INTERNATIONAL TRADE CASE STUDY

COCA COLA’S 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

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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 aren’t too far off from each other, people

preferably purchase tubainas with a relatively pocket-friendlier price tag instead of Coca

Cola. So that’s 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 don’t 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.

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The strategy to stabilize the company and win the soda market in Brazil was with

efforts to improve the subsidiary’s profitability and regain Coca Cola’s 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, Pepsi-

Cola, Coca Cola’s 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.

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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 (Associação

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 classes—A, 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 http://www.fazenda.gov.br/portugues/real/planreal.asp 2 http://www.ut.ngb.army.mil/clp/linguists/fbis/bra.pdf

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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 food-

related 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

3 Gertner, David, Rosane Gertner and Dennis Guthery. “Coca Cola’s Marketing Challenges in Brazil: The Tubainas War.” 2004

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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,

4 ibid

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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 it’s 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.

5 Gertner, David, Rosane Gertner and Dennis Guthery. “Coca Cola’s Marketing Challenges in Brazil: The Tubainas War.” 2004 6 http://www.investopedia.com/terms/t/taxevasion.asp#axzz1rAROCN6A

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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

7 http://www.mckinsey.com/Insights/MGI/In_the_news/Tax_evasion_a_way_of_life_in_Brazil 8 Ibid. 9 Ibid. 10 Ibid.

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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 Cola’s declining market share. In 1999, Coca Cola’s share in Brazil

dropped to 48%. Coca Cola’s competitor, AmBev, Companhia de Bebidas das

Americas (American Beverage Company—NYSE: 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 America’s 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

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

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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 Cola’s 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 country’s 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 Cola’s 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 favored-

flavor. 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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azi