marketing case study
The Wall Street Journal
Monday, 27 October 2003, p. A1
A Low-Budget Cola Shakes Up Markets South of the Border
Peru's Kola Real Takes On Coke, Pepsi By Cutting Frills and Targeting Bodegas
By DAVID LUHNOW and CHAD TERHUNE
Staff Reporters of THE WALL STREET JOURNAL
MEXICO CITY -- The Ananos family was in a tough spot. Shining Path guerrillas had just razed their
family farm in southern Peru and were slowly strangling the nearby city of Ayacucho, where the family
had retreated to its second home.
But while the rest of Peru despaired at the Shining Path's campaign of terror in the late 1980s, Eduardo
and Mirtha Ananos spotted an opportunity. Rebels routinely hijacked trucks bringing Coca-Cola to the
city, so the couple decided to start making cola in their backyard and sell it to locals. Together with
their five sons, they took out a mortgage on their home and started the business with $30,000.
Today, Kola Real is emerging as an unlikely threat to both Coca-Cola Co. and PepsiCo Inc. in a
region where the two soft-drink giants enjoy some of their fattest global profit margins. By cutting out
frills and skimping in areas such as advertising, Kola Real, officially called Industrias Ananos, offers
ultra-low prices that appeal to the region's poor majority. As a result, the company has captured almost
one-fifth of the Peruvian market and has made inroads into Ecuador and Venezuela.
Now Kola Real (pronounced RAY-AL) is shaking things up in Mexico.
Mexico is a crown jewel in Coke's international operations and the
world's second-biggest soft-drink market after the U.S., with annual
sales of roughly $15 billion. In less than two years, the Mexican version
of Kola Real, called "Big Cola," has captured roughly 4% of the market.
Coke and Pepsi have cut prices in response, denting their profits. At the
Sam's Club warehouse store in Mexico City's upscale Polanco
neighborhood, Big Cola is the fifth-best-selling product, narrowly trailing
Coke.
Kola Real has put a new twist on globalization. As trade barriers have
dropped in much of the developing world, foreign-owned behemoths
such as Wal-Mart Stores Inc. have squeezed local incumbents
unaccustomed to competition and raised local people's price sensitivity.
The Ananos family has turned the tables on two U.S. giants by
undercutting their prices and adapting their aggressive marketing tactics to local conditions.
"Not bad for having started out in the backyard, don't you agree?" says Carlos Ananos, 37 years old,
one of the family's two sons who moved to Mexico last year to direct the upstart's expansion. The family-owned company does not release sales or profit figures. Analysts estimate the company's
revenue is more than $300 million a year and growing fast.
Kola Real's success also illustrates how the cola wars are changing in many markets around the globe.
Coke and Pepsi once vied primarily with each other. Today both are fending off downmarket
alternatives -- either so-called B-brands such as Kola Real or private-label drinks sold by Wal-Mart
and other big retail chains. These cheaper rivals can cut into Coke and Pepsi's profits and make it
harder for them to raise prices to offset slowing sales. The trend goes beyond Latin America. Big
retailers in Germany, Great Britain and other European markets are selling more private-label cola, and
B-brands are aggressive in Poland and Hungary.
One big reason this is happening: the switch to plastic. In the 1990s, plastic bottles largely replaced
glass, offering a cheaper alternative that lowered newcomers' cost of entry in the soft-drink industry.
Plastic also allowed larger bottles that could be sold cheaply in supermarkets. Supermarkets provide an
important outlet for new competitors since Coke and Pepsi often dominate smaller stores.
Big Sizes, Low Prices
Kola Real's strategy is simple: offer big sizes at low prices. In a Carrefour supermarket in Mexico City,
a large display of Big Cola beckons shoppers with a price of about 75 cents for a 2.6-liter bottle.
Nearby, bottles of Coke go for about $1.30 for a slightly smaller 2.5-liter bottle. On a recent day,
housewife Lourdes Avila put four of the Big Cola bottles in her cart and said: "For that price, I'll try it."
To keep prices low, the Ananos family runs a lean operation. While Coke and Pepsi bottlers spend
nearly 20% of their revenue on beverage concentrate from Atlanta-based Coke and PepsiCo,
Purchase, N.Y., the Ananoses make their own. Instead of maintaining a fleet of trucks as most Coke
and Pepsi bottlers do, Kola Real hires third parties for deliveries -- even individuals with dented
pick-up trucks. The company also does little advertising beyond an occasional radio spot, relying on
word-of-mouth from penny-pinching housewives.
