Tuesday, March 31, 2015

Threat of Entry to the Cola War

This week I read the case: “Cola Wars Continue: Coke and Pepsi in 2010” and Porter’s article “The Five Competitive Forces that Shape Strategy”. The aim of this post is to link the Cola Wars with Porter’s ideas, specifically the threat of a new entrant to this Cola War. In my country, Peru, the Cola War was never between Coke and Pepsi, but between Coke and Inca Kola. It was so intense that they performed a joint venture in 1999. However, besides Inca Kola, I also thought about AJE Group and Big Cola while reading this week.

In the 80’s Peru was a chaotic country, facing recession, world-record inflation rates, unemployment, and two terrorist groups trying to overthrow the government to implement a centralized communist regime. 65,000 Peruvians perished in 20 years of terrorism. When I was a kid in the 80’s I had little opportunities to travel to inner cities in the highlands of Peru as it was too dangerous because of the presence of terrorist groups. The Peruvian society was affected by this context and businesses were not the exemption. It was too costly and too risky for many companies to deliver their products to inner cities and rural areas, as their trucks were terrorists’ targets. Coca Cola and Inca Kola had to stop shipping their products to some areas. However, despite terrorism, people missed their favorite beverages.  

Ayacucho is a Peruvian inner region in the highlands and the most affected one by terrorism. However, in 1988 the local family Añaños looking how to economically survive decided to satisfy the demand of their neighbors. With an investment of $30,000, they implemented a small bottling plant in their house, with their own-developed formulas, and started to produce soft drinks to substitute Coca-Cola and Inca Kola. Initially they filled empty beer bottles with their beverages. By the mid 90’s terrorism started to soften and the Añaños family business started to grow nationwide. With their own plants in several cities, under the name of AJE group (AJE) and with their best known brand, Kola Real, this family business started to fight Coca Cola and Inca Kola. Their strategy was simple, but smart. They delivered their soft drinks in bigger bottles (more than 2 liters per bottle), focused on low-income families and, of course, at substantial lower prices. Also, the company was in charge of the whole production process.  

In 2000 AJE started its international expansion in Venezuela. Using the same successful strategy as in Peru, but with Big Cola instead of Kola Real as a brand name. Eventually, the group spread throughout South America, including Brazil. Also, they developed new products such as juices, bottled water and sports drinks. Then came Central America and Mexico, the second largest soft drink market after USA. In all of these countries AJE grew by decreasing the market share of Coca-Cola and Pepsi. But that was not enough. Using the same pricing strategy, focusing on emerging markets, using in-house production and developing agreements with local distributors, Asia was the next market to conquer. In 2005 AJE inaugurated a plant in Thailand, followed by many others in Vietnam, Indonesia, and India. From 2000 to 2013 their yearly sales increased at a 22% average rate, accounting to $2 Billion.  
Returning to the first paragraph of this post, the Cola Wars case states that 80% of Coca Cola sales derive from international markets, while Pepsi focuses more in the USA. USA alone represents 1/3 of the world soft drinks market. However, both companies plan to invest more than $2 Billion each in China and other Asian markets in the next few years. I wonder if Pepsi and Coke are doing their homework—as suggested by Porter—of analyzing AJE as a new entrant threat to their purposes in the Asian markets. As Porter says: “new entrants bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete.” AJE is doing precisely that.

For more information and supporting facts and figures, please go to these links:

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