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Home--News
Learning to Live with the Giants
By Daniel Altman
International Herald Tribune
March 20, 2006
The soft drinks industry was one of the earliest to be globalised.
Coca-Cola has been sold overseas for about a century, and its main
competitors have been expanding abroad for decades.
For years, three multinational companies, Coca-Cola, PepsiCo and Cadbury-Schweppes
have dominated the global market for soft drinks. With the rapid growth
of some developing countries, local competition is starting to re-emerge.
But can new brands really compete with the big three, even in their
home markets?
The soft drinks industry was one of the earliest to be globalised.
Coca-Cola has been sold overseas for about a century, and its main
competitors have been expanding abroad for decades. Together, the
big three have controlled about 80 per cent of the global market for
many years.
They have achieved that control by buying up local brands and expanding
their own operations, sometimes using tactics that American or European
competition authorities might not permit in their home markets. In
some countries, their presence is overwhelming. In Chile, for example,
two of the main bottlers of soft drinks are affiliated with Coke and
the third with Pepsi. In India, Coke bought up the biggest local brands
in the 1990s and now has a million retail outlets, according to a
case study by the ICFA .
Developing countries often welcome the investment that the big three
bring, said Lauren Torres, a beverage industry analyst at HSBC. “They
love to have these brands come in,” she said. “In India and China,
they’re building out infrastructure, the roads to their distribution
centres to actually get their brands out there.” The companies and
their joint ventures have run into problems related to environmental
and labour practices, she added, but sometimes the developing countries
are in such an early stage of economic growth that their governments
don’t protest.
Money power
Given the enormous financial power of the big three, it’s not easy
for local brands to take on Coke, Pepsi and Schweppes under any circumstances.
Sometimes, said Peter Holmes, an expert on competition policy at the
University of Sussex in Britain, local brands may just be up against
superior products and distribution networks. But the lack of strong
antitrust rules in some developing countries can make it even harder
for local companies to compete. “Clearly there are problems,” Holmes
said. “There are international cartels, there are some multinational
firms that undoubtedly abuse their dominant positions in developing
countries.” As an example in microcosm, Holmes proposed the case of
a small shop. If it only has a small refrigerator, and its distribution
contract requires it to stock the whole range of Coca-Cola products,
then there might not be any room for other brands. “A similar case
actually led to an antitrust ruling in Europe,” he said, “but governments
in poor countries may not have the wherewithal to take action.” Developing
countries’ governments can’t always rely on the big three’s corporate
leaders to police their actions overseas, either. There are some international
cooperation agreements, but developing countries are often left out.
“The developed countries say, ‘Well, you get yourself proper competition
authorities, good rules in place, and then you’ll be able to join
these cooperation schemes,’” Holmes said. “You can’t possibly expect
the US to hand over confidential information about an American firm
to a third-world competition agency .“
Local niche
When competition in the soft drinks business does arise, Torres said,
it usually is from a diffuse group of local brands without any substantial
market power on their own. They often gain a foothold by serving niche
clientele, like malt-flavoured beverage drinkers in Latin America.
One such company is Wahaha in China. It started out in 1989 with a
niche product and a novel marketing plan, and then it used the brand
as a platform for challenging the main players. “They started making
a drinkable yogurt for the kids; they positioned it as something to
help the kids eat more,” said Z John Zhang, an associate professor
of marketing at the University of Pennsylvania who has studied the
company. “In China, a lot of families have only one child. You always
worry that the child won’t eat enough and get enough nutrition.” Wahaha
initially aimed its marketing at low-income peasants in the countryside,
a clientele that Coke and Pepsi largely left alone.
Coke and Pepsi are viewed as premium brands in China, Zhang said,
and they don’t really compete on price; indeed, lowering their prices
could damage their images as high-end products. Distributing outside
major cities was expensive, but Wahaha’s production costs were low,
so it could still sell at affordable prices. “They targeted those
low-income peasants in the countryside,” Zhang said. “They took advantage
of their own strength in low costs, so they could actually profitably
serve those people.”
But this was only a first step. “They actually used this strategy
for developing the countryside and eventually encircling the city,”
Zhang said.
“In five years, all the countryside may turn into the cities,” and
Wahaha would have a loyal customer base. After succeeding with their
drinkable yogurts, Wahaha branched out into cola drinks, purified
water and other categories. Now the company claims a 16 per cent market
share in soft drinks across all of China. “Definitely Wahaha is a
formidable competitor,” Zhang said. So far, the company has merged
with other Chinese drink makers and started a joint venture with Danone
of France, but it remains independent. Because of companies like Wahaha,
the big three’s combined market share may have finally peaked, said
John Sicher, editor of Beverage Digest, a trade publication.
“There’s pressure on the big three companies to maintain their market
share, because as developing countries develop, local brands gain
more momentum,” he said. “That is sort of the countertrend to the
expansion of the big companies.”
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