The profitability of the leading cola syrup manufacturers, PepsiCo and Coca Cola, and of the bottlers in the cola business is different. PepsiCo and Coca Cola enjoy 81 operating profit as a percentage of sales; bottlers experience only 15 operating profit as a percentage of sales. Perform porters five analysis that explains why one type of business is potentially so profitable relative to the other

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2 Sep 2018

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THE BEVERAGE BATTLEFIELD In 2007, the President and CEO of Coca-Cola asserted that Coke has had a rather rough run in India; but now it seems to be getting its positioning right. Similarly, PepsiCoâs Asia chief asserted that India is the beverage battlefield for this decade and beyond. Even though the government had opened its doors wide to for- eign companies, the experience of the worldâs two giant soft drinks companies in India during the 1990s and the beginning of the new millennium was not a happy one. Both companies experienced a range of unexpected problems and difficult situations that led them to recognize that competing in India requires special knowledge, skills, and local expertise. In many ways, Coke and Pepsi manag- ers had to learn the hard way that âwhat works hereâ does not always âwork there.â âThe environment in India is challenging, but weâre learning how to crack it,â says an industry leader. THE INDIAN SOFT DRINKS INDUSTRY In India, over 45 percent of the soft drinks industry in 1993 con- sisted of small manufacturers. Their combined business was worth $3.2 million dollars. Leading producers included Parle Agro (hereafter âParleâ), Pure Drinks, Modern Foods, and McDowells. They offered carbonated orange and lemon-lime beverage drinks. Coca-Cola Corporation (hereafter âCoca-Colaâ) was only a distant memory to most Indians at that time. The company had been pres- ent in the Indian market from 1958 until its withdrawal in 1977 fol- lowing a dispute with the government over its trade secrets. After decades in the market, Coca-Cola chose to leave India rather than cut its equity stake to 40 percent and hand over its secret formula for the syrup. Following Coca-Colaâs departure, Parle became the market leader and established thriving export franchise businesses in Dubai, Kuwait, Saudi Arabia, and Oman in the Gulf, along with Sri Lanka. It set up production in Nepal and Bangladesh and served distant markets in Tanzania, Britain, the Netherlands, and the United States. Parle invested heavily in image advertis- ing at home, establishing the dominance of its flagship brand, Thums Up. Thums Up is a brand associated with a âjob well doneâ and personal success. These are persuasive messages for its target mar- ket of young people aged 15 to 24 years. Parle has been careful in the past not to call Thums Up a cola drink so it has avoided direct comparison with Coke and Pepsi, the worldâs brand leaders. The soft drinks market in India is composed of six product seg- ments: cola, âcloudy lemon,â orange, âsodaâ (carbonated water), mango, and âclear lemon,â in order of importance. Cloudy lemon and clear lemon together make up the lemon-lime segment. Prior to the arrival of foreign producers in India, the fight for local dominance was between Parleâs Thums Up and Pure Drinksâ Campa Cola. In 1988, the industry had experienced a dramatic shakeout fol- lowing a government warning that BVO, an essential ingredient in locally produced soft drinks, was carcinogenic. Producers either had to resort to using a costly imported substitute, estergum, or they had to finance their own R&D in order to find a substitute ingredient. Many failed and quickly withdrew from the industry. Competing with the segment of carbonated soft drinks is an- other beverage segment composed of noncarbonated fruit drinks. These are a growth industry because Indian consumers perceive fruit drinks to be natural, healthy, and tasty. The leading brand has traditionally been Parleâs Frooti, a mango-flavored drink, which was also exported to franchisees in the United States, Britain, Portugal, Spain, and Mauritius. OPENING INDIAN MARKET In 1991, India experienced an economic crisis of exceptional se- verity, triggered by the rise in imported oil prices following the first Gulf War (after Iraqâs invasion of Kuwait). Foreign exchange reserves fell as nonresident Indians (NRIs) cut back on repatria- tion of their savings, imports were tightly controlled across all sec- tors, and industrial production fell while inflation was rising. A new government took office in June 1991 and introduced measures to stabilize the economy in the short term, then launched a fun- damental restructuring program to ensure medium-term growth. Results were dramatic. By 1994, inflation was halved, exchange reserves were greatly increased, exports were growing, and foreign investors were looking at India, a leading Big Emerging Market, with new eyes. The turnaround could not be overstated; as one commentator said, âIndia has been in economic depression for so long that ev- erything except the snake-charmers, cows and the Taj Mahal has faded from the memory of the world.