INTERNATIONAL TRADE CASE STUDY COCA COLAS MARKETING CHANLENGGES IN BRAZIL THE TUBAINAS WAR

FANY 043200800 JOEY GILDAS 04320100006 LAURENZIA LUNA 04320100018 MARC LAOH 04320100040 PRISCILLA ALEXANDRA WAKKARY 04320100046 EMILIO KRISANTUS GUMANSALANGI 04320100053

LIPPO KARAWACI APRIL 2012

CHAPTER I BACKGROUND

Our case study is about Coca Cola and its efforts to attempt different strategies to undercut the growth of Tubainas. But before we go in depth about their so called war, we must first briefly understand what Coca Cola is and its organization in general. The Coca Cola Company is an American multinational beverage corporation and manufacturer, retailer and marketer of non-alcoholic beverage concentrates and syrups. The Coca Cola Company also sells soda fountains to major restaurants and food service distributors. Based on best global brand 2011, Coca Cola was the world's most valuable brand. Its influence on the beverage world is unquestionable and is evident in most parts, if not the whole world. This paper talks about Coca Cola and their challenges in their second largest international market against the local soda called tubainas. Tubainas refers to several brands of fairly cheap, carbonated and sweet beverages sold locally throughout Brazil, which is in many ways just like Coca Cola. For more than half a century, hundreds of micro, and a few medium-sized, manufacturers produced and distributed the so-called tubainas on a local or regional basis. The growth of tubainas in Brazil frustrated Coca Cola, so in order to maintain their performance and strength of Coca Cola in Brazil they tried to find the way to undercut or to defeat the growth of tubainas. They believed that if the company succeeded in pressing the growth of the tubainas, then it would make more profit for the company.
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The problem between Coca Cola and tubainas was actually about the price. Brazil with its high population, had a too wide range of people to consume water especially soda water, for example Coca Cola sodas. The quality of Coca Cola in some ways is better than tubainas, it can be seen by the people who consume Coca Cola in Brazil, but the problem is the price of tubainas is cheaper than Coca Cola. This means that tubainas is the problem in terms of its price and it would affect the profitability of the Coca Cola company, because people who consumed soda drinks will enjoy lower price soda drink with good quality, even though it may be second place in terms of quality. The fact that the taste and quality arent too far off from each other, people preferably purchase tubainas with a relatively pocket-friendlier price tag instead of Coca Cola. So thats why Coca Cola exercised its efforts to undercut tubainas in order to stabilize the production of Coca Cola in Brazil. The reason why tubainas had cheaper prices is because of small manufacturers with low operational and administrative costs. They produce their beverages without a clear legal existence and they dont pay taxes to produce the tubainas, because the products are produced by small producers. It is different with Coca Cola as a brand company which is included as a legal company, big and an enormous producer and of course with expectation of high profit, they must spend more money to pay the tax so it can be considered as a legally recognized company. These two factors influence the price of that product in Brazil which results in tubainas frustrating and even threatening Coca Cola.

The strategy to stabilize the company and win the soda market in Brazil was with efforts to improve the subsidiarys profitability and regain Coca Colas market share. Rather than the Cola war which was the name referred to in Coke versus Pepsi competition in many countries, the real issue for the Brazilian subsidiary of the Coca Cola Company has been the tubainas war. Over the years, Coca Cola attempted different strategies to undercut tubainas growth, and having previously mentioned the strategy of regaining market share, PepsiCola, Coca Colas notorious contender, which is ranked fourth among the best-selling soda brands in Brazil, also gained market share, thanks to its partnership with Brazilian beverage manufacturer AmBev and the successful launch of Pepsi Twist in 2003. Many factors come into play when we analyze such a case. Our group will try and see it from different perspectives and point of views, associate it with the trade and economic theories that we see relevant, and analyze the case from an institution and resource based view in relation with what both tubainas and Coca Cola have in advantages and disadvantages. We will also see the role of both formal and informal institutions in what we have touched previously about being a legally recognized company with taxes and so forth, and also the role of it being a foreign direct investment and how it enters a foreign market.

CHAPTER II SYMPTOMS AND PROBLEM STATEMENTS

I.

