Peru has the greatest potential of all Latin America’s markets for soft drinks growth, a point not lost on Coca-Cola or its local rivals. Owain Johnson investigates the local strategies that have kept the international giants at bay and the consolidation that may change that landscape for good.
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Say Peru to most people and images of the Andes mountains, Inca ruins and pan pipe music will spring to mind. But there is another image that lingers in the mind of those people who have visited the South American country – the bright yellow colour of Inca Kola, the national soft drink whose advertising hoardings dominate Peru’s cafes and landscape.
As a result of the ubiquity of Inca Kola, Peru is one of the few countries in the world where Coca-Cola or Pepsi are not the best-selling soft drink. Instead, the vividly coloured drink with the bubble gum taste accounted for 26% of all soft drink sales in Peru last year, a sales figure slightly ahead of Coke and almost four times more than that of Pepsi.
But that bright yellow that used to be the exclusive hallmark of Inca Kola now has a similarly coloured rival that threatens its dominance. In recent years, another equally garish yellow soft drink, Sabor Oro, has begun to cut into its more established rival’s sales.
The Young Pretenders
Sabor Oro is part of the range of low-cost brands, which include the popular Big Cola, produced and marketed by the Añaños family through their company, Añaños Industries.
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By GlobalDataEduardo and Mirtha Añaños and their six children started making soft drinks in 1988 at their home in the city of Ayacuchó. Previously farmers, the family spotted a gap in the market when the terrorist activities of the Maoist rebel group, the Shining Path, rendered large swathes of the country around Ayacuchó off limits to larger distributors.
Fifteen years on, the family owns plants in Peru, Mexico, Venezuela and Ecuador, employs 7,000 people and is expanding rapidly. The secret of its success: low, low prices.
Añaños soft drinks can be up to half the price of their competitors with reductions achieved by an austere approach to business that has drawn comparisons with US retail giant WalMart.
The company is still primarily run by the family, and spends very little on offices, marketing or executive salaries. It also aggressively drives down distribution costs, meaning that, while the family’s Big Cola brand resembles Coke and Sabor Oro looks like Inca Kola, both are substantially cheaper.
The slogan of Añaños Industries is “Quality at a Fair Price,” and their aim is to bring soft drinks to sections of the population who previously could not afford them. The policy seems to be paying dividends: Big Cola outsold Pepsi in Peru in 2002 and the company is beginning to bridge the gap with its two bigger rivals.
The Coca-Cola Company certainly takes the threat of Big Cola seriously, so much so that Mexico’s Federal Competition Commission recently launched an investigation into allegations that Coca-Cola has used unfair practices to block Big Cola’s expansion into Mexico.
The Peruvian brand had secured a market share in Mexico of around 5% in a remarkably short time, rattling Coca-Cola, despite its enormous 75% market share. Establishing a permanent presence in the profitable Mexican market is crucial for Añaños because average per capita consumption in Mexico is three times that of Peru and prices are higher. The different timing of the Mexican and Peruvian summers also means the company can counterbalance seasonal fluctuations in the two countries.
The Old Royalty
If the Añaños family are a rising power, their older established rivals – the Montagus to their Capulets – are the Lindleys, who created Inca Kola back in 1935 and still control the brand through the José R. Lindley Corporation.
Maintaining their slight lead over Coke for so many years proved a draining business for the Lindley family, who were forced to spend heavily on marketing and seemed to be locked in an endless war of attrition.
The breakthrough for the company came in 1999, when The Coca-Cola Company took an 18% stake in José R. Lindley and the two longstanding rivals agreed (over glasses of both Inca Kola and Coke) to co-operate on marketing and distribution.
As Rodolfo Salas, the manager of Coca-Cola Peru, recently noted, both sides soon benefited enormously from sharing distribution channels and from the ability to focus on their brands without always having to look over their shoulders.
“The truth is that it was an arduous competition for years,” Salas said. “The joint effort was the best alternative, because the process of eating each other up prevented both of us from expanding the category.”
Further Consolidation
The alliance between Inca Kola and Coca-Cola drove down costs on both sides and changed the face of the industry in Peru. Now, a new proposed merger between the country’s two biggest producers is also likely to have similar, if not greater, consequences.
The José R. Lindley Corporation is currently considering launching an ambitious move to purchase its slightly larger competitor, Embotelladora Latinoamericana S.A. (ELSA).
Last year ELSA, the Peruvian subsidiary of Chile’s Coca-Cola Embonor, had a 31% market share compared to José R. Lindley’s 29%. Nevertheless, the Inca Kola producer is close to issuing a formal purchase offer for ELSA, and has already asked J. P. Morgan to evaluate “the economic and financial convenience of acquiring a majority share in Embotelladora Latinoamericana S.A (ELSA).”
José R. Lindley has also already informed Peru’s Securities and Exchanges Commission that it is considering “the possible expansion of its soft drinks business in Peru.”
Coca-Cola Embonor agreed to turn over ELSA’s accounts to José R. Lindley back in May after a request by The Coca-Cola Company, which owns 45% of its shares, and is represented on both sides of the negotiating table.
Despite Coca-Cola’s apparent enthusiasm for the sale, the deal is not yet cut and dried. Embonor has reserved the right to block the deal if it feels it will harm the group, which derives 38% of its income from ELSA’s sales in Peru.
But most analysts predict the deal will go through and that the two operations will be swiftly merged, provided that Peru’s mergers commission gives its approval. The new soft drinks giant created would enjoy a majority market share and would leave The Coca-Cola Company, as a major shareholder of both sides, in a very dominant position.
The creation of a new company combining José R. Lindley and ELSA would allow the two producers to cut costs and thus bring their established brands closer to the pricing level of their brash new competitors, such as the Añaños range.
A full-scale soft drinks war in Peru is unlikely, however. Añaños has little scope for further price reductions, while José R. Lindley and ELSA are more interested in buttressing their existing position and maximising profits than in slashing margins to win over Añaños’ lower income customers.
Most importantly, all the producers are very aware there is enough room for everyone to expand their sales in Peru, which is widely considered one of the Latin American soft drinks markets with the greatest potential for growth.
With 18 million inhabitants, Peru represents a substantial market that has yet to be fully developed. In neighbouring Chile, where the soft drinks market is relatively mature, average per capita consumption is 220 bottles, whereas Peruvians drink an average of just 70 bottles per year.
With consolidation and a new drive to efficiency on the cards at the major producers and the continuing growth of their low-cost rivals, the market is likely to grow significantly in the short-term. Meanwhile, Añaños plans to establish itself as a major Latin American player, while José R. Lindley has signed a deal with Coca-Cola to market Inca Kola abroad. For the Peruvian soft drinks industry, the future’s bright and the future’s bright yellow.
