After a series of missteps during recent years, Coca-Cola India has had to learn lessons the hard way. In the process, says the company, executives had to recalibrate the old kinks in its supply chain and bust a few myths about winning over Indian consumers, especially in the country’s highly promising rural markets.
Now, the beverages of the US$31 billion multinational are back on the shopping lists of Indian consumers, and Coca-Cola India is reaping the rewards. At the end of last year, its sales volume grew more than 30% and it turned a profit for the first time since it returned to the country in 1993 after a 16-year hiatus, according to Atul Singh, who was appointed the firm’s Delhi-based president and CEO of Coca-Cola India and southwest Asia in 2005. Much of last year’s growth for Coca-Cola — and its rival PepsiCo — came from urban and semi-urban markets, but experts note that Coca-Cola’s rural push helped it consolidate its overall market leadership.
As in previous years, the tasks ahead for Singh and his team are clear. One of the biggest challenges is introducing a greater number of people to consuming beverages in a ready-to-drink packaged form, he says. That means getting its bottles of fizzy drinks to the right place at the right time at the right price — a tall order in a country with such a vast hinterland like India.
Cold Drinks, Hot Markets
The reality is that the consumers Singh covets most are in hard-to-reach rural India. “Coca-Cola must realize that the future of its drink will be determined in the countryside because that is where the consumers are,” says Z. John Zhang, a Wharton marketing professor. “Today’s farmer could be tomorrow’s city resident; you better capture that market quickly.”
It’s a similar scenario in China, a country that Zhang has studied closely, which also has an enormous untapped rural consumer market. Home-grown beverage company Wahaha uses “a guerilla marketing strategy to encircle the city from the countryside, knowing those people will become city residents eventually,” Zhang says. “Wahaha also knows the rural markets are where Coke is weak,” helping its own beverages gain a bigger share of China’s soft drinks market than Coca-Cola’s Sprite and Coke, and PepsiCo’s Pepsi.
As in China, the dream of capturing rural consumers in India is, of course, not Coca-Cola’s alone. But as Coca-Cola and its rivals know, India is a market that makes neither distribution nor inventory management easy, and is hugely diverse in terms of tastes and buying power. Indeed, even established consumer-goods companies in India have covered only about a tenth of the country’s 600,000 villages, according to Jagdeep Kapoor, chairman and managing director of Samsika Marketing Consultants, a brand marketing-services firm in Mumbai. Kapoor in the past was head of marketing for a number of popular drinks, including India’s biggest cola brand, Thums Up, before Coca-Cola bought it in 1993. Depending on how you look at it, he adds, it’s either good news or bad news that “you have the whole rural market up for grabs.”
Consumer-goods experts agree that one reason why Coca-Cola’s India foray faltered after it re-entered the country was that it did not pay enough attention to refrigeration. In India, consumers — urban or rural — want a “cold drink” and not just a “soft drink,” says Kapoor. “For the first three or four years [after its return, Coca-Cola] was grappling with whether it should focus on Thums Up or Coke, and refrigeration took a back seat.”
The key to the turnaround, Singh says, is that Coca-Cola India along with its bottlers ramped up its route-to-market strategy. Part of that meant a greater focus on refrigeration. In electricity-deficient areas, such as some of the hinterland in Uttar Pradesh, it now provides shops with coolers that operate with brine solution so its products can stay chilled up to 12 hours without electricity. In other places, it has trade agreements with local ice makers.
Taking a New Route
As for distribution, Coca-Cola India has done what other companies in the hinterland have done, and moved from a centralized distribution model to a hub-and-spoke approach, says CEO Singh. Rather than transporting beverages directly from the bottling plants to retailers, its goods are now sent first to a “hub,” and are then parceled out to nearby “spoke” centers when orders need filling. Among the benefits, that approach reduces costs because fewer long-haul journeys in large, uneconomical vehicles are needed, while efficiency increases through more timely, tailored fulfillment.
Gowri Arun, principal consultant at RK Swamy BBDO, an advertising agency in Mumbai that produces urban and rural market indices, adds that although rural India’s population is three times larger than in urban areas, “the market is not three times the size and is not homogenous.” The larger areas that companies have to cover in rural India disproportionately increase logistics costs, she says.
It wasn’t just distribution and refrigeration issues that caused Coca-Cola to stumble in India. The company also erred in adopting the low price-point strategy that many other foreign consumer-goods companies were using at the time to sell their products in rural India. “People think Indian consumers want low-priced products,” says Kapoor. “There cannot be a bigger myth. They want good-quality products at a reasonable price.”
Kapoor points out that between the time that Coke left India (because of disagreements over government regulations) and its reentry, it was common practice for rural consumers to pay one rupee more for packaged beverages to cover the cost of keeping them chilled. “How can anyone say they are price-sensitive consumers?” he asks.
The High Cost of a Low Price
Yet about seven years ago, Coca-Cola set out to woo rural consumers by halving the price of a 200-milliliter (seven-ounce) bottle to Rs. 5 (11 cents). Rs. 5 is a “psychological price point,” according to Arun of RK Swamy BBDO. A price greater than Rs. 5 means a consumer has to “break a Rs. 10 note.”
At the time, Coca-Cola claimed the low price spurred sales. Today, a Coca-Cola spokesperson says, “The real thought behind the 200-ml bottle is to get people in rural India used to this packaged beverage.”
But among the problems, according to Kapoor, was that Coca-Cola advertised the lower price on billboards and in print media. Indian retailers found themselves arguing with customers, who wanted the drink for Rs. 5 and were unwilling to pay the extra rupee for refrigeration, he says.
