Paanch drunk?

After making the market fizz with a Rs 5 offering, cola makers have raised prices

Aamir Khan may have left an enduring mark on popular consciousness with his engaging parochial endorsements of Chhota Coke, the 200-ml Rs 5 version of the cola that was introduced towards the end of 2002.

For marketers, Coke's Rs 5 strategy "" which universally came to be referred to as paanch (five) "" could hold some important lessons in the issues that arise when companies cut prices.

To be sure, the Rs 5 strategy helped Coke "" and Pepsi, which was forced to follow suit "" expand its market substantially. Former cola king Ramesh Chauhan calls it "shock treatment".

Yet two years later, about a month ago, both cola rivals increased the prices of their 200-ml returnable glass bottles to Rs 6 (prices of the 300-ml bottles have also been raised from Rs 6 to Rs 7). In Coke's case, the price rise took place two years ahead of schedule.

Two new campaigns with Aamir Khan, a part of the paanch strategy, have been shelved.

For Coca-Cola India, the price change is applicable across select markets including big cities like Delhi and Mumbai, while the Rs 5 pricing will continue in some parts of rural India. In PepsiCo India's case, the revised price is applicable in the south, Delhi, Haryana, Punjab and Mumbai markets only.

This selective pricing is purely strategic in nature. According to a statement by Coca-Cola India, specific regional pricing is followed in areas in which the company still has expansion potential. It claims to continue to use lower price points on certain packs, that is, Rs 5 and Rs 6 for the 200-ml and 300-ml packs, respectively.

Neither company is willing to say how this price increase has impacted sales. Admittedly it is early days yet, but signs of future pressures are already evident. Retailers in south Mumbai (in markets like Colaba, Badhwar Park and Churchgate), Worli and Lower Parel have started feeling the pinch.

They say sales for the 200-ml cola in these areas have dropped by about 45 per cent within a month of the price increase.

A Worli-based retailer says consumption habits have changed as well. Where customers bought one bottle each for Rs 5, they are now sharing one 300-ml bottle (at Rs 7) between two people rather than paying Rs 6 for 200 ml.

So was paanch a mistake? Naturally, neither company will admit that. Coca-Cola's statement said the 200-ml bottle at Rs 5 was a part of the company's "affordability" strategy to ensure that every Indian (whether in rural or urban markets) gets his share of the company's beverage.

Pepsi, too, tried to play the "affordability" card. The company says that the lower price points were an investment in growth and part of its aggressive agenda to offer consumers its products at affordable prices, expand the consumer base and invest in growth.

But let's look at the decision to introduce the Rs 5 price point. We focus on Coke because it led the way. The objectives were clear: to push volumes and double the sales, to make Coke more affordable in rural markets and to add some fizz to the Rs 7,000-crore carbonated soft drinks (CSD) market, which has been growing at 20 per cent for the past three years.

According to industry observers, the market was expected to witness at least 40 per cent growth last year but the players could achieve only 20 per cent.

Sure, the company was able to almost double the consumer base from 160 million consumers to 240 million in two years. The company was also able to meet its sales target in the first year of the price cut. According to a company source, Coke achieved a 65 per cent growth in 2003. And while the intention was to achieve 50 per cent over that in the following year, the company managed only 35 per cent growth. With sugar prices increasing 30 per cent this year, it is little surprise that the company was unable to sustain the Rs 5 strategy for four years as planned (Pepsi said it had no specific targets).

While there are many advantages to slashing prices, there can be problems too. As an industry observer points out, "The company reduced prices at the cost of value. Thus it didn't make sense to keep bleeding."

Indeed, value was eroded in any case because many shopkeepers tended to add on a Re 1 premium as refrigeration charges, even though the companies installed cooling machines in shops (in reality this might have been done to compensate for already low margins). So for both the cola companies, keeping the price points low was no longer a winning situation.

But it is uncertain how far the current price rise will help matters. For one, retailers have less incentive to push the products. This is because, to compensate for the inevitable pressure on profitability, both Coke and Pepsi cut retail margins even as they raised prices.

On 200-ml packs, the margin is down to Rs 16 a crate (24 bottles) from Rs 18 a month ago. Similarly, for 300-ml packs, margins have been more than halved from Rs 48 a crate to Rs 20.

There is a practical issue, too "" the hassle of handing out loose change. As Chauhan puts it, "Rs 6 is a funny price to have. You are irritating the consumer by asking him to shell out change. Rs 5 is a key number."

Looking back, Chauhan and other industry observers are of the opinion that though the price point may not have been wrong, the strong paanch campaign was a mistake. "It's too strongly embedded in people's minds and for them to get used to a new price point is not easy," says Chauhan.

Also, revelling in the fizz created by the 200-ml Coke, the company stopped focusing on its 300-ml packs. According to a company source, this brought about tremendous de-growth in the 300-ml category. Agrees Chauhan. "Coke's 200-ml managed to completely kill the PET bottles and the 300-ml packs in the last two years," he says.

And now the company is busy trying to get the fizz back into its 300-ml packs. As a first step in the direction, Coke has stopped manufacturing the 200-ml packs in certain areas like Gujarat. Confirms a company source, "Since profit was coming under pressure, the company has decided to sell only 300-ml packs of Coke in some areas."

If company sources are to be believed, Coke eventually plans to phase out the 200-ml packs.

Asked if Pepsi had similar plans, Rajeev Bakshi, chairman, PepsiCo India Holdings said, "Rs 6 is the preferred price point. As of now, there are no plans to look at an increase in prices but if there is pressure from the competition, we may be forced to consider it."

Says Jagdeep Kapoor, chairman and managing director, Samsika Marketing Consultants, "A stable price is like a heartbeat. If you try to create fluctuations in the marketplace by continuously increasing and decreasing prices, it will only lead to a heart attack." Maybe it's time cola companies went in for a health check.

Do you think Coke and Pepsi did the right thing? Write in with your views to strategist@business-standard.com and send us your photograph in jpg format. The best letter will win a prize of Rs 1,000 and will be published in the next issue of The Strategist. Letters should not exceed 700 words.

Coca-Cola clarifies

Coca-Cola India has clarified that it had no specific time-frame to review its "affordablity strategy" of offering a 200-ml bottle of Coke at Rs 5. Responding to a report published in The Strategist (Paanch drunk, October 5), the company has stated that its sales volumes surged by 39 per cent in 2002 and by 22 per cent in 2003 and that it is on track to meet its targets this year also even after the selective price increase in a few markets.

"There is no question of our volumes falling, even in the select Mumbai area," a statement from Coca-Cola India's vice-president, public affairs and communications, Sunil Gupta, has said.

The company has also contested the report's contention that the company reduced prices at the cost of value, arguing that the "affordability strategy" was profitable as it managed to reduce costs.

Noting that the company did not reduce dealers' margins after the price increase, the statement further points out that contrary to what The Strategist report stated, its 300-ml pack size has registered "strong growth" and continues to be significant contributors to its overall volumes.

Also, the company continues to manufacture the 200-ml pack in Gujarat. Nor does it intend to phase out the 200-ml pack, which the company maintains, will be its main pack for a large market segment.

Our report was based on discussion with senior officials of Coca-Cola India and its retail dealers.

(This is a updated version as on 19th October).