Pepsi Cola Pakistan: Franchising and Product Line Management

CASE: IB-84 DATE: 06/27/08

PEPSI COLA PAKISTAN: FRANCHISING & PRODUCT LINE MANAGEMENT1

In July 1991, Irfan Mustafa faced several dilemmas. As West Asia area vice president and chief executive officer of Pepsi Cola Pakistan Incorporated (PCI), Mustafa was charged with developing a strategy to grow share and profitability across PCI sales but focusing particularly on 7-Up. Pepsi Cola International had shifted focus to its global brands and, since acquiring 7Up International in 1986, had withdrawn all marketing and technical support for Pepsi's local Pakistani brand, Teem. As a country manager, however, Mustafa was evaluated on profitability, and Teem was a profitable brand. Mustafa knew that he would need to make important decisions about Teem in developing a brand strategy and marketing plan. Considering Teem's success in Pakistan, Mustafa wondered how he should position the soft drink and whether to continue investing in it despite the loss of international support.

With PepsiCo's acquisition of 7-Up International, arranging for 7-Up and PCI bottlers in Pakistan to merge also became a priority for Mustafa. The ability to coordinate strategies across all bottlers producing PCI brands would be essential. By August 1990, PCI had been able to merge 7-Up and PCI bottlers in three regions. As contracts expired over the next year or two, Mustafa would need to convince the remaining 7-Up bottlers to sell their plants to PCI bottlers as well. With the mergers complete, Mustafa's next step would be to persuade bottlers to adopt an updated product line. However, since this would entail changes to Teem, a strong Pakistani brand that outsold 7-Up in some regions, Mustafa anticipated resistance.

PEPSICO INC.

Pepsi Cola International was owned by parent company, PepsiCo Inc. In 1990, PepsiCo's numerous food and beverage brands were available in nearly 150 countries and accounted for an

1 Unless otherwise noted, information in this case comes from interviews with Irfan Mustafa, West Asia area vice president and chief executive officer, Pepsi Cola Pakistan Incorporated (PCI), or data provided by PCI. Professor Wasim Azhar and Davina Drabkin (MBA '03) prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

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estimated $44 billion in retail sales. Net sales were almost $18 billion and net income was over $1 billion.2 In 1990, PepsiCo operated in three markets:

? Soft Drinks: Pepsi Cola Company and Pepsi Cola International ? Snack Foods: Frito Lay Inc. and PepsiCo Foods International ? Restaurants: Pizza Hut, Taco Bell, and Kentucky Fried Chicken (KFC)

PepsiCo described itself as "first and foremost a growth company."3 The company had a good year in 1990, demonstrating double-digit growth in all three of its markets (soft drinks 14 percent, snack foods 16 percent, and restaurants 26 percent). One out of every five sales dollars was from outside of the United States and, in every line of business, the company saw global potential that "equals or exceeds the explosive growth that occurred when our domestic industries were in their infancies."4

Soft Drinks: Pepsi Cola International

Pepsi Cola International represented PepsiCo's soft drink business outside of the United States. Pepsi Cola's first international expansion was in 1934 when it formed a Canadian subsidiary. Over the following two years, Pepsi established subsidiaries in Cuba and England. By 1956, Pepsi Cola was produced by 149 bottlers in 61 foreign countries. In 1972, Pepsi sealed a production agreement with the Soviet Union and then, in 1981, reached a bottling agreement with the People's Republic of China5 (see Exhibit 1). Pepsi Cola International accounted for almost $1.5 billion in net sales and close to $94 million in operating profit in 1990.6

With nearly 14 billion cases sold worldwide in 1990, the international soft drink market was almost double that of the United States. Compared to the United States, however, international soft drinks consumption rates were fairly low--in most of the world, soft drink consumption was far below the almost 500 12-ounce units consumed annually by the average American.7 In Mexico, for example, the world's second largest soft drink market, per capita consumption was only about two-thirds what it was in the United States (see Exhibit 2).8 According to John Ferebee, an analyst with Value Line Inc., prospects for the global soft drink business were bright. Overseas consumption levels were well below those of the United States, mainly because of the underdeveloped distribution system. However, as Ferebee explained, "Demand for PepsiCo's beverages is quite high and, as the distribution infrastructure is improved, we think that unit volume will grow rapidly."9

2 PepsiCo Inc. Annual Report, 1990, Operating Overview, p. 9. 3 Ibid. 4 Op. cit., PepsiCo's Prospects, p. 7. 5 "Pepsi-Cola," Encyclopedia of Consumer Brands, Vol. 1. pp. 443-444. [check for date] 6 PepsiCo Inc., Annual Report, Financial Review, op. cit. 7 Bruce Oman, "Past, Present and Future. (Soft Drink Industry) (Beyond the End Aisle)," Beverage World, August

1, 1990. 8 PepsiCo Inc. Annual Report, op. cit., Industry Position, p. 10. 9 Edward Clifford, "PepsiCo Seeking to Build Global Market Share," The Globe and Mail, September 7, 1990.