â The Indian government was viewed as unfriendly to foreign investors. Outside invest- ment had been allowed only in high-tech sectors and was almost entirely prohibited in consumer goods sectors. The âprinciple of indigenous availabilityâ had specified that if an item could be obtained anywhere else within the country, imports of similar items were forbidden. As a result, Indian consumers had little choice of products or brands and no guarantees of quality or reliability. Following liberalization of the Indian economy and the dis- mantling of complicated trade rules and regulations, foreign investment increased dramatically. Processed foods, software, engineering plastics, electronic equipment, power generation, and petroleum industries all benefited from the policy changes. PEPSICO AND COCA-COLA ENTER THE INDIAN MARKET Despite its huge population, India had not been considered by for- eign beverage producers to be an important market. In addition to the deterrents imposed by the government through its austere trade policies, rules, and regulations, local demand for carbonated drinks in India was very low compared with countries at a simi- lar stage of economic development. In 1989, the average Indian was buying only three bottles a year, compared with per-capita consumption rates of 11 bottles a year in Bangladesh and 13 in Pakistan, Indiaâs two neighbors. PepsiCo PepsiCo entered the Indian market in 1986 under the name âPepsi Foods Ltd. in a joint venture with two local part- ners, Voltas and Punjab Agro.â As expected, very stringent condi- tions were imposed on the venture. Sales of soft drink concentrate to local bottlers could not exceed 25 percent of total sales for the new venture, and Pepsi Foods Ltd. was required to process and dis- tribute local fruits and vegetables. The government also mandated that Pepsi Foodâs products be promoted under the name âLehar Pepsiâ (âleharâ meaning âwaveâ). Foreign collaboration rules in force at the time prohibited the use of foreign brand names on products intended for sale inside India. Although the requirements for Pepsiâs entry were considered stringent, the CEO of Pepsi-Cola International said at that time, âWeâre willing to go so far with India because we want to make sure we get an early entry while the market is developing.â In keeping with local tastes, Pepsi Foods launched Lehar 7UP in the clear lemon category, along with Lehar Pepsi. Marketing and distribution were focused in the north and west around the major cities of Delhi and Mumbai (formally Bombay). An aggres- sive pricing policy on the one-liter bottles had a severe impact on the local producer, Pure Drinks. The market leader, Parle, pre- empted any further pricing moves by Pepsi Foods by introducing a new 250-ml bottle that sold for the same price as its 200-ml bottle. Pepsi Foods struggled to fight off local competition from Pure Drinksâ Campa Cola, Dukeâs lemonade, and various brands of Parle. The fight for dominance intensified in 1993 with Pepsi Foodâs launch of two new brands, Slice and Teem, along with the introduction of fountain sales. At this time, market shares in the cola segment were 60 percent for Parle (down from 70 percent), 26 percent for Pepsi Foods, and 10 percent for Pure Drinks. Coca-Cola In May 1990, Coca-Cola attempted to reenter India by means of a proposed joint venture with a local bottling company owned by the giant Indian conglomerate, Godrej. The gov- ernment turned down this application just as PepsiCoâs application was being approved. Undeterred, Coca-Cola made its return to India by joining forces with Britannia Industries India Ltd., a local pro- ducer of snack foods. The new venture was called âBritco Foods.â Among local producers, it was believed at that time that Coca- Cola would not take market share away from local companies be- cause the beverage market was itself growing consistently from year to year. Yet this belief did not stop individual local produc- ers from trying to align themselves with the market leader. Thus in July 1993, Parle offered to sell Coca-Cola its bottling plants in the four key cities of Delhi, Mumbai, Ahmedabad, and Surat. In addition, Parle offered to sell its leading brands Thums Up, Limca, Citra, Gold Spot, and Mazaa. It chose to retain ownership only of Frooti and a soda (carbonated water) called Bisleri. FAST FORWARD TO THE NEW MILLENNIUM Seasonal Sales Promotionsâ2006 Navratri Campaign In India the summer season for soft drink consumption lasts 70 to 75 days, from mid-April to June. Dur- ing this time, over 50 percent of the yearâs carbonated beverages are consumed across the country. The second-highest season for consumption lasts only 20 to 25 days during the cultural festival of Navratri (âNavâ means nine and âratriâ means night). This tra- ditional Gujarati festival goes on for nine nights in the state of Gujarat, in the western part of India. Mumbai also has a significant Gujarati population that is considered part of the target market for this campaign. As the Regional Marketing Manager for Coca-Cola India stated, âAs part of the âthink localâact localâ business plan, we have tried to involve the masses in Gujarat with âThums Up Toofani Ramjhat,â with 20,000 free passes issued, one per Thums Up bottle. [âToofanâ means a thunderstorm and âramjhatâ means âletâs dance,â so together these words convey the idea of a âfast dance.