India’s Window of Opportunity Most U.S. based multinational companies generate about 80% of their sales and profits in the U.S. and about 20% internationally. Since PepsiCo is currently skewed more heavily toward the U.S., where we generate about 90% of our sales and profits, we view the international market as an arena of great potential for us. So now that we have established ourselves in the Soviet Union and the People’s Republic of China, we’d like to turn our attention to India and make it our number one priority outside the U.S. Michael Jordon, Former President and COO, PepsiCo Inc, 1987 I still feel guilty filling a bathtub with water. We at home didn’t get much water growing up during the 1960s in the Indian coastal city of Chennai. I belong to a very middle class family wherein we had to rise every morning between three and five – the only hours that the valves to the municipal water supply were turned on – and fill every bucket in the house. Two buckets were set aside for cooking, and two each would go to me, my older sister and my younger brother. You had to think about whether to take a bath. As a matter of fact you learned to live your life off those two buckets. Indira Nooyi, Chief Executive, PepsiCo in Business Week, 2007 PepsiCo is facing and confronting the most exciting times and unprecedented challenges in 2008. The operating environment and contexts had evolved over a period of time. It was in November of 1987 when PepsiCo was granted an approval by the Government of India‘s Project Approval Board to enter the country. The challenge in the beginning was to enter into an un-evolved and a nascent market, create awareness of the product, penetrate into the rural and urban markets, capture market share, stabilize operations, capture the imagination of customers and set up a talented team that would lead to the success of PepsiCo in India. PepsiCo has built a respectable presence over the last two decades in the carbonated drinks and juice drinks category in India and now they are confronting formidable challenges that are unique to India. The foremost challenge in India is to increase per capita consumption of branded beverages. Despite a booming economy, young consumers, increasing disposable income, growth in per capita income et al Indian consumer is posing a unique challenge. The challenge is to make consumers adopt branded liquid refreshment beverages within their staple diet or to increase the per capita consumption, currently amongst the lowest in the world. In 2003 and then in 2006 PepsiCo and Coca Cola faced their toughest test in India. Both the Cola giants were embroiled into the pesticide controversy. The pesticide controversy created a negative image of Cola products in the mind of the consumer. The challenge mitigated to the level wherein Cola giants had to launch a consumer education campaign about the safety of the product. As PepsiCo was looking at moving into capturing the throat share in the scorching Indian market they faced new realities and had to brainstorm a few strategic questions. Could PepsiCo revive the flagging Carbonated Soft Drink Category? Should PepsiCo move into other categories i.e. new and innovative beverage that are particular to India and provide PepsiCo with new profitable revenue streams? What kind of positioning the products should have? How the competition will shape up in each of these categories? Was it that liquid refreshment beverages were a single competitive market or the competition was segmental? How would PepsiCo exploit the opportunities provided by the modern retail
Professor Amit Kapoor of Management Development Institute, Gurgaon prepared this case for the campus engagement program of PepsiCo International in India. You can contact Professor Amit Kapoor at amit@amitkapoor.com. No part of this publication may be reproduced without the permission of PepsiCo International. For copyright permissions and publications related queries kindly write to pepsicoindia.beveragestaffing@intl.pepsico.com.
format in the country and last but not the least maintaining the high social responsibility standards as epitomised by the Chief Executive of PepsiCo, Indira Nooyi. PepsiCo In 2006, PepsiCo earned $6.4 Billion in operating profit on $35 Billion in sales worldwide from its divisions: PepsiCo International, PepsiCo Beverages North America, Frito-Lay North America and Quaker Foods North America (see Exhibit 1). PepsiCo primarily operated in the area of snack foods and liquid refreshment beverages. PepsiCo dominated the snack food market internationally through brands like Lays, Doritos etc. In liquid refreshment beverage category PepsiCo got a major chunk of its revenue from its flag ship product Pepsi-Cola. It did have other brands in the portfolio as Diet Pepsi, Tropicana and more. At the global stage Pepsi was rated as the fourth most valuable brand in the category of beverages and food and overall 26 (see Exhibit 2). In addition Pepsi was ranked 61 on the Fortune 500 list and had 17 brands in its portfolio that were valued greater than $ 1 Billion. The business of liquid refreshment beverages could be categorized further into carbonated and non carbonated drinks category. PepsiCo generally ranked second in the carbonated soft drink market after Coca-Cola but was posing a serious threat to the dominance of the Cola giant in countries like India and Pakistan (see Exhibit 3). History The history of PepsiCo can be traced back to a pharmacist from North Carolina. Caleb Bradham started serving a concoction to his friends in 1893 out of his drug store. In 1898 Caleb was calling the drink Pepsi-Cola based on his faith that the drink would relieve people of dyspepsia and pain of peptic ulcers. Since early days the competitor for Pepsi was Coca-Cola who had started manufacturing the drink in 1886. It was in 1907 when PepsiCo crossed the 100,000 gallon mark though at the same time Coca-Cola was selling 2.6 million gallon of the cola. Pepsi-Cola Company faced its second bankruptcy in 10 years in 1931 and was sold to Charles Guth in 1931. It was Charles Guth who formulated a policy of pricing the 12 ounce bottle in a way that it was retailing at the same price point to that of its nearest competitor who was bottling the drink in 6 – 7 ounce bottles. This was the first innovation and price competition that the stiffest competitors and rivalries the world of business saw. PepsiCo in 1939 had launched a jingle that ended up becoming one of the most popular songs of that period. Pepsi-Cola hits the spot. Twelve full ounces, that’s a lot. Twice as much for a nickel, too. Pepsi-Cola is the drink for you. Alfred Steel became the CEO of PepsiCo in 1950 and his tenure was one of the most successful tenures for the CEO of PepsiCo. In less than 10 years the revenues for PepsiCo grew four times to $137 million. This was the time when Pepsi repositioned itself to a lifestyle drink. It was in 1960s when PepsiCo started moving into other lines of business. PepsiCo merged with Frito-Lay in 1965 and later in 1970s it acquired Pizza Hut and Taco Bell. It acquired Kentucky Fried Chicken in 1986. PepsiCo entered India in 1989 through the joint venture root. PepsiCo appointed Indira Nooyi as the CEO in 2006. Indira Nooyi is the first CEO of the beverage giant of Indian origin. PepsiCo in India PepsiCo looked at entering into the Indian market in the early 1980s. The entry was against a backdrop wherein foreign participation was limited to 40% of the venture equity.