SYMPTOMS A. SOCIAL CLASS CLASSIFICATION The social class classification is also detected as one of the symptoms. Why is that? The basis is the Brazilian economic stabilization plan, Plano Real (English: Real Plan), which was established in the mid-1990s that restored the purchasing power of the low-income segment of the population thus creating an overall consumer marketing target. After the plan established, inflation has been mastered without price freezes, confiscation of bank deposits or other affectations of economic heterodoxy. As the result, the Brazilian economy grew back quickly (Plano Real, 2011).1 Brazilians can purchase consumer goods that were used to be inaccessible to them. The Brazilian Market Research association, ABIPEME (Associao Brasileira de Institutos de Pesquisa de Mercado) (Abbreviation and Acronyms used in the Brazilian Press, 2012)2, had developed a social class classification that defines five social classesA, B, C, D, and E. Classes A and B possess the highest levels of income, education, and purchasing power, and tend to be more

sophisticated consumers. Classes D and E are lack purchasing power and struggle to
1 2

http://www.fazenda.gov.br/portugues/real/planreal.asp http://www.ut.ngb.army.mil/clp/linguists/fbis/bra.pdf

afford even the very basic goods and services. Class C consumers are described as typical workers in the lower middle class, and comprise 12.6 million Brazilian households. Brazilians categorized in the Social Class C group were the most benefited by the economic stabilization that occurred in the 1990s. Class C accounts for 28% of total national consumption of soft drinks. From this classification, the selling is now depending on them, because they hold quite big portion in national consumption and products benefits.

B. QUALITY OVER BRANDS Another symptom that is found is the market tendencies to choose quality over brands. According to a market study conducted by the local branch of the Boston Consulting Group (BCG), in spite of the fact that price affects 38% of the foodrelated purchase decisions and 31% of other products, quality seems to be the main factor that guides Class C Brazilians buying decisions3. The study pointed out that brand was the least important factor in the food purchase decisions of Class C. The BCG report also noted that very few Class C consumers could be considered brand loyalists. They often switch among a few brands. When no evident difference in the perceived quality exists, Class C consumers tend to favor lower-priced products. The problem is that people of this

Gertner, David, Rosane Gertner and Dennis Guthery. Coca Colas Marketing Challenges in Brazil: The Tubainas War. 2004

social class make the purchase decision according to two factors quality and price; if they could find the same quality for the lower price, they choose the cheaper product. The lack of importance of branding among Class C Brazilian consumers was supported by market data showing that, between 1998 and 2000, 63% of the market leaders in 157 product categories lost market share in Brazil4. In Brazil, for nearly a decade, consumer habits observed among the massive segment of Class C consumers resulted in significant market share losses for brand leaders in several categories. That is why Coca Cola does not seem to be the first choice of the Class C members when they are looking for soda beverages.

C. BRAZILIAN B-BRANDS Informal industries in Brazil, such as the tubainas market, are growing vastly because there are not enough jobs in comparison to the productive workers around. Tubainas market is also a viable option because, as previously explained, of the tendencies of Brazilian consumers coming from the C Class to choose products of lower price. These so-called lower-priced products are referred to as B-Brands in the Brazilian market. Between 1998 and 2000, Brazilian brand leaders in 15 product categories lost 63% of market share, according to an A.C. Nielsen/CPBA study (Gertner,

ibid

Gertner, & Guthery, 2004)5. The study showed that the most affected categories were beverages, candies and sweet confections, and house-care products. In terms of the soda beverages market, tubainas served as the B-Brands available and favored. At its beginning, tubaina was a brand of candy and sweets registered by the Ferraspari Company, but later it introduced a soft drink under the same brand. Later on, tubainas became the general term for low-profile soft drinks. ABIR director Carlos Cabral Menezes estimated that tubainas combined market share was 23% and that it generated sales of nearly R$3.5 billion in 2001 (approximately US$ 1.5 billion).

D. TAX EVASION IN BRAZIL Another issue that this group identifies as a symptom in the case of Coca Cola Company in Brazil is tax evasion by small chains of brands and/or regional brands of soft drinks. By definition according to investopedia.com, tax evasion means an illegal practice where a person, organization or corporation intentionally avoids paying his/her/its true tax liability6. Business owners say that its a jungle out there in the Brazilian market with its stringent labor laws, high interest rates, and heavy taxes. Those factors contribute to a rampant of smuggling and tax evasion up to international organized crimes in the country. Jungle said as businesses and individuals do what they can to survive and, unofficially, indeed that had happened.
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Gertner, David, Rosane Gertner and Dennis Guthery. Coca Colas Marketing Challenges in Brazil: The Tubainas War. 2004 6 http://www.investopedia.com/terms/t/taxevasion.asp#axzz1rAROCN6A

