Pepsi s Entry Into India

Pepsi’s entry into India

...a lesson in globalization

The Crew...

Ashish Chavan

Namratta Pattensheti

Rajani Rawat 88

Mahesh Soni 92

Reetiesh Yadav

Some words to quote...

“Convincing India that it needs Western junk has not been easy”

...a new internationalist magazine article, commenting on Pepsi’s struggle to enter India, in August 1988

An Introduction

• Type : Public

• Industry : Food Beverages

• Founded : New Bern, North Carolina, U.S. (1890)

• Founder : Caleb Bradham, Donald M. Kendall, Herman W. Lay

• Headquarters : New York, U.S.

• Area served Worldwide

• Key people Indra Nooyi (Chairperson and CEO)

• Current Revenue : US$44.3 billion ▲

• Employees : 203,000 (2010)

PepsiCo India’s Chairman Sanjeev Chadha (right) and Managing Director Gautham Mukkavilli

An abstract...

• Its co-owners were Punjab Agro Industries and Voltas subsidiary of the Tata Group.

• PepsiCo agreed to set up fruit and vegetable processing plants, agriculture research stations, franchised bottling operations and snack-food factories using local potatoes and other ingredients.

• It also planned to invest more than $1 billion in India till 1998.

• The company’s first plants were built in northern Punjab state.

• Pepsi Foods Private had planned to call its flagship drink “Pepsi Era”, but opponents challenged the name under a law.

• Lehar Pepsi, 7-Up and Miranda, got an unexpected assist when the Govt. decided in April, 1989 to begin enforcing a two-year-old ban on the use of brominated vegetable oil.

The re-entry of Pepsi in India...

Pepsi’s entry into India – the story...

• The NY office of PepsiCo’s President received a letter of approval from George Fernandes (Gen. Sec., JD) in 1988.

• Before this Coca-Cola had been forced out of India in 1977.

• Even in the 1980s, Indian economy was marked by high govt. intervention.

• Pepsi, though, was eyeing India for a couple of reasons:...the US market seemed to be reaching its saturation level

...India was always a market every MNC giant wanted to enter (vast population)

...urbanization familiarized Indians with global brands

• Some problems, though, posed as entry barriers:...high govt. intervention

...low per capita consumption of soft drinks (3 bottles p.a.) compared to – ...63 for Egypt, 38 for Thailand and 13 for Pakistan

A futile effort in the first go...

• In May 1985, PepsiCo joined hands with RPG Group to form Agro Product Export Limited.

• It planned to import cola concentrate and sell soft drinks under the Pepsi label.

• It was said to be done in return for the export of juice concentrate from Punjab.

• The govt. rejected the proposal on following grounds:...it did not accept the clause regarding import of cola concentrate, and

...use of foreign brand name (Pepsi) was not allowed as per regulatory framework

Pepsi gave it another shot...

• PepsiCo put forward another proposal to the govt. a few months later.

• It decided to link it’s entry to development and welfare of Punjab.

• Presence of healthy agricultural sector also backed the company’s decision.

• The new proposal gave enough emphasis on effects of PepsiCo’s entry on agriculture and employment in Punjab.

• The company promised to create many employment opportunities in the state.

• It further claimed that many terrorists would be lured to come back to the society to work.

• It added a lot of positives to the company’s proposal.

The protests continued...

• Many Indian soft drinks companies, social and political groups strongly voiced their opposition to PepsiCo’s entry.

• The prominent reasons included:...company would siphon out money from the country in form of –

...profits

...promotional fees, and

...various other means

...they even cited instance of PepsiCo’s involvement in Chile’s political turmoil

...it was also seen as a violation of govt.’s foreign trade policies

Pepsi’s promises...

• The co. would focus on food and agro-processing.

• Only 25% of the investment would be directed towards soft drinks.

• The co. would bring advanced food technology to India.

• In the process, it would also boost the image of Indian products in foreign markets.

• The EXIM ratio was promised to be kept at 5:1 for 10 years.

• Creation of jobs for 50k people (25k for Punjab alone).

• No use of foreign brand names.

• Establishment of an agricultural research centre.

The promises came good...

• The govt. was quite impressed with Pepsi’s promises.• Finally, Pepsi Foods Ltd. venture was finally cleared in Sep ’88.• “Pepsi” – a JV b/w PepsiCo (36.89%), PAIC (36.11%), and Voltas (24%)

India Ltd.• The co. launched its soft drinks business in 1989.• Along with the protestors, there was a lot who appreciated the way in

which Pepsi clinched the deal.• Pepsi used 6P’s as according to Philip Kotler:...Product

...Price

...Place

...Promotion

...People, and

...Politics

Once Pepsi re-entered India...

