INTERNATIONAL TRADE CASE STUDY COCA COLA’S MARKETING CHANLENGGES IN BRAZIL THE TUBAINAS WAR FANY 043200800 JOEY GILDAS 04320100006 LAURENZIA LUNA 04320100018 MARC LAOH 04320100040 PRISCILLA ALEXANDRA WAKKARY 04320100046 EMILIO KRISANTUS GUMANSALANGI 04320100053 LIPPO KARAWACI APRIL 2012
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INTERNATIONAL TRADE CASE STUDY
COCA COLA’S MARKETING CHANLENGGES IN BRAZIL
THE TUBAINAS WAR
FANY 043200800
JOEY GILDAS 04320100006
LAURENZIA LUNA 04320100018
MARC LAOH 04320100040
PRISCILLA ALEXANDRA WAKKARY 04320100046
EMILIO KRISANTUS GUMANSALANGI 04320100053
LIPPO KARAWACI
APRIL 2012
1
CHAPTER I
BACKGROUND
Our case study is about Coca Cola and its efforts to attempt different strategies to
undercut the growth of “Tubainas”. But before we go in depth about their so called war, we
must first briefly understand what Coca Cola is and its organization in general. The Coca
Cola Company is an American multinational beverage corporation and manufacturer,
retailer and marketer of non-alcoholic beverage concentrates and syrups.
The Coca Cola Company also sells soda fountains to major restaurants and food
service distributors. Based on best global brand 2011, Coca Cola was the world's most
valuable brand. Its influence on the beverage world is unquestionable and is evident in most
parts, if not the whole world. This paper talks about Coca Cola and their challenges in their
second largest international market against the local soda called tubainas.
Tubainas refers to several brands of fairly cheap, carbonated and sweet beverages
sold locally throughout Brazil, which is in many ways just like Coca Cola. For more than
half a century, hundreds of micro, and a few medium-sized, manufacturers produced and
distributed the so-called tubainas on a local or regional basis.
The growth of tubainas in Brazil frustrated Coca Cola, so in order to maintain their
performance and strength of Coca Cola in Brazil they tried to find the way to undercut or to
defeat the growth of tubainas. They believed that if the company succeeded in pressing the
growth of the tubainas, then it would make more profit for the company.
2
The problem between Coca Cola and tubainas was actually about the price. Brazil
with its high population, had a too wide range of people to consume water especially soda
water, for example Coca Cola sodas. The quality of Coca Cola in some ways is better than
tubainas, it can be seen by the people who consume Coca Cola in Brazil, but the problem is
the price of tubainas is cheaper than Coca Cola. This means that tubainas is the problem in
terms of its price and it would affect the profitability of the Coca Cola company, because
people who consumed soda drinks will enjoy lower price soda drink with good quality,
even though it may be second place in terms of quality.
The fact that the taste and quality aren’t too far off from each other, people
preferably purchase tubainas with a relatively pocket-friendlier price tag instead of Coca
Cola. So that’s why Coca Cola exercised its efforts to undercut tubainas in order to
stabilize the production of Coca Cola in Brazil. The reason why tubainas had cheaper
prices is because of small manufacturers with low operational and administrative costs.
They produce their beverages without a clear legal existence and they don’t pay
taxes to produce the tubainas, because the products are produced by small producers. It is
different with Coca Cola as a brand company which is included as a legal company, big and
an enormous producer and of course with expectation of high profit, they must spend more
money to pay the tax so it can be considered as a legally recognized company. These two
factors influence the price of that product in Brazil which results in tubainas frustrating and
even threatening Coca Cola.
3
The strategy to stabilize the company and win the soda market in Brazil was with
efforts to improve the subsidiary’s profitability and regain Coca Cola’s market share.
Rather than the Cola war which was the name referred to in Coke versus Pepsi competition
in many countries, the real issue for the Brazilian subsidiary of the Coca Cola Company has
been the tubainas war.
Over the years, Coca Cola attempted different strategies to undercut tubainas’
growth, and having previously mentioned the strategy of regaining market share, Pepsi-
Cola, Coca Cola’s notorious contender, which is ranked fourth among the best-selling soda
brands in Brazil, also gained market share, thanks to its partnership with Brazilian beverage
manufacturer AmBev and the successful launch of Pepsi Twist in 2003.
Many factors come into play when we analyze such a case. Our group will try and
see it from different perspectives and point of views, associate it with the trade and
economic theories that we see relevant, and analyze the case from an institution and
resource based view in relation with what both tubainas and Coca Cola have in advantages
and disadvantages.
We will also see the role of both formal and informal institutions in what we have
touched previously about being a legally recognized company with taxes and so forth, and
also the role of it being a foreign direct investment and how it enters a foreign market.
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CHAPTER II
SYMPTOMS AND PROBLEM STATEMENTS
I. SYMPTOMS
A. SOCIAL CLASS CLASSIFICATION
The social class classification is also detected as one of the symptoms. Why is that?
The basis is the Brazilian economic stabilization plan, Plano Real (English: Real
Plan), which was established in the mid-1990s that restored the purchasing power of
the low-income segment of the population thus creating an overall consumer
marketing target. After the plan established, inflation has been mastered without
price freezes, confiscation of bank deposits or other affectations of economic
heterodoxy. As the result, the Brazilian economy grew back quickly (Plano Real,
2011).1 Brazilians can purchase consumer goods that were used to be inaccessible to
them.
