Acting in tandem in the Indian market, the two cola majors have agreed to raise prices and shift focus to the young upwardly-mobile affluent segment of customers
Mumbai: Soft drink consumers will now have to pay more for soft drinks as Coca Cola India and PepsiCo Holdings India have increased prices of the 200ml pack and 300ml pack by Re1 while Larger PET bottles are costlier by 10-12 per cent. However, there is another side to the price rise.
Consumers say the increased prices will not really make much difference as they were paying higher prices for the packs anyway.
Ramesh Reddy, a class 10 student says, "Hardly any outlets charges Rs6 for a 300 ml coke bottle. Also not many people are aware that the price of a 300ml bottle is Rs6. For the 200ml bottle however, since the company has been advertising the price heavily, most of us know the price and can argue with shopkeepers. But for the small packs, shops tend to hike up the price by Re1 as the refrigeration charge."
This is even though both the cola companies install the cooling machines at the vendors' premises. Industry observers say soft drink traders have been hit by the cut in trade margins, which came into effect earlier this year.
Coke and Pepsi cut retailer margins by more than half from Rs48 a crate (24 bottles of 300ml each) to Rs20 now. On small bottles of 200ml, the margin is down to Rs16 a crate from Rs18 a few weeks ago.
Retailers say their margins have come down from 20 per cent to between 12 and 13 per cent now, on both. Many retailers also admit they sell the regular pack (300ml) for Rs7 a bottle against the printed price of Rs6 to compensate for the cut in trade margins, as price awareness of this point is low.
For both the cola companies, keeping the price points low has become a lose-lose situation. While the traders are unhappy with the lowered margins and prefer to sell non-cola drinks, the cola makers are also suffering a decline in profitability even though the top line is still going strong.
According to the company, the two per cent cess imposed by the government in this year's Budget had a cascading price effect - sugar prices have risen by 30 per cent, prices of pre-formed resin used to make PET bottles and other forms of packaging are rising and affecting their margins.
Thus the two cola companies, which are now acting in tandem in the Indian market, are shifting focus to the young upwardly-mobile affluent segment of customers since it represents a more stable revenue proposition.
The total cola consumer base is currently pegged at around 250 million with consumption levels lower than 10 servings per year (that is, each person has a cola drink less than 10 times per year). Pepsi is trying to tap the top five million consumers who drink Pepsi more than 325 times per year.
Industry analysts say the lower prices also helped the companies tide over the pesticide crisis and now with that phase behind them and sales having stabilised, it may be time to look at higher revenues.
Company officials say the affordability strategy was aimed at increasing penetration and widening the consumer base of carbonated soft drinks. The pricing action was aggressively supported by strong advertising to expand the consumer base (which rose from 160 million consumers in 2002 to 250 million consumers in 2004) and re-energise growth.
Since the price increase of the two packs has been implemented in select areas of the country, the strategy seems to be aimed at targeting a select affluent class.
In the case of Pepsi, the revised price is applicable all over the South, Delhi, Haryana, Punjab and Mumbai markets, while in other parts of the country the price would remain the same.
For Coca-Cola India, the price change would be applicable across select markets including big cities like Delhi and Mumbai, while the Rs5 pricing would continue in some parts of rural India.
The soft drink industry is asking for abolition of special excise duty (SED) on soft drinks but finance minister P Chidambaram did not tinker with the SED in the Budget.
According to Sanjiv Gupta, managing director, Coca-Cola India the soft drink industry consumer base has doubled over the last two years to touch 250 million and this has been made possible due to the lower price point strategy. He says, the company saw double-digit growth in the first half of 2004, which was lower than that of last year.