Entr y into INDIA……… A lesson in GLOBALIZATION.
AN ABSTRACT It took half decade of negotiating, 20 debates in Parliamentand a monumental public relations campaign for Pepsi to enterIndia. Not exactly Pepsi-Cola, it was called Lehar Pepsi, a concessionto the anti-foreign lobby. It appear only in Jaipur, Kanpur, Bangalore and Punjab. Christopher Sinclair, the President of Pepsi-Cola International,called his company’s venture in India “An Historic Agreement.” PepsiCo’s move into the Indian market was made possible bythe company’s willingness to take a 36.9% share in aconglomerate called “Pepsi Foods Private Limited” It’s a co-owners were Punjab Agro Industries and Voltas asubsidiar y of TATA Group.
AN ABSTRACT PepsiCo agreed to set up fruit and vegetable processingplants, agriculture research stations, franchised bottlingoperations and snack-food factories using local potatoes andother ingredients. It is also planned to invest more than $1Billion in India by1998. First plants were built in nor thern Punjab State Pepsi Food Private Ltd had planned to call his flagship drink“Pepsi Era” but opponents challenge a name under a law. Lehar Pepsi,7-Up and Miranda got an unexpected assist whenGovernment decide in April 1989, to begin an enforcing a twoyear ban on the use of brominated use of vegetable oil.
"Convincing India that it needsWestern junk has not been easy." - A New Internationalist Magazine Article, commenting on Pepsis struggle to enter India, in August 1988
A Letter to PEPSI In 1988, the New York office of the President of the multibillion cola company PepsiCo received a letter from India. The company had been trying for some time to enter the Indian market without much success. The letter was written by George Fernandes (Fernandes), The General Secretary of one of the countrys leading political parties, Janata Dal.
A Letter to PEPSI"I learned that you are coming here. I am the one that threw CocaCola out, and we are soon going to come back into the government. If you come into the country, you have to remember that the same fate awaits you as CocaCola." George Fernandes The General Secretary – Janta Dal
PEPSI’S ENTRY INTO INDIA Before Before this Coca-cola had been thrown out of India in1977. Even in 1980’s economy was marked by high governmentinter ventions. Pepsi though, was looking India for couple of reasons, The US market seems to be reaching its saturation level. India was always a market that ever y MNC wanted to enter . .( reason ver y vast population). Urbanization familiarized Indians with global brands. Low per capita consumption of sof t drink, 3 bottles p.a. ascompared to 63 for Egypt, 38 for Thailand and 13 for Pakistan.
THE PROMISES - PEPSI’S ENTER May 1985, PepsiCo had joined hands with the R P Goenka(RPG) group, to begin operations in the nor th Indian state ofPunjab. Agro Product Expor t Ltd., planned to impor t the colaconcentrate and sell sof t drinks under the Pepsi label. Make its proposal attractive to the Indian government Objectives -revolved around promoting and developing theexpor t of Indian agro-based products The government rejected this proposal primarily on twogrounds:1. Did not accept the clause regarding the impor t2. Use of a foreign brand name (Pepsi) was not allowed RPG group too ended at this juncture
THE PROMISES - PEPSI’S ENTER Decision to link its entr y with the development and welfare ofthe state of Punjab. Fact that Punjab boasted a healthy agricultural sector Entr y on agriculture and employment New employment oppor tunities would tempt many of theterrorists to return to society... Focus on food & agro-processing only 25% investment for Sof tdrink Bring advanced food processing technology & Boost imageof Made in India to Foreign Market The Ex-Im ration 5:1 for 10 years 80% Expor t of Company & 20% Expor t of SelectedManufacturer 50K Jobs in India & 25K in Punjab, No Foreign Brand Namesused & Agriculture Research Center
PEPSI ENTERED Govt. Quite impressed with T&C Proposed In 1988 Finally Cleared by the Govt. JV – PAIC (Punjab Agro Ind. Corp.) & Voltas India Ltd. (TATA) JV Stake PEPSI – 36.89, Voltas – 36.11% & PAIC – 24% In 1989 Launched the Soft Drinks with Great Fanfare & Multi-Media advertising Campaing
Marketing Expert – PHILIP KOTLER Some year later Commenting, how the company used Mega Marketing to enter the Indian Market Pepsi bundled a set of benifits that won the support of various interest groups in India. Instead of relying on the normal four Ps added two Ps – Politics & Public Opinion Committing towards developing Rural economy & Bringing Technologies for Food Processing & water treatment Turned a lot of Votes in Pepsi Cos favor.
