The case discusses the major strategies adopted by Pepsi Co (Soft drinks & snack food major) to enter the Indian market in the late 1980s. Initially the company found it very hard to sell itself to the Indian government as the Indian economy was highly regulated. So to lure Indian government Pepsi Co made promises of working towards enrichment of the rural economy Punjab by getting involved in the agricultural activities. Pepsi Co also made several promises to make its proposal look very attractive to the Indian government.
The case also highlights the criticism faced by the company. Its failure to keep many of the promises after it started the operations in India, invited wrath of many politicians & activists. The case also discusses how liberalization of Indian economy helped Pepsi Co & how they used it to their own benefit. Lastly, the case also talks about the contract farming initiatives taken up by Pepsi Co since the 1990s & analyzes the strategies used by the company to enter the Indian market.
Case questions: 1. Why do companies like Pepsi need to globalize? What are the various ways in which foreign companies can enter a foreign market? What hurdles & problems did Pepsi face when it tried to enter India during the 1980s?
The companies like Pepsi need to globalize because their domestic markets are getting saturated. The external environment can have serious implication on the profitability of a company. The changes in markets (in this case saturation of domestic market), changes in consumer behavior (decreasing health consciousness) led Pepsi to search for new markets. In such cases companies prefer markets of emerging countries where there are less educated people who are easy to persuade to use their product. PepsiCo was also encouraged by the fact that increasing urbanization had already familiarized Indians with leading global brands. Hence Pepsi entered India. India at that time had a huge population which was a huge untapped market of bottom of pyramid segment. So Pepsi knew once it taps this market it would earn huge profits & also it would make its entry in the nearby countries easy.
When companies are looking to enter foreign markets they can have various collaborative arrangements with the domestic companies operating in those countries. It mainly depends on how cash-rich the foreign company is & how much risk it is willing to take. Companies who are cash-rich & willing to take risk use the Greenfield investment approach wherein they start everything from scratch. Companies who are risk averse prefer collaborative arrangements like Joint Ventures, Strategic alliances, Licensing, Franchising etc. This reduces the need of initial capital. Having a domestic partner reduces the risk as through the domestic partner foreign companies can learn the know-how of the processes followed in the country. It also allows them to connect with the consumer better thereby increasing the local responsiveness for the companies own product.
In case of Pepsi, it collaborated with RPG (R P Goenka) Group initially to persuade the Indian government, an effort which ended prematurely. But Pepsi did not sit back as it continued its effort. Finally in the year 1988, Pepsi started a joint venture with Punjab Agro Industrial Corporation (PAIC, a body established by the Punjab government) and Voltas India Ltd. (a company owned by the business house of Tatas) While PepsiCo held 36.89% other venture's stake, PAIC and Voltas held 36.11% and 24% stakes respectively. The company launched the soft drinks business with great fanfare and an elaborate multi-media advertising campaign in 1989. So Pepsi’s strategy to make the state government itself its partner worked in its favor & it proved to be a huge success.
At the time when Pepsi decided to enter Indian market, the Indian economy was heavily regulated. Coca cola found it difficult to deal with the government so it had left. India as a country was considered to be politically risky at that time. The company faces several problems as listed below:
* The Indian government & many political parties and factions were against the entry of Pepsi in Indian market. * The Indian law did not permit the use of a foreign brand name Pepsi. In Pepsi’s initial proposal the government did not accept the clause regarding the import of the cola concentrate. * Many Indian soft-drinks companies and social and political groups strongly voiced their opposition to Pepsi’s entry. * Protestors said that the company would siphon out money from the country in the form of profits, promotional fees, and various other means. Protestors argued that the same money could be used for the development of the country. * Some critics even cited the instance of PepsiCo's involvement in Chile's political turmoil to support their opposition to the proposal. Most of the opponents said that allowing a foreign company into a non-priority sector would go against the existing government's foreign trade policies.
2. Critically analyze the strategy adopted by Pepsi to sell itself to the Indian Government. Do you think the biggest factor responsible for the acceptance of its proposal by the regulatory authorities was its projection of its operations as the solution to many of Punjab’s problems? Why/Why not?