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Pepsi Cola International held 15 percent of the international soft drink market in 1990, 10 and was intent on increasing its market share. Pepsi had focused on building its brands in high potential markets and had grown its sales by 29 percent in 1990. In the Soviet Union, Pepsi signed an agreement that would more than double its production there over the next decade. In India, Pepsi's joint venture launched its first product, Lehar Pepsi.

In April, 1990, Pepsi Cola gathered bottlers from all parts of the globe in Los Angeles for its first ever international convention, announcing plans to spend more than $1 billion over the next five years to upgrade bottling plants, improve distribution and bolster marketing programs. According to the Wall Street Journal, "The Pepsi convention seemed like an orchestrated attempt to rally overseas bottlers and to convince them once and for all that Pepsi is committed to the soda business abroad. Under the crush of Coke's global strength, some Pepsi international bottlers have felt neglected, particularly as PepsiCo has plunged hundreds of millions of dollars into building its snack and restaurant businesses abroad." Pepsi also unveiled a strategy to target certain fast-growing market segments that were in their infancy abroad--including diet soft drinks, and fountain and vending machines. The idea was to beat Coca-Cola in establishing a commanding advantage in these segments.11

The international push was largely the result of a slowdown in the U.S. soft drinks market, where annual growth had slowed to 3 percent by 1990 compared to 4-5 percent in the 1980s. The international market, however, was expected to grow annually in 8-10 percent spurts for several years to come. PepsiCo senior management planned to derive 25 percent of sales and profits from foreign markets over the next five years--Pepsi estimated that its new strategy of targeting high-growth segments would more than double its overseas soft drink volume from about 2 billion cases in 1990 to 5 billion by 1995.12 All franchise arrangements and subsidiary companies abroad were to work towards this goal.

7-Up International

In 1986, PepsiCo Inc. bought 7-Up's international division for $246 million. PepsiCo had originally offered to buy both the American and international interests of 7-Up for $380 million but the United States Federal Trade Commission blocked that deal on grounds of violating antitrust laws. 7-Up International was the third-largest soft drink company both abroad and inside the United States and operated in more than 85 countries. Adding 7-Up's international unit boosted PepsiCo's foreign volume by almost 20 percent. Coca-Cola Company, however, remained the industry leader--that year, Coca-Cola had 39 percent market share compared to Pepsi's 29 percent in the United States13 and the company outsold Pepsi by three to one outside of the United States.14

10 Ibid. 11 Michael J. McCarthy, "PepsiCo Plans Extensive Ad Campaign to Contest Coke's Overseas Dominance," The

Wall Street Journal, April 2, 1990, p. B6. 12 Ibid. 13 "PepsiCo Buys 7-Up's International Unit," Los Angeles Times, July 15, 1986. 14 Cotten Timberlake, "PepsiCo Buys 7-Up's Foreign Unit," The Associated Press, [The Record,] July 15, 1986.

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Robert Beeby, then Pepsi Cola International president, explained:

The addition of 7-Up International will greatly improve our competitive position overseas for a number of reasons. It expands our presence in the burgeoning lemon-lime category: it strengthens our network of franchised bottlers: and it will increase the efficiency of our respective manufacturing, distribution, and marketing systems.15

PepsiCo's 7-Up acquisition was widely praised. The fast growing lemon-lime category, in which 7-Up was a leading producer in 1986, represented 15 percent of international soft drink sales.16 Emanuel Goldman, a beverage industry analyst with the investment firm Montgomery Securities, commented, "I don't think Pepsi has any pretense of being Coca-Cola overseas." Nevertheless, he added, "It's certainly good for PepsiCo because they do increase their overseas gallonage. ... It gives them a world-renowned, lemon-lime product. It fits in very well with their soft drink infrastructure overseas and, with all of that in mind, it will help them make a lot of money." David Goldman [not related to Emanuel Goldman], an analyst with Dean Witter Reynolds Inc., said: "It gives them [PepsiCo] a new lease on life, internationally. PepsiCo is at present almost a noncompetitor abroad. They are an insignificant factor in every market with the exception of Venezuela and Mexico. Although the increment to Pepsi's international volume appears small, it does afford Pepsi a new growth capability. Seven-Up is a rapidly growing brand outside the United States."17

