Emergic: Rajesh Jain's Blog

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Taking on Pepsi and Coke

October 28th, 2003 · No Comments

It is not often that the small guys win. So, it was interesting to read this story in The Wall Street Journal about how Peru’s Kola Real is taking up on the big guys in Latin America:

Kola Real is emerging as an unlikely threat to both Coca-Cola Co. and PepsiCo Inc. in a region where the two soft-drink giants enjoy some of their fattest global profit margins. By cutting out frills and skimping in areas such as advertising, Kola Real, officially called Industrias Ananos, offers ultra-low prices that appeal to the region’s poor majority. As a result, the company has captured almost one-fifth of the Peruvian market and has made inroads into Ecuador and Venezuela.

Now Kola Real (pronounced RAY-AL) is shaking things up in Mexico. Mexico is a crown jewel in Coke’s international operations and the world’s second-biggest soft-drink market after the U.S., with annual sales of roughly $15 billion. In less than two years, the Mexican version of Kola Real, called “Big Cola,” has captured roughly 4% of the market. Coke and Pepsi have cut prices in response, denting their profits. At the Sam’s Club warehouse store in Mexico City’s upscale Polanco neighborhood, Big Cola is the fifth-best-selling product, narrowly trailing Coke.

Kola Real has put a new twist on globalization. As trade barriers have dropped in much of the developing world, foreign-owned behemoths such as Wal-Mart Stores Inc. have squeezed local incumbents unaccustomed to competition and raised local people’s price sensitivity. The Ananos family has turned the tables on two U.S. giants by undercutting their prices and adapting their aggressive marketing tactics to local conditions.

Kola Real’s strategy is simple: offer big sizes at low prices. In a Carrefour supermarket in Mexico City, a large display of Big Cola beckons shoppers with a price of about 75 cents for a 2.6-liter bottle. Nearby, bottles of Coke go for about $1.30 for a slightly smaller 2.5-liter bottle. On a recent day, housewife Lourdes Avila put four of the Big Cola bottles in her cart and said: “For that price, I’ll try it.”

To keep prices low, the Ananos family runs a lean operation. While Coke and Pepsi bottlers spend nearly 20% of their revenue on beverage concentrate from Atlanta-based Coke and PepsiCo, Purchase, N.Y., the Ananoses make their own. Instead of maintaining a fleet of trucks as most Coke and Pepsi bottlers do, Kola Real hires third parties for deliveries — even individuals with dented pick-up trucks. The company also does little advertising beyond an occasional radio spot, relying on word-of-mouth from penny-pinching housewives.

Some lessons for Linux companies in their battle against Microsoft, perhaps…?

Tags: Emerging Markets

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