So far, Kola Real has hurt Pepsi more than Coke, in part because the upstart competes more directly
with Pepsi as a lower-cost alternative. Coke has more than 70% of the Mexican market, based on
volume; Pepsi has about 21%; Kola Real, 4%. Pepsi's biggest bottler, Pepsi Bottling Group Inc.,
Somers, N.Y., said its Mexico volume fell 5% in the third quarter and it warned that full-year profits
from Mexico would be more than 40% lower than expected due to the escalating price war and a
weak economy. That's a disappointing result after Pepsi Bottling spent more than $1 billion last year to
buy Mexico's biggest Pepsi bottler, Grupo Gemex SA.
But Coke has much more at stake in Mexico than Pepsi. Ever since Coke arrived south of the border
in 1926, Mexico has been Coke country. Mexicans drink more Coke per capita than anyone on Earth,
and countless small restaurants and mom-and-pop shops are awash in the company's red-and-white
colors. Mexico's current president, Vicente Fox, is a former head of Coke's Mexican operations. Coke gets about 11% of both its global profits and sales volume in Mexico. Fomento Economico
Mexicano SA, or Femsa, the biggest bottler in Mexico and the No. 2 Coke bottler in the world, has
recorded an average annual return on invested capital -- a broad measure of profitability -- of about
20% during the past decade, two to three times what Coke's other big bottlers earn.
Earlier this year, Femsa, one of Coke's most assertive and best-run bottlers, bought Miami-based
Panamerican Beverages Inc. for $2.7 billion, the biggest purchase of a foreign entity by a Mexican
company. The purchase put Coke's two biggest Latin American bottlers under the same management
team. Still, the increased competition in Mexico could threaten Coke's high returns there. Last week,
Femsa said its cola sales in Mexico were flat for the first nine months of the year.
"Coke cannot afford to see the Mexico system unravel," says Carlos Laboy, a Bear Stearns beverage
industry analyst.
Kola Real's foray into Mexico has put the two beverage giants on the defensive. Jose Bustamante,
owner of the small Santa Cecilia store in Mexico City's middle-class Roma neighborhood, says his local
Coca-Cola salesman recently threatened to stop delivering Coke unless Mr. Bustamante removed Big
Cola from his shelves. Mr. Bustamante says the salesman also offered two free cases of Coke a month.
"I agreed," Mr. Bustamante says. "I can't afford to stop selling Coke."
Earlier this year, two Mexico City stores lodged a complaint with Mexico's antitrust commission,
alleging similar tactics by Coke. Authorities are investigating the allegations. Last year, the antitrust
commission ruled Coke was abusing its dominance of Mexican retailers and ordered it to stop certain
sales practices designed to keep out competitors, such as exclusive contracts. Several Coke bottlers in
Mexico have challenged the government decision in court.
Jose Octavio Reyes, president of Coke's Latin American division, says accusations of bullying are
"urban legends" and "simply not something that we would do." He said Coke abides by Mexico's rules
and welcomes competition. Coke officials concede the price gap with Big Cola has grown too wide at
times. But they plan to compete with smaller, inexpensive bottles and don't intend to match Pepsi's
recent price reductions, says Xavier Tercero Quintanilla, a sales executive at Coke bottler Femsa.
Pepsi Bottling this month instituted its second price cut of the year.
Others have joined Kola Real's march into Mexico. This year, an Ecuadorian company, Fiemex SA,
launched a cut-price cola called El Gallito, or Little Rooster. Mexico's popular Guadalajara soccer club
has its own Chiva Cola. Toronto-based Cott Corp., which supplies the private-label drinks for
Wal-Mart in North America, expanded to Mexico last year.
One risk for Coke and Pepsi is that Mexico will go the way of Brazil, the world's third-largest
soft-drink market. There, B-brands went from 3% of the market in the early 1990s to about 30% of
soft-drink sales. Soft-drink sales in Brazil are also less profitable than in Mexico, because more than
half go through supermarkets. Supermarket chains use their buying clout to squeeze suppliers. In Mexico, supermarkets account for less than 5% of soft-drink sales, but they are the fastest-growing
sales channel in Mexico.
