Colpe de Cola

Lessons from Venezuela

November 20, 2001Jared Fragin

Katherine Friedman

Gabriel Tam

Vatnak Vat-Ho

Agenda

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

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

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

50.5%15.5%Fourth Quarter, 1996

21.5%70.4 %Fourth Quarter, 1995

% Who Drank Coke

% Who Drank Pepsi

Year

50.5%15.5%Fourth Quarter, 1996

21.5%70.4 %Fourth Quarter, 1995

% Who Drank Coke

% Who Drank Pepsi

Year

Source: www.zonalatina.com/Zldata08.htm

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

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

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

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

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

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

Questions?