By 1991, five years after purchasing 7-Up International, Pepsi Cola International had expanded 7-Up sales, adding more than 30 additional markets.18

Competitive Analysis

The soft drink industry was one of the most competitive consumer product industries. With many competing sources of information, it was often difficult to obtain consistent data, pushing each company to rely heavily on its own research. Pepsi Cola's main competitor, both in the United States and abroad, was the Coca-Cola Company. With its original soft drink invented in 1886 by a pharmacist, the Coca-Cola Company was the largest manufacturer, marketer, and distributor of soft drink concentrates and syrups in the world. By 1990, Coca-Cola sold soft drink products in almost 170 countries, outselling all other soft drinks in most of these geographies. Worldwide, Coca-Cola sold 9.4 billion cases and claimed 46 percent of the international soft drink market--according to the company, "four times that of any competitor."19 The company held the lead in the United States as well with 41 percent of the market. In 1990, Coca-Cola boasted over $10 billion in combined domestic and international revenues and almost $1.4 billion in net income20 (compared to PepsiCo's combined domestic and

15 Terry Dodsworth, "PepsiCo Pays 246 Million Dollars for 7-Up Overseas," The Financial Times, July 15, 1986. 16 Ibid. 17 Cotten Timberlake, op.cit. 18 PepsiCo Inc. Annual Report, op. cit., p.12. 19 The Coca-Cola Company, 1990 Annual Report, Financial Highlights and International Soft Drinks. 20 Ibid.

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international soft drink revenues of $6.5 billion and operating profits of $767 million).21 CocaCola's international soft drink business grew 8 percent from 1989 to 1990 while Pepsi-Cola's international sales grew 29 percent. 22, 23

Speaking in 1991, former Chairman Roberto Goizeuta explained that the Coca-Cola Company had been transformed in 10 years from a diversified U.S. beverage company with large foreign business to a well-focused global soft drink company that "just happens to be based in Atlanta."24 Goizeuta affirmed that in the 1990s, Coca-Cola planned to put ever-greater focus on growing business outside the U.S. because "that's where the money is." More than 80 percent of CocaCola's net income came from its international business in 1990 compared with slightly over 60 percent in 1981. "In 1981, our market share internationally was 39 percent, last year [in 1990] it was 46 percent and within the next three years, half of the soft drink products sold internationally will be from the Coca-Cola Company."25

According to Goizeuta, per capita consumption of soft drinks outside the U.S. averaged only about one-fifth the rate of the U.S., where the typical person drank 292 eight-ounce servings of Coca-Cola products in 1990. Like Pepsi Cola International, this relative gap in consumption steered Coca-Cola toward the non-U.S. market. Goizueta explained that the tactic of investing in local bottling companies worldwide had given Coca-Cola a greater role in pushing for expansion because "we have a say in management" of the business in various markets. "Prior to 1981, we saw ourselves as suppliers of concentrate and syrups and advertising software to bottlers. We were passive beneficiaries or victims of our bottlers."26

PepsiCo went about its business in a slightly different way than Coca-Cola. While Coca-Cola focused solely on beverages, PepsiCo had diversified from the soft drink business into other food-related lines, most notably snack food giant Frito-Lay (the leading manufacturer of snack chips in the United States), and fast-food chains Pizza Hut, Kentucky Fried Chicken, and Taco Bell (making PepsiCo the world's largest restaurant company at the time).27 In the United States, Pepsi Cola was solidly in second place in 1991 with 33 percent of the U.S. soft drinks market compared to Coca Cola's 41 percent (domestic 7-Up and Dr. Pepper, both owned by Hicks & Haas, a Dallas-based investment firm, were in third position with 9.8 percent market share28) (see Table 1, next page). Internationally, however, Pepsi Cola lagged far behind CocaCola, with less than one-third of Coca Cola's international sales.

21 PepsiCo Inc. Annual Report, op. cit., p.37. 22 Ibid. 23 The Coca-Cola Company, op.cit. 24 Richard Walker, "Coca-Cola Aims for More Global Growth," Reuters News, February 27, 1991. 25 Ibid. 26 Ibid. 27 Edward Clifford, op. cit. 28 Standard & Poor's Industry Surveys, "Beverages," June 27, 1991 (vol. Jan. 1992), pp. F23-F26.

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