Colpe de Cola

1
Colpe de Cola

• Lessons from Venezuela

November 20, 2001
Jared Fragin
Gabriel Tam
Katherine Friedman
Vatnak Vat-Ho
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2
Agenda

• Current State of the Industry
• August 22nd, 1996
• Vertical Restraints
• Legal Implications
• What has Pepsi done?
• Next Steps

3
Current State of the Industry

• Coke America, Asia, and Europe
• Minimal market share in Venezuela and most Latin
  American countries
  
• Looking for a way to gain market share
• Pepsi Latin America
• Soft drink of choice in Venezuela by more than a
  41 margin over Coke

4
August 22nd, 1996

• What Happened?
• Coke bought half of Venezuelas largest bottling
  company for 300M
  
• Over one weekend
• 4,000 Pepsi trucks had their logos painted over
  to Coke
  
• Pepsi stranded without a bottler

5
Vertical Restraints

• Vertical Restraints
• Arrangements to reinforce vertical relations
  without explicit integration
  
• Cisneros had significant power
• Near distribution monopoly in Venezuela
• Hard to penetrate the market for newcomers

6
Vertical Restraints

• Pepsi refused to help Cisneros expand
• Cisneros turned to Coke for capital
• Coke achieved in two years what Pepsi had built
  over 50 years
  
• Market share eventually exploded to 81
• Tapered integration to arrange vertical
  restraints
  
• Wield influence in input markets, enjoy
  competition
  
• Vulnerable to competitors buying out your
  supplier and distributor
  

7
Legal Implications

• Venezuelan Law
• Any business activity which alone increased
  market share significantly must be approved by
  Government
  
• Cisneros controlled 80 of the bottling market
• Cokes market share increased from 10 to 50
  overnight
  
• Merger did not increase bottlers market share
  and was
  
• therefore legal

8
Legal Implications

• Coke placed six bottling plants and other assets
  (or junk
  
• according to Pepsi) for sale to Pepsi
• Cisneros offered to continue Pepsi production at
  25 of output
  
• for one month to give Pepsi a chance to sign up
  other bottlers
  
• (Cisneros is near monopoly bottler in Venezuela)
• Pepsi refuses both options
• Coke argues Pepsi is not interested in
  Venezuelan soft drink
  
• market
• International arbitration court forced Coke to
  pay Pepsi 94M
  

9
What has Pepsi done?

• Marketing Blitz
• Installed 50,000 refrigerated display cases
  visi-coolers
  
• 1,000 delivery routes with 200 more added in
  1998
  
• Polar (SOPRESA) vs. Panamco (Cisneros)
• 30 share in SOPRESA
• 400M over 3 years
• Price War
• Discount to retailers
• Coca-Cola decided to match aggressive
  discounting
  

10
Next Steps

• In Venezuela
• Discontinue price war
• Continue aggressive marketing
• Power of One
• Globally
• Defensive
• Respect distributor power
• Offensive
• Look for joint ventures, esp. with distributors

11
Questions?