The Pepsi challenge – Drinks giant returns to Kenya after four decades

Global soft-drinks giant PepsiCo has made a dramatic re-entry into the Kenyan market, reviving a turf war with its old international rival Coca Cola after a four-decade absence in East Africa’s largest economy.

PepsiCo officially launched its manufacturing plant located in Kenya’s capital Nairobi on February 18, and immediately stoked a price war with Coca Cola.

The company had exited Kenya in the 1970s amid a fierce battle for market share with its American rival, and its re-entry is set to light up the industry which has since then remained in the firm grip of Coke, the world’s biggest soft drinks maker.

“We will be selling our products in the 350ml glass bottle at the price of a regular 300ml soda,” said the Pepsi Kenya operation’s chairman Faysal El-Khalil, in an apparent reference to Coke’s popular 300ml brands.

“We are committed to ensuring that our customers enjoy pocket-friendly prices,” he added.

Softa Bottling Company, a Kenyan firm, has been Coke’s only competitor in the soda market but its limited resources mean it has barely challenged the global giant’s market dominance.

After what appears to have been an ill-advised exit in the seventies, PepsiCo made a quiet comeback on Kenya’s supermarket shelves in 2011 supplying the market through imported plastic bottled sodas and cans.

Within a year the company had concluded that there was a viable case for setting up a processing plant, underlining its faith in the growth potential of Kenya’s soft drinks market.

A manufacturing presence is expected to help Pepsi cut its operational costs, freeing up cash for the looming turf war with Coke.

Interestingly, Pepsi maintained a presence in East Africa’s second and third biggest economies Tanzania and Uganda respectively, even as it closed shop in Kenya.

It is a decision that would come back to haunt them as they missed out on Kenya’s steady economic growth in the past decade, which saw its annual output of $43 billion exceed the combined GDP of Tanzania and Uganda.

Coca Cola Kenya’s reaction to Pepsi’s comeback has been muted, but market watchers have taken note of the subtle reaction to its rival’s price strategy.

In a country whose GDP per capita is less than $800, Coke is well aware that soda is still considered a luxury in most households, and the saving of a few coins could significantly sway consumer choices.

The sensitivity to price was most apparent in 2011 when a surge in the inflation rate to a peak of 19.72 per cent flattened demand for soft drinks, knocking down annual industry output by more than 10 million litres.

Coke, which has been in the Kenyan market for 65 years, reacted by cutting the price of its 300ml soda by two shillings to Sh23, and the price of the half-litre bottle by three shillings to Sh37.

Coke says its price cuts were targeted at positioning its products within consumer’s reach, and was not necessarily a reaction to Pepsi’s re-entry.

“In this business you cannot play the price game,” said Bob Okello, the Coca Cola public affairs and government relations manager for East Africa in an interview with GTA Magazine.

Coke’s strategy, he said, has been to package its products in many different sizes tailored for the pockets of each consumer segment.

The company’s array of products ranges from the 200ml bottle, to 300ml, 500ml, 1 litre, 1.25 litre and 2 litres.
“This pack portfolio offers consumers the widest choice at a price point for every segment,” says Mr Okello.

The 200ml Coke bottle costs about $0.17 and is targeted mainly at the low-income earners, while the two-litre bottle costs about $1.6 each, and is mainly targeted at middle-income consumers ordinarily stock their fridges with them during their occasional shopping.

Pepsi’s re-entry into Kenya coincided with a slight decline in the fortunes of soft drink processors.

Total annual production of sodas in the Kenyan market hit the highest mark of 371.4 million litres in 2011, but declined 3.2 per cent to 359.5 million litres last year.

Growth of the industry has been rather slow since 2007, when total production crossed the 300 million litres mark.
Mr Okello however sees last year’s drop in production volumes as a temporal blip on the growth radar, which was caused mainly by high inflation.

Coke cites its $60 million investment in capacity expansion over the past three years and a further commitment of $62 million in the next three years as its vote of confidence in the growth potential of Kenya’s soft drinks market.

The money is spent on setting up new production lines, glass bottles and canning lines, and market development strategies like supplying retailers with free coolers.

Coke has six bottling companies located in different regions of the country and a juice processing plant in Nairobi.

Pepsi remains guarded on its expansion plans, only revealing that it has about 200 employees in its Nairobi plant with plans to grow this to 300 in the next twelve months.

“The manufacturing capacities have been designed to keep abreast of market demand,” said Mr El-Khalil. With a market experience of six-and-a-half decades, Coke feels that its competitor will take time before establishing a distribution machine that can rival its reach around the country.

Coke also feels that the Kenyan market can only grow bigger to accommodate the new competitor. “The Competition will not eat into Coke’s market share; they will help to grow the cake. It’s just like in the mobile telephony market, where the subscriber base keeps growing as service providers increase,” said Mr Okello.

Kenya’s non-alcoholic drinks consumers are also increasingly opting for healthier fruit-based drinks, posing a new challenge to soda processors.

Coke has taken note of the shift, and has introduced other beverages such as teas, coffees, energy drinks, bottled water and fruit juices. Its Minute Maid range of juices have grown in popularity, challenging the dominance of Kevian Kenya, the biggest player in this field.

However, sales volumes of fruit juices have been held down by the relatively more expensive pricing which makes them a favourite for the relatively small middle-income earners, meaning that soda remains the main field of competition.

Washington Gikunju 2013