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PepsiCo did face stern resistance in India at that time from the opponents of foreign firms entering the local markets. The opposition was led by Captains of the industry who fanned patriotic sentiments against foreign investment. PepsiCo‘s task was however made easier because of the balance of payment crisis India was facing at that time. This time over the proposal was denied on the grounds that PepsiCo would be detrimental to Indian Soft Drink manufacturers. In 1986 PepsiCo submitted a second proposal. This time over the permission was granted and PepsiCo started its journey towards capturing one of the nascent beverage markets in the world. Pepsi had a decent start in the Indian market with 32 per cent market share in its pocket by 1994. It was post 1994 when the effects of liberalization and deregulation started having an impact on the spending ability of the Indian consumer that the market started catching the fizz. PepsiCo in 1994 moved into strategically capturing the Indian market and increasing volumes in the growing Indian market. PepsiCo volumes grew at a CAGR of 14.5% for the period 1994 thru 2006. The volume growth that was seen was a result of distribution expansion, setting up of plants and adding talent. The ramping up of infrastructure was one of the primary drivers of growth over the years. The period can be further broken into three phases, Phase 1 wherein PepsiCo looked at growth and share gain wherein they grew at 27.7% CAGR; Phase 2 when PepsiCo focused on competitiveness & productivity gains wherein they grew at 10.36% CAGR and Phase 3 when they grew at CAGR of 6.57 %(see Exhibit 4). These were the roller coaster years wherein cola companies faced their worst crises by way of the Pesticide issue and the carbonated drinks markets stagnated. The shift in consumption patterns between 2003 and 2006 raised important issues for PepsiCo in India. Is it that PepsiCo should focus on the carbonated drinks market or focus on broader liquid refreshment beverage market wherein various segments were growing at a rapid pace. The thinking was instigated by the fact that the industry was jolted in 2003 and again in 2006. The cola industry was accused of serious misdemeanour in terms of pesticides being present in the cola drinks (see Exhibit 5) and depletion of the water table in parts of the country where their bottling plants existed. This accusation was rebutted by major players in the industry i.e. PepsiCo and Coke through explanation of their processes and significantly focusing on quality policy they had (see Exhibit 6). Incidentally post the pesticide controversy an independent scientific body was constituted to specify the quality standards for the beverage industry. Today India boasts of one of the most stringent quality standards for the beverage industry in the world. What has been found out over a period of time by various studies and reports is that carbonated drinks are the safest in the world, with quality of the product and presence of impurities that is lesser than even baby food (see Exhibit 7). Beyond the growth and challenges are some very interesting facts about PepsiCo in India. In 18 years of their operations they have become the fourth largest FMCG in India, employing over 3,700 people directly and over 1,30,000 indirectly. The brand Pepsi exudes confidence with the highest top of the mind recall and being the most preferred carbonated drink in the country. Looking at revenue contributions within the PepsiCo portfolio in India for 2007 we see Cola dominating the revenue shares.
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Orange 1%
Water 17%
Mango 7% Cola 75%
PepsiCo success in India could be attributed to the four pronged strategy i.e., building a winning image, build blocks for market leadership, build high quality management capabilities and controlling its destiny. This was accentuated by the fact that PepsiCo was investing strongly for the future with investments in R&D, infrastructure and capabilities. For the future PepsiCo was strengthening its commitment towards Corporate Social Responsibility. Commitment from PepsiCo PepsiCo was looking at engaging the stakeholders across the spectrum to move to a platform wherein they are adequately equipped to follow a robust Corporate Social Responsibility Agenda. They were looking at engaging Government, NGOs, consumers, regulatory bodies etc. The motto of the company was Performance with Purpose. PepsiCo focused on generating healthy financial returns while giving back to communities the company serves. This includes meeting consumer needs for a spectrum of convenience foods and beverages, reducing the impact on environment through water, energy and packaging initiatives, supporting its employees through a diverse and inclusive culture that recruits and retains world – class talent, creating value through building successful partnerships (see Exhibit 8). The above statement reflects the beliefs and ethos that PepsiCo has and it reflected in their actions. Their commitment and beliefs in Corporate Social Responsibility are the underlying principle on the basis of what decisions are made. PepsiCo looks forward to be categorized as a model CSR corporation. In order to emerge as a model CSR corporation, PepsiCo looks at building a strong foundation based on critical areas that have a business link, a competitive advantage and address the issues of the corporation credibility. PepsiCo is fundamentally looking at – a. Expanding its expertise in water conservation and achieve zero water balance by 2010 and find solutions to provide safe drinking water to millions of poor, b. Build agri-partnerships with farmers and scale up the association so that farmers across the country grow and earn more, c. Commitment to the health and well-being of children, and d. Waste to wealth. PepsiCo is actively working on these issues and making a long term commitment to the cause. They are making strategic investments so it reflects the commitment PepsiCo has to the cause. PepsiCo is working on community projects for making life easier for villagers, water conservation for agriculture, solid waste management program, recycling initiatives, environment training institutes etc. The commitment is also reflected in one of the statements from CEO of PepsiCo i.e. the goal of a net-neutral impact on environment will increasingly be the rallying cry of the corporation (see Exhibit 9). Indian Beverage Landscape The Indian beverage landscape could be divided into carbonated and non carbonated drinks (see Exhibit 10). The carbonated drinks landscape is dominated by the cola giants i.e. PepsiCo and Coca Cola with each controlling around equal market share. The market did have certain fringe players who had a market share of around 3%. The non carbonated drinks accounted for the major consumption within the Indian household and were dominated by the unorganized sector. At the moment the non carbonated drinks were poised to grow as the carbonated drinks had taken a beating in the last 4 years due to pesticide issue (see Exhibit 11). The liquid refreshment beverage category seems to be driven by impulse purchase rather than driven by habitual consumption.
