Case Study of Pepsi

An Introduction to Pepsi

In 1988, the New York office of the President of the multi-billion cola company PepsiCo received a letter from India. The company had been trying for some time to enter the Indian market - without much success.

The letter was written by George Fernandes (Fernandes), the General Secretary of one of the country's leading political parties, Janata Dal. He wrote, "I learned that you are coming here. I am the one that threw Coca-Cola out, and we are soon going to come back into the government. If you come into the country, you have to remember that the same fate awaits you as Coca-Cola." This development did not seem to be a matter that could be ignored. PepsiCo's arch-rival and the world's number one cola company, Coca-Cola, had indeed been forced to close operations and leave India in 1977 after the Janata Dal came to power. Even in the late 1980s, India had a closed economy and government intervention in the corporate sector was quite high.

However, multinational companies such as PepsiCo had been eyeing the Indian market for a long time for a host of reasons. As the major market for PepsiCo, the US, seemed to be reaching saturation levels, the option to expand on a global scale seemed to have become inevitable for the company.

India was a lucrative destination since its vast population offered a huge, untapped customer base. During the late 1980s, the per capita consumption of soft drinks in India was only three bottles per annum as against 63 and 38 for Egypt and Thailand respectively. Even its neighbor Pakistan boasted of a per capita soft drink consumption of 13 bottles. PepsiCo was also encouraged by the fact that increasing urbanization had already familiarized Indians with leading global brands. Given these circumstances, PepsiCo officials had been involved in hectic lobbying with the Indian government to obtain permission to begin operations in the country. However, the company could not deny that many political parties and factions were opposed to its entry into the country.

In May 1985, PepsiCo had joined hands with one of India's leading business houses, the R P Goenka (RPG) group, to begin operations in the country. The company, along with the RPG group company Agro Product Export Ltd., planned to import the cola concentrate and sell soft drinks under the Pepsi label.

To make its proposal attractive to the Indian government, PepsiCo said that the import of cola concentrate would essentially be in return for exporting juice concentrate from operations to be established in the north Indian state of Punjab. In its proposal submitted to the Ministry of Industrial Development, company sources said that the objectives of PepsiCo's entry into India revolved around 'promoting and developing the export of Indian agro-based products and introducing and developing PepsiCo's products in the country.' However, the government rejected this proposal primarily on two grounds: one, the government did not accept the clause regarding the import of the cola concentrate and, two, the use of a foreign brand name (Pepsi) was not allowed as per the regulatory framework.

The association with the RPG group too ended at this juncture. Not willing to sit quietly on the issue, PepsiCo put forward another proposal to the government a few months later. The company knew that the political and social problems. that plagued Punjab were an extremely sensitive issue for India in the 1980s. PepsiCo's decision to link its entry with the development and welfare of the state was thus a conscious one, aimed at winning the government over. The fact that Punjab boasted a healthy agricultural sector (with good crop yields in the past) also played a role in PepsiCo's decision. Reportedly, the new proposal gave a lot of emphasis to the effects of PepsiCo's entry on agriculture and employment in Punjab. The company claimed that it would play a central role in bringing about an agricultural revolution in the state and would create many employment opportunities. To make its proposal even more lucrative, PepsiCo claimed that these new employment opportunities would tempt many of the terrorists to return to society.

Pepsi began by setting up a fruit and vegetable processing plant at Zahura village in Punjab's Hoshiarpur district. The plant would focus on processing tomatoes to make tomato paste. Since the local varieties of tomatoes were found to be of inferior quality, Pepsi imported the required material for tomato cultivation.

The company entered into agreements with a few big farmers (well-off farmers with large land holdings) and began growing tomatoes through the contract farming route (though the agro-climatic profile of Punjab was not exactly suitable for a crop like tomato, Pepsi had chosen the state because its farmers were progressive, their landholdings were on the larger side, and water availability was sufficient). Initially, Pepsi had a tough time convincing farmers to work for the company. Its experts from the US had to interact extensively with the farmers to explain how they could benefit from working with the company. Another problem, although a minor one, was regarding financial transactions with the farmers. When the company insisted on payments by cheque, it found out that as many as 80% of the farmers did not even have a bank account.

Question:

1-     What Type of Problems faced by Pepsi to grow their beverages and Agri Business in India.

2-     In your Opinion what could be done to facilitate better operations for pepsi in India.