â] There are a number of [retail] on-site activities too, such as the âbuy oneâget one freeâ scheme and lucky draws where one can win a free trip to Goa.â (Goa is an independent Portuguese- speaking state on the west coast of India, famed for its beaches and tourist resorts.) For its part, PepsiCo also participates in annual Navratri cel- ebrations through massive sponsorships of âgarbaâ competitions in selected venues in Gujarat. (âGarbaâ is the name of a dance, done by women during the Navratri festival.) The Executive Vice President for PepsiCo India commented: âFor the first time, Pepsi has tied up with the Gujarati TV channel, Zee Alpha, to telecast âNavratri Utsavâ on all nine nights. [âUtsavâ means festival.] Then there is the mega offer for the people of Ahmedabad, Baroda, Surat, and Rajkot where every refill of a case of Pepsi 300-ml. bottles will fetch one kilo of Basmati rice free.â These four cities are located in the state of Gujarat. Basmati rice is considered a premium quality rice. After the initial purchase of a 300-ml bottle, consumers can get refills at reduced rates at select stores. The TV Campaign Both Pepsi-Cola and Coca-Cola en- gage in TV campaigns employing local and regional festivals and sports events. A summer campaign featuring 7UP was launched by Pepsi with the objectives of growing the category and building brand awareness. The date was chosen to coincide with the Indiaâ Zimbabwe One-Day cricket series. The new campaign slogan was âKeep It Coolâ to emphasize the product attribute of refresh- ment. The national campaign was to be reinforced with regionally adapted TV campaigns, outdoor activities, and retail promotions. A 200-ml bottle was introduced during this campaign in order to increase frequency of purchase and volume of consumption. Prior to the introduction of the 200-ml bottle, most soft drinks were sold in 250-ml, 300-ml, and 500-ml bottles. In addition to 7UP, Pepsi Foods also introduced Mirinda Lemon, Apple, and Orange in 200-ml bottles. In the past, celebrity actors Amitabh Bachchan and Govinda, who are famous male stars of the Indian movie industry, had en- dorsed Mirinda Lemon. This world-famous industry is referred to as âBollywoodâ (the Hollywood of India based in Bombay). Pepsiâs Sponsorship of Cricket and Foot- ball (Soccer) After India won an outstanding victory in the IndiaâEngland NatWest One-Day cricket series finals, Pep- siCo launched a new ad campaign featuring the batting sensation, Mohammad Kaif. PepsiCoâs line-up of other cricket celebrities includes Saurav Ganguly, Rahul Dravid, Harbhajan Singh, Zaheer Khan, V.V.S. Laxman, and Ajit Agarkar. All of these players were part of the Indian team for the World Cup Cricket Series. During the two months of the Series, a new product, Pepsi Blue, was marketed nationwide. It was positioned as a âlimited edition,â icy-blue cola sold in 300-ml, returnable glass bottles and 500-ml plastic bottles, priced at 8 rupees (Rs) and Rs 15, respectively. In addition, commemorative, nonreturnable 250-ml Pepsi bottles priced at Rs 12 were introduced. (One rupee was equal to US 2.54 cents in 2008.) In addition to the sponsorship of cricket events, PepsiCo has also taken advantage of World Cup soccer fever in India by featur- ing football heroes such as Baichung Bhutia in Pepsiâs celebrity and music-related advertising communications. These ads fea- tured football players pitted against sumo wrestlers. To consolidate its investment in its promotional campaigns, PepsiCo sponsored a music video with celebrity endorsers includ- ing the Bollywood stars, as well as several nationally known crick- eters. The new music video aired on SET Max, a satellite channel broadcast mainly in the northern and western parts of India and popular among the 15â25 year age group. Coca-Colaâs Lifestyle Advertising While Pepsiâs promotional efforts focused on cricket, soccer, and other athletic events, Coca-Colaâs India strategy focused on relevant local idioms in an effort to build a âconnection with the youth market.â The urban youth target market, known as âIndia A,â in- cludes 18â24 year olds in major metropolitan areas. Several ad campaigns were used to appeal to this market seg- ment. One campaign was based on use of âgaanaâ music and bal- let. (âGaanaâ means to sing.) The first ad execution, called âBombay Dreams,â featured A. R. Rahman, a famous music director. This approach was very successful among the target audience of young people, increas- ing sales by about 50 percent. It also won an Effi Award from the Mumbai Advertising Club. A second execution of Cokeâs south- ern strategy was âChennai Dreamsâ (Chennai was formerly called Madras), a 60-second feature film targeting consumers in Tamil Nadu, a region of southern India. The film featured Vijay, a youth icon who is famous as an actor in that region of south India. Another of the 60-second films featured actor Vivek Oberoi with Aishwarya Rai. Both are famous as Bollywood movie stars. Aishwarya won the Miss World crown in 1994 and became an in- stant hit in Indian movies after deciding on an acting career. This ad showed Oberoi trying to hook up with Rai by deliberately leaving his mobile phone in the taxi that she hails, and then calling her. The ad message aimed to emphasize confidence and optimism, as well as a theme of âseize the day.