Promises are meant to be broken...

• Pepsi set up a fruit and vegetable processing plant at Zahura village in Punjab’s Hoshiarpur district.

• It began to import materials for tomato cultivation.• The co. entered into contract farming with the rich farmers for

growing tomatoes. • The problems, though, were never ending:...80% of farmers did not have bank accounts rendering them unable to accept cheque payments

...there was a delay in making the Zahura plant operational

...as a result, harvested crop could not be utilized as planned and local farmers had to bear a combined loss of Rs. 2.5 mn.

...Pepsi only paid Rs. 0.75/kg of tomatoes as against market rate of Rs. 2/kg

...the co. selected only big farmers

...by end of 1991, it employed only 783 people as against 50k promised earlier

Promises are meant to be broken...

• The problems, though, were never ending:...on the other hand, Pepsi argued that it provided indirect employment to nearly 26k people (inclusion of local vendors selling Pepsi)

...information revealed that more than 50% Pepsi employees were working in its bottling business and not for food processing activities

...it also had major holding in Futura Polymers Ltd. – a capital intensive firm

...the use of name “Lehar Pepsi” also attracted much controversy

...Pepsi also failed to adhere its commitment to export 50% of its production

...it began exporting tea, rice, shrimps, glass bottles, leather products, champagne as against fruit/vegetable based products

• There was even a show-cause notice to Pepsi by the Ministry of Commerce, to which the co. paid no attention.

• Luckily for Pepsi, it did not have to face criticism for long.

India liberalizes – Pepsi enjoys...

• In 1990, Govt. of India liberalized the economy on the ground of severe foreign exchange crisis.

• The process included:...removal of numerous restrictions on foreign trade, and

...increased role of private equity in Indian markets

• Pepsi benefited from the economic changes in many ways:...it was free from the commitments that it made at the time of its entry

...the co. can now invest more than 25% in its soft drinks business

...it was also no longer required to export 50% of its production

...PAIC’s share was brought down to 1% and Voltas’s to nil

...the co. established a wholly-owned subsidiary, PepsiCo Holdings India Pvt. Ltd.

...Pepsi changed its cola’s name from “Lehar Pepsi” to “Pepsi”

...it sold off its tomato paste plant to HLL in 1995

...PHI’s business grew by 50% in 1995 and turnover surpassed Rs. 1.25 bn in ‘96

After all, Pepsi wasn’t that bad...

Pepsi’s entry – Indian benefits...

• Pepsi’s tomato farming project shot up India’s tomato production from 4.24 mn tonnes (‘91-92) to 5.44 mn tonnes (‘95-96).

• Punjab’s overall tomato productivity went up from 28k tonnes to 250k tonnes and per hectare from 16 tonnes to 50 tonnes.

• The co. offered its contract farmers, free of cost, some advanced equipments such as transplanters and seedling machines.

• It also set up the agricultural research centers in Jallowal and Channo (Punjab) and Nelamangala (Karnataka).

• Through “Pepsi Agri Backward Integration Program”, the co. encouraged Punjab’s farmers to cultivate potatoes with low-sugar content.

• It extended its contract farming initiatives to groundnuts in 2000.

Pepsi’s entry – Indian benefits...

• The project initiated in Punjab and then introduced in Gujarat.

• By using imported technology from China, the per hectare yield improved from 1 tonne to 3.5 – 4.5 tonnes.

• Pepsi invested an additional amount of Rs. 3.75 bn spread over 3 years (2000-02) in Karnataka over & above the existing investment of Rs. 1.4 bn.

• Since its entry into India, the co. had already invested Rs. 18 bn by the year 2000.

Pepsi – doing business on its own terms...

• In 2000, Pepsi’s exports added up to Rs. 3 bn.

• It included processed foods, basmati rice, guar gum and even soft drink concentrate.

• Even by 2000, it could procure only 3k tonnes of potatoes p.a. as against its requirements of 25k.

• In 2002, the co. entered into various contract farming deals.

• It joined hands with Punjab Agri Export Corporation to process citrus fruits for its Tropicana project in August 2002.

• The co. also initiated, first of its kind, organized, and commercial seaweed farming in Tamilnadu.

• By 2003, Pepsi’s soft drinks, snacks, fruit juices and mineral water business had established themselves firmly in India.

Some words to quote...

“For millions of Indians, Pepsi had become a part of their lives in many different ways”

…