Learning to Live with the Giants
By Daniel Altman
International Herald Tribune
March 20, 2006

The soft drinks industry was one of the earliest to be globalised. Coca-Cola has been sold overseas for about a century, and its main competitors have been expanding abroad for decades.

For years, three multinational companies, Coca-Cola, PepsiCo and Cadbury-Schweppes have dominated the global market for soft drinks. With the rapid growth of some developing countries, local competition is starting to re-emerge. But can new brands really compete with the big three, even in their home markets?

The soft drinks industry was one of the earliest to be globalised. Coca-Cola has been sold overseas for about a century, and its main competitors have been expanding abroad for decades. Together, the big three have controlled about 80 per cent of the global market for many years.

They have achieved that control by buying up local brands and expanding their own operations, sometimes using tactics that American or European competition authorities might not permit in their home markets. In some countries, their presence is overwhelming. In Chile, for example, two of the main bottlers of soft drinks are affiliated with Coke and the third with Pepsi. In India, Coke bought up the biggest local brands in the 1990s and now has a million retail outlets, according to a case study by the ICFA .

Developing countries often welcome the investment that the big three bring, said Lauren Torres, a beverage industry analyst at HSBC. “They love to have these brands come in,” she said. “In India and China, they’re building out infrastructure, the roads to their distribution centres to actually get their brands out there.” The companies and their joint ventures have run into problems related to environmental and labour practices, she added, but sometimes the developing countries are in such an early stage of economic growth that their governments don’t protest.

Money power

Given the enormous financial power of the big three, it’s not easy for local brands to take on Coke, Pepsi and Schweppes under any circumstances. Sometimes, said Peter Holmes, an expert on competition policy at the University of Sussex in Britain, local brands may just be up against superior products and distribution networks. But the lack of strong antitrust rules in some developing countries can make it even harder for local companies to compete. “Clearly there are problems,” Holmes said. “There are international cartels, there are some multinational firms that undoubtedly abuse their dominant positions in developing countries.” As an example in microcosm, Holmes proposed the case of a small shop. If it only has a small refrigerator, and its distribution contract requires it to stock the whole range of Coca-Cola products, then there might not be any room for other brands. “A similar case actually led to an antitrust ruling in Europe,” he said, “but governments in poor countries may not have the wherewithal to take action.” Developing countries’ governments can’t always rely on the big three’s corporate leaders to police their actions overseas, either. There are some international cooperation agreements, but developing countries are often left out.

“The developed countries say, ‘Well, you get yourself proper competition authorities, good rules in place, and then you’ll be able to join these cooperation schemes,’” Holmes said. “You can’t possibly expect the US to hand over confidential information about an American firm to a third-world competition agency .“

Local niche

When competition in the soft drinks business does arise, Torres said, it usually is from a diffuse group of local brands without any substantial market power on their own. They often gain a foothold by serving niche clientele, like malt-flavoured beverage drinkers in Latin America. One such company is Wahaha in China. It started out in 1989 with a niche product and a novel marketing plan, and then it used the brand as a platform for challenging the main players. “They started making a drinkable yogurt for the kids; they positioned it as something to help the kids eat more,” said Z John Zhang, an associate professor of marketing at the University of Pennsylvania who has studied the company. “In China, a lot of families have only one child. You always worry that the child won’t eat enough and get enough nutrition.” Wahaha initially aimed its marketing at low-income peasants in the countryside, a clientele that Coke and Pepsi largely left alone.

Coke and Pepsi are viewed as premium brands in China, Zhang said, and they don’t really compete on price; indeed, lowering their prices could damage their images as high-end products. Distributing outside major cities was expensive, but Wahaha’s production costs were low, so it could still sell at affordable prices. “They targeted those low-income peasants in the countryside,” Zhang said. “They took advantage of their own strength in low costs, so they could actually profitably serve those people.”

But this was only a first step. “They actually used this strategy for developing the countryside and eventually encircling the city,” Zhang said.

“In five years, all the countryside may turn into the cities,” and Wahaha would have a loyal customer base. After succeeding with their drinkable yogurts, Wahaha branched out into cola drinks, purified water and other categories. Now the company claims a 16 per cent market share in soft drinks across all of China. “Definitely Wahaha is a formidable competitor,” Zhang said. So far, the company has merged with other Chinese drink makers and started a joint venture with Danone of France, but it remains independent. Because of companies like Wahaha, the big three’s combined market share may have finally peaked, said John Sicher, editor of Beverage Digest, a trade publication.

“There’s pressure on the big three companies to maintain their market share, because as developing countries develop, local brands gain more momentum,” he said. “That is sort of the countertrend to the expansion of the big companies.”

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