• Foreign trade was subject to:
 import tariffs
 export taxes
 quantitative restrictions
• Foreign Direct Investment (FDI) was restricted by
BARRIERS like:
 upper-limit equity participation
 restrictions on technology transfer
 export obligations
 government approvals
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7. • The restrictions ensured that FDI averaged
only around $200M annually between 1985 and
1991; a large percentage of which came from
foreign aid, commercial borrowing and
deposits of non- resident Indians
• By the time PepsiCo began its negotiations,
the upper cap on equity-holding for foreign
investors was only 40% of an Indian enterprise
• Any foreign investment had a lot of political
sensitivity to it
• Negotiations between the government and
the foreign investors used to be public, long
and no action used to be taken during the
election time for the fear of backlash
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8. • In the late 1960s, the FDI policy restriction became
very visible
and largely stemmed from the fact that:
 There was a considerable drain of Foreign exchange
between 1956 -65 (largely due to no policy on
regulation of existing FDI in India)
 Because if the fear of foreign economic domination
(since in between 1957-67, MNCs came to control
one-fifth of India’s corporate assets, up from one-
tenth in 1957)
• Taking a broader perspective, India’s FDI policy in
1980s has
served as a double-edged sword.
• On one hand, it has fostered individual firms who
have become highly efficient and competitive by
international standards using their own R&Ds. On the
other hand, it has created stagnation in technological
development.
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9. However, these FDI regulations weren’t justified
because:
• The whole gamut of regulations had seriously
undermined the international competitiveness of
Indian Industry.
• It discouraged foreign companies with highly
sophisticated technologies from investing in India.
• Lack of competition had fostered widespread areas
of inefficiency and technology backwardness.
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10. 1977
PepsiCo sees opportunity in India after Coca-cola departed
1985 First Attempt
Proposal with R.P. Goenka group. The proposal involved:
• Export of fruit juice concentrates from Punjab in return
for the Import of cola concentrates.
• The deal offered was 3:1 export import ratio.
Outcome - rejected
1985 Second Attempt
Proposal along with Tata Industries and Punjab Agro Industries
Corporation (PAIC). Proposal included:
• Initial Investment of $15 Million
• Agro Research centre (costing Rs 1.55 crores).
• A potato and grain based processing unit (costing Rs 8 crores).
• A fruit and vegetable processing unit (costing Rs &.5 crores).
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11. 1985 Second Attempt (contd.)
• The Pepsi co would have an equity holding of 39%, PAIC, 20%and Voltas , 24%. The
balance was to be placed privately from loans.
• Imports would be 37 Crs and exports a minimum of Rs 194 Crs over a 10 year period.
• Benefits and advantages of proposal includes better market for rice, wheat and fruits
in Punjab
• Location of company in politically volatile region of Punjab (due to Khalistan
terrorism)
• Creation of 25,000 jobs in Punjab and 25,000 more in other parts
• Technology for better utilization of Punjab Fruit production by prevention wastage
(30% )
• Make local companies to grow and distribute more/better to compete with foreign
companies who have significant comparative advantage
1986 through 1988
• 20 Parliamentary Debates
• 15 review Committees
• 5000 articles in Press
• Allegations of PepsiCo and CIA nexus
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12. 1986 through 1988
• Indian governments Opposition to foreign capital investment in areas where
India lacked expertise
• Governments concern that PepsiCo's proposal of production of processed food
(chips,
fruit drinks, sauces) would displace what are home prepared items and hurt India’s
BOP
• Indian Govt. deliberates. Pepsi continues to negotiate
1988
• Indian government and PepsiCo reach an agreement. The conditions were:
 EXIM ratio of 5:1. About $150 million of export to be done over 10 year period
 Soft drink sale limited to 25% of total sales
 Ownership limited to 39.9%
 75% of soft-drink concentrate to be exported
 The JV will setup agricultural research center
 The company could sell Pepsi Era, 7-Up Era and Miranda Era
 The JV will setup fruit and vegetable processing plants
• Coca-cola applies to re-enter Indian market.
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13. 1989
• Cokes application is rejected
• V.P Singh becomes Prime Minister of minority government
1990
• Pepsi begins production of Snack Food. Soft drink production to commence during
summer.
• V.P. Singh expresses concern over FDI. Announces to reexamine PepsiCo agreement.
• US government threatens to impose trade restrictions (under Super 301 legislation)
on India for its negative FDI regulations
• PepsiCo lobbies FOR India. US backs out and pepsi gains goodwill through tax sops
• Pepsi agrees to place a new logo of Lehar with its insignia.
1991
• P.V. Narsimha Rao becomes PM. Promotes FDI and LPG.
• Newly formed Foreign Investment Promotion Board allows 51% foreign ownership of
companies.
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14. Concessions made seem unfavorable only when compared
to post-liberalization age. Considering the points during
the ensuing period of PepsiCo's negotiations with India the
concessions seem like a good bet.
• 40% max cap of foreign ownership
• Only domestic competition in soft-drink industry
• Will gain an early entrant advantage for a foreign
soft-drink player
• Incredible potential due to reasons like:
 Low per-capita consumption of Soft-drinks
 Population
 Size and Purchasing power of Indian middle
class
 Estimated $300 million market in near future
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15. • Pepsi would benefit in near-long and long term with most
of the concessions like:
 $150 million exports is achievable with 10 year cushion
seeing that it was a growing market
 Although soft-drink sales are capped, Pepsi had other
avenues like processed food, fruit-juices and its chain of
restaurants like KFC and Pizza hut. Even globally, soft-drinks
used to contribute 32% to its profits globally.
 Already a max cap of 40% for foreign ownership. So 39.9%
is not a major concession.
 With the estimated market size in India, Pepsi would have
to invest in concentrate manufacturing in a large scale. There
was also a good demand around India for soft-drinks. So 75%
of concentrate export is achievable as it complements the
other concession that about $150 million exports have to be
achieved.
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16. • Setting up agricultural research center is a good social
initiative. It would boost Pepsi’s image in India. Pepsi
could also derive benefits from this as it would feed into the
processed foods business of Pepsi.
• Setting up of Fruit and Vegetable processing plants would
enable Pepsi to fulfill its other social commitment of
providing employments. Looking that the proposal was to
set these up in Punjab where the land is fertile and farmers
were looking for different avenues in farming seeing that
income from wheat was falling. Also importantly, fruit
production was increasing but there was considerable
wastage of about 30%, These plants would enable better
usage of production.
• Pepsi Global branding strategy is to target
YOUNGISTHAN The YOUTH POPULATION in INDIA
would be huge in numbers in the coming years.
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17. Governments’ Demands from Coca-Cola:
1. Reduce the equity holding – 100 to 40%
2. Divulge its formula
3. Use dual trademark
Coca-Cola was NOT THANDA with the two latter
demands and exited India.
Did they make the right decision seeing how things
unraveled for Pepsi?
We give it a Thums Up!
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18. Coke heavily markets itself on the secrecy and superiority of its formula.
This has been its global mantra.
NOBODY LIKES TO GIVE THEIR SPIRIT AWAY.
Consent to divulge its formula for one country would impact a global stand
of Coke. This is a deal breaker. Coca-Cola could not have agreed to it and
are justified to end their India Operations.
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