PepsiCo in India Case Study Presentation - IIM Calcutta

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This Case Study presentation details PepsiCo venture in Indian territory and what was India\'s FDI policies then. Please email me at info@ankursharma.co.in if you require this presentation

This Case Study presentation details PepsiCo venture in Indian territory and what was India\'s FDI policies then. Please email me at info@ankursharma.co.in if you require this presentation

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  • 1. • 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.
  • 2. • 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 Coco-Cola 23% of global sales 47% of global sales 15% of profit from outside US 80% profit from outside US Looking for market expansion Presence in profit high markets, Early in advantage in Myanmar & faster sales growth Vietnam – 90’s strategy
  • 3. • 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.
  • 4. • 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%.
  • 5. • 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
  • 6. • 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
  • 7. • 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.
  • 8. 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.
  • 9. 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).
  • 10. 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
  • 11. 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.
  • 12. 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.
  • 13. 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
  • 14. • 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.
  • 15. • 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.
  • 16. 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!
  • 17. 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.
  • 18. The Ninth Avatar: Ankur Sharma – info@ankursharma.co.in / +91-9886403253 Sriharasha Nagaraj Sudheendhra M Mangala N Shruthi Shridhar Sujeeth Kumar Suresh S V Reuben Thomas Ajay