Heavy taxes prompt producers to increase their products prices in order to be able to cover such taxes. For example, payroll taxes in Brazil consume an average 42 percent of an employee's income, compared with about 24 percent in the United States, and corporate taxes average 23 percent, compared with an average 14 percent in the United States. Sales taxes vary widely by state and type of purchase. In Sao Paulo state for cigarettes, it's 72 percent. Beer is taxed at 56 percent. For soap, add 42 percent. And the tax on a new car is 44 percent (Rapoza, 2004)7. And according to Emerzon Kapar, a Brazilian businessman who investigated the nonpayment of taxes by firms, taxes amounted to 40% of the final soft drink sales price8. Though not only specific to the soda beverages market, but companies are up to their necks facing unethical competition9. Vice president of the Brazilian Coca Cola bottler Spal, Marco Aurelio Eboli, estimated that 90% of the 750 regional brands of soft drinks did not pay the taxes they ought (Gertner, Gertner, & Guthery, 2004) 10. Thus explaining the major reason how tubainas could compete on the price basis against the global brands of soft drinks such as Coca Cola. In 2004 the Brazilian government put tax reform high on its political agenda. At the same time an influential study appeared that emphasized the role of unfair competition in undermining productivity and investment (McKinsey & Company

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http://www.mckinsey.com/Insights/MGI/In_the_news/Tax_evasion_a_way_of_life_in_Brazil Ibid. 9 Ibid. 10 Ibid.

2004). This led policymakers to realize that tackling informality and extending the tax base were necessary to stimulate growth and improve the efficiency of the economy. The Brazilian case provides some concrete examples of what can be done (Kenyon & Emerson, 2005)11.

II.

PROBLEM STATEMENTS A. COCA COLA DECLINING MARKET SHARE From the symptoms that have been identified, we found the one of the problems is Coca Colas declining market share. In 1999, Coca Colas share in Brazil dropped to 48%. Coca Colas competitor, AmBev, Companhia de Bebidas das Americas (American Beverage CompanyNYSE: ABV and Aback), made a corporation with Pepsi in 1997; Brahma signed a 20-year franchise contract to produce and distribute Pepsi products in Brazil. Besides, AmBev, formed from a merger in July 1999 of Brahma and Antartica, two leading Brazilian beer and soft drink manufacturers. With the merger, AmBev became the fifth largest beer manufacturer, the seventh largest world beverage manufacturer, and Latin Americas largest beverage company. AmBev held nearly 70% of the Brazilian beer market and 17% of the Brazilian soft drink market . Although Coca Cola is worldly recognized as one of the largest in the soft drink market and the third largest in global operations of Coca Cola in Brazil, evidence shows that Brazil has been a difficult market for Coca Cola

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www.etco.org.br/user_file/etco_301Kenyon_Kapaz.pdf

effecting market share, sales and profitability. The rising social Class C consumers allowed for the success of the tubainas brands. Tubainas, refers to the numerous local brands of inexpensive, carbonated beverages manufactured and distributed on a local and regional basis by hundreds of small companies. This made Coca Colas market share declined and it has to find solutions to keep the company on going.

B. CHEAP BRANDS COMPETITORS As the symptoms had shown, the group identifies that cheap local brands that not only referred based on price, those brands also favored based on Brazilian market preferences as of taste and the like, as a challenge and a problem to The Coca Cola Company in Brazil. Tubainas manufacturers had been in business for around seventy years as of 2003 2004. Though they were not much of a competitor at firsthand, this situation changed after the early 1990s when the plans to reform the Brazilian economy were initiated and pulled through. Tubainas manufacturers previously relied on cheap prices to attract consumers but were increasingly investing in quality control, product development packaging, branding, advertising, and marketing. Its distribution also spread from going through small sales in the neighborhoods, up to available in the leading supermarket chains. In the Brazilian Northeast, the region with the countrys lowest income circa 2004, tubainas market share was the highest with over 40%.
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CHAPTER III SOLUTION

The case about Coca Cola in Brazil faces lots of problems in its progress, such as tubainas goods, the policies of Multinational Companies by the Brazilian government, the preferences from the Brazilian consumers, the other competitors such as B-Brands, and still many. However, these are several things that should be noted, such as: More than fifty years, Tubainas goods were produced and distributed in Brazil. The number of selling is considered high in Brazil, and the price of the tubainas goods are affordable for Brazilian consumers. The tax for the Tubainas goods is low or even no tax by the Brazilian government, while Multinational Companies such as Coca Cola probably face problems like higher tax. Most of the Brazilian consumers do not really make brands as their priority, while they prioritize themselves to cheaper goods. From the facts that is going on in Brazil, there are several solutions that should be in charge in order to keep the existence of Coca Cola in Brazil, develop, even become the second biggest market, surpassing Mexico which is the current second Coca Colas biggest market. Here are the solutions that can be conducted in efforts by Coca Cola: Reducing the price of Coca Cola: It is one of the ways to get more consumers. However, it is the hardest way to do, because reducing the price means Coca

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Cola must reduce the production cost, choose the cheaper raw materials. However, this will make the quality of the soft drinks worse, and it is not the right way to do. One of the possible ways to reduce the price of Coca Cola is reducing the tax that is applied by Coca Cola, and it will be possible if Coca Cola approaches the Brazilian government as the policy makers.

