Strategy Case; Pepsi's Entry into India24

Pepsi's entry into India illustrates one of the most comprehensive market entry strategies. The strategy is primarily focused on managing the host country environment and the government. But, the strategy also gives useful illustrations of how and Ptpsi's entry proposal when to enter a foreign market because these are interrelated phenomena. Pepsi's first move for entry into the Indian market was during 1985. In early 1985, a proposal with the R.P. Goenka group was rejected by the government. The project involved export of fruit juice concentrates from Punjab in exchange of import of cola concentrates. The deal proposed 3: 1 export-import ratio and also that the company be allowed to market Pepsi in India. Pepsi's second move was during 1988. Due to the failure of the first move, the scope of the bid was widened to include a food processing division. The proposal contained the following: Agro research centre project (project cost Rs 1.55 crore): PepsiCo's agro expertise would be combined with Indian know-how. The focus would be on developing improved varieties, optimum production technologies and seed multiplication, initially for potatoes, tomatoes and oilseed crops. A potato and grain-based processing unit (cost Rs 8 crore): It would produce ready-to-serve food products in long life consumer packages for allIndia markets. It would use about 25,000 tonnes of

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potatoes and 5000 tonnes of grain every year,or 6 per cent to 7 per cent of the total potato production of the state of Punjab. A fruit and vegetable processing unit (cost Rs 7.5 crore): Processing 80,000 tonnes of tomatoes,pears. mangoes, apples and other fruits to produce juicebased concentrates which would be franchised to small, independent 100 per cent Indian bottlers aU over the country. Exports: Apart from processed fruits and vegetables, the venture would undertake exports of othernontraditional items. Total foreign exchange was estimated at 50 per cent of the total outflowfIX machinery, raw materials, dividends, etc. Theoffer was further sweetened. Soft drinks sales were limited to 25 per cent of the total annual turnover and the export-import ratio was hiked to 5:1. In early 1988, the debate was on whether to allo . Pepsi Cola into the Indian market (as part of a larger fruit and food products venture, in collaboration with Voltas and Punjab Agro Industries Corporation-PAlC) amidst a series of issues facing the country: the future of Indian agriculture, the foreign exchange Debate over problem, the role of MNCs, the future diet of Indians, global business situation, tc. e Pepsi's entry Pepsi project of Rs 22 crore would account for only a fraction of 1 per cent of thetotal industrial investment which takes place in the country every year. The PAIC, which was in the forefront, had made a very strong case for the project. The main advantage was the likely benefit that would accrue to the thousands of farmers inthe predominantly agricultural state of Punjab. Attention was also drawn to the frustration experienced by Punjab's farmers from decreasing returns on land holdings. According to Gokul Patnaik, MD of PAIC, who had been closely following the progress ofthe proposal and directly interacting with the Punjab farmers: 'The moment some newspaper report appears about its progress, I get flooded with telegrams from farmers asking me to locate it intheir areas.' He added, 'I am afraid so much expectation has been built that it may be a difficult task to fulfil it.' The PepsiCo project was a key element in the Punjab government's overall industrialand agricultural strategy. The proposal hinged on helping the farmers to move from rice and wheat cultivation into horticultural crops. Data available from Punjab Agricultural University (pAD), Ludhiana, indicated that the cultivation of wheat and rice gave the farmers decreasing incomesdue to stagnant yields and rising input costs. This had started worrying the Punjab government. The PepsiCo project appealed from another angle also. The state government was already worried about the marketing of agricultural produce. For example, in the case of pears, only 4700 of the 16,000 acres under cultivation were fruit bearing, yielding a production of 47,000 tonnes per year. Even with this modest output, farmers faced a severe marketing bottleneck.The price of a box of 20 kg had crashed from Rs 40 in 1987 to Rs 30 in 1988. If one also tookinto account the costs of various farm inputs, pear cultivation would eventually be a losing proposition for the farmers. Sukhdev Singh, VC of PAU, had warned the state government that, unless rt stepped in to help the farmers, some of the orchids would have to be uprooted in the absence of lucrative marketing outlets. Farmers' movements, such as the Bharatiya Kisan Union (the largest non-political organization ofthe farmers in the country), the Farmers' Forum (with the then Lok Sabha Speaker Balram Jakhar as patron), and the Maharashtra-based Shetkari Sanghatana (led by Sharad Joshi) had extended unqualified support to the PepsiCo project. So had the neighbouring states of Himachal Pradesh and Jammu and Kashmir, which also saw in the project lucrative outlets for their fruits and vegetables. The Akalis were also for once united and supported the project very strongly.

