Entry into INDIA Entry into INDIA ………………A lesson in A lesson in GLOBALIZATION.GLOBALIZATION.

AN ABSTRACT It took half decade of negotiating, 20 debates in It took half decade of negotiating, 20 debates in

Parliament and a monumental public relations campaign Parliament and a monumental public relations campaign for Pepsi to enter India. for Pepsi to enter India.

Not exactly Pepsi-Cola, it was called Lehar Pepsi, a Not exactly Pepsi-Cola, it was called Lehar Pepsi, a concession to the anti-foreign lobby. concession to the anti-foreign lobby.

It appear only in Jaipur, Kanpur, Bangalore and Punjab.It appear only in Jaipur, Kanpur, Bangalore and Punjab.

Christopher Sinclair, the President of Pepsi-Cola Christopher Sinclair, the President of Pepsi-Cola International, called his company’s venture in India “An International, called his company’s venture in India “An Historic Agreement.”Historic Agreement.”

PepsiCo’s move into the Indian market was made PepsiCo’s move into the Indian market was made possible by the company’s willingness to take a 36.9% possible by the company’s willingness to take a 36.9% share in a conglomerate called “Pepsi Foods Private share in a conglomerate called “Pepsi Foods Private Limited”Limited”

It’s a co-owners were Punjab Agro Industries and Voltas It’s a co-owners were Punjab Agro Industries and Voltas a subsidiary of TATA Group.a subsidiary of TATA Group.

PepsiCo agreed to set up fruit and vegetable PepsiCo agreed to set up fruit and vegetable processing plants, agriculture research stations, processing plants, agriculture research stations, franchised bottling operations and snack-food factories franchised bottling operations and snack-food factories using local potatoes and other ingredients.using local potatoes and other ingredients.

It is also planned to invest more than $1Billion in India It is also planned to invest more than $1Billion in India by 1998.by 1998.

First plants were built in northern Punjab StateFirst plants were built in northern Punjab State

Pepsi Food Private Ltd had planned to call his flagship Pepsi Food Private Ltd had planned to call his flagship drink “Pepsi Era” but opponents challenge a name under drink “Pepsi Era” but opponents challenge a name under a law.a law.

Lehar Pepsi,7-Up and Miranda got an unexpected assist Lehar Pepsi,7-Up and Miranda got an unexpected assist when Government decide in April 1989, to begin an when Government decide in April 1989, to begin an enforcing a two year ban on the use of brominated use enforcing a two year ban on the use of brominated use of vegetable oil.of vegetable oil.

AN ABSTRACT

"Convincing India that it needs "Convincing India that it needs Western junk has not been easy."Western junk has not been easy."

- A New Internationalist Magazine Article, commenting on Pepsi's struggle to enter India, in August 1988

A Letter to PEPSI In 1988, the New York office of the

President of the multi-billion cola company PepsiCo received a letter from India.

The company had been trying for some time to enter the Indian market - without much success.

The letter was written by George Fernandes (Fernandes), The General Secretary of one of the country's leading political parties, Janata Dal.

"I learned that you are coming here. I am the one that threw Coca-Cola out, and we are soon going to come back into the government. If you come into the country, you have to remember that the same fate awaits you as Coca-Cola."

George Fernandes The General Secretary – Janta Dal

A Letter to PEPSI

PEPSI’S ENTRY INTO INDIA Before

Before this Coca-cola had been thrown out of India in1977.

Even in 1980’s economy was marked by high government interventions.

Pepsi though, was looking India for couple of reasons,

The US market seems to be reaching its saturation level.

India was always a market that every MNC wanted to enter . .( reason very vast population).

Urbanization familiarized Indians with global brands.

Low per capita consumption of soft drink, 3 bottles p.a. as compared to 63 for Egypt, 38 for Thailand and 13 for Pakistan.

May 1985, PepsiCo had joined hands with the R P Goenka (RPG) group, to begin operations in the north Indian state of Punjab.

Agro Product Export Ltd., planned to import the cola concentrate and sell soft drinks under the Pepsi label.

Make its proposal attractive to the Indian government

Objectives -revolved around 'promoting and developing the export of Indian agro-based products

The government rejected this proposal primarily on two grounds:

1. Did not accept the clause regarding the import

2. Use of a foreign brand name (Pepsi) was not allowed

RPG group too ended at this juncture

THE PROMISES - PEPSI’S ENTER

Decision to link its entry with the development and welfare of the state of Punjab.