â This campaign used print, outdoor, point-of-sale, restaurant and grocery chains, and local pro- motional events to tie into the 60-second film. âWhile awareness of soft drinks is high, there is a need to build a deeper brand connectâ in urban centers, according to the Director of Marketing for Coca- Cola India. âVivek Oberoiâwhoâs an up and coming star today, and has a wholesome, energetic imageâwill help build a stronger bond with the youth, and make them feel that it is a brand that plays a role in their life, just as much as Leviâs or Ray-Ban.â In addition to promotions focused on urban youth, Coca-Cola India worked hard to build a brand preference among young people in rural target markets. The campaign slogan aimed at this market was âthanda matlab Coca-Colaâ (or âcool means Coca-Colaâ in Hindi). Coca-Cola India calls its rural youth target market âIndia B.â The prime objective in this market is to grow the generic soft drinks category and to develop brand preference for Coke. The âthandaâ (âcoldâ) campaign successfully propelled Coke into the number three position in rural markets. Continuing to court the youth market, Coke has opened its first retail outlet, Red Lounge. The Red Lounge is touted as a one-stop- destination where the youth can spend time and consume Coke products. The first Red Lounge pilot outlet is in Pune, and based on the feedback, more outlets will be rolled out in other cities. The lounge sports red color, keeping with the theme of the Coke logo. It has a giant LCD television, video games, and Internet surfing facilities. The lounge offers the entire range of Coke products. The company is also using Internet to extend its reach into the public domain through the Web site www.myenjoyzone.com. The com- pany has created a special online âSprite-itudeâ zone that provides consumers opportunities for online gaming and expressing their creativity, keeping with the no-nonsense attitude of the drink. Coca-Colaâs specific marketing objectives are to grow the per- capita consumption of soft drinks in the rural markets, capture a larger share in the urban market from competition, and increase the frequency of consumption. An âaffordability plank,â along with introduction of a new 5-rupee bottle, was designed to help achieve all of these goals. The âAffordability Plankâ The purpose of the âaf- fordability plankâ was to enhance affordability of Coca-Colaâs products, bringing them within armâs reach of consumers, and thereby promoting regular consumption. Given the very low per- capita consumption of soft drinks in India, it was expected that price reductions would expand both the consumer base and the market for soft drinks. Coca-Cola India dramatically reduced prices of its soft drinks by 15 percent to 25 percent nationwide to encourage consumption. This move followed an earlier regional action in North India that reduced prices by 10â15 percent for its carbonated brands Coke, Thums Up, Limca, Sprite, and Fanta. In other regions such as Rajasthan, western and eastern Uttar Pradesh, and Tamil Nadu, prices were slashed to Rs 5 for 200-ml glass bottles and Rs 8 for 300-ml bottles, down from the existing Rs 7 and Rs 10 price points, respectively. Another initiative by Coca-Cola was the introduction of a new size, the âMini,â expected to increase total volume of sales and ac- count for the major chunk of Coca-Colaâs carbonated soft drink sales. The price reduction and new production launch were announced together in a new television ad campaign for Fanta and Coke in Tamil. A 30-second Fanta spot featured the brand ambassador, ac- tress Simran, well-known for her dance sequences in Hindi mov- ies. The ad showed Simran stuck in a traffic jam. Thirsty, she tosses a 5-rupee coin to a roadside stall and signals to the vendor that she wants a Fanta Mini by pointing to her orange dress. (Fanta is an orangeade drink.) She gets her Fanta and sets off a chain reaction on the crowded street, with everyone from school children to a traditional ânaniâ mimicking her action. (âNaniâ is the Hindi word for grandmother.) The director of marketing commented that the company wanted to make consumers âsit up and take notice.