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Colpe de Cola

Colpe de Cola. Lessons from Venezuela. November 20, 2001. Jared Fragin. Gabriel Tam. Katherine Friedman. Vatnak Vat-Ho. Agenda. Current State of the Industry August 22 nd , 1996 Vertical Restraints Legal Implications What has Pepsi done? Next Steps. Current State of the Industry.

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Colpe de Cola

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  1. Colpe de Cola Lessons from Venezuela November 20, 2001 Jared Fragin Gabriel Tam Katherine Friedman Vatnak Vat-Ho

  2. Agenda • Current State of the Industry • August 22nd, 1996 • Vertical Restraints • Legal Implications • What has Pepsi done? • Next Steps

  3. Current State of the Industry • Coke: America, Asia, and Europe • Minimal market share in Venezuela and most Latin American countries • Looking for a way to gain market share • Pepsi: Latin America • Soft drink of choice in Venezuela by more than a 4:1 margin over Coke

  4. August 22nd, 1996 • What Happened? • Coke bought half of Venezuela’s largest bottling company for $300M • Over one weekend: • 4,000 Pepsi trucks had their logos painted over to Coke • Pepsi stranded without a bottler

  5. Vertical Restraints • Vertical Restraints • Arrangements to reinforce vertical relations without explicit integration • Cisneros had significant power • Near distribution monopoly in Venezuela • Hard to penetrate the market for newcomers

  6. Vertical Restraints • Pepsi refused to help Cisneros expand • Cisneros turned to Coke for capital • Coke achieved in two years what Pepsi had built over 50 years • Market share eventually exploded to 81% • Tapered integration to arrange vertical restraints • Wield influence in input markets, enjoy competition • Vulnerable to competitors buying out your supplier and distributor

  7. Legal Implications • Venezuelan Law • Any business activity which alone increased market share significantly must be approved by Government • Cisneros controlled 80% of the bottling market • Coke’s market share increased from 10 to 50% overnight • Merger did not increase bottler’s market share and was therefore legal

  8. Legal Implications • Coke placed six bottling plants and other assets (or ‘junk’ according to Pepsi) for sale to Pepsi • Cisneros offered to continue Pepsi production at 25% of output for one month to give Pepsi a chance to sign up other bottlers (Cisneros is near monopoly bottler in Venezuela) • Pepsi refuses both options • Coke argues Pepsi is not interested in Venezuelan soft drink market • International arbitration court forced Coke to pay Pepsi $94M

  9. What has Pepsi done? • Marketing Blitz • Installed 50,000 refrigerated display cases: “visi-coolers” • 1,000 delivery routes with 200 more added in 1998 • Polar (SOPRESA) vs. Panamco (Cisneros) • 30% share in SOPRESA • $400M over 3 years • Price War • Discount to retailers • Coca-Cola decided to match aggressive discounting

  10. Next Steps • In Venezuela… • Discontinue price war • Continue aggressive marketing • “Power of One” • Globally… • Defensive • Respect distributor power • Offensive • Look for joint ventures, esp. with distributors

  11. Questions?

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