As Kola Real got its start in 1988, Jorge, the eldest son, used his agricultural-engineering degree to
develop the drink's formula. The family kept distribution costs low by using old beer bottles and pasted
labels on by hand. The operation grew slowly, with the family reinvesting profits and looking for
cost-saving ways to grow, such as buying plants abandoned by other bottlers. The company expanded
to the Peruvian capital, Lima, in 1997. When Peru's economy stalled in 1998, Kola Real's low price
appealed to cash-strapped consumers. By year's end, Kola Real and other B-brands more than
doubled their market share to 21%.
The Ananos family next targeted Coke and Pepsi bottlers in Ecuador and then Venezuela. Within a
year after entering Venezuela, Kola Real had nearly 10% of the market. Coke's biggest bottler there at
the time, Panamerican Beverages, was forced to cut prices.
The Ananos sons, who now largely run the business, saw the promise of Mexico. Last year both Carlos
and Arturo moved to Mexico to oversee the company's $7 million investment -- its biggest yet -- for a
state-of-the-art plant near the central city of Puebla.
Previous B-brands in Mexico tried to compete against Coke solely in the supermarkets. Coke's
stronghold in Mexico has been the nearly one million mom-and-pop stores and family-run eateries that
account for more than 75% of the country's soft-drink sales. Kola Real's 800 salesmen have attacked
that market and gotten their drinks in more than a quarter of those outlets in Mexico City, Guadalajara
and other big cities. Kola Real has also attacked Coke and Pepsi on price, something other
independent brands failed to do.
Taking on Coke's well-oiled distribution machine has been tough for the Peruvian firm. Coke woos
shop owners by buying them life-insurance policies or cooking oil and offering free classes on how to
run a business. Fernando Garcia Tapia, who runs the Abarrotes Casa Conchita bodega in Mexico City,
says he twice rejected a sales pitch from Big Cola for fear of losing the valuable perks he receives from
Coke.
Mr. Garcia says Coke gives him 100 free cases three times a year and he personally has received a
free refrigerator, 29-inch television and compact-disc player from Coke because his sales earned
enough points in a rewards program. "The free cases are like oxygen for me," he says. Mr. Garcia
doesn't carry Big Cola.
Coke for Breakfast
In his cramped store, packed with snacks and daily staples, Coke and Pepsi coolers are squeezed in
the back. His low-income clientele of construction workers, maids and waiters clearly prefer Coke. "I
even have Coke for breakfast," says construction worker Raymundo Perez. Coke is Mexico's only
soft-drink maker offering returnable plastic bottles, a competitive advantage over all rivals because they cost consumers about 20% less than disposable bottles.
Coke says it doesn't sign deals forcing the shops to carry only Coke, a practice forbidden by last year's
antitrust decision. But most Coke salesmen forbid shop owners from putting rival products in Coke's
850,000 coolers across the country.
The ruling against Coke made some of the mom-and-pops more aware they have a choice, helping Big
Cola get a foot in the door. While Coke can still prohibit stores from selling rival drinks in its
refrigerators, Big Cola salesmen such as Fernando Mejia point out that they can chill Big Colas in the
refrigerator where shops usually keep meats and cheeses.
Only about 10% of Mexican mom-and-pop stores don't have a Coke cooler. La Roca de Oro in
Mexico City is one. Pamela Medina, the owner, uses her own cooler to stock a variety of drinks,
including Big Cola. "Customers ask for it," she says.
Still, it can be hard to match the manpower of Coke and Pepsi. Juan Chavez, manager of a giant
Comercial Mexicana grocery store in a Mexico City suburb, recently berated visiting Big Cola officials
about their sloppy service. He said Coke and Pepsi employees constantly tend to their products in the
store, keeping them stacked and clean. The Big Cola display, Mr. Chavez said, was a mess.
"We can't afford to pay a guy to sit and tend to our display all day long," says Roy Morris, marketing
director for Big Cola in Mexico and a former executive at Ambev, Brazil's biggest Pepsi bottler.
Kola Real is now trying to keep pace by rolling out more sizes and flavors. This summer, the company
introduced a new grapefruit-flavored soda and its first individual-serving-size bottle.
It's all a long way from the jungles of southern Peru. Carlos Ananos recently showed a visitor an old
family photo taken a few years before the Shining Path destroyed their farm. "Life is odd," said Mr.
Ananos. "If it weren't for the Shining Path, we would have never lived our dream."