Wednesday, November 11, 2015

Understand your competition: Postobón and Bavaria

The Coca-Cola vs Pepsi case study brings up a similar situation that occurred in Colombia, in which one of the competitors failed to analyze correctly the consequences of entering a new market. Postobón, owned by the Ardile Lülle organization (OAL), is one of Colombia's leading providers of drinks, especially soft drinks, where they represent Coca-Cola's main competitor. However, instead of analyzing the competitive relationship between these two companies, we will analyze a situation that occurred between OAL and Colombia's largest brewery, Bavaria.

Back in 1995, the OAL decided there was a big opportunity in the beer market and that it was time to challenge Bavaria. Leveraging Postobón's efficient logistics and distribution channels, they decided to build a brewery near Bogotá and start producing and distributing a new beer in the market: Leona. The brewery required a significant investment and was at some point considered one of the best in Latin America. Leona proved to be highly successful in Bogotá and surrounding areas, however this success was not replicated in other regions. OAL decided to make additional investments to improve and grow the brewery in order to reach the broader market. Failing to catch up with the acquired debt of around US$350 million, they finally decide to exit the market, selling Leona's brewery to Bavaria. Several factors contributed to this outcome, such as OAL's failure to foresee:

  • The high investment required to build a brewery of enough scale to compete with Bavaria.
  • Bavaria's reaction. Bavaria effectively reacted to OAL's move and even played a similar move by entering Postobon's market and producing different kinds of drinks.
  • The unfavourable economic conditions in Colombia at the time.
"Competitor Analysis: Understand Your Opponents" presents important recommendations when analyzing the competition. One recommendation is especially relevant in this case: "determine how each key competitor reacts to moves by you". Bavaria reacted to OAL's move and, although it failed in Postobon's market as well, its losses were far less than OAL's, which tried to enter a market with higher capital requirements. As this case shows, recognizing your own strengths, as OAL did regarding Postobon's advantage in logistics and distribution, is not enough. Entering a new market requires a careful analysis of the incumbent players as well as the industry in general and economic conditions that shape market interactions.

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