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In 2007, India‘s per capita income has been US$650 and India has been witnessing an economic growth of over 6% in the last decade. The price point for a serving of Coke or Pepsi has been around 10 Rupees. Local carbonated drinks like Bunta Lemon would be priced around 5 rupees. Cola giants had understood from their experience of operating and playing around with price points that India was an extremely price sensitive market. They had typically refrained from increasing prices as the price point of 10 rupees for a serving was already around one-twentieth of the minimum wage stipulated by the Government in the country. The pricing effectively acted as a barrier for the majority of Indians to consume or savour the taste of a cola. The carbonated drinks market saw a growth of 7.5% during the period 1999 to 2003. The per capita consumption rose from 6 servings per capita to 8 servings per capita. It has been the period after 2003 that has been a roller coaster ride for the cola giants. It was in this period wherein India was touching growth rates of over 8% for its GDP and surprisingly the carbonated drinks market was shrinking. Contrary to the experience of cola giants in India the Chinese liquid refreshment beverage market for the period 2001 – 2007 was growing at an exorbitant pace of 16% wherein China‘s economy was having a growth rate of around 10%. Carbonated Drinks Category Carbonated Soft Drinks have an inherently contradictory relationship. The relationship seems to be caught between dichotomies, dichotomies that signify and portray either good or bad. At one end of the likeability spectrum carbonated drinks signify issues like exciting, joyful, energising etc and on the other end they signify things like risky, artificial and others. In this spectrum Pepsi as a brand too signifies a certain personality. A personality that is nostalgic and safe at one end of the spectrum and on the other end Pepsi as a brand loses relevance as the person grows old. The most potent issue on the spectrum is the artificiality attached to the product. Cola defines the carbonated drinks category through all the drama, tension and excitement related to the product. Colas have a different trigger at each life stage with a challenge to redefine its meaning for the consumer as he grows older. The carbonated drinks market is getting encroached from other categories as juices, tea, coffee, dairy, energy drinks etc. With the spectrum detailing calm and energy on the xaxis with social and individual on the y-axis it is other products who are providing new meaning to the consumer by moving away from all the negativities attached to the carbonated drinks. Consumer Behaviour The consumption of carbonated drinks is driven by ideas like the efficacy of the drink in refreshing, quenching thirst etc (see Exhibit 12). Over a period of time the consumer was becoming more aware and particular about nutrition and health (see Exhibit 13). The nutritional health focus was more beyond lip service by consumers as it was becoming an important factor in consumption decision and process. In typical Indian households the view about carbonated drinks was that they are unhealthy and unsafe for consumption. This led to parents acting like gatekeepers and not letting the kids consume cola. This change in view about the cola drinks was quite likely driven by factors like the pesticide issue. Incidentally the dip in sales for the cola manufacturers since 2003 has been significant. The changing attitude toward cola was likely to shape a new pattern in consumption of carbonated and non carbonated beverages. The consumer today was driven by the wellness agenda with opinion makers from the field of yoga and ayurveda having a significant impact on acceptance of carbonated drinks. The consumer in India was evolving over a period of time, giving very little time for the
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players to adjust. The future was becoming more robust for players who were likely to ride on the trends and be privy to creating and defining the future (see Exhibit 14). Digging deeper into the consumption pattern in Indian homes it was certainly realized that tea, dairy and Indian beverages dominated (see Exhibit 15). This can be accentuated by the fact how people engaged with and thought about beverages (see Exhibit 16). Typically beverages are consumed across the day with consumption peaking up during midday (see Exhibit 17), varying consumption pattern (see Exhibit 18), had at different occasions (see Exhibit 19) and last but not the least the consumer also looked at beverages from the perspective of status it reflects (see Exhibit 20). Segmentation The beverages market could be defined by way of product classification i.e. carbonated and non carbonated. This might not be the smartest way of doing the same. The struggle was to segment the consumer on the basis of life stage or classify the product in terms of time it was consumed. Clearly the focus had to be to understand the underlying category motivations and consumption patterns and taking a dig at future opportunities and options (see Exhibit 21) Distribution PepsiCo over the years in one of the most unorganized retail markets has made deep inroads into the urban as well as the rural territory. Pepsi today boasts of 40% penetration of all retail outlets of the Indian retail. Pepsi reaches the outlets directly and unlike other FMCGs there is a low dependence on wholesale channel. The distribution presence becomes important as carbonated drinks can be impulse purchases. If not available at the point of sale it has been typically seen that customer could move to the other cola brand. 40 Plants
7000 Distributors
12000 Salesmen
1.1 Million Outlets
The challenge for the future is to understand the evolution of the retail trade and how the consumer at present uses and accepts the channels. (see Exhibit 22, 23, 24 & 25). The future retail formats would have individual segmentation and consumer footfall patterns. In addition another factor that would have an impact on the change of distribution channels would be the emergence of large consumer class in the rural areas in addition to the growth of urban centres and cities in the country. Competition The competition in the sector is getting intense over a period of time. The traditional competitors i.e. Coke and PepsiCo are vying and playing market share battles in a stagnant market. Surprisingly India has been a market that has moved contrary to the general beliefs. It has been seen in countries across the board that increase in per capita income has led to the rise of consumption of carbonated beverages. The market is price sensitive with huge level of taxation. The competition is coming from new and non traditional carbonated drinks. The competition for drinks also comes through from fruit drinks, the lime and lemon category, ready to drink tea etc. Some of the successful products in the arena were Maaza, Frooti, Limca and Sprite. Drinks like Appy Fizz did capture the imagination of the consumer. The new and emerging players are likely to play on the turf in different manner. The players could look at redefining the traditional business models and approaches for being successful in the FMCG market. The competition is not only approaching from traditional competitors but from
