How Colas lost their mojo: Amid

downturn, Coca-Cola, Pepsi face

challenge from local companies
Coca-Cola and Pepsi are under siege as consumer preference shifts to low-sugar, low-calorie soft
drinks from a host of domestic companies.
Sumant Banerji and Ajita Shashidhar New Delhi Print Edition: June 4, 2017

They lorded over the Indian soft drink market for almost three decades, often
setting the rules of the game. Indeed, after PepsiCo entered India in 1989 and
Coca-Cola re-entered via a dramatic launch at Agra in 1993, cola had become
synonymous with beverages and vice versa. The two US giants applied every
tactic in the book to coax, cajole, threaten, acquire or smother local and
international rivals. Within a decade, they had cornered nearly all the
organised carbonated beverage market between them. Then they battled each
other in the bitter cola wars every summer.
But in the past couple of years, the hunters are being hunted in India's
Rs60,336 crore soft drink market. Ironically, PepsiCo and Coca-Cola find
themselves on the same side of the fence as old and new rivals - Dabur, Parle,
Hector Beverages (Paper Boat), ITC, Manpasand Beverages, and a host of
others - have managed to push the cola giants into a corner through some
innovative healthy beverages, smart positioning and deft moves in the
marketplace. Not just that, PepsiCo and Coca-Cola failed to see through the
enormous opportunity in milk-based beverages and also couldn't protect their
market share in packaged drinking water, even as their attention got diverted
to fending off charges of depleting water tables at their plants across the
country.
According to Euromonitor, between 2014 and 2016, Coca-Cola India's market
share has shrunk from 35.5 to 33.5 per cent while PepsiCo's has gone down
from 23.2 to 22.2 per cent. Interestingly, as consumption switched
dramatically to healthy beverages, the duo, ill-equipped to tap the new
opportunities, have been losing share in a growing market. Their combined
share is now down 3 percentage points to 55.7 per cent in a market that has
grown from Rs44,624 crore to Rs60,336 crore and continues to grow at a
healthy 9.7 per cent per annum. The share of carbonated beverages,
commonly referred as colas, was 51 per cent at its peak in 2014 - it's now down
to 46 per cent.

This trend is mirrored in the bottled water segment, which has grown 19 per
cent in the last five years and at Rs14,270 crore, commands a 24 per cent share
of the overall soft drink market. Parle Bisleri is the outright market leader with
a 24.6 per cent share while Coca-Cola's Kinley at 17.2 per cent has lost 2
percentage points since 2014. PepsiCo's Aquafina has stagnated at 10 per cent.
True, Coca-Cola and PepsiCo have retained their hold in carbonated beverages
with a near 96 per cent share but, unfortunately for them, the segment is
lagging overall industry growth. The segment has grown at barely 3.9 per cent
between 2011 and 2016. They entered India to tap the potential offered by the
abysmally low per capita consumption of soft drinks in the country. And
though the per capita consumption has grown from 1.2 litres in 1990 to 13
litres per day today, to their dismay, the bulk of the new growth hasn't come
their way. Effectively, the duo has failed to tap a substantial part of the
Rs16,000 crore growth, largely in the healthy beverages category, in the past
two-three years. And it's getting tougher by the day. The major beneficiaries
have been Parle Bisleri and Parle Agro whose combined market share in soft
drinks has gone up from 15.8 per cent in 2014 to 17.7 per cent last year. In a
highly fragmented market, the rest - including Dabur, UB Group, Dhariwal
Industries, Narangs Hospitality, ITC, Bisleri, Parle Agro and Dharampal
Satyapal among others - have together risen 1 percentage point in the last
three years. Then, there are the smaller players led by Manpasand and Hector
Beverages that are also slowly making their presence felt.
Both PepsiCo and Coca-Cola have responded with a range of their own in
healthy beverages but the slide in market share is yet to be arrested. While
Coca-Cola launched three non-carbonated beverages (Aquarius, a low calorie
beverage; Vio, a milk-based beverage and Zico, a coconut water brand),
competitor PepsiCo, has promised to bring down the calorie content in two-
thirds of its beverage portfolio to 100 or less calories per 12 ounce serving
(approx 350 ml) by 2025. It has already launched 7UP with 30 per cent less
sugar. While these launches may seem like strategic moves of the two cola
giants to strengthen their position in India, the truth is these are desperate
tactics to retain and grab market share.
Their delayed entry into the dairy segment is a case in point. The packaged
dairy business in India is an even bigger opportunity than all soft drinks -
aerated beverages and juices put together - valued at Rs70,924 crore in 2016.
Coca-Cola ventured into the category last year with 'Vio' while Pepsi has only
recently ventured into this segment with their ready to drink flavored oat milk
offering. Experts believe the delay will make it harder for them to start
producing blockbuster successes in healthier beverages. The tepid response to
Vio only underlines that.
The plight of the Cola giants is evident in their finances. In fiscal 2016, Coca
Cola India suffered a 6 per cent decline in net profit while its total income was
nearly stagnant at Rs1,833.86 crore. Its operating margin has slipped from 38
per cent to 28 per cent since fiscal 2014. For PepsiCo, the going has been even
tougher. Its net loss in FY 2016 widened to Rs554.2 crore from Rs154.83 crore
in the previous fiscal while total income declined 15 per cent. Its operating
margin has progressively declined from 4.95 per cent in 2013/14 to 1.73 per
cent in 2015/16.