Improve the relations with Brazilian consumers It is very important to improve the relations with the Brazilian consumers, because by that way, it will be easier to enter the Brazilian market and try to approach for new market and new opportunities. Coca Cola Brazil also sponsors some important events locally, nationally, or regionally such as carnavals.

Observing the needs of the consumers - Every country has its own favoredflavor. While Brazilian consumers are tend to have their own taste, and it is need to be observed which taste that they like. The success of the Pepsi-Lime in Brazil because it was welcomed well by the Brazilian consumers with a package that is easier to handle, and also the taste like ice-cola with lime. Coca Cola created new flavors in the future, such as guarana, grape, orange, and lemon flavors.

Approach the government Approach the Brazilian government is the way for Coca Cola to reduce its tax, because the only cost that can Cola-Cola reduce is tax from the government, and the lower tax can resulted in lower sell price and

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can get more profit. Tubainas goods can have lower price because the policy of the government with low tax, even no tax at all. Coca Cola Brazil cannot seel their products efficiently if they cannot sell it with the lower price with tax barriers. If Coca Cola can persuade the Brazilian government to reduce the tax for Coca Cola, it will be possible for Coca Cola to reduce the price and will attain more consumers. However, after Coca Cola can get the tax less than the usual, Coca Cola Brazil should keep maintaining the relationship with the Brazilian government, because it is the main key for a company to get more success in Brazilian market. If Coca Cola Brazil does not maintain its good relations with Brazilian government, it can cause the obstacles of the success growth or even the government will ban the license of Coca Cola in Brazil. When Coca Cola Brazil can improve its movement, it can compete with the Tubainas goods, and try to reduce the price near with tubainas goods price, people will re-consider to buy Coca Cola more than Tubainas soft drinks. Creating new technology Returnable glass bottles was re-introduced by Coca Cola as one of the ways to stop the growth of tubainas. This kind of method is expected to make growth of profit for Coca Cola. Coca Cola should make improvements in technology such as new flavors, new ways to promote Coca Cola, because Brazilian consumers as one of the biggest consumers will reach their limit in consuming Coca Cola. They can create new innovative flavors, such as chocolate cola, vanilla cola, green tea cola, and coffee cola or other flavors that Brazilian consumers prefer.

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Partnership with Local Brands Partnership with local brands can bring more opportunity to approach the market in Brazil, and resulted in the broader accessibility in snack bars and grocery stores with cheaper price. It is one of the ways to do improvisation and broaden the distribution.