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players who redefine and understand consumer needs in a new way. This could move the competition to newer segments and redefine existing industry structure and boundaries. PepsiCo though has worked and captured the imagination of the Indian consumer well. It was their strategy of innovation and being ahead of the curve that gave them the dominance they enjoy in the market. PepsiCo made it a point to enter the market with new products, change packaging, advertise and push the product in the market at regular intervals (see Exhibit 26) At the same time, its competitor Coca Cola was leveraging alternate channels and focusing on consumer connect strategy. Coke focused on creating red lounges, marketing initiatives and launch of innovative products as Minute Maid in the market. Coca Cola is investing in size with improved technology and adding manpower. Revenue management was improved through differential MRP and introduction of 400 ml PET bottle to win over the consumer psyche. Simultaneously Coke launched dispensers in McDonalds and can vending machines at various places. The marketing and operational focus was centred on more visibility at competitive pricing. It introduced Maaza and generated 37% volume share in the mango drink segment. Coke looked at establishing supremacy through consumer differentiation, product introductions with differentiated formulation such as Minute Maid with pulp launched in February 2007 in South India. Parle Agro, the other competitor in the beverages market with Appy and Frooti controlled around 30 per cent market share. Company had a significant focus on value engineering reflected in differentiated value added packaging. It introduced a sparkling juice drink Appy. The company consolidated with aggressive marketing and sales through grocery stores and institutions. Dabur another competitor had a strong innovation, Research & Development focus. Dabur concentrated on market segmentation and creating products that appeal to local taste with improved packaging and differentiated flavours. Dabur had an advantage of having their manufacturing in Nepal, Rajasthan and Siliguri wherein they had custom processing benefits through focus on low cost sourcing of raw material. What the Future Holds India is expected to carry forward on its path of growth at around 7% per year. The growth in economy is expected to create significant opportunities and pose new challenges. The growth is expected to bring in major transformations within the Indian market. From changes in income distribution, to change in consumption patterns, higher disposable incomes, the shift in consumption paradigms in the urban and rural areas, the spectre of change in retail trade and evolving consumer behaviour. What we could see in the future is having food on the go but could increase the risk of lifestyle diseases. India is expected to be the fifth largest consumer market by 2025 moving from the existing rank of 12 as of today. This change would be brought about by rising incomes of people. This would significantly alter the income pyramid and structure of the Indian consumer market (see Exhibit 27). The most significant opportunity would be provided by the sheer size of the burgeoning middle class in this country. The reshaping of the income pyramid would reshape the individual‘s share of wallet (see Exhibit 28), give rise to the amount spent on food consumption (see Exhibit 29) it is expected that the money spent on food would nearly double in the next 20 years. The sheer multiplier of population would give rise to a gargantuan opportunity ending up being the fifth largest consumer market in the world. Most importantly the non alcoholic beverage market in the country is expected to see a growth of 9% in the next 20 years. The market opportunity according to the McKinsey Global Institute is stated to move from 346 billion rupees in 2005 to 750 billion rupees in 2015 to a formidable market size of 1877 billion rupees by 2025.
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Trebliing of Indian Incomes
Growth in Urbanization
Middle Class that is 583 Million Strong
Food the largest consumption category with
India becomes the fifth largest consumer market by 2025 Shift in consumption pattern towards discretionary items
Significant changes in the Indian Market Source: McKinsey Global Institute
The Way Ahead As the innovation group was sitting in its office for the last meeting of 2007 they were wondering what about the way ahead for PepsiCo in India. They were facing imminent threat from not only the major competitors but also from fringe players, increasingly aware consumer was expecting much more and changing. The opportunity in the food and beverage market was knocking at the door, which was poised to grow at a pace of 9% for the next twenty years, and India was going to have a middle class that would be greater than the total population of the US in 2025 The decision though had to be taken in view of the recent news item that appeared on December 12, 2007 in the newspaper that PepsiCo would be focusing on health and well being of its customers (see Exhibit 30). From just a carbonated beverage the focus was to shift towards, generating nutrition, health and wellness through product innovation within the present range and introduce new products through research and development to cater in consonance with the organoleptic acceptance to Indian taste buds, through appropriate product branding, consumer education, market segmentation et al. The aspect not be ignored was that all major factors were shifting and evolving in the market with expected shifts in industry structure and competitive strategies. The fundamental idea was to make significant inroads into the Indian beverage market in 2008 and achieve dominance in the marketplace in the future.