WHO MOVED MY COLA?

The growing consumer preference for healthier food and beverages and the
excessive use of sugar in their soft drinks has played against the duo. But the
two companies' complacency and reluctance to let go off their dependence on
carbonated beverages has also proved detrimental.
Only four years ago, PepsiCo had launched a stronger flavoured cola, Atom, in
its bid to take on Coca-Cola's Thums Up. It bombed spectacularly, providing
the first indication that the market was not ready for another aerated
beverage. "It is a case of clinging on to carbonated beverages and not moving
on. Both Coke and Pepsi still believe that the low per capita consumption of
carbonated beverages in India could work for them, but the consumer has
changed," points out former head of marketing of Coca-Cola India, Shripad
Nadkarni (currently, co-founder of food start-up, Foodlix) "Colas are not
fashionable anymore. They are considered detrimental to health and the cola
majors have to understand that," adds Ajimon Francis, Country Head of brand
valuation company, Brand Finance.
The cola giants are in a dilemma. Venkatesh Kini, the former head honcho of
Coca-Cola India, in an interview with Business Today a fortnight prior to his
exit, candidly admitted that there has
been three consecutive years of
downturn for the company because of a
slowdown in rural consumption and
steep increase in taxation. The Union
Budgets of 2015 and 2016 increased
excise duty on aerated beverages by 3.5
per cent and that forced manufacturers
to increase prices. To make things
worse, Chief Economic Advisor Arvind
Subramanian has also recommended a
40 per cent "sin tax" on the category
under the Goods and Services Tax
(GST). If that happens, PepsiCo and
Coca-Cola India will be the worst
affected as the consumer shift from
colas may get accentuated. "The
consumers, their choices today are much more precise and varied. We are
therefore transitioning ourselves to being a company that can offer a range of
beverages for life. Our innovation pipeline includes products which are non-
carbonated and also products that are diets and lighter versions of our
carbonated range. Today, about 35-40 per cent of our business is from our
non-carbonated portfolio," points out T. Krishnakumar, President, Coca-Cola
India and South West Asia, who recently stepped into the shoes of Kini.