Fact that Punjab boasted a healthy agricultural sector

Entry on agriculture and employment

New employment opportunities would tempt many of the terrorists to return to society...

Focus on food & agro-processing only 25% investment for Soft drink Bring advanced food processing technology & Boost image of Made in India to Foreign Market

The Ex-Im ration 5:1 for 10 years

80% Export of Company & 20% Export of Selected Manufacturer

50K Jobs in India & 25K in Punjab, No Foreign Brand Names used & Agriculture Research Center

THE PROMISES - PEPSI’S ENTER

PEPSI ENTERED

Govt. Quite impressed with T&C Proposed

In 1988 Finally Cleared by the Govt. JV – PAIC (Punjab Agro Ind. Corp.) &

Voltas India Ltd. (TATA) JV Stake PEPSI – 36.89, Voltas –

36.11% & PAIC – 24% In 1989 Launched the Soft Drinks

with Great Fanfare & Multi-Media advertising Campaing

PEPSI ENTEREDPEPSI ENTERED

36.89

36.11

24

PEPSIVoltasPAIC

JV – Stakes - 1988JV – Stakes - 1988

Marketing Expert – PHILIP KOTLER Some year later Commenting, how the

company used Mega Marketing to enter the Indian Market

Pepsi bundled a set of benifits that won the support of various interest groups in India.

Instead of relying on the normal four P's added two P's – Politics & Public Opinion

Committing towards developing Rural economy & Bringing Technologies for Food Processing & water treatment

Turned a lot of Votes in Pepsi Co's favor.

PEPSI's 6 P'sPEPSI's 6 P's

ProductProduct PricePrice PlacePlace PromotionPromotion People &People & PoliticsPolitics

Promises Keep Some, Break Some! Pepsi began by setting up a fruit and vegetable processing plant at Zahura village in Punjab's Hoshiarpur district.

Focus on processing tomatoes to make tomato paste

Local varieties of tomatoes were found to be of inferior quality

Imported the required material for tomato cultivation.

Agreements with a few big farmers

The agro-climatic profile of Punjab was not exactly suitable for a crop like tomato

Chosen the state because farmers were progressive, landholdings were on the larger side, & water availability was sufficient

Experts from the US had to interact extensively with the farmers

PROMISES ARE MEANT TO BE BROKENPROMISES ARE MEANT TO BE BROKEN

On payments by cheque, found out that 80% of the farmers did not even have a bank account..!

Croped Harvested 1990, Plant not been made operational Farmer had to bear losses of 2.5 Millions

Pepsi paid Rs. 0.75/Kg & Market Price was Rs. 2.00/Kg

Fails to Creat Jobs, Promised for 50000 Jobs but by 1991 - 783 Employed, 1992 – 909, & By 1996 – 2400 people as Direct Employees. Pepsi Claimed Employed 26000 as Indirect Employment

Industry Commeted company included the small vendors who sold soft drinks as indirect employees. It could not be regarded as the employees of Pepsi

Information revealed that more than 50% employees working in its bottling business and not for food processing activities.

Promises Keep Some, Break Some! It also had major holding in Futura Polymers Ltd. Recyling plastic – a capital intensive firm.

The use of name “Lehar Pepsi” also attracted much contraversey.

Pepsi also failed to adhere its commitment to export 50% of its production.

It began exporting tea, rice, shrimps, glass bottles, leather products, champagne as against fruit or vegetable based products has always been exported.

There was even a show cause notice to Pepsi company by Ministry of Commerce, to which company paid no attention.

Luckily for Pepsi, it did not have to face criticism for long

India Liberalizes - A Boon For Pepsi In the early 1990s, the Government of India was facing a

foreign exchange crisis.

Organizations like the International Monetary Fund agreed to help the government.

Condition that it liberalized the Indian economy.

The Process included:removal of numerous restriction on foreign trade and increased the role of Private Equity in Indian market.

Pepsi benefited from the economic changes in many ways.

The Company took full Adavantage of New Economic Policy

India Liberalizes - A Boon For Pepsi Bought off its partners in Joint Venture. A Wholly-Owned

subsidairy.