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Exhibit 1: % Share of Revenue of Each Business Unit
PepsiCo Beverages North America, 27
PepsiCo Internation, 37
Frito Lay North America, 31 Quaker Foods North America, 5 Asia region contributes 15% of PepsiCo Internationals Net Revenue; Asia Pacific has been growing at nearly 9% in beverage volume growth and nearly 12% in snack volume growth.
Exhibit 2: Best Global Brands 2007 in Beverage and Food 2007 Rank
2006 Rank
1 24 26 40 53 63 67 80
1 23 22 40 54 63 67 79
Brand Coca Cola Nescafe Pepsi Kellogg‘s Heinz Nestle Danone Kraft
Source: Best Global Brands, 2007
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2007 Brand Value ($m) 65,324 12,950 12,888 9,341 6,544 5,314 5,019 3,732
Country of Origin US Switzerland US US US Switzerland France US
Sector Beverages Beverages Beverages Food Food Food Food Food
Exhibit 3: CSD Industry: International Consumption Rates and Market Shares Consumption 8 oz servings per capita 2003
Annual Growth 1999 - 2003
Coke
Pepsi
Europe Germany United Kingdom France Russia Netherlands Hungary
340 420 180 70 335 279
-0.3% 3.2% 3.3% 7.7% -1.5% 0.5%
51 47 60 21 80 49
5 11 6 18 14 25
Latin America Mexico Brazil Argentina
610 312 400
0.9% 3.1% 1.7%
73 46 50
20 7 19
Asia Pacific China Japan Australia India Pakistan
21 80 490 8 24
-1.2% -3.4% -0.6% 7.5% 14.4%
51 64 56 45 26
24 11 10 43 73
North America United States Canada
837 463
-1.1% -1.4%
44 38
31 37
Source: Beverage Digest Fact Book 2005
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2003 Share
Exhibit 4: PepsiCo Performance in India
508.85 394.47
265.93
100.00
1994
1998
2002
2006
Indexed Volume data, 8 oz MM Exhibit 5: Press Release by Centre for Science and Environment Hard Truths About Soft Drinks New Delhi, August 5, 2003: After bottled water, it‘s aerated water that has plugged the purity test. In another exposé, Down To Earth has found that 12 major cold drink brands sold in and around Delhi contain a deadly cocktail of pesticide residues. The results are based on tests conducted by the Pollution Monitoring Laboratory (PML) of the Centre for Science and Environment (CSE). In February this year, CSE had blasted the bottled water industry‘s claims of being ‗pure‘ when its laboratory had found pesticide residues in bottled water sold in Delhi and Mumbai. This time, it analysed the contents of 12 cold drink brands sold in and around the capital. They were tested for organochlorine and organophosphorus pesticides and synthetic pyrethroids — all commonly used in India as insecticides. The test results were as shocking as those of bottled water. All samples contained residues of four extremely toxic pesticides and insecticides: lindane, DDT, malathion and chlorpyrifos. In all samples, levels of pesticide residues far exceeded the maximum residue limit for pesticides in water used as ‗food‘, set down by the European Economic Commission (EEC). Each sample had enough poison to cause — in the long term — cancer, damage to the nervous and reproductive systems, birth defects and severe disruption of the immune system. What we found Market leaders Coca-Cola and Pepsi had almost similar concentrations of pesticide residues. Total pesticides in all PepsiCo brands on an average were 0.0180 mg/l (milligramme per litre), 36 times higher than the EEC limit for total pesticides (0.0005 mg/l). Total pesticides in all Coca-Cola brands on an average were 0.0150 mg/l, 30 times higher than the EEC limit. While contaminants in the ‗Dil mange more‘ Pepsi were 37 times higher than the EEC limit, they exceeded the norms by 45 times in the ‗Thanda matlab Coca-Cola‘ product. Mirinda Lemon topped the chart among all the tested brand samples, with a total pesticide concentration of 0.0352 mg/l.
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The cold drinks sector in India is a much bigger money-spinner than the bottled water segment. In 2001, Indians consumed over 6,500 million bottles of cold drinks. Its growing popularity means that children and teenagers, who glug these bottles, are drinking a toxic potion. PML also tested two soft drink brands sold in the US, to see if they contained pesticides. They didn‘t. The question, therefore, is: how can apparently quality-conscious multinationals market products unfit for human consumption? CSE found that the regulations for the powerful and massive soft drinks industry are much weaker, indeed non-existent, as compared to those for the bottled water industry. The norms that exist to regulate the quality of cold drinks are a maze of meaningless definitions. This "food" sector is virtually unregulated. The Prevention of Food Adulteration (PFA) Act of 1954, or the Fruit Products Order (FPO) of 1955 — both mandatory acts aimed at regulating the quality of contents in beverages such as cold drinks — do not even provide any scope for regulating pesticides in soft drinks. The FPO, under which the industry gets its licence to operate, has standards for lead and arsenic that are 50 times higher than those allowed for the bottled water industry. What‘s more, the sector is also exempted from the provisions of industrial licensing under the Industries (Development and Regulation) Act, 1951. It gets a one-time license to operate from the ministry of food processing industries; this license includes a no-objection certificate from the local government as well as the state pollution control board, and a water analysis report. There are no environmental impact assessments, or citing regulations. The
industry‘s use of water, therefore, is not regulated.
