Colpe de Cola
Lessons from Venezuela
Jared Fragin
Katherine Friedman
November 20, 2001
Gabriel Tam
Vatnak Vat-Ho
Agenda
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Current State of the Industry
August 22nd, 1996
Vertical Restraints
Legal Implications
What has Pepsi done?
Next Steps
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 4:1 margin over
Coke
August 22nd, 1996
 What Happened?
• Coke bought half of Venezuela’s largest bottling company for
$300M
• Over one weekend:
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4,000 Pepsi trucks had their logos painted over to Coke
Pepsi stranded without a bottler
Year
% Who Drank
Pepsi
% Who Drank
Coke
Fourth Quarter,
1995
70.4 %
21.5%
Fourth Quarter,
1996
15.5%
50.5%
Source: www.zonalatina.com/Zldata08.htm
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
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
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
 Coke’s market share increased from 10 to 50% overnight
 Merger did not increase bottler’s market share and was
therefore legal
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
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
Next Steps
 In Venezuela…
• Discontinue price war
• Continue aggressive marketing
• “Power of One”
 Globally…
• Defensive
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Respect distributor power
• Offensive
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Look for joint ventures, esp. with distributors
Questions?