Pepsi had cited the reasons of the unrest in the country & it tried to answer them through its strategy. 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 also played a role in PepsiCo's decision. India was not even doing well on its exports. So considering all these Pepsi came up with the following strategies:
* To project the entry of Pepsi as a boost for the economy of Punjab * To project that entry of Pepsi would result in increase in employment level in Punjab * To project that entry of Pepsi would alleviate the problem of terrorism via creating more employment * To project that entry of Pepsi would help India boost export as half of the production would be exported and the export-import ratio would be 5: 1 for a period of 10 years. Pepsi’s projection of its operations as the solution to many of Punjab’s problems certainly played a crucial role as at that time the Indian government was incompetent to address the problems of Punjab. The proposal of Pepsi was very attractive so government gave the green signal to the Pepsi Foods Ltd.
3. How did the company react to the change in the business environment after the liberalization of the Indian economy in the early 1990s? Critically comment on the allegations that Pepsi deliberately did not adhere to most of its commitments.
Liberalization of Indian economy was a boon for Pepsi. It allowed Pepsi various benefits which they used wisely. The removal of various restrictions meant government would no longer challenge Pepsi even if it did not adhere to its commitments. The government removed the restrictions that bound Pepsi's investments in the soft drinks business to 25% of the overall investments and required it to export 50% of its production.
In 1994, Pepsi bought off its partners in the venture; while Voltas sold off its stake completely, PAIC's stake was reduced to less than 1%. The company established a wholly-owned subsidiary, PepsiCo Holdings India Pvt. Ltd. (PHI), which was completely devoted to the soft drinks business. Soon, all of Pepsi's investments in the country were being routed through this new company. Under the new economic policy, the use of foreign brand names in India was allowed which led Pepsi to change its cola's name from Lehar Pepsi to Pepsi. Then in 1995, Pepsi's sold off its tomato paste plant to the Indian FMCG majors. The only link that Pepsi maintained with its agriculture related commitments was the contract farming of tomatoes over 3,500 acres of land. HLL used the bulk of the tomato paste produced by the plant for its tomato ketchup and puree offerings. The rest was handed over to Pepsi for export.
All above developments of Pepsi deviated Pepsi from the path it had chosen to enter the Indian market. Company’s main focus was clearly on the soft drinks business. Pepsi had broken most of the promises it had made. The company’s projections of the growth of Indian market in the beverages business were correct & as a result PHI’s turnover surpassed Pepsi's turnover by Rs 1.25 billion. So Pepsi reduced its emphasis on fruit/vegetable-based products & concentrated more on soft drinks business. PHI's plastic exports (bottles manufactured al Furura) were as high as 67%. It was alleged that the plastic bottles business resulted in the emission of highly toxic material that was polluting the areas around the factor and irreparably damaging the ecosystem. Also, even by 1997, the agro-research center promised by the company was nowhere in sight. Overall after liberalization Pepsi focused more on its core business to earn more profits rather than helping India develop its economy.
4. Examine the contract farming initiatives undertaken by Pepsi in India & explain the rational for such initiatives from the company’s perspective. Why is it important for multinational corporations to work towards the improvement of the economy of the countries in which they operate? What are the various other ways in which this can be done?
Pepsi, although criticized for many reasons, received some praise for its initiatives of contract farming. Pepsi offered its contract farmers advanced equipment such as transplanters (for planting tomato and chili saplings) and seeding machines (for groundnuts) to help them carry out their tasks efficiently and speedily. The equipment was offered free of cost to the farmers & it had been imported and modified to suit Indian conditions. The contract farming helped India boost its tomato production. The company identified that tomato contract farming had been very successful so it only focused on it. It also started Peanut project as the demand of peanut butter in the foreign markets was increasing. The contract forming provided Pepsi a kind of diversification in the business. It was later able to provide tomatoes to FMCG major HLL for its tomato related products. Most of the contract farming was done with a view to either export products to foreign markets or provide the raw material to FMCG majors. This provided Pepsi another source of revenue.
Multinationals like Pepsi are not viewed favorably & so they have to prove themselves that they can carry out developmental activities & help countries improve their economies. Unearthing the untapped potential of emerging countries remains a challenge for multinationals due to government policies & regulations. If they can help countries improve their economies then they are likely to get more help from governments which make their entry easy into such countries. Sometimes multinationals can be detrimental to economy as it can siphon off huge profits from country. So it is the job of the government to ensure this does not happen.
Many multinationals now take up CSR (Corporate Social Responsibility) activities. Their purpose is to explore opportunities in the bottom of pyramid segment. But in doing so they also help countries weakest sectors to develop. This serves both the purposes of earning profits & co-creating business’s social compact by linking with NGOs & governments.