Source: CSE Press Release, ―Hard Truths about Soft Drinks,‖ 8/5/03.
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Exhibit 6: Is Pepsi Safe PepsiCo Quality Policy: ―Make, sell and deliver the beverage to the consumer as it was designed, in order to derive preference.‖ Pepsi Is One Of The Safest Beverages You Can Drink Today. They follow regulations laid down by the Indian Government which are amongst the world's most stringent. PepsiCo products comply with the Prevention of Food Adulteration Act (PFA) directive on the use of water in the preparation of soft drinks. PepsiCo also complies with the Bureau of Indian Standards (BIS) for packaged drinking water. PepsiCo uses a six stage water purification process to deliver this quality consistently. Independent government data has shown that pesticide residues present in soft drinks are at safe levels. Incidentally PepsiCo follows one of the most stringent quality norms for all the ingredients that get into the beverage including sugar and concentrate.
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Exhibit 7: What Independent Government Data Shows
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Exhibit 8: PepsiCo Values
Exhibit 9: The CSR Initiatives Human Sustainability
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Supporting Communities
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Waste to Wealth CHENNAI: Chennai born Indra Nooyi, who heads multinational giant PepsiCo, made a pitch for greater contribution from the corporate sector to society and environment. Stating that Pepsi‘s role in the Zero Waste Centre of Pammal Municipality near Pallavaram was worthy of being emulated, Ms. Nooyi, Chairman and Chief Executive Officer ofC, said such models of public-private-government participation could take the country forward. She was addressing a large gathering of media persons at the Zero Waste Centre in Visweswapuram, where kitchen waste from all the 21 wards of Pammal Municipality is converted into manure through organic composting. Pepsi has been supporting the facility financially. Among other initiatives PepsiCo had launched, she said, their Agro Programmes helped them get in touch directly with the farmers involved in cultivation of tomato and potato to refine their farming techniques and increase productivity. In the past three years, the company had conducted trials on direct seeding in paddy cultivation that could save 30 per cent of water compared to conventional methods. They had launched a comprehensive watershed management programme to rejuvenate water bodies in Karnataka and Uttarakhand. As part of steps to conserve water, Ms. Nooyi said Pepsi was committed to achieving Positive Water Balance in its facilities in the next two years. ―Our plants use just one third of the water they did five years ago,‖ she remarked. Along with the Punjab Government‘s Citrus Development Programme, Pepsi had established a large collection of ―world class planting material‖ for farmers as India had the potential of being a major global source for citrus fruits like Florida and Brazil. This was to ensure the availability of citrus fruits round the year as the market for fresh fruit juices was increasing. Abhiram Seth, Executive Director, Exports and External Affairs, PepsiCo, who was present, said a few lakh saplings of citrus fruits were planted. But the project to expand it was difficult, as it was not easy to acquire farming land. Ms. Nooyi said the country faced huge challenges ahead and they could be overcome only through the collaborative partnerships involving the corporate sector, community, government and voluntary organisations. ―No one can go it alone, not even the government, despite their best intentions,‖ she remarked. To a question on the pesticide issue surrounding carbonated drinks marketed by the multinationals, the CEO of Pepsi said all products were safe. The levels of pesticide were well below the stipulated norms and even lower than levels traced in baby food. ―Pepsico‘s food and beverages are as safe as any other in the food chain,‖ she said. On the action plan for the future, Ms. Nooyi said the priority was to sustain the growth and retain the talent in the company as everyone who had contributed to company‘s growth in the past one year was an asset. Asia, particularly the Indian sub-continent, was an important market, she added
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Exhibit 10: The Beverage Landscape in India The beverage market in India can be distinctly divided into two categories i.e. Carbonated Soft Drinks (liquid refreshment beverages that are carbonated) and Non Carbonated Beverages (liquid refreshment beverages that are not carbonated). The Carbonated Soft Drink market is clearly divided into 3 categories i.e. Regular Colas, Lime Lemony Cloudy & Clear and Orange7. As for non carbonated beverages the market can be categorized into the Juice Drinks, Healthy Whites, Bottled Water and Indian Beverages like nimbu pani, squash, fresh juice, sweet & salt lassi, sugar cane juice etc.