PepsiCo Holdings India Pvt. Ltd. (PHI) – Devoted Soft Drinks Business. Changed Cola Name from Lehar Pepsi to Pepsi.

Decision to sell off its Tomato Paste Plant to the Indian FMCG major, Hindustan Lever Ltd. (HLL).

1995 – Beverages business grew by as much as 50%

1996 – PHI – Pepsi's turnover by Rs. 1.25 Billion, 1.5% Fruit & Vegetable Exports & 67% Plastic Exports

1997 – The Agro Research Center promised by the Company was nowhere in sight.

Pepsi Goes Farming - Finally

Though Pepsi attracted a lot of criticism, many people felt there was a positive side to the company's entry into India.

Pepsi’s tomato farming project shot up India’s tomato production from 4.25mn tonnes in ’91-92 to 5.44mn tonnes in ’95-96.

Punjab’s overall tomato productivity went up from 28,000 tonnes to 250,000 tonnes and per hectare from 16 tonnes to 50 tonnes.

The company offer its contract farmers, free of cost, some advanced equipments such as transplanters and seedling machines.

It also set up agriculture research centers in Jallowal and Chano (Punjab) and Nelamangala(Karnataka).

Though “Pepsi Agri Backward Integration Programme” the company encouraged Punjab farmers to cultivate potatoes with low sugar content.

AFTER ALL PEPSI WASN’T THAT BAD AFTER ALL PEPSI WASN’T THAT BAD PEPSI’S ENTRY-INDIAN BENEFITSPEPSI’S ENTRY-INDIAN BENEFITS

It extended it contracts farming initiatives to It extended it contracts farming initiatives to groundnuts in the year 2000.groundnuts in the year 2000.

The project initiated in Punjab and then in Gujarat.The project initiated in Punjab and then in Gujarat.

By using improved technology from China, the per By using improved technology from China, the per hectare yield improve from 1tonne to 3.5-4.5tonnes.hectare yield improve from 1tonne to 3.5-4.5tonnes.

Pepsi invested additional Rs.3.75bn in spread over 3 Pepsi invested additional Rs.3.75bn in spread over 3 years (2000-2002) in Karnataka over and above the years (2000-2002) in Karnataka over and above the existing investment of Rs.1.4bnexisting investment of Rs.1.4bn

Since its entry to India company already invested Since its entry to India company already invested Rs.18bn by the year 2000.Rs.18bn by the year 2000.

8000 people were working for the Company 8000 people were working for the Company

DOING BUSINESS ON ITS OWN TERMS……..

In 2000 Pepsi’s export added up to Rs. 3bn.In 2000 Pepsi’s export added up to Rs. 3bn.

It included processed foods, basmati rice, guar gums and even It included processed foods, basmati rice, guar gums and even soft drink concentrate.soft drink concentrate.

Even by 2000 it could procure only 3,000 tonnes of potatoes Even by 2000 it could procure only 3,000 tonnes of potatoes p.a. as against its requirement of 25,000 tonnes.p.a. as against its requirement of 25,000 tonnes.

In 2002, company entered into various contract farming deals.In 2002, company entered into various contract farming deals.

It joined hands with Punjab Agri Export Corporation to process It joined hands with Punjab Agri Export Corporation to process citrus fruits for its Tropicana project in August 2002.citrus fruits for its Tropicana project in August 2002.

The company also initiated, first of its kind, organized and The company also initiated, first of its kind, organized and commercial seaweed farming in Tamilnadu.commercial seaweed farming in Tamilnadu.

By 2003, Pepsi’s soft drinks, snacks, fruit juices and mineral By 2003, Pepsi’s soft drinks, snacks, fruit juices and mineral water business had established themselves firmly in India.water business had established themselves firmly in India.

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 hurdels and problems did Pepsi face when it tried to enter India during the 1980s?

Companies like Pepsi Need to be global for the Following

* Expand Sales- Increase the market for their production by tapping potential new countries

* Minimize Risks- Globalization and International trade also helps in minimizing risks.

* To leverage on technology

* To increase production efficiencies

* For diversification so as to reduce risks

* To counter foreign investments by competitors

* Minimize Costs and optimal resource utilization- By shifting operations in areas with cheaper labour and resources.

