The anti-soda rhetoric in the United States can make investors feel as though nobody buys carbonated soft drinks anymore. However, Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP) continue to grow in emerging markets where per-capita consumption is much lower than in the United States.
India, in particular, is a crucial part of both companies' growth strategies; a victory in the second most populous nation on earth could enable either beverage giant to dominate Asia in the 21st century.
Coca-Cola overtakes PepsiCo after initially falling behind
Coca-Cola operated in India long before PepsiCo entered the country, but it left in the 1970s due to a political climate that made it difficult to do business. PepsiCo entered India in 1989, prompting Coca-Cola to return to the country in 1993.
Although PepsiCo had an early advantage due to its four-year head start, Coca-Cola eventually surpassed its smaller rival in the country and now commands a 61% market share compared to PepsiCo's 36% share.
Both Coca-Cola and PepsiCo are positioned for huge growth
It is no secret that emerging markets are key to both companies' long-term growth, but perhaps no country is more important than India. The Asian nation is the world's second most populous; more than 1.2 billion people call India home.
However, relatively few Indians drink carbonated soft drinks. In 2012, per-capita consumption of Coca-Cola's beverages was 28 times higher in the United States than in India. Worldwide, the average citizen drinks almost 7 times more Coke than the average Indian citizen. Clearly, there is an enormous growth opportunity in the country as it reaches economic modernity.
I have previously argued that Coca-Cola is an exportable brand; you can ship it to all parts of the globe, and people of all cultures and economic backgrounds can understand and enjoy it. The same is true of PepsiCo's brands. In addition to Pepsi, Mountain Dew is popular worldwide. On the company's third-quarter conference call, CEO Indra Nooyi remarked:
One of the things we are most heartened by is Mountain Dew really travels well to international markets. Whether you look at India [or China], the Dew franchise is clearly a global franchise.
If you just looked at market share, you might think Coca-Cola's massive lead cements its leadership in India. However, Pepsi's and Mountain Dew's popularity among youths positions the second-place beverage company for long-term market share gains in the decades ahead.
In addition, both companies have announced plans for multi-billion dollar investments in India through the year 2020. With a combined 97% share of the market and easily exportable brands, Coca-Cola and PepsiCo are set to rule India in a duopoly for decades to come.
Not without risk
Coca-Cola and PepsiCo have encountered significant hurdles since their entry into India. In addition to the general uncertainty regarding government policy, the companies have had to contend with rumors and false attributions that have materially dampened sales.
Coke was India's leading soft drink until it was booted out of the country in 1977 for refusing to reveal its secret formula. Then, in 2003, India's Center for Science and Environment, or CSE, published a study that showed Coke and Pepsi contained pesticide residues. Coca-Cola and PepsiCo disputed the study and the results eventually faded from the public eye, but it caused an adverse reaction that hurt both companies' brands. Coca-Cola also received poor publicity in India due to its zealous use of water in a region where water is scarce.
There will undoubtedly be more problems in the future, but the enormous growth opportunity in India outweighs the risks of doing business in the emerging economy.