Multinational soft drinks groups have built strong positions in the growing Indian soft drinks market, in spite of relatively high taxation and the setback of the pesticide row in 2003. And with a huge amount of untapped potential remaining, particularly in rural markets, industry analyst Euromonitor believes the majors will continue to dominate.

While the soft drinks market in India remains underdeveloped compared to its Asian counterparts, favourable economic conditions and the vast population, with so much untapped potential particularly in rural areas, have attracted growing interest from international players.

The soft drinks industry in India experienced a spectacular growth of 151% in volume terms between 1997 and 2004, with total volume sales reaching 4.21 billion litres in both retail and foodservice channels combined in 2004. In 2004, total volume sales expanded by 16%, which is slightly higher than that in 2003, when the market grew by 14%.

India has one of the fastest growing soft drinks markets in the world, and the potential remains immense thanks to the extremely low consumption base. Total per capita consumption is about 4 litres, which is the lowest in the world, and considerably lower than that of comparable Asian countries.

In the booming soft drinks industry, multinationals seem to be the biggest winners in terms of market share. The Coca-Cola Company led the highly consolidated market with a 42.8% volume share, followed by PepsiCo at 28.6% in 2004. Danone is a minor player in India with a 0.5% share, chiefly due to its late market entry and limited offerings.

Despite the dominant positions in this land of promise, multinationals face challenges from the operating environment. Despite the reduction in excise duty from 32% to 24% in 2003, taxation on soft drinks remains high compared to that on other drinks, such as tea. Mainstream soft drinks' marketers feel that the high excise duty levied on soft drinks prevents them from fully exploiting the potential of the market, with soft drinks remaining a luxury product to many Indian consumers.

According to the Federation of Indian Chambers of Commerce and Industry (FICCI), 90% of total consumption is generated by the middle income group. Soft drinks companies believe lower taxation would stimulate demand, creating additional employment and reduce the large quantities of counterfeit products on the market.

In developing markets, growth is mainly achieved by reaching new consumers and developing affordable products to cater to low-income groups, and in India this comes down to reaching the 70% of India's one billion population living in rural areas.

Pricing is a crucial factor in these areas. In late-2002, both The Coca-Cola Company and PepsiCo undertook aggressive marketing strategies by dropping the price of 200ml packs to Rs5 (US$0.1). The significant price cut was seen as a driver for volume growth, allowing them to successfully expand their reach to new consumers. This strategy was especially well received in rural areas and collectively, both companies claimed to have double-digit volume growth between 2002 and 2003.

However, in the third quarter of 2004, with increased costs in raw materials and transportation squeezing margins, Coke and PepsiCo increased prices for their 200ml and 300ml bottles. It remains to be seen if rural consumers will retreat from the price hikes.

As well as price cuts, flexible packaging formats suitable for low-income consumers also seem to have been received well. Coke began selling Kinley water in small pouches in 2002, helping the brand to make considerable progress in semi-urban and rural areas.  As a result of various concerted efforts to expand rural consumption of soft drinks, industry sources estimate that sales in rural areas grew from 227m litres in 1998 to 471m litres in 2003.

Carbonates account for over 54% of total soft drinks sales in volume terms in India, with sales amounting to 2.3 billion litres in 2004. Growth in carbonates was around 6% in 2003, which is slower than the previous year, when the market grew by 10%. As elsewhere, the share of carbonates within soft drinks is under pressure from bottled water with consumers looking for healthier drinks.

Pressure on the CSD sector was also created by negative publicity over pesticide levels in soft drinks in 2003. An Indian environmental group claimed that the colas manufactured by The Coca-Cola Company and PepsiCo contained unhealthy amounts of pesticides, and sales of the product slumped by 35%-40% in the third quarter of 2003.

Coca-Cola and PepsiCo denied the charges, and filed cases with the High Court in Delhi to block the publication of the report. At the same time, random tests were conducted by the Indian central government and by some state governments. Test results released in October 2003 revealed that the pesticide levels in the majority of tested bottles were within the EU norm.

Despite the boom and bust in sales of carbonates in 2003, multinationals appear firm and resilient. The Coca-Cola Company launched Vanilla Coke in 500ml PET bottles in April 2004. Essentially, the launch was an attempt to create some excitement and cushion the slower demand for carbonates, and PepsiCo's Mountain Dew recorded good growth after its initial launch in February 2003. It was reported that Mountain Dew sold 3m cases within three months of its launch, and the brand continued to perform well at the beginning of 2004.

In terms of multinational penetration, unlike alcoholic drinks where domestic companies and local governments protect the local industry and discriminate against foreign players, the large multinational players already dominate the soft drinks industry. Euromonitor does not expect the continued liberalisation of the Indian economy to have any significant impact on the operations of the soft drinks industry and therefore the dominance of the established multinationals.

This is the first of two features on the Indian soft drinks market from Euromonitor. The second will look at progress in non-carbonated soft drinks sectors.