According to industry sources, the ministry was trying to get big companies, like Kissan, Cadbury's and even Parle into Punjab as an alternative to PepsiCo, in case the project was not cleared. They would be asked to specifically develop strong linkages with farmers to promote horticulture. Negotiations were going on to finalize deals. In fact, PepsiCo had also been told to show results without the soft drinks component. PepsiCo's front office image was that of a soft drinks manufacturer and marketer, but PepsiCo Inc. is much more than a mere purveyor of fizz. Besides Pepsi Cola Co and Pepsi Cola International, it has six other divisions which give it a commanding presence in the foods business. In 1987, its restaurants constituted 36 per cent of PepsiCo's total sales of $1l.49 billion, as much as its soft drinks' sales. Even though snack foods contributed 28 per cent to the total sales, in 1987, they constituted 41 per cent of PepsiCo 's operating profits of $1.32 billion. Of the total operating profits, soft drinks contributed 32 per cent and the restaurants 27 per cent. According to Ramesh Chauhan, Chairman, Parle Exports (country's largest soft drinks company), 'Pepsi's proposal is much worse for India than Coca-Cola's. Coke had only 4 per cent import content, and its annual import bill was only Rs 16 lakh, against Rs 1.72 crore for Pepsi. And Coke was required to reduce its imports by 0.5 per cent every year; so in eight years it would have no imports at all.' When accused of wanting to protect his monopoly, he reacted, 'Have we objected to Double-Cola entering India?' Tobaccowala, Chairman, Voltas, said, 'I am convinced that this project can do as much for Indian agriculture as the Tata-Mercedes-Benz collaboration did for the entire engineering industry.' Tobaccowala was, in fact, so convinced of the project (which offered India better foreign exchange terms than Pepsi did to either the Soviet Union or China) that he thought it could be made the model for all future collaborations. But, Chauhan wondered, 'Why can't the Tatas make their own soft drink without foreign collaborations? In soft drinks, know-how is available in the country. I will be delighted to have the Tatas join the fray. One hundred years ago, the Tatas had set up a steel plant without foreign collaboration.' It was Ramesh Chauhan versus PepsiCo and Voltas (Tatas). He even tried to shout down the Chairman of the Punjab Agro Industries Corporation, Manohar Singh Gill, when he said that Punjab was interested in a fruit juice-making venture. Chauhan mentioned that he too was in favour of the fruit juice project as that meant exports, but asked Gnemment of India's why link that with soft drinks and potato chips. It seemed to be a one-man crusade Iiltmma against the feared foreign invasion. And, then, finally, it became Ramesh (Chauhan) versus Ramesh (Vengal), Director, Business Development, Pepsi Cola International. If the government of India had not made up its mind, it was essentially because of the issues involved. Certainly, Pepsi's terms were much more advantageous than Coke's. Unlike Coke, Indian companies (pAlC and Voltas) would hold majority shares; the country would earn nearly Rs 200 crore in foreign exchange over ten years when the new joint venture exported fruit juice and other fruit products; and the exports would, in fact, be five times as much as imports by the new venture. Pepsi would bring in new agricultural technology of the kind that was claimed to have doubled Mexico's per acre productivity for potatoes in three years by using patented technology available with the company, and a domestic cola market-that was said to be one company's monopolywould see new competition so that the consumer ultimately benefits. On the other hand, in its essence, the objection was to undermine a domestic business success, just when it was establishing export markets, by allowing a multinational to get into the domestic market. The accompanying perception was that the entire Pepsi 'facade' of agricultural technology and exports was a ploy to get the real prize-the soft drinks market. Due to some very strong objections from within, the government was not able to decide which of the arguments were right. The strongest opposition to the proposal had come from the Food and Civil Supplies Ministry which had argued that India should be promoting fruit juices, not carbonated soft drinks. Opposition had also come from the Council for Scientific and Industrial Research (CSIR), one of whose laboratories had developed its own soft drinks flavours (one of which went into the Double Seven Cola). The council, therefore, did not see any need for a foreign collaboration in that area.