Meanwhile, a price war erupted as rival PepsiCo matched the Rs. 5 price. Both firms have since dropped the strategy, however, and let prices for their 200-ml sodas rise up to around Rs. 8, though the rivalry remains as intense as ever: PepsiCo India grew its beverage business more than 32% in 2009, its highest volume growth in recent years, making it the fastest-growing beverage company in the country for the second consecutive year, according to company marketing.
Yet Zhang, who has analyzed priced wars in China extensively, says the Rs. 5 experience shouldn’t make Coca-Cola or other companies fear entering into price wars in the future. Despite what many Western companies believe, he says, a price war can be an effective business strategy but must be managed well and works best in fragmented markets in which consumers are price sensitive.
In any case, there seems to be no easy way for Coca-Cola to woo rural consumers with pricing strategies. “The price barrier has definitely been a problem in rural India,” concedes a spokesperson for Coca-Cola India. “Soft drinks that come in a glass bottle have to be returned to bottling plants, and no mechanism can provide such drinks at a cheap cost due to freight charges. We are now looking at alternative packaging and how to organize distribution.”
Nabankur Gupta helped develop the low-priced Videocon brand of televisions and other white goods in India before becoming CEO of Nobby Brand Architects, a brand consulting firm in Mumbai. He argues in favor of going to a 150-ml bottle to woo rural Indian consumers, arguing that it is consistent with their drinking habits. Lassi, India’s popular yogurt drink, is usually consumed in 300-ml or 350-ml tumblers, but tea or soft drinks are served in small glasses, he says. He notes that reducing sizes has worked well for shampoo manufacturers supplying India’s rural and semi-urban markets with small sachet packs.
Of Drinks and Dreams
The psychological impact of pricing is just one part of the bigger basket of intangible considerations that MNCs often struggle to manage in rural India. Another one is the power of a brand’s image, which might draw consumers to buy one product while making them shun another. Indian consumers are “emotional,” according to Kapoor. “Only 50% of what is consumed is what goes in the mouth and in the stomach; the other 50% goes in the mind and heart.”
Foreign companies should be particularly mindful of helping their brands appeal to the lifestyle aspirations of up-and-coming Indians, says Wharton’s Zhang. “Rural customers aspire to the urban consumers’ lifestyle,” he notes. “In China, the rural population is already sensitive to the idea that they are not as good as city residents in terms of quality of life. You don’t want to treat them like country bumpkins.”
What’s more, “rural” is a state of mind that can exist in an urban metropolis, according to Gupta. “One of the biggest rural markets in India is Mumbai — the slums of Dharavi,” he says. For a consumer in the “ghetto market” of Dharavi, a cold cola is an “aspiration” and a “status symbol that tells his neighbor that he has arrived.”
Thanks to a growing number of Indians with access to television, “you can see the consumer experience of your urban cousins and you want the same experience,” adds Kapoor. Armed with that knowledge, he says marketers at companies like Coca-Cola need to increase their investments around educating rural consumers. “In urban India, it is a question of reach. But in rural India, it is about reach and preach,” he says. “You have to tell them what a cold drink is, how is it opened, how [to drink it] in a macho manner by holding your head up — you cannot take it for granted.”
At Coca-Cola, education initiatives have been more focused on the retailers selling their sodas than on the customers drinking them. In late 2008, Coca-Cola’s University on Wheels launched a nationwide training program called Parivartan on 20-seater buses for mom-and-pop retailers. So far, the program has covered more than 30,000 retailers in cities including Agra, Ludhiana, Chandigarh and Lucknow, with courses on such topics as how to display products and improve inventory management. The aim is to train 100,000 retailers in the next two years, according to a Coca-Cola spokesperson.
But Santosh Desai, managing director and CEO at Future Brands, a brand consulting company in New Delhi, says that while education is important — particularly that of retailers — expectations need to be managed. “Symbolically, it is both significant and valuable in intent, but in terms of market building, it merely scratches the surface,” he says. “Training the retailer is a great idea, but given the scale of India and its number of villages, it will be an extremely long time before you get any significant scale.”
Neglecting Thums Up
There are thornier issues involving brand management that Coca-Cola India has had to confront. One involves its failed attempt to let the popular home-grown Thums Up brand fade away in the mid-1990s so that its own Coke brand could gain more market share. “Coca-Cola bought Thums Up when it ruled the market, and as a result Thums Up gave PepsiCo a very hard time when PepsiCo entered the market,” says Kapoor. “Initially, Coke neglected the Thums Up brand. Then it started paying attention and Thums Up is still number one in India, with Coke and Pepsi following.”
As Desai of Future Brands notes: “Thums Up is a brand that refuses to die … although Coca-Cola never intended to let the brand live. There are huge pockets of enthusiasm for it across the country, and it tends to appeal to rural audiences more than other brands. Where it is strong, it has a good rural profile.”
With or without Thums Up, being the most visible soft drink brand means Coca-Cola also attracts unwelcome attention. In India, it continues to battle (along with Pepsi) allegations that it has excessive pesticide content in its soft drinks, and that it depletes and contaminates groundwater resources. Coca-Cola made headlines yet again in March, when it faced a US$47 million fine in the southern state of Kerala for alleged groundwater pollution — a charge it denies. Just as with distribution, pricing and the like, Coca-Cola India now knows that issues like these can make or break even the hardiest of emerging market strategies.