â A NEW PRODUCT CATEGORY Although carbonated drinks are the mainstay of both Cokeâs and Pepsiâs product line, the Indian market for carbonated drinks is now not growing. It grew at a compounded annual growth rate of only 1 percent between 1999 and 2006, from $1.31 billion to $1.32 billion. However, the overall market for beverages, which includes soft drinks, juices, and other drinks, grew 6 percent from $3.15 billion to $3.34 billion. To encourage growth in demand for bottled beverages in the Indian market, several producers, including Coke and Pepsi, have launched their own brands in a new category, bottled water. This market was valued at 1,000 Crores.1 Pepsi and Coke are responding to the declining popularity of soft drinks or carbonated drinks and the increased focus on all beverages that are non-carbonated. The ultimate goal is leader- ship in the packaged water market, which is growing more rapidly than any other category of bottled beverages. Pepsi is a signifi- cant player in the packaged water market with its Aquafina brand, which has a significant share of the bottled water market and is among the top three retail water brands in the country. PepsiCo consistently has been working toward reducing its dependence on Pepsi Cola by bolstering its non-cola portfolio and other categories. This effort is aimed at making the company more broad-based in category growth so that no single product or category becomes the key determinant of the companyâs market growth. The non-cola segment is said to have grown to contribute one-fourth of PepsiCoâs overall business in India during the past three to four years. Previously, the multinational derived a major chunk of its growth from Pepsi-Cola. Among other categories on which the company is focusing are fruit juices, juice-based drinks, and water. The estimated fruit juice market in India is approximately 350 Crores and growing month to month. One of the key factors that has triggered this trend is the emergence of the mass luxury segment and increasing consumer consciousness about health and wellness. âOur hugely successful international brand Gatorade has gained momentum in the coun- try with consumers embracing a lifestyle that includes sports and exercise. The emergence of high-quality gymnasiums, fitness and aerobic centres mirror the fitness trend,â said a spokesperson. Coca-Cola introduced its Kinley brand of bottled water and in two years achieved a 28 percent market share. It initially produced bottled water in 15 plants and later expanded to another 15 plants. The Kinley brand of bottled water sells in various pack sizes: 500 ml, 1 liter, 1.5 liter, 2 liter, 5 liter, 20 liter, and 25 liter. The smallest pack was priced at Rs 6 for 500 ml, while the 2-liter bottle was Rs 17. The current market leader, with 40 percent market share, is the Bisleri brand by Parle. Other competing brands in this segment include Bailley by Parle, Hello by Hello Mineral Waters Pvt. Ltd., Pure Life by NestlÃ©, and a new brand launched by Indian Railways, called Rail Neer. CONTAMINATION ALLEGATIONS AND WATER USAGE Just as things began to look up for the American companies, an environmental organization claimed that soft drinks produced in India by Coca-Cola and Pepsi contained significant levels of pes- ticide residue. Coke and Pepsi denied the charges and argued that extensive use of pesticides in agriculture had resulted in a minute degree of pesticide in sugar used in their drinks. The result of tests conducted by the Ministry of Health and Family Welfare showed that soft drinks produced by the two companies were safe to drink under local health standards. Protesters in India reacted to reports that Coca-Cola and Pepsi contained pesticide residues. Some states announced partial bans on Coke and Pepsi products. When those reports appeared on the front pages of newspapers in India, Coke and Pepsi executives were confident that they could handle the situation. But they stumbled. They underestimated how quickly events would spiral into a nationwide scandal, misjudged the speed with which local politi- cians would seize on an Indian environmental groupâs report to attack their global brands, and did not respond swiftly to quell the anxieties of their customers. The companies formed committees in India and the United States, working in tandem on legal and public relations issues. They worked around the clock fashioning rebuttals. They com- missioned their own laboratories to conduct tests and waited until the results came through before commenting in detail. Their ap- proaches backfired. Their reluctance to give details fanned con- sumer suspicion. They became bogged down in the technicalities of the charges instead of focusing on winning back the support of their customers. At the start, both companies were unprepared when one state after another announced partial bans on Coke and Pepsi products; the drinks were prevented from being sold in government offices, hospitals, and schools. Politicians exploited the populist potential. In hindsight, the Coke communications director said she could see how the environmental group had picked Coca-Cola as a way of attracting attention to the broader problem of pesticide contami- nation in Indian food products. âFringe politicians will continue to be publicly hostile to big Western companies, regardless of how eager they are for their investment,â she said. Failing to anticipate the political potency of the incident, Coke and Pepsi initially hoped that the crisis would blow over and they adopted a policy of silence. âHere people interpret silence as guilt,â said an Indian public relations expert. âYou have to roll up your sleeves and get into a street fight. Coke and Pepsi didnât un- derstand that.