Companies can enter foreign markets through the following ways:

* Export – Direct & Indirect

* JV - Joint Ventures

* Mergers and Acquisitions

* Licensing, Franchising

* Strategic Alliances

* Management Contracts

* Contract Manufacturing

* FDI – Foreign Direct Investments

Hurdles faced by Pepsi

* India being a closed economy till 1991, there was high level of intervention by the government in the corporate sector

* Low awareness, demand and consumption for soft drinks. The per capita consumption was only 3 per annum

* Foreign brand name could not be used

* There was no liberalization and this not even 1% FDI was allowed.

* Sensitive political and social problems in the country like terrorism

* Cola concentrate – the major ingredient to make Pepsi soft drink could not be imported

* Agriculture sector was the priority and thus Pepsi had to win the government by making promises of development in the agriculture sector

Questions . . ?

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?

Strategy Adopted by Pespi

Promoting and developing the export of Indian Agro-based products, though it got rejected.

Each cola import would be in return of exporting juice concentrate from Punjab.

Development and Welfare of State.

Bringing about Agriculture Revolution in state.

Creating Employments.

Terrorists to return to society.

Punjab boasted a healthy agricultural sector

Strategy Adopted by Pespi

Development of Areas it planned to operate in

Directing major (75%) investment towards agricultural sector

Focusing on food and Agro-processing.

Boosting the image of Indian products in foreign market.

Establishing Agricultural Research Centre.

More emphasis on Exports than imports to improvise the balance of payment.

Reson for Acceptance of ProposalBy the Regulatory Authorities

Yes, Most of the commitments were related with Punjab therefore it is the biggest factor responsible for acceptance of Pepsi.

Questions . . ?

3. How did the Company react to the changes in the Business Environment after the Liberalization of the Indian Economy in the early 1990s? Critically comment on the allegation that Pepsi deliberatly did not adhere to most of its commitments.

After Liberalization

In 1994, it bought off its partner in venture i.e. Voltas and PAIC.

Establishing wholly owned subsidiary PepsiCo Holding India Pvt. Ltd.

Changed name from “Lehar Pepsi” to “Pepsi”

Sold off its Tomato Paste Plant in 1995

Gradually reduce the contract farming

Plastic Exports were 67%.

Till 1997, the agro research centre was no where.

Allegation

Failing to create jobs

50% of employee working for Concentrate and Bottling Business not for Food processing Business.

Pepsi with Futura Polymers Ltd. were reducing the workforce and more machine oriented

More lasting impression of “Pepsi” and “Lehar Pepsi”.

Export of fruit & vegetable based products was negligible & started exporting Tea, Rice & Shrimps

Failed its commitment to export 50% production.

Products exported were same which use to happen earlier.

Questions . . ?

4. Examine the Contract Farming initiatives undertaken by Pepsi in India and Explain the rationale for such initiative 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 other various ways in which this can be done?

Contract Farming Initiative

Increase in Tomato crop production

Providing High yield seeds to increase the productivity in the tomato cultivation

Offered advanced equipments (Free of cost) to increase the speed & efficiency

Imported the required material for tomato cultivation

Rationale for Contract Farming

Rationale behind the contract farming was that in one or the other way company insisted on the development of those crops which were directly or indirectly related to their businesses such as soft drinks, snacks, fruit juices & mineral water.

Other rationale behind the contract farming was to increase their own business rather than any social welfare.

Taken initiative for

Chilly farming

Groundnuts production over paddy production

Rice production

Fruits & Vegetable Farming

Encouraging farmers to cultivate potato with low sugar content for chips.

Rationale for Contract Farming

Case Study - References

Case written by A. Mukund.

ICFAI Center for Management Research. Slideshare.net – agarwalpuneet11 Slides Project Reference: IIM Calcutta. Times Of India Washington Post.

Thank Thank YouYou

ITM Malad ITM Malad SMBA - 18SMBA - 18

Presented By Presented By Group No. 04 Group No. 04

Prassanna Ghorpade

Jay Sanghrajka

Pooja Dave

Vishal Sawant

Mehul Shah

Nidhi Sheth

Shubhangi Panchal

MCE - Multinational Corporate Environment

Case Study Submited to Prof. Abdul

On 16/12/2012

AtITM Malad – SMBA – 18