According to our group, Coca Cola Brazil should approach the government of Brazil to the Brazilian government would reduce the tax payable by the Coca Cola Brazil. Coca Cola Brazil has to sell their products at more affordable (cheaper) prices to be accessible to people of Brazil. Because, if the government set a high tax Brazil for Brazil Coca Cola, Coca Cola Brazil cannot sell its products at prices more affordable (cheaper prices). If Coca Cola has managed to reach out and affect the Brazilian government to reduce taxes owed by Coca Cola, Coca Cola may lower the selling price of its products. If the tax due is reduced by Coca Cola, Coca Cola Brazil must continue to foster close relationships and foster a good relationship with the government of Brazil. A close relationship and foster good relationships with local governments is one key to the success of a company can achieve success in the country concerned. If a company cannot develop a close and good relationship with local governments, it would hamper the company's success. Local governments may ban products made by these companies. If Coca Cola Brazil has managed to foster a close relationship and foster good relationships with the governments of Brazil, Brazil Coca Cola can affect the government of Brazil to the Brazilian government would side with the Coca Cola Brazil rather than in favor of the Tubainas and B-brands.
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If the Brazilian government has sided with Brazil Coca Cola, Coca Cola Brazil could influence the government to control (control) operation Coca Cola competitor competitors Brazil. Coca Cola Brazil should be able to influence the government of Brazil to competitors' products Coca Cola competitors are not widespread. Another problem faced by Coca Cola Brazil is a variation or diversity of products sold by Coca Cola Brazil less diverse with a variety of products sold by AmBev. AmBev is one major competitor Coca Cola Brazil. AmBev have different types of soft drink products with a variety of flavors. AmBev also worked with the Coca Cola rival Pepsi. Since AmBev working with Pepsi, and Pepsi AmBev position in the Brazilian market was stronger. Pepsi makes a new product variant, namely Pepsi Twist (lemon-flavored Pepsi). Pepsi Twist favored by the people of Brazil. Pepsi Twist commercial success. With the success achieved by Pepsi in Brazil, Pepsi can create a more eager for more innovative products again. According to our group, Coca Cola should be able to create new products in the product. In order for products sold by Coca Cola increasingly diverse and growing number of types and tastes. Finished products Coca Cola products are not monotonous. Not only that it alone. If the product is Coca Cola products that just that alone, no longer a new innovation, the Brazil can be bored with Coca Cola products. Brazil could be leaving the community Coca Cola and switch to another brand a wider variety and more flavors. Therefore, to prevent people from getting bored with Brazil Coca Cola products, Coca Cola Brazil must make its latest product innovation product innovation with a variety of new types and flavors that did not exist in Brazil. Coca Cola Brazil should make innovations are new products that can be favored and which can be favored by the people of Brazil. That
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way, Coca Cola Brazil can face off to its biggest competitor against competitors such as AmBev, Pepsi and others. Example: making chocolate-flavored drink cola, vanilla cola, green tea and coffee cola. Soft drinks with a taste like that do not exist in Brazil. Soft drinks with a unique sense of taste as it will be able to attract the attention of Brazilian society. Brazilian society would have liked a drink with a unique flavor. Because, like the Brazilian community with various types of Soft drinks with a variety of flavors.

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CHAPTER IV CONCLUSION

Coca Cola is the leading soft drinks company in the world. Coca Cola has fans in different countries. Lots of people in different countries who likes to drink Coca Cola Coca Cola flavor and love. Because, Coca Cola has a unique flavor and very refreshing when drunk with ice or without ice cubes too, a sense of Coca Cola still good, unique and refreshing. Brazil is the international market is the second largest Coca Cola in the world after Mexico. Brazil is where Coca Cola operates the third largest in the world. Coca Cola can meraik success in Brazil. However, the success achieved by the Coca Cola is not without a hitch. In Brazil, the Coca Cola has a competitor c the same as selling soft drinks. There are all sorts of brands which competitor Coca Cola in Brazil. A wide range of brand (brand) is called as 'tubainas'. Tubainas is the designation for the various brands (brand) that sells a variety of soft drinks with various types and a variety of flavors at an affordable price. Tubainas prices are less expensive than the price of Coca Cola. Communities in Brazil are not concerned with brand (brand). Brazilian society concerned with affordable prices (low prices). Brazilian society would prefer to buy products at affordable prices (low prices) because purchasing power of Brazil has not been too good. Because Brazil is a developing country income per capita per year has not been too good for a country with a population which is very much like a country Brazil.

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Local products at affordable prices (low prices) beat global products. It does not only happen in Brazil, but also occurs in other developing countries. Market Soft drinks in Brazil is easy to develop. That is a simple way that is improvised (product development) and expands the distribution (to expand their market). Coca Cola competitors are not only tubainas, but there are also other competitors, dubbed as the 'B-brands'. According to observations, global brand lost market because of the 'B-brands'. The main problem or big problem for global brands like Coca Cola brand is unfair competition in which many companies do not pay taxes, so they can sell their products at more affordable prices (lower prices) than the selling price of Coca Cola.

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Abbreviation and Acronyms used in the Brazilian Press. (2012, April). Retrieved from Official Homepage of the Utah National Guard: http://www.ut.ngb.army.mil/clp/linguists/fbis/bra.pdf Gertner, D., Gertner, R., & Guthery, D. (2004). Coca Cola's Marketing Challenges in Brazil: The Tubainas War. Thunderbird, The Garvin School of International Management. Kenyon, T., & Emerson, K. (2005, December). The Informality Trap: Tax Evasion, Finance, and Productivity in Brazil. The World Bank Group Private Sector Development Vice Presidency. Washington, DC: Grammarians, Inc. Plano Real. (2011). Retrieved from Ministrio da Fazenda Esplanada dos Ministrios - Ministry of Finance: http://www.fazenda.gov.br/portugues/real/planreal.asp Rapoza, K. (2004, July 13). Tax evasion a way of life in Brazil. Retrieved April 3, 2012, from McKinsey Global Institute: http://www.mckinsey.com/Insights/MGI/In_the_news/Tax_evasion_a_way_of_life_in_Br azi

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