Focus - Long-Term Perspective for CSDs in Middle East/Africa and Latin America
Richard Haffner contrasts the prospects for the carbonates category in the Middle East, Africa and Latin America regions.
When looking at the share of the major global beverage companies, Middle East/Africa and Latin America appear very similar. In Middle East/Africa, the Coca-Cola Co and PepsiCo had a combined 45.8% share of total soft drinks retail volume in 2011. In Latin America their combined share was 48.6%.
Coca-Cola, in particular, is well established in Latin America and competing against this company in the carbonates category is quite difficult. There seems to be little opportunity for other manufacturers in this category. However, there are important differences between Middle East/Africa and Latin America that may favour a more competitive environment for carbonates in the former region.
The current situation for total soft drinks
Middle East/Africa has the lowest soft drinks per capita volume of any region. The main cause is the very low incomes in the region. Average annual per capita disposable was only US$6,500 in 2011, with only 15% of households having disposable income over US$10,000. By 2020 the percentage of households with disposable incomes over US$10,000 will approach the level that Asia Pacific was at in 2006.
While incomes are low, demographics are favourable to soft drinks. Of the 1.3bn people on the continent, two in three are under 30 years old. Volume growth, mirroring income, has been slow and steady.
CSDs is the largest soft drinks category in both the Middle East/Africa and Latin America. In both regions, bottled water is the second largest soft drinks category, but it is growing at a faster rate.
In Latin America, Coca-Cola was early to recognise the region’s potential and is well established with a strong share lead in both total soft drinks and, especially, CSDs. In Middle East/Africa, both Coca-Cola and PepsiCo were quick to recognise the future potential of the region. In the Middle East (from Egypt to Saudi Arabia), PepsiCo and Coca-Cola have about the same volume share of total soft drinks in 2011, each with 21% of the market. Aside from Nestlé, with a 6% share, there are many smaller local companies.
On the rest of the continent, Coca-Cola dominates with a 38% share of total soft drinks followed by PepsiCo’s 5%. Establishing their brands now will make it difficult for other competitors to enter the market as favourable macroeconomic trends foster growth through this decade.
Nigeria typifies the challenges on the continent
Incomes are particularly low in Nigeria with average disposable income in 2011 of US$3,500. Per capita soft drinks volume last year was only 24 litres, 2011 compared to 37 litres per person for the entire region. Volume growth, albeit from a low base, has been steady and strong; 8% in 2011 and forecasted to be 7.5% in 2012.
Similar to many other countries in Africa, Coca-Cola maintains a leading share in soft drinks primarily due to CSDs. The company has developed a strong distribution network in a country where the road networks remain challenging. With the strong distribution network Coca-Cola has a commanding share of CSDs (58% in 2011) but, while leading the bottled water category, is much less dominant (14% volume share).
Bottled water will continue to grow with incomes since there is a lack of clean potable tap water in the country, with the majority of houses having no running water. Fruit/vegetable juice also represents a future opportunity as incomes grow since there is growing health awareness among younger middle- and higher-income consumers.
Similar to Latin America, Coca-Cola and PepsiCo have concentrated on their CSDs business in Middle East/Africa, where they are strong and getting stronger. PepsiCo is not as late to this region as they were to Latin America, but Coca Cola is investing in infrastructure in this region and trying to pull away. Low per capita volumes indicate low consumer penetration of soft drinks (due to incomes). The companies have just started to focus on the other soft drinks categories.
The focus for Coca-Cola and PepsiCo has been in the high-volume, modern trade stores. Per store sales of carbonates in super/hyper markets is comparable in Middle East/Africa and Latin America. However, per store sales of CSDs in the traditional trade (independent small grocers) is only about one third the level of Latin America, indicating that the two beverage giants have not yet fully reached the traditional channel in Africa.
The distribution pattern for all other soft drinks categories in Middle East/Africa is distinctly different from carbonates. For all other soft drinks categories, per store volume in traditional trade is comparable in both Middle East/Africa and Latin America.
Coke and Pepsi have strong shares in carbonates but much less share in other categories. The power of their bottlers is shown by their ability to gain distribution in traditional trade in developing markets. In all developing regions, except Middle East/Africa, distribution of carbonates is greater in independent small grocers than for all other soft drinks categories.
This pattern of distribution in Middle East/Africa suggests that, while Coke and Pepsi have a big share of carbonates in this region, the companies have not had the chance to leverage their distribution network to the extent that they have in other developing regions to gain distribution in the traditional trade. As per capita volume increases in this region, there may be an opportunity for other manufacturers to get their products into the traditional trade before Coca-Coola and Pepsi become well established.
Aje Group’s experience: a tale of two countries
The lesson of getting distribution before Coca-Cola and Pepsi have established themselves is a lesson demonstrated by Aje Group, a small soft drinks manufacturer located in Peru.
The story in Thailand, where the two drinks giants have not fully established themselves, is quite favourable for Aje. The company entered the market with a low-priced brand in rural areas where Coca-Cola and Pepsi were not yet established and achieved a strong share of carbonates.
Aje Group introduced its Big Cola brand to Thailand in 2007 before Coca-Cola and Pepsi became established. Big Cola provided a low-price alternative and the category expanded with its introduction.
Initially the company focused on distribution in up-country provinces and traditional trade with a low price strategy selling at about half the price per litre of Coca-Cola and Pepsi. Big Cola has continued to grow its market share due to aggressive distribution growth in modern trade channels and more coverage in Bangkok.
The company also markets Big Cola through lifestyle marketing to target a new generation of consumers. For example, Aje organises a big event like ‘Big Cola Action Extreme’ that prominently displays Big Cola with a stage performance by a name act at an extreme sporting event.
This has proven such a successful formula that Thailand is Big Cola's biggest market, where it accounts for around the same size of market share as Coca-Cola. The key has been aggressive distribution expansion at the right price before Coca-Cola and Pepsi were well established.
As shown earlier, Middle East/Africa has the lowest of all regions of annual per capita volume of soft drinks in 2011. Distribution now may have a big, long-term payoff but products would need to be differentiated form Coca-Cola’s and PepsiCo’s offerings. Aje Group has shown that low price is an option in the cola category where Coke and Pepsi are particularly strong brands. In non-colas, the beverage giants are not quite as strong and there may be an opportunity to compete based on brand image.
European carbonates companies may want to take note.
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