COLA WARS IN VENEZUELA The longstanding international success of Coca- Cola and Pepsi

COLA WARS IN VENEZUELA The longstanding international success of Coca- Cola and Pepsi

The longstanding international success of Coca- Cola and Pepsi shows that a powerful brand name can confer a sustainable advantage. In recent years, there have been few credible challengers to the two leading cola makers. The reason has only partly to do with taste—many consumers believe that other colas, such as RC Cola, taste just as good as Coke or Pepsi. But competitors lack Coke and Pepsi’s brand images and would need to spend huge sums in advertisements to achieve it. The owner of one potential competitor even risked his life to boost his cola’s brand image. Richard Branson twice attempted to fly around the world in a hot-air balloon emblazoned with the Virgin Cola logo. While Coca-Cola and Pepsi have remarkable international brand recognition, they do not share international markets equally. For example, Coca-Cola has long been the dominant cola throughout South America. The lone exception was Venezuela, where Pepsi held an 80 percent share of the $400 million cola market until August 1996. That is when Coca-Cola struck a deal to buy half of Venezuela’s largest soft-drink bottler, Hit de Venezuela, from the Cisneros Group. The bottler, which changed its name to Coca-Cola y Hit, immediately switched operations to Coca-Cola, and 4,000 Pepsi trucks became Coke trucks. As might be expected, Coke had to pay dearly for this change—an estimated $500 million for a 50 percent stake in Hit. Economic theory suggests that Coca-Cola should not have profited from this deal. After all, the source of monopoly power in this market belonged to the Cisneros Group rather than cola makers. Coca-Cola officials claimed that the benefits from the Venezuelan acquisition would accrue in the long run. A Venezuelan director stated, “We’ll do whatever we have to win this market. We don’t think about today. We think about ten years from now.10 Whether Coca-Cola overpaid to gain market share became moot in May 1997 when PA Namco, an independent Coke bottler headquartered in Mexico, paid $1.1 billion to acquire Coca-Cola y Hit. Coca-Cola appears to have made out handsomely from these deals: it profited from the purchase and subsequent sale of Hit de Venezuela, and it still has a dominant market share in Venezuela. Coca-Cola might have wrested control of the Venezuelan market from Pepsi, but Pepsi still possessed valuable assets in Venezuela: Pepsi’s brand image and taste. (Many Venezuelans apparently prefer Pepsi’s sweeter taste.) Months after Coca-Cola’s takeover of the market, Venezuelans continued to express a decided preference for Pepsi—if they could find it in the stores. To exploit its assets, Pepsi formed a joint venture—known as Sorpresa—with Polar, Venezuela’s largest brewer. The joint venture had fewer bottling plants in Venezuela than Coca- Cola had, but its plants were larger and were believed to be more efficient than Coke’s. This enabled Pepsi to compete aggressively on price with Coke, and by the end of the 1990s, it was able to rebuild its market share to 38 percent. Cisneros Group, Polar, and Coke were the clear winners of this competitive battle. Although Pepsi was able to recover partially from its drastic drop in market share in 1996, on balance, it has probably been a loser. One other loser: any other soft-drink maker that contemplated entry into the Venezuelan market. As a combined force, Coke and Pepsi were stronger in 1998 than they were before August 1996. As always seems to happen, Coca-Cola and Pepsi might bloody themselves in the cola wars, but in doing so they gain protection from outside threats.

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