The cola giants are clearly in a mood to admit their strategies need immediate
overhauling. Vipul Prakash, Senior Vice-President, PepsiCo India, also agrees
that dependence on a certain category is a myopic way of looking at a business.
"The need to build the portfolio is very clear. Today, the consumer is exposed
to more brands, unlike in the past where he only had a carbonated drink for
every occasion."
While the company has already taken the first step of reducing sugar content
in its products with 7UP, will it be able to do so with Pepsi as successfully?
Prakash is unsure. "Obviously, Pepsi will be tougher. It's very difficult for any
sweetener to taste like full sugar. So, don't expect it to be the same. Perhaps
the classic version can also continue and we could do a Pepsi light, we don't
know." Prakash also admits that Pepsi could have done better with its juice
brand, Tropicana. Juice as a category has been growing at a robust 16.8 per
cent. Despite getting into the market early in 1998, Tropicana has registered a
sharp decline in market share - from 33.5 to 28.7 per cent (as per Nielsen)
between March 2016 to February 2017 while Dabur is the market leader with a
share of 56.3 per cent. "Dabur has done a good job over the last few years in
terms of their innovation. We are also doing that but I think we need to step
up our game," admits Prakash. While Coca-Cola's mango beverage Maaza is
the market leader in the mango juice category, its other juice brand, Minute
Maid, has been a slow burner.
The new Coca-Cola India head stresses that his company is taking steps to
reduce its dependence on carbonated beverages but says his immediate
concern is the possibility of heavy taxes being levied on carbonated beverages,
which is the companys bread and butter. "The best way would be to tax based
on sugar levels and not carbonation. Carbonated beverages is an affordable
indulgence just like a chocolate or biscuit. If the prices are too high, the
consumption will go down, consumers may end up getting their beverage
needs from somewhere else," points out Kini. In fact, Indra Nooyi, PepsiCo
Chairman and CEO, during her recent visit to India met Finance MinisterArun
Jaitley to pitch for a lower rate of taxation for beverages under the soon to be
implemented GST. Sugar carbonated beverages are likely to fall under the
highest 28 per cent category of taxes. Worse, there are murmurs that an
additional 15 per cent cess, reserved for those products which the government
wants to discourage, may also be slapped on this category of beverages.
HOMEGROWN CHALLENGERS
While the two cola giants are struggling to cover lost ground, homegrown
beverage makers are slowly and steadily making headway. There are
established companies such as Dabur, ITC, Parle Agro, Bisleri as well as
newcomers such as Global Consumer Products, Hector Beverages, Raw
Pressery. Then there are regional players including Manpasand Beverages and
Caavinkare. Each of these companies has its unique positioning but all of them
are focused on fruit-based beverages and not colas. The likes of Parle Agro and
Manpasand Beverages are growing their mango beverage business from
strength to strength and at the same time foraying into carbonated fruit
beverages. It is a category where Parle Agro has the first mover advantage with
its brand Appy Fizz. The company has recently launched Frooti Fizz, a
carbonated variant of its popular mango drink, which has 11 per cent fresh
fruit extracts (as opposed to a Fanta or a Mirinda, which are fruit flavoured
beverages). "The beverage category has opened up as consumers are willing to
experience new products and are looking for variety," says Nadia Chauhan,
Joint Managing Director, Parle Agro.
Similarly, Hamdard recently ventured into the ready-to-drink juice segment,
with Rooh Afza Fusion - an extension of its 100 year old brand Rooh Afza -
which not only has fresh juice
content of 20 per cent, but also
retains the flavour of the parent
brand. Dabur, on the other hand,
not only has the early mover
advantage in juices, it has the lead
in terms of innovations. From a
variety of fruit juices to healthy
vegetable juices, Daburs portfolio
is much larger than Tropicana or
Minute Maid. It has recently
launched a mass mango juice
brand, Ju.C. to compete with
Frooti and Mazaa.
These companies benefit from
being a local company. Not only
do they understand local tastes
better, they are also able to
innovate faster. "Domestic
companies always have faster decision making. That aids innovation. If I have
to take permission from Atlanta or Connecticut or wherever, there will be
time-lag. Also, the guidelines in these international companies are very strict.
So half of their proposed innovations gets killed there," points out K.K.
Chutani, Executive Director, Dabur India. Concurs Mansoor Ali, Chief Sales
and Marketing Officer, Hamdard. "When we were working on Rooh Afza
Fusion we test marketed several versions. Some which didnt work and we
pulled it out at once. Had we been bound by global diktats, I dont think we
could have been so flexible," he says.

The other company which has created a niche on the back of innovations is
Hector Beverages, a company founded by former Coca Cola India employees.
Though it is not yet profitable, by touching the ethnic Indian tastes with juices
such as Aam Panna, Thandai, etc, through its Paper Boat brand, Hector has
managed to get premium consumer mindspace. "Acquiring speed is a tough
one for a large company. The main-stay of the business is their core
carbonated beverages. They will always have a small team for innovation, but
whenever there is a strain in the business, that segment suffers as the focus is
on growing the core business more," says Parvesh Debuka, marketing head of
Paper Boat for Hector Beverages. In every FMCG segment in India,
homegrown players are not only successful but smarter in their go to market,
says Arvind Singhal, Chairman of business consultancy firm Technopak. "It is
not a matter of desi versus videshi, but they (Pepsi and Coke) are bound by
their own legacy and are not able to think Indian. A Paper Boat will give you
the taste that consumers want and can relate to."