Carbonated Soft Drink Market
Regular Colas
Coca Cola, Pepsi, Thums Up
Lime Lemony Cloudy & Clear
7Up, Mirinda Lemon, Mountain Dew, Sprite, Limca
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Orange
Non Carbonated Drinks
Juice Drinks
Tropicana, Mirinda, Fanta
Slice, Maaza, Real, Frooti
Healthy Whites
Bottled Water
Boost, Milo, Horlicks,
Aquafina,
Bournvita,
Bisleri, Kinley
Maltova
Indian Beverages
Exhibit 11: Industry Volume and Value Estimates
Industry Volume 2002
2003
2004
2005
2006
2007
CSD
364.8
417.4
466
413.3
372.5
382.5
JD M
27.9
31.9
36.7
36.9
46.8
57.3
3.3
5.1
7
8.7
15.9
21.9
327.8
395.4
396.3
409.9
427.9
459
Sports / Energy
0
0
0
0
1
1.4
RTD T
Juice, Nectar & Others Water
0
0
0
0.5
0.9
1.1
Dairy
13.9
15.5
17.5
21.2
27.8
28.5
Total
737.7
865.3
923.5
890.5
892.8
951.7
2002
2003
2004
2005
2006
2007
CSD
856.93
803.07
901.73
979.33
1120.27
1185.33
JD M
65.73
61.33
71.07
87.47
140.80
284.13
Juice, Nectar & Others
22.80
41.33
36.93
64.93
139.20
183.07
147.20
175.60
182.13
208.13
239.47
292.93
Sports / Energy
0.00
0.00
0.00
0.00
26.53
37.73
RTD T
0.00
0.00
0.00
0.00
2.67
3.33
Dairy
0.00
0.00
0.00
0.00
65.07
66.80
Total
1101.33
1092.00
1200.00
1352.00
1750.67
2074.67
Industry Value
Water
Industry Volume is in Million 8 Oz cases and Industry Value is in INR Millions. JD is Juice Based Drink (having less than 20% of juice rest is water), JD M is Juice Drink Mango , RW is Retail Water, Bulk is Bulk water, EW is Enhanced Water (with more Oxygen etc), RTD T is Ready to Drink Tea
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Exhibit 12: Why people have beverages
Refreshing 8%
Taste 5%
Basic Thirst 8%
Well Being 9%
Enjoyment 10%
Vitality 7%
Mental Lift 10%
Social Occasion 16%
Attitude 27%
Exhibit 13: The Changing Indian Consumer The Indian consumer is evolving over time. The change and evolution is creating a future that is challenging, exciting and at times intimidating. The change would provide new opportunities, give rise to newer segments, alter the fundamentals that govern the consumer markets et al. The change would present challenges for firms to redefine themselves, evolve, strategize for the future, make tradeoffs, and create different fits within the activities of the firm.
Demographic Evolution Extended Lifespans
Changing Life stages
Working Women
Changing Lifestyles Rising Mobility
Irregular working Hours
Increasing Lifestyle Diseases
Changing Consumer Profile International Exposure
Rising Disposable Incomes
Urbanization
Changing Values Growing Individualism
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Time Constraints
Exhibit 14: Health and Wellbeing Health is becoming one of the most important parameters in the decision process of an individual. It is though interesting to note that we are getting health inclined and not necessarily health behaved. There is an increased awareness on issues pertaining to health. Health consciousness is reflected by the boom in health boutiques like VLCC, Body Care et al. People are becoming more aware and anxious about lifestyle diseases. The most important factor driving health worries are heart attacks at young age. The various age groups think about health in different manner. Age < 24 Look conscious Health as a lifestyle statement Aware Sinners
Ages 24 – 35 Being active Health linked to quality of life, indulgent Trying to learn the art of moderation
Ages >36 Beyond Health About good habits Health Specificity increases
The health belief landscape is primarily driven by what is good for an individual, what are the ingredients, nutritional delivery, calorie consciousness etc. Health is a multidimensional concept for people being driven by Psychological and Physiological factors. Psychological factors that dominate are appearance, performance, healthy behaviour. Physiological factors are relaxed, mental agility, emotional stability. Most of the drinks would fall into one of the quadrants of the health – enjoyability matrix. Typically all Carbonated drinks are considered enjoyable but unhealthy by consumers and their is a high correlation between health and claimmed consumption behavior.
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Healthy, Not Enjoyable
Healthy, Enjoyable
Neither Healthy, Nor Enjoyable
Enjoyable, Not Healthy
Exhibit 15: What People Consume During the Day
Carbonated Soft Drinks, 14.7
Coffee, 6.0
Tea, 32.7
Dairy, 17.8
Indian beverages, 15.0
Energy Drinks, 0.0 Sports, 1.1 Still Bottled Water, 1.0
Bulk Bottled Water, 4.0
Fruit Based Drinks, 7.7
Exhibit 16: What Consumers Think About Beverages
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Exhibit17: When People Have Beverages
Total Beverages include all beverages either packed or non packaged drinks as loose milk, lassi etc. LRB is Liquid Refreshment Beverages and contains all packaged soft drinks that are carbonated or non-carbonated.