The Brazilian Market Research association, ABIPEME (Associação
Brasileira de Institutos de Pesquisa de Mercado) (Abbreviation and Acronyms used
in the Brazilian Press, 2012)2, had developed a social class classification that
defines five social classes—A, B, C, D, and E. Classes A and B possess the highest
levels of income, education, and purchasing power, and tend to be more
sophisticated consumers. Classes D and E are lack purchasing power and struggle to
afford even the very basic goods and services. Class C consumers are described as
typical workers in the lower middle class, and comprise 12.6 million Brazilian
households.
Brazilians categorized in the Social Class C group were the most benefited
by the economic stabilization that occurred in the 1990s. Class C accounts for 28%
of total national consumption of soft drinks. From this classification, the selling is
now depending on them, because they hold quite big portion in national
consumption and products’ benefits.
B. QUALITY OVER BRANDS
Another symptom that is found is the market tendencies to choose quality over
brands. According to a market study conducted by the local branch of the Boston
Consulting Group (BCG), in spite of the fact that price affects 38% of the food-
related purchase decisions and 31% of other products, quality seems to be the main
factor that guides Class C Brazilians’ buying decisions3.
The study pointed out that brand was the least important factor in the food
purchase decisions of Class C. The BCG report also noted that very few Class C
consumers could be considered brand loyalists. They often switch among a few
brands. When no evident difference in the perceived quality exists, Class C
consumers tend to favor lower-priced products. The problem is that people of this
3 Gertner, David, Rosane Gertner and Dennis Guthery. “Coca Cola’s Marketing Challenges in Brazil: The Tubainas War.” 2004
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social class make the purchase decision according to two factors – quality and price;
if they could find the same quality for the lower price, they choose the cheaper
product.
The lack of importance of branding among Class C Brazilian consumers was
supported by market data showing that, between 1998 and 2000, 63% of the market
leaders in 157 product categories lost market share in Brazil4. In Brazil, for nearly a
decade, consumer habits observed among the massive segment of Class C
consumers resulted in significant market share losses for brand leaders in several
categories. That is why Coca Cola does not seem to be the first choice of the Class
C members when they are looking for soda beverages.
C. BRAZILIAN B-BRANDS
Informal industries in Brazil, such as the tubainas market, are growing vastly
because there are not enough jobs in comparison to the productive workers around.
Tubainas market is also a viable option because, as previously explained, of the
tendencies of Brazilian consumers coming from the C Class to choose products of
lower price. These so-called lower-priced products are referred to as B-Brands in
the Brazilian market.
Between 1998 and 2000, Brazilian brand leaders in 15 product categories
lost 63% of market share, according to an A.C. Nielsen/CPBA study (Gertner,
4 ibid
7
Gertner, & Guthery, 2004)5. The study showed that the most affected categories
were beverages, candies and sweet confections, and house-care products.
In terms of the soda beverages market, tubainas served as the B-Brands
available and favored. At its beginning, tubaina was a brand of candy and sweets
registered by the Ferraspari Company, but later it introduced a soft drink under the
same brand. Later on, tubainas became the general term for low-profile soft drinks.
ABIR director Carlos Cabral Menezes estimated that tubainas combined market
share was 23% and that it generated sales of nearly R$3.5 billion in 2001
(approximately US$ 1.5 billion).
D. TAX EVASION IN BRAZIL
Another issue that this group identifies as a symptom in the case of Coca Cola
Company in Brazil is tax evasion by small chains of brands and/or regional brands
of soft drinks.
By definition according to investopedia.com, tax evasion means an illegal
practice where a person, organization or corporation intentionally avoids paying
his/her/its true tax liability6. Business owners say that it’s a jungle out there in the
Brazilian market with its stringent labor laws, high interest rates, and heavy taxes.
Those factors contribute to a rampant of smuggling and tax evasion up to
international organized crimes in the country. Jungle said as businesses and
individuals do what they can to survive and, unofficially, indeed that had happened.
5 Gertner, David, Rosane Gertner and Dennis Guthery. “Coca Cola’s Marketing Challenges in Brazil: The Tubainas War.” 2004 6 http://www.investopedia.com/terms/t/taxevasion.asp#axzz1rAROCN6A
8
Heavy taxes prompt producers to increase their products’ prices in order to
be able to cover such taxes. For example, payroll taxes in Brazil consume an
average 42 percent of an employee's income, compared with about 24 percent in the
United States, and corporate taxes average 23 percent, compared with an average 14
percent in the United States.
Sales taxes vary widely by state and type of purchase. In Sao Paulo state for
cigarettes, it's 72 percent. Beer is taxed at 56 percent. For soap, add 42 percent. And
the tax on a new car is 44 percent (Rapoza, 2004)7. And according to Emerzon
Kapar, a Brazilian businessman who investigated the nonpayment of taxes by firms,
taxes amounted to 40% of the final soft drink sales price8. Though not only specific
to the soda beverages market, but companies are up to their necks facing unethical
competition9.
Vice president of the Brazilian Coca Cola bottler Spal, Marco Aurelio Eboli,
estimated that 90% of the 750 regional brands of soft drinks did not pay the taxes
they ought (Gertner, Gertner, & Guthery, 2004)10
. Thus explaining the major
reason how tubainas could compete on the price basis against the global brands of
soft drinks such as Coca Cola.
In 2004 the Brazilian government put tax reform high on its political agenda.
At the same time an influential study appeared that emphasized the role of unfair
competition in undermining productivity and investment (McKinsey & Company