THE FRUIT DRINKS REVOLUTION

Both PepsiCo and Coca-Cola have made little headway in the segments that
have found favour with consumers and are growing faster-juices and dairy.
The packaged juices segment in India - categorised into three sub segments
fruit drinks, juices and nectar - has grown at a CAGR of 16.8 per cent over the
last 5 years. At Rs16,207 crore in 2016, it accounts for 27 per cent of the soft
drink market. While Pepsi has the advantage of a bigger portfolio-Slice in fruit
drinks and Tropicana in juices and nectar-it is clearly losing out to local rivals
Parle Frooti and Dabur Real respectively. Tropicana has lost 5 percentage
points in the last one year at the hands of Dabur, ITC and Hector Beverages.
Coca-Cola's fruit drinks Maaza and Minute Maid does give them a significant
33.8 per cent share in juices but it does not have a presence in the other
categories. Juices and nectar have higher fruit content and are considered
healthier. "Ultimately the market will evolve and consumers will move
towards this category," says Deepika Warrier, Vice President, Nutrition
category, PepsiCo India.
The pace of innovation in the two companies is visibly slower in this category.
When Prime Minister Narendra Modi exhorted beverage companies to mix at
least 5 per cent fruit juice in aerated drinks to help distressed farmers around
the country in September 2014, Vadodara-based Manpasand Beverages was
ready with such a drink, Fruits Up, within a week. Mixing fruit with aerated
beverages would create a healthy demand for fruits across the country thus
benefiting farmers while, at the same time, it will at least partly take care of
the high sugar content in these drinks. Though most beverage companies
claim it was already part of their gameplan much before the PM's speech, his
appeal did speed up the process. Indian companies seem to have a head start
in this area.

Yet, it may not be all smooth sailing for the homegrown firms. At least 600
odd-beverages are launched every summer in India but 90 per cent of them do
not live to see another season. With their deep pockets and distribution
network, Coca-Cola and Pepsi may still capture the market with a me-too
beverage. Smaller players face the challenge of scaling up quickly. "To sustain
distribution for a full year, one needs deep pockets for a broader portfolio of
products," points out Abheek Singhi, Partner (Head, Consumer Practice),
Boston Consulting Group. Agrees Prakash of PepsiCo. "They understand local
taste better than us and are free spirited. Their biggest limitation is scaling up,
 that's why you will not
find these people being
able to go outside their
state." Abhishek Singh,
Director at Manpasand,
believes most beverage
businesses lack long-term
focus. "One needs to have
a solid hold on
manufacturing," he says.

PROBLEMS GALORE
Increasing competition is
not the only challenge the
two cola giants are
grappling with. They also
find themselves at the
centre of a backlash over
depleting water table
across the country. In
March, two major trade
bodies in Tamil Nadu - the Federation of Tamil Nadu Traders Associations
(FTNTA) and the Tamil Nadu Traders Associations Forum (TNTAF) - banned
the sale of Coca-Cola and Pepsi beverages across the state blaming the
companies for extracting too much water from rivers that has increased
problems for farmers in the state. The issue is still unresolved. "We pay the
price for being a large, visible consumer brand," says Krishnakumar of Coca-
Cola India. "In Tamil Nadu, we had nothing to do with what transpired in the
beginning of the year. Yet we were targeted. We listened, engaged and
clarified."

A week later, a similar call for boycott was given by a trader in the
neighbouring state of Kerala but it has not had much impact. PepsiCo
however, has faced relentless resistance from locals in Kerala for drawing
water from the Kanjikode area for its bottling plant in Palakkad. The plant
operates at way less than optimum capacity today after the state government
put a temporary restriction on industrial water consumption in the state. Coca
Cola also had a factory in the vicinity but it had to shut it down back in 2004
after facing a similar resistance. There are also protests against the Atlanta
based firm in Hoshangabad in Madhya Pradesh where it is setting up a Rs750
crore greenfield bottling unit. It would be Coca-Cola's biggest in India and
draw water from the Narmada. A group of local activists have started an
agitation, claiming it would cause pollution and water scarcity in the region
and are planning to file a petition in the Jabalpur High Court. The two
companies have steadfastly refuted allegations and claim they replenish the
water table more than they exhaust. "Through our rainwater replenishment
initiatives, we return 148 per cent water to the ground than our usage, yet we
are targeted," says Krishnakumar. The ire, however, is directed only at the two
companies, which means the field is open for the homegrown companies to
invest and grow.

With challenges multiplying, will PepsiCo and The Coca-Cola Company be

able to regain their erstwhile glory? They have to change their strategy in
order to succeed. For now, the odds are against them.~