â Coca-Cola eventually decided to go on the attack, though in- directly, giving detailed briefings by executives, who questioned the scientific credentials of their productsâ accusers. They directed reporters to Internet blogs full of entries that were uniformly pro- Coke, and they handed out the cell phone number for the director of an organization called the Center for Sanity and Balance in Pub- lic Life. Emphasizing that he was not being paid by the industry, Kishore Asthana, from that center, said, âOne can drink a can of Coke every day for two years before taking in as much pesticide as you get from two cups of tea.â The situation continued to spin out of control. Newspapers printed images of cans of the drinks with headlines like âtoxic cocktail.â News channels broadcast images of protesters pouring Coke down the throats of donkeys. A vice president for Coca- Cola India said his âheart sankâ when he first heard the accusa- tions because he knew that consumers would be easily confused. âBut even terminology like P.P.B.âparts per billionâis difficult to comprehend,â he said. âThis makes our job very challenging.â PepsiCo began a public relations offensive, placing large ad- vertisements in daily newspapers saying, âPepsi is one of the safest beverages you can drink today.â The company acknowledged that pesticides were present in the groundwater in India and found their way into food products in general. But, it said, âcompared with the permitted levels in tea and other food products, pesticide levels in soft drinks are negligible.â After all the bad press Coke got in India over the pesticide content in its soft drinks, an activist group in California launched a campaign directed at U.S. college campuses, accusing Coca- Cola of India of using precious groundwater, lacing its drinks with pesticides, and supplying farmers with toxic waste used for fertilizing their crops. According to one report, a plant that produces 300,000 liters of soda drink a day uses 1.5 million liters of water, enough to meet the requirements of 20,000 people. The issue revolved around a bottling plant in Plachimada, India. Although the state government granted Coke permission to build its plant in 1998, the company was obliged to get the lo- cally elected village councilâs go-ahead to exploit groundwater and other resources. The village council did not renew permission in 2002, claiming the bottling operation had depleted the farmersâ drinking water and irrigation supplies. Cokeâs plant was closed until the corporation won a court ruling allowing them to reopen. The reopening of the plant in 2006 led students of a major Mid- western university to call for a ban on the sale of all Coca-Cola products on campus. According to one source, more than 20 cam- puses banned Coca-Cola products, and hundreds of people in the United States called on Coca-Cola to close its bottling plants be- cause the plants drain water from communities throughout India. They contended that such irresponsible practices rob the poor of their fundamental right to drinking water, are a source of toxic waste, cause serious harm to the environment, and threaten peo- pleâs health. In an attempt to stem the controversy, Coca-Cola entered talks with the Midwestern university and agreed to cooperate with an independent research assessment of its work in India; the univer- sity selected the institute to conduct the research, and Coke fi- nanced the study. As a result of the proposed research program, the university agreed to continue to allow Coke products to be sold on campus. In 2008 the study reported that none of the pesticides were found to be present in processed water used for beverage produc- tion and that the plants met governmental regulatory standards. However, the report voiced concerns about the companyâs use of sparse water supplies. Coca-Cola was asked by the Delhi-based environmental research group to consider shutting down one of its bottling plants in India. Cokeâs response was that âthe easiest thing would be to shut down, but the solution is not to run away. If we shut down, the area is still going to have a water problem. We want to work with farming communities and industries to reduce the amount of water used.â The controversies highlight the challenges that multinational companies can face in their overseas operations. Despite the huge popularity of the drinks, the two companies are often held up as symbols of Western cultural imperialism. QUESTIONS 1. Timing of entry into the Indian market brought different results for PepsiCo and Coca-Cola India. What benefits or disadvantages accrued as a result of earlier or later market entry? ? 2. âGlobal localizationâ (glocalization) is a policy that both companies have implemented successfully. Give examples for each company from the case. ? 3. Which of the two companies do you think has better long- term prospects for success in India? ? (Please answer the three questions with 300-350 words each, thank you so much).

