Carbonates fall flat in heat of Indian market

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A delayed monsoon should have provided the boost multinationals Coke and Pepsi needed to drive soft drinks consumption forward in India this year. But health scares, crippling taxes and strategic mistakes have all held the category back. R.Badrinath reports

It has been a tough year for the two soft drink giants Coca-Cola and Pepsi in India, with both suffering set backs in market growth during the past soft drink season, despite the enormous potential for the country. Consistent investment in bottling capacities and high impact marketing programmes have failed to take per capita consumption levels to even 50% of the levels experienced in China, for example, and there has been no significant change in the 250 million case CSD volumes.

The carbonated sector continues to dominate the Indian market and a delayed monsoon this year offered signs of hope for the soft drink industry, extending the "consumption season". Indeed, there were significant increases in volume growth of around 20% at the start of the year. Both Coca-Cola and Pepsi ambitiously introduced 200ml returnable bottles (RGBs), in conveniently sized small packs aiming at driving higher volume growth. (RGBs continue their market domination with 80% of volumes. PET bottles in 500ml, 1500ml and 2 litre formats generate about 15% of volumes. 12oz cans have suffered a significant decrease in volumes due to the high cost of packaging vis-à-vis other CSD packaging.)

Unfortunately much of the initial hope quickly subsided as consumers made a significant shift to the 200ml bottle from the 300ml bottles, without a significant increase in overall volumes, resulting in lower price realisation for the product and in turn lower turnover for CSDs in general.

But the difficult conditions this year have not all been of the producers doing. A crippling tax structure imposed on the industry continues to take its toll. Industry duties ordained by several states contribute towards steep cost-per-unit figures for the multi-nationals, with taxes constituting up to 60% of unit cost in some regions. Tamil Nadu, for instance, has passed legislation authorising a further increase in the current tax structure by a whopping 50%. The increase means companies are landed with a 20% sales tax and an additional 1% turnover tax on second sales or marketing.

These escalating duties mean that, combined with central taxation, CSD prices have been driven up by as much as 50% and as a consequence out of the reach of many rural consumers, as well as drying up the increase in demand seen in the summer season.

The good news for the drinks companies is that Coca-Cola and Pepsi's consistent policy of installing chillers at retail premises has proved a shrewd sales tool and may offset, to some extent, the effects of price increases on demand. Furthermore, advertising involving celebrity endorsements, including cinema stars and cricketers, seems to have struck a cord with the youth in India, despite the price increases.

However, CSD producers are battling a third front, which in the long-term may prove their most serious threat. The Indian perception is that while CSDs are certainly a refreshing pick-me-up, they are one dietary indulgence that has virtually no nutritional value, indeed quite the opposite. This image is exacerbated by the prevalence in the Indian population of diabetes and other sugar related illnesses. The medical fraternity has further fuelled the wariness of consumers of carbonates by cautioning that they should be consumed in moderation. This has impacted on demand in the summer season, aggravating a situation that sees Indians turn away from CSDs in the monsoon season because they attribute common cough, cold and sore throat problems to an indulgence in such drinks.

Health fears are multiplied by the thriving counterfeit market for drinks in India, driven by the lack of stringent measures and actions by health and sanitation officials to combat duplicate products. Duplicates are causing misery to CSD bottlers and the absence of any strict enforcement has lead to a thriving adulteration business, which has both the capacity to overrun the soft drinks market and threaten the position of the legal trade.

Expert Analysis

The Market for Soft Drinks in India

This report investigates off-trade versus on-trade sales of soft drinks and value and volume growth in addition to supplying forecasts to 2006. 


The lack of regulation is also causing confusion amongst consumers over the issue of price. Retail prices continue to be set at the individual retailers' discretion nearly never as per the prices marked on bottles themselves. Although, there is a significant growth in the number of outlets dispensing CSDs, key areas, such as bus terminals and railway stations, continue to over charge customers under the disguise of higher overheads.

Companies: PepsiCo

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