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At one stage, the projects' promoters were asked if they would be willing to drop thecob proposal and come in only with the fruit juice and potato chip venture. The answer was a firm 'no'. Nevertheless, the promoters agreed to limit the soft drink business to 22.5 per cent ofthe total turnover. The Project Approval Board met in late 1987, considered the latest amendments and thenSell the proposal to a group of ministers, who, in turn, met in February 1988. In the chair, on 8 Februe, was (the then) Home Minister Buta Singh. The others present were the then Finance Minister .n. Tiwari, Industry Minister J. Vengal Rao, Agriculture and Rural Development Minister G.S. Dhillon and Food and Civil Supplies Minister H.K.L. Bhagat. Since the project was to be based in Punjab. both Buta Singh and Dhillon wanted it. But, Bhagat strongly opposed it. Vengal Rao wavered inhis views. On an earlier occasion, he had told one ofthe project promoters: 'Fifty members of Parliament have signed a memorandum opposing this project. Nobody is on your side. What am I supposed to do?' Soon after this, fifty MPs had signed another memorandum supporting it. The governmenfs dilemma was: 'Fifty MPs are supporting the project, fifty are opposing. What do we do?' At the same time, the skirmishing in the law courts had been particularly bitter. A little know company, Express Bottlers, filed a case claiming ownership of the Pepsi brand name and contesting Pepsi Cola's claim to it. Pepsi Cola International established that Express Bottlers was linked to none other than Ramesh Chauhan-its address was the residence of Parle Director, R.N. Mungak, and its shareholders were Parle's bottlers. On 8 August 1988, the Punjab government convened a meeting of political leadersin Chandigarh, wherein the politicians unanimously backed the project. Those who raised objections were few and said nothing new. Both the Punjab and Central governments got busy with public relations exercises to prepare the ground under instructions from the top. The government seemed determined to push through the deal. Fresh negotiations got a fillip after a new ministry of food processing was set up on 25 June 1988, with Jagdish Tytler as its Minister of State and P. Murari as its Secretary. Proposals flew back and forth between Delhi and Chandigarh, from where PAIC negotiated on behalf of the three partners. The new formula guaranteed that, for the next ten years, for every dollar spenton import, the company would ensure a return of $5 through the export of processed foods. The ratio earlier proposed was 1:3. The 1:5 ratio was unparalleled in Pepsi's operations in 151 countries around the world. In China and the Soviet Union, Pepsi operated on a 1:1 deal. As for equity, Pepsi's share was originally to have been just under 40 per cent. That was whittled dowa to about 35 per cent, and PAIC's share was hiked to 40 per cent. Conditions for These were mainly the issues on which Coke had left India in 1977. Pepsi not only Pepsi's entry accepted the 1977 conditions but also went much further. The Government of India had imposed a series of conditions for Pepsi's entry into India. These conditions included local partnership, high commitment to exports, introduction of latest food processing technologies, use of Indianized brand names, etc. Pepsi decided to address the entire issue strategically. To quote Pepsi: ' ....We had to operate in difficult circumstances; our launch was patchy ..... virulent anti-Pepsi lobby and competitive propaganda made it difficult. But Pepsi managed to get quite a few well-wishers from among the members of Parliament and ministers-friends of the project.' The company had embarked upon a massive campaign among politicians. They had distributed over 100 video cassettes to key political personalities across major political parties. The cassettes highlighted the company's initial operations in the state of Punjab and their contribution to the state's economic growth. They had also circulated a small booklet containing details of Pepsi's major achievements and future plans. Pepsi pleaded: 'We seek equity and fairness and to be judged on fact and merit....We have accepted what is perhaps the toughest set of terms by an Indian company and have every intention to execute our obligations .... Most of our turnover is going to be from exports-just as the government wants. Next year, exports alone would be Rs 200 crore ($70 million) .... Another factor is that one of our major segments is processed food, a core sector activity for India ... 75 per cent of

our turnover in India will come from exports and processed food. Even with expansion, this equation will not change.' In general, Pepsi built its image on a people base and Indian social life and also as Pepsilaunched in India in June a contributor to the programmes of the government and strategically used this image to 1990 overcome the environment. So, after more than five years of acrimonious battle, Pepsi was finally launched in June 1990 selectively in Rajasthan, Punjab, Uttar Pradesh and the South as 'Lehar Pepsi'. On 15 August 1990, television viewers watched prime-time ads launching Lehar Pepsi beckoning nearly 100 million viewers to drink the Indian version of International Pepsi Cola. The host government was finally managed and Pepsi had arrived in India.