Promises Keep Some, Break Some! Pepsi began by setting up a fruit and vegetable processingplant at Zahura village in Punjabs Hoshiarpur district. Focus on processing tomatoes to make tomato paste Local varieties of tomatoes were found to be of inferiorquality Imported the required material for tomato cultivation. Agreements with a few big farmers The agro-climatic profile of Punjab was not exactly suitablefor a crop like tomato Chosen the state because farmers were progressive,landholdings were on the larger side, & water availability wassufficient Experts from the US had to interact extensively with thefarmers
PROMISES ARE MEANT TO BE BROKEN On payments by cheque, found out that 80% of the farmersdid not even have a bank account..! Croped Harvested 1990, Plant not been made operationalFarmer had to bear losses of 2.5 Millions Pepsi paid Rs. 0.75/Kg & Market Price was Rs. 2.00/Kg Fails to Creat Jobs, Promised for 50000 Jobs but by 1991 -783 Employed, 1992 – 909, & By 1996 – 2400 people as DirectEmployees. Pepsi Claimed Employed 26000 as IndirectEmployment Industry Commeted company included the small vendors whosold soft drinks as indirect employees. It could not be regardedas the employees of Pepsi Information revealed that more than 50% employees workingin its bottling business and not for food processing activities.
Promises Keep Some, Break Some! It also had major holding in Futura Polymers Ltd. Recylingplastic – a capital intensive firm. The use of name “Lehar Pepsi” also attracted muchcontraversey. Pepsi also failed to adhere its commitment to export 50% ofits production. It began exporting tea, rice, shrimps, glass bottles, leatherproducts, champagne as against fruit or vegetable basedproducts has always been exported. There was even a show cause notice to Pepsi company byMinistry of Commerce, to which company paid no attention. Luckily for Pepsi, it did not have to face criticism for long
India Liberalizes - A Boon For Pepsi In the early 1990s, the Government of India was facing a foreign exchange crisis. Organizations like the International Monetary Fund agreed to help the government. Condition that it liberalized the Indian economy. The Process included:removal of numerous restriction on foreign trade and increased the role of Private Equity in Indian market. Pepsi benefited from the economic changes in many ways. The Company took full Adavantage of New Economic Policy
India Liberalizes - A Boon For Pepsi Bought off its partners in Joint Venture. A Wholly- Owned subsidairy. PepsiCo Holdings India Pvt. Ltd. (PHI) – Devoted Soft Drinks Business. Changed Cola Name from Lehar Pepsi to Pepsi. Decision to sell off its Tomato Paste Plant to the Indian FMCG major, Hindustan Lever Ltd. (HLL). 1995 – Beverages business grew by as much as 50% 1996 – PHI – Pepsis turnover by Rs. 1.25 Billion, 1.5% Fruit & Vegetable Exports & 67% Plastic Exports 1997 – The Agro Research Center promised by the Company was nowhere in sight.
Pepsi Goes Farming - Finally Though Pepsi attracted a lot of criticism, many people felt there was a positive side to the companys entry into India. Pepsi’s tomato farming project shot up India’s tomato production from 4.25mn tonnes in ’91-92 to 5.44mn tonnes in ’95-96. Punjab’s overall tomato productivity went up from 28,000 tonnes to 250,000 tonnes and per hectare from 16 tonnes to 50 tonnes. The company offer its contract farmers, free of cost, some advanced equipments such as transplanters and seedling machines. It also set up agriculture research centers in Jallowal and Chano (Punjab) and Nelamangala(Karnataka). Though “Pepsi Agri Backward Integration Programme” the company encouraged Punjab farmers to cultivate potatoes with low sugar content.
AFTER ALL PEPSI WASN’T THAT BAD PEPSI’S ENTRY-INDIAN BENEFITS It extended it contracts farming initiatives to groundnuts in the year 2000. The project initiated in Punjab and then in Gujarat. By using improved technology from China, the per hectare yield improve from 1tonne to 3.5- 4.5tonnes. Pepsi invested additional Rs.3.75bn in spread over 3 years (2000-2002) in Karnataka over and above the existing investment of Rs.1.4bn Since its entry to India company already invested Rs.18bn by the year 2000. 8000 people were working for the Company
DOING BUSINESS ON ITS OWN TERMS…….. In 2000 Pepsi’s export added up to Rs. 3bn. It included processed foods, basmati rice, guar gums and even soft drink concentrate. Even by 2000 it could procure only 3,000 tonnes of potatoes p.a. as against its requirement of 25,000 tonnes. In 2002, company entered into various contract farming deals. It joined hands with Punjab Agri Export Corporation to process citrus fruits for its Tropicana project in August 2002. The company also initiated, first of its kind, organized and commercial seaweed farming in Tamilnadu. By 2003, Pepsi’s soft drinks, snacks, fruit juices and mineral water business had established themselves firmly in India.
