For both Coca-Cola and Pepsi, the past year in India was marred by the pesticide residue scandal which threatened to undermine fundamentally their business in this huge developing market. In the first of two updates on the Indian soft drinks market in 2003, Raghavendran Badrinath reports on the impact of the pesticide story and other issues affecting the carbonated sector during the year.

There is little doubt that Coca-Cola and Pepsi have made most of the headlines in the Indian soft drinks market over the past year but as 2003 saw some extremely controversial moments for the two multinationals, they may have preferred a lower profile. Coca-Cola and Pepsi can be said to have had something of a roller-coaster year in India as they seek to establish this huge market as a key part of their international activities.

While there were some successes, by far the biggest influence on Pepsi and Coke's year was the pesticide scandal which made the headlines not only in India but throughout the world. Following the publication of findings by the New Delhi-based Center for Science and Environment that overall pesticide residues in 12 drinks bottled by Coke and Pepsi were, on average, at least 30 times higher than acceptable limits in Europe, the two companies were faced with a major PR disaster. While a health ministry report shortly after found in Coke and Pepsi's favour, the pesticide scare has shown its effect on volume growth of CSDs.

Furthermore, the pesticide scare was not the only negative publicity the majors had to cope with. Following the scare, several unfounded claims were made against Coca-Cola and Pepsi in local media, taking a temporary toll on their logistics and brand loyalty. Analysts believe the pesticide residue issue together with off-season has reduced consumption levels for both the companies while there is also a long-term negative impact on CSD consumption.

In addition, some parts of the country witnessed the recall of Coke and Pepsi products which had exceeded their expiry dates. Based on these episodes, Pepsi and Coke are thought to be working on improving their tamper-proof packaging formats, especially in returnable glass bottles, while creating better logistics to handle expired products. Better enforcement by inspection agencies will create a firm ground for sustained growth in this segment.

Another worrying trend for Pepsi and Coca-Cola has been the continuing loss of share to companies with less stringent controls on production. This is particularly galling given the events of the last year. Benefiting from lax laws and enforcement, such companies are still allowed to manufacture products without bottle sterilisation or proper washing liquids. These bottlers do not adhere to taxation rules and hence undercut Pepsi and Coke products.

In addition to the impact of the pesticide residue issue, a government order on label declaration caused confusion regarding use of RGBs. The FPO (Food Products Order) issued a rule for embossing "Contains No Fruit" labeling on all RGBs with effect from November 2003. However, major soft drink manufacturers were not given enough time to get new bottles into the market with the declaration. Old bottles do not have any declaration regarding drink contents. Bottlers were faced with scrapping almost 80% of glass stock investments. However, a court verdict favouring the bottlers gave temporary relief for the bottlers.

As if the pesticide residue scandal were not enough, Coca-Cola was further hampered by a furore over its water usage at a plant in Kerala. For the past two years, local residents have been protesting against Coca-Cola drawing excess water from a dozen bore wells which they allege deprives residents of water. Left with little water for agricultural purposes, villagers sought judicial help. Coca-Cola claimed the water scarcity is due to lack of rainfall.

A local authority in Panchayat, which oversees the issuing of licences, gave a negative report on Coke. However, the issue is still being fought out in the courts. However, if the allegation is proved it could affect both Coke and Pepsi plants elsewhere in India. Nevertheless, in spite of some major setbacks during the year, Pepsi and Coke managed to revive their brands with the help of strong media activity.

Indeed, there were even some successes to report. The five-rupee price point for Coca-Cola, Pepsi and Mirinda brands saw volume increases of 20% though this was at the cost of some drop in volumes in the 300ml category.

During the year, Coca-Cola stole a march on Pepsi by introducing 200ml servings in returnable glass bottles (RGBs), following the general trend in the food and drinks market towards smaller portion servings. Coca Cola and Pepsi decided to introduce 200ml servings in returnable glass bottles (RGBs). Coke's investment in 200ml glass stock allowed it to take a lead over Pepsi which responded by reducing the price of its 300ml serving.

Non-cola variants such as Mountain Dew, Sprite and Fanta were reported to have performed better in the south of the country than in the north, where cola-based beverages retained market dominance. Mountain Dew currently has around 3% to 4% of the market, Sprite around 3% and Fanta 10%.

In the market at large, sales in returnable glass bottles have fared better than PET, cans or fountain formats. High Excise duties levied on packaging Preforms and finished products make PET-packaget drinks very expensive. The cost of PET packaging is about 30% of total cost. Due to high prices, repeat purchase of PET bottles on 500ml or bigger format is limited to small gatherings. Penetration in rural area is also very limited due to the price factor. Due to high prices for PET drinks, Coke adopted a cost per serving promotion on PET bottles during 2003. However, there is potential for PET in India and a total price reduction in packaging costs could lead to significant volume increases for PET

As with PET, sales in aluminium cans are also inhibited by high raw material costs. The packaging cost of aluminium cans is around Rup7 to Rup9 per can, making it uneconomical to offer 300ml to 500ml formats in cans. Growth in this area is thought to be unlikely until import duties on raw materials are reduced.

Growth in Fountain installations stagnated in 2003, with the supply of quality water to retail outlets creating logistical problems. Tap water is unreliable or dangerous at many retail outlets. This, together with Pesticide residue controversy, has meant that fountain installations did not grow in 2003. Coke and Pepsi currently have around 20,000 dispensers throughout India but analysts do not believe there is potential to increase this during the next few years.