Exhibit 18: Eating Occasion and Beverage Consumption
100%
9
90% 80%
7 4
19
17 4
26
16 11
5
16
24 35 23 38
9
70%
4
9
8
10
8 5
12 17 10 7 3 13 2 10
5
2
3 22
39 48
60% 50% 40% 30%
89 72
79 65
72 75 57
68
86 85 81 80 79 48
20% 10% 0%
On its own
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75
61 66
With a meal
With a snack
59
Exhibit 19: When People Have Beverages Others, 6 Socialising, 4 Meal, 5
Work, 13
Sports, 7
Lesiure and Entertainment, 49
Out and About, 16
Exhibit 20: The Need State for Liquid Refreshment Beverages
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Exhibit 21: Product Portfolio for PepsiCo in India a. Product Classification Carbonated Soft Drinks
Non Carbonated Drinks
Snacks
Pepsi, Diet Pepsi, Mirinda, 7Up, Mountain Dew
Aquafina, Slice, Tropicana, Gatorade
Lays, Kurkure, Cheetos, Lehar, Quaker
Morning
Mid-Day
Evening
Tropicana, Quaker
Pepsi, Diet Pepsi, Mountain Dew, 7Up, Mirinda, Lays, Cheetos, Aquafina, Slice
Kurkure, Lehar, Gatorade
b. Products throughout the day
c. Product throughout the life stage Kids < 20 Years old
Young Adults 21 – 34 Years Old
Middle Age 35 +Years Old
Cheetos, Mirinda, Mountain Dew, Gatorade
Pepsi, Mountain Dew, 7Up, Mirinda, Lays, Aquafina, Quaker
Diet Pepsi, Lehar, Kurkure
Exhibit 22: The Retail Formats and Consumers Hypermarket Large
Supermarket Medium
Convenience Small
Cash & Carry Large
Discounters Small, Private Labels
Space
Large; 50,000 – 1,50,000 Square Feet
Medium; 2,000 – 10,000 Square Feet
Small; 1,000 – 3000 Square Feet
Large; 1,00,000 – 2,00,000 Square Feet
Small or Medium; 1,000 – 10,000 Square Feet
Shopping Occasion
Monthly, Large Basket
Top ups, Small Basket
Emergency, Small Basket
All, Large Basket
Monthly, Large Basket
Shopper Profile
Rich, Car Owners
Middle Class
All
Club Shoppers
Value Seekers with Money for Stock Up
Stock Keeping Units
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Exhibit 23: Out of home consumption locations and channels
Service
Quick Service Retail Over the counter, Drive thru
Ambience
Casual Dine
Fine Dine
Caterers
Table Service
Table Services
Customer Premises
Loud
Loud and Peppy
Soft and Elite
Varies
Pricing
Low
High
Very High
Low or Medium
Occasion
Functional
Entertainment
Stylish, eminent evenings
Functional
Travel Airports, Railways, Airlines, Hotels
Exhibit 24: Consumption locations, carbonated soft drinks
Home, 37
On the go, 15 Traditional Retail, 13 Catering, 10 Entertainment, 9 Modern Trade, 8 Eatery, 5
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Convenience Retail, 3
Exhibit 25: Consumption locations, non carbonated drinks
Home, 77
On the go, 5
Entertainment, 5
Catering, 5
Traditional Retail, 4
Eatery, 2
Convenience Retail, 1
Exhibit 26: Launch Timelines 1993: Fountain Pepsi, Slice 1995: 300 ml upsizing 1996: Cans, PET bottles 1998: Mirinda Lemon 1999: Diet Pepsi, 500 ml PET bottle, 2 Litre Pet, Aquafina 2000: 500 ml and 1.5 Litre Sodas 2001: Mirinda Apple, Tropicana 2002: Pepsi Aha (Twist) 2003: Mountain Dew, Pepsi Blue 2005: 7Up Ice, Non returnable glass bottle, Gatorade 2006: Cafe chino 2007: Pepsi Gold, Twister
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Modern Trade, 1
Exhibit 27: The Changing Income Distribution
1 6
1 4
2 18
1
2 9
1
19 41
32
Burgeoning Middle Class
43 93
80
36 54 35
1985 Deprived (<90)
1995 Aspirers (90-200)
22
2005
2015
2025
Seekers (200-500)
Strivers (500-1000)
Globals (>1000)
Share of population in each income bracket; household income brackets; % of million people
Source: McKinsey Global Institute
Exhibit 28: Shifting Indiaâ&#x20AC;&#x2122;s Share of Wallet
Food & Beverage 42
34
56 5 6 5 14 2 4 11 1 3 4
12 3 8 16
12 3 9 19
25
Apparel
5 10 3 11
Housing
19
Transportation
6 9
Communication
2 5 6
3 6 9
12
60
82
140
248
1995
2005
2015
2025
Household Products Personal Products
Education Health Care
Thousand Indian Rupees
Share of average household consumption, %, thousand Indian rupees Source: McKinsey Global Institute
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Exhibit 29: How Food Consumption Stacks Up in Future
17296 12102
11547 3931
1985
5622
1995
9035
7147
2005
2015
2025
Total Food Consumption, billion INR
5207
6058
6454
1985
1995
2005
2015
2025
Per Capita Food Consumption, INR
Source: McKinsey Global Institute
Exhibit 30: PepsiCo to cut down saturated fats in chips
PepsiCo to cut down ‘saturated fat’ in chips Anandita Singh Mankotia Posted online: Thursday, December 13, 2007 at 0002 hrs New Delhi, Dec 12 In line with its vision to emerge as a health focussed food and beverage company, PepsiCo would now focus on reducing ―saturated fat‖ in its chips and India would be amongst the first countries where the company would introduce its new healthier product range. The development comes after the company earlier shunned trans fats in its products as part of its health drive. The chips will now have a saturated fat reduction of almost 40% and over a period of time the company is planning to further push this down. ―Being conscious of our contribution towards the health of our consumers, this initiative is part of our drive to provide healthier alternatives to our consumers. First we eliminated trans fats and now we want to reduce the saturated fats. Though trans fats were eliminated globally but in the saturated fat reduction India would be amongst the first countries in Pepsico‘s markets globally to introduce this,‘‘ Abhiram Seth, executive director, PepsiCo India Holdings told FE. The company will now be using rice bran oil for its food offerings. The oil has 47% of its fats monounsaturated and only 20% of the fats in the oil are saturated. PepsiCo will be amongst the first big corporations in the country to substantially reduce the saturated fats in its offerings. Saturated fats are responsible for cardio-vascular diseases and the primary cause for obesity.
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