Subaru's Sales Boom Thanks to the Weaker Yen For the Japanese carmaker Subaru, a sharp fall in the value of yen against the U.S. dollar has turned a problem the lack of U.S. production into an unexpected sales boom. Subaru, which is a niche player in the global auto industry, has long bucked the trend among its Japanese rivals of establishing significant manufacturing facilities in the North American market. Instead, the company has chosen to concentrate most of its manufacturing in Japan in order to achieve economies of scale at its home plants, exporting its production to the United States. Subaru still makes 80 percent of its vehicles at home, compared with 21 percent for Honda. Back in 2012, this strategy was viewed as something of a liability. In those days, one U.S. dollar bought only 80 Japanese yen. The strong yen meant that Subaru cars were being priced out of the U.S. market. Japanese companies like Honda and Toyota, which had substantial production in the United States, gained business at Subaru's expense. But from 2012 onward, with Japan mired in recession and consumer prices falling, the country's central bank repeatedly cut interest rates in an attempt to stimulate the economy. As interest rates fell in Japan, investors moved money out of the country, selling yen and buying the U.S. dollar. They used those dollars to invest in U.S. stocks and bonds where they anticipated a greater return. As a consequence, the price of yen in terms of dollars fell. By December 2015, one dollar bought 120 yen, representing a 50 percent fall in the value of the yen against the U.S. dollar since 2012. For Subaru, the depreciation in the value of the yen has given it a pricing advantage and driven a sales boom. Demand for Subaru cars in the United States has been so strong that the automaker has been struggling to keep up. The profits of Subaru's parent company, Fuji Heavy Industries, have surged. In February 2015, Fuji announced that it would earn record operating profits of around Â¥410 billion ($3.5 billion) for the financial year ending March 2015. Subaru's profit margin has increased to 14.4 percent, compared with 5.6 percent for Honda, a company that is heavily dependent on U.S. production. The good times continued in 2015, with Subaru posting record profits in the quarter ending December 31, 2015. Despite its current pricing advantage, Subaru is moving to increase its U.S. production. It plans to expand its sole plant in the United States, in Indiana, by March 2017, with a goal of making 310,000 a year, up from 200,000 currently. When asked why it is doing this, Subaru's management notes that the yen will not stay weak against the dollar forever, and it is wise to expand local production as a hedge against future increases in the value of the yen. Indeed, when the Bank of Japan decided to set a key interest rate below zero in early February 2016, the yen started to appreciate against the U.S. dollar, presumably on expectations that negative interest rates would finally help stimulate Japan's sluggish economy. By late March 2016, the yen had appreciated against the dollar and was trading at $1=112 yen. Sources: Chang-Ran Kim,Subaru-Maker, Fuji Heavy Lifts Profit View on Rosy US Sales, Weak Yen Reuters, February 3, 2015; Yoko Kubota, Why Subaru's Profit Is Surging, The Wall Street Journal, November 14, 2014; Doron Levin, Subaru Profit Soaring on Weaker Yen, Market Watch, November 15, 2014; Y. Kubato, Weaker Yen Drives Subaru Makers Profit Higher, The Wall Street Journal, February 4, 2016. Page 294

Case Discussion Questions:

Why do you think that historically, Subaru chose to export production from Japan, rather than set up manufacturing facilities in the United States like its Japanese rivals?

What are the currency risks associated with Subaru's export strategy?

What are the potential benefits? Why did Subaru's sales and profits surge in 2014 and 2015? Is Subaru wise to expand its U.S. production capacity?

What other strategies could the company use to hedge against adverse changes in exchange rates? What are the pros and cons of the different hedging strategies Subaru might adopt?