PRERNA MAKHIJANI ROLL NO. 29 PGDM-IB

Pepsi’s entry into India – A lesson in globalization

Reasons for Pepsi’s globalization

Saturation of markets in USA Emerging economies opening up India’s vast population was an attractive proposition Arch rival Coca-Cola was also globalizing

Various methods for companies to enter a foreign market

Joint venture - The cooperation of two or more individuals or businesses in which each agrees to share profit, loss and control in a specific enterprise.

Wholly owned subsidiary - A company whose common stock is 100% owned by another company, called the parent company. A company can become a wholly owned subsidiary through acquisition by the parent company or spin off from the parent company.

Franchising - The party in a franchising agreement that is purchasing the right to use a business's trademarks, associated brands and other proprietary knowledge in order to open a branch.

Licensing - A written agreement entered into by the contractual owner of a property or activity giving permission to another to use that property or engage in an activity in relation to that property.

Greenfield investments - A form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up.

Hurdles for Pepsi while entering India

Political Environment1. No intent to invest locally in industries or provide employment2. Opposition to promotion of carbonated drinks3. Fear of invasion of foreign brand

Legal Environment1. Severe restrictions in equity through FERA2. Dispute in relation to ownership of Pepsi brand name

Economic Environment1. Closed and foreign exchange starved economy2. Aerated drinks industry in nascent stage

Socio cultural environment1. Fear of invasion of MNC culture2. Fear of impact on Health/diet

PRERNA MAKHIJANI ROLL NO. 29 PGDM-IB

Strategies adopted by Pepsi to enter Indian markets

Pre-establishment attempt1. PepsiCo teamed up with Agro Product Export Ltd., a company owned by RPG group.2. Objectives to attain permission – a) To promote the development and export of Indian

made and agro based products. (b) To import cola concentrate and to sell a PepsiCo brand soft drink in India

3. The proposal was rejected on the grounds that import of concentrate was not allowed and the use of a foreign brand name was also not allowed.

The Punjab card1. Second attempt with more stress on diversification of Punjab’s agriculture and

employment generation rather than on soft drinks.2. Green revolution in Punjab which would end the stagnation there and promote small

and medium farmers. Also help divert the youth away from terrorism and bring peace.3. The ruling parties agreed to this proposition and PepsiCo formed a joint venture with

PAIC and Voltas. The bundle offered by Pepsi turned the scale on their side.

1. The project was to create employment for 50000 people nationally.2. 74% of the total investment was to be in food and agro processing. The rest to be used

for manufacturing soft drinks.3. Pepsi was to bring advanced agricultural technologies to India and market Indian

products abroad.4. 50% of the production to be exported, thereby boosting India’s exports.

All this led the conservative Indian govt. to believe that Pepsi’s intentions were of boosting exports, bringing in latest technology and helping farmers with the production in Punjab. Due to the political situation there was unrest in Punjab and the government thought that this decision will help Punjab stabilize in terms of providing employment to the youth and also in increasing Punjab’s stagnant agricultural produce.

Pepsi’s game in the post liberalization era

Pepsi greatly benefitted from India’s liberalization as the business environment was relaxed and it was no longer liable to honour its commitments made previously to enter the country.

Pepsi bought off its partners and established itself as wholly owned subsidiary and devoted itself to the soft drinks business completely. Lehar Pepsi was changed to Pepsi.

Pepsi consolidated its business and sold off its tomato paste business to HLL. Their exports of plastic bottles were as high as 67% and their beverages business grew by 50%.

Critical evaluation of the allegations Pepsi’s commitments that it did not adhere to

From the case study it is obvious that the company did not complete the commitments it had made before entering into the Indian markets. It is also evident that they the company had no

PRERNA MAKHIJANI ROLL NO. 29 PGDM-IB

intentions of keeping those commitments either. Pepsi realized that the entry was the most crucial point and if that is taken care of, rest all can be managed.

Pepsi with its strong market instinct and research decided to play along with the government’s conditions. Once after establishing a certain amount of goodwill and local support they began with their main motive of selling soft drinks.

As Kottler mentions, they used politics and public image to manipulate the Indian business environment to gain entry and luckily for them liberalization happened at the right time.

There were a few positives to Pepsi’s entry into India. Most of them relate to improvements in agriculture methodology which improved productivity of tomatoes and other crops. They setup agro-research centers and brought in state of the art technology into India.

As a company, Pepsi was obviously looking to make profits, which they did in India because of the large market size. As they grew over the years, they also invested some of the profits in the development of agriculture as a whole, which can be seen as a positive sign.

Contract Farming initiatives by Pepsi

1. Offered transplanters to farmers free of cost to carry out tasks more speedily.2. Pepsi expanded its contract farming network across Punjab.3. It set up agro-research centers in Punjab and Karnataka.4. Helped cultivate low sugar potatoes by a programme called “Pepsi Agri Backward Integration

program”.5. Contract farming initiatives extended to groundnuts, which was to be exported.6. Pepsi imported superior technology from China and transferred it to farmers in India.7. Invested a huge amount of capital in contract farming and further planned to extend it.

Multinationals working towards improvement of economy

Multinationals like Pepsi work towards improvement of the economy and also involve themselves in other social activities to maintain their public image. It is important for them to give back to the economy and society from which they derive so many profits. Therefore to promote inclusive growth and long term sustainability, the MNCs do their part in helping the society at large.

These are done in form of counter-trade, CSR activities, contract farming, co-operatives, backward integration with raw materials provider like famers etc. ITC’s e-chaupal is one such inititative.