Questions . . ?1. Why do Companies like Pepsi need to Globalize? What are the various ways in which Foreign Companies can enter a Foreign Market? What hurdels and problems did Pepsi face when it tried to enter India during the 1980s?
Companies like Pepsi Need to be global for the Following* Expand Sales- Increase the market for their production by tapping potential new countries* Minimize Risks- Globalization and International trade also helps in minimizing risks.* To leverage on technology* To increase production efficiencies* For diversification so as to reduce risks* To counter foreign investments by competitors* Minimize Costs and optimal resource utilization- By shifting operations in areas with cheaper labour and resources.
Companies can enter foreign markets through the following ways:* Export – Direct & Indirect* JV - Joint Ventures* Mergers and Acquisitions* Licensing, Franchising* Strategic Alliances* Management Contracts* Contract Manufacturing* FDI – Foreign Direct Investments
Hurdles faced by Pepsi* India being a closed economy till 1991, there was high level of intervention by the government in the corporate sector* Low awareness, demand and consumption for soft drinks. The per capita consumption was only 3 per annum* Foreign brand name could not be used* There was no liberalization and this not even 1% FDI was allowed.* Sensitive political and social problems in the country like terrorism* Cola concentrate – the major ingredient to make Pepsi soft drink could not be imported* Agriculture sector was the priority and thus Pepsi had to win the government by making promises of development in the agriculture sector
Questions . . ?2. Critically analyze the strategy adopted by Pepsi to sell itself to the Indian Government. Do you think the biggest Factor Responsible for the acceptance of its proposal by the Regulatory Authorities was its Projection of its Operations as the solution to many of Punjabs Problems? Why/Why Not?
Strategy Adopted by Pespi Promoting and developing the export of Indian Agro-based products, though it got rejected. Each cola import would be in return of exporting juice concentrate from Punjab. Development and Welfare of State. Bringing about Agriculture Revolution in state. Creating Employments. Terrorists to return to society. Punjab boasted a healthy agricultural sector
Strategy Adopted by Pespi Development of Areas it planned to operate in Directing major (75%) investment towards agricultural sector Focusing on food and Agro-processing. Boosting the image of Indian products in foreign market. Establishing Agricultural Research Centre. More emphasis on Exports than imports to improvise the balance of payment.
Reson for Acceptance of Proposal By the Regulatory Authorities Yes, Most of the commitments were related with Punjab therefore it is the biggest factor responsible for acceptance of Pepsi.
Questions . . ?3. How did the Company react to the changes in the Business Environment after the Liberalization of the Indian Economy in the early 1990s? Critically comment on the allegation that Pepsi deliberatly did not adhere to most of its commitments.
After Liberalization In 1994, it bought off its partner in venture i.e. Voltas and PAIC. Establishing wholly owned subsidiary PepsiCo Holding India Pvt. Ltd. Changed name from “Lehar Pepsi” to “Pepsi” Sold off its Tomato Paste Plant in 1995 Gradually reduce the contract farming Plastic Exports were 67%. Till 1997, the agro research centre was no where.
Allegation Failing to create jobs 50% of employee working for Concentrate and Bottling Business not for Food processing Business. Pepsi with Futura Polymers Ltd. were reducing the workforce and more machine oriented More lasting impression of “Pepsi” and “Lehar Pepsi”. Export of fruit & vegetable based products was negligible & started exporting Tea, Rice & Shrimps Failed its commitment to export 50% production. Products exported were same which use to happen earlier.
Questions . . ?4. Examine the Contract Farming initiatives undertaken by Pepsi in India and Explain the rationale for such initiative from the Companys Perspective. Why is it important for Multinational Corporations to Work towards the Improvement of the Economy of the Countries in which they Operate? What are the other various ways in which this can be done?
Contract Farming Initiative Increase in Tomato crop production Providing High yield seeds to increase the productivity in the tomato cultivation Offered advanced equipments (Free of cost) to increase the speed & efficiency Imported the required material for tomato cultivation
Rationale for Contract Farming Rationale behind the contract farming was that in one or the other way company insisted on the development of those crops which were directly or indirectly related to their businesses such as soft drinks, snacks, fruit juices & mineral water. Other rationale behind the contract farming was to increase their own business rather than any social welfare.
Rationale for Contract FarmingTaken initiative for Chilly farming Groundnuts production over paddy production Rice production Fruits & Vegetable FarmingEncouraging farmers to cultivate potato with low sugar content for chips.
Case Study - References Case written by A. Mukund. ICFAI Center for Management Research. Slideshare.net – agarwalpuneet11 Slides Project Reference: IIM Calcutta. Times Of India Washington Post.