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Pepsi's Challenge : Billions Are at Stake in its Battle With Coke Over Foreign Market Share

August 23, 1993|JUANITA DARLING and GEORGE WHITE | TIMES STAFF WRITERS

When Manuel Rubiralta arrived in Monterrey, Mexico, in January, he launched his own "Operation Desert Storm." His aim was to conquer for Pepsi the arid landscape in and around the prosperous city.

With a blistering climate, the metropolitan area has an average per capita soft drink consumption rate that is about 47% higher than the U.S. average. Yet Pepsi had less than one-tenth of the market until Pepsi-Cola International, which launched a $1.5-billion global offensive against Coca-Cola three years ago, bought a 49% stake in the local Pepsi bottling franchise and installed its own management team headed by Rubiralta.

Rubiralta doubled Pepsi's Monterrey market share in one month and has since moved on to Mexico City to head Pepsi's nationwide fight against market leader Coca-Cola.

As the second-largest soft drink market in the world, Mexico is a key battleground in an international cola war that has seen both Pepsi and Coke pour billions into foreign markets to build bottling plants, expand distribution networks and finance elaborate promotions.

Industry analysts say both companies will continue to spend heavily because the stakes and the potential payoffs abroad are extremely high.

"Soft drink consumption in the United States has hit a plateau and won't rise much further," said John Frank, editor of Beverage Industry magazine in Northbrook, Ill. But foreign consumption has climbed about 20% in the past five years.

Although foreign soft drink consumption is still only about a tenth of the level in the United States, "the potential is huge," said Jesse Meyers editor of Beverage Digest in Stamford, Conn. "I expect the foreign consumption levels to double annually--and that's a conservative estimate."

Adds Frank, "foreign markets are the key to any sales growth for major soft drink companies and Pepsi is now much more aggressive in these markets."

Each company has increased its foreign market share by 2% since 1990, Meyers said, but Coke remains clearly the worldwide leader.

Pepsi finds itself on a commercial teeter-totter--rising in Mexico, for example, and falling behind its rival in parts of highly coveted Eastern Europe.

Pepsi, which became first Western company to part the Iron Curtain when it opened a small bottling plant in the Soviet Union in 1972, still holds the lead in what is now the Russian Republic. But Coke has quickly made a series of joint ventures--boosting its distribution--in other parts of Eastern Europe.

After quietly lagging far behind Coke abroad for years, Pepsi decided in 1990 "to elevate the whole mind-set of our (international) organization," Pepsi-Cola International President Chris Sinclair said in an interview.

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"The strategy was to jump-start the organization and grow by being more aggressive," he said recalling the 1990 Los Angeles conference during which Pepsi told international bottlers that it planned to increase its foreign sales from $2 billion per year to $5 billion by 1995. The company expects $3 billion in foreign sales this year.

"We had been drifting along as solid No. 2 abroad. But we want to be leaders and a shake-up was needed," he said.

The kind of shake-up Pepsi had in mind was evident in Monterrey where Rubiralta's team put $10 million into a new fleet of trucks, got a new bottling plant running in a record 100 days and replaced 1,000 sales representatives.

Pepsi picked the perfect time to take on Mexico. Overall economic deregulation has loosened the rules of competition. The government has removed price controls for the first time in 40 years and bureaucrats no longer dictate bottle sizes or the kinds of promotions soft drink companies can launch.

Industry analysts say Pepsi currently has about 26% of the Mexican market, but aggressive and successful franchise owners in Mexico City and Guadalajara account for much of the company's overall sales.

Outside those two cities, Coke still dominates the Mexican soft drink market. Pepsi is difficult to find in the beach resorts of Yucatan in the Southeast. And Pepsi has not been easily available in the Mexican border community of Chihuahua since the company sold its bottling plant in that city to Coca-Cola a decade ago.

Pepsi has heavily relied on promotions to win market share--awarding about $10 million in cash to Mexican consumers during six major promotions in the past three years. Company officials say the contests helped Pepsi raise its market share 3% between 1990 and 1992.

"To get a consumer response in foreign markets, you have to create excitement," said Ken Ross, a spokesman for Pepsi-Cola International. "Advertising and promotions generate a big response."

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Responding to Pepsi's aggressive moves in Mexico, Coke sponsored promotions with 102 franchise bottlers during the first half of 1993, giving consumers 27 million prize items.

However, both companies are learning--the hard way--that promotions abroad can be a boon or a public relations bust. Two of the more recent embarrassing incidents occurred in Latin America.

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