1. Colpe de Cola Lessons from Venezuela November 20, 2001 Jared Fragin Katherine Friedman Gabriel Tam Vatnak Vat-Ho

2. Agenda  Current State of the Industry  August 22 nd, 1996  Vertical Restraints  Legal Implications  What has Pepsi done?  Next Steps

3. Current State of the Industry  Coke: America, Asia, and Europe Minimal market share in Venezuela and most Latin American countries Looking for a way to gain market share  Pepsi: Latin America Soft drink of choice in Venezuela by more than a 4:1 margin over Coke

4. August 22 nd, 1996  What Happened? Coke bought half of Venezuela’s largest bottling company for $300M Over one weekend:  4,000 Pepsi trucks had their logos painted over to Coke  Pepsi stranded without a bottler

5. Vertical Restraints  Vertical Restraints Arrangements to reinforce vertical relations without explicit integration  Cisneros had significant power Near distribution monopoly in Venezuela Hard to penetrate the market for newcomers

6. Vertical Restraints  Pepsi refused to help Cisneros expand Cisneros turned to Coke for capital Coke achieved in two years what Pepsi had built over 50 years Market share eventually exploded to 81%  Tapered integration to arrange vertical restraints Wield influence in input markets, enjoy competition Vulnerable to competitors buying out your supplier and distributor

7. Legal Implications  Venezuelan Law Any business activity which alone increased market share significantly must be approved by Government  Cisneros controlled 80% of the bottling market  Coke’s market share increased from 10 to 50% overnight Merger did not increase bottler’s market share and was therefore legal

8. Legal Implications  Coke placed six bottling plants and other assets (or ‘junk’ according to Pepsi) for sale to Pepsi  Cisneros offered to continue Pepsi production at 25% of output for one month to give Pepsi a chance to sign up other bottlers (Cisneros is near monopoly bottler in Venezuela)  Pepsi refuses both options Coke argues Pepsi is not interested in Venezuelan soft drink market  International arbitration court forced Coke to pay Pepsi $94M

9. What has Pepsi done?  Marketing Blitz Installed 50,000 refrigerated display cases: “visi-coolers” 1,000 delivery routes with 200 more added in 1998  Polar (SOPRESA) vs. Panamco (Cisneros) 30% share in SOPRESA $400M over 3 years  Price War Discount to retailers Coca-Cola decided to match aggressive discounting

10. Next Steps  In Venezuela… Discontinue price war Continue aggressive marketing “Power of One”  Globally… Defensive  Respect distributor power Offensive  Look for joint ventures, esp. with distributors

11. Questions?