Big Cola vs The Real Thing

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When Coca Cola distributors in Mexico City tried to persuade Raquel Ch¡vez to stop selling a rival brand of cola the shopkeeper complained to Mexico’s Federal Competition Commission. The result was $15 million fine for the distributors, a moral victory for Ch¡vez, and an unexpected boost for Peru’s Añaños family.

The Añaños family owns the business that makes Big Cola, the cut-price alternative to Coke and Pepsi that Chavez fought to keep on her shelves. And while Coca Cola is suffering a public relations disaster, Big Cola and Peru’s Kola Real are getting the kind of publicity money can’t buy.

The story starts in 1988 in the Peruvian city of Ayacucho. The Shining Path guerrillas had all but cut off the area’s supply of Coca Cola which, like other goods, had to be brought in from Lima. Being besieged by Maoist revolutionaries isn’t usually conducive to entrepreneurship, but according to Lucien O. Chauvin of Latin CEO, it was just the start the Añaños’ needed.

"We saw an opportunity because there was no bottling company in Ayacucho. Soft drinks had to be brought in from Lima, which was very complicated because of terrorism," says Carlos Ananos, the company’s executive director and CEO.

With a loan from the government’s now-defunct Industrial Bank, the Ananos family opened a bottling plant in Ayacucho, which is in south central Peru. Industrias Ananos began producing five flavors of Kola Real — cola, pineapple, strawberry, lemon-lime and orange — reusing old returnable beer bottles.

Jorge Añaños, the family’s oldest son, developed the cola’s flavour syrup himself. And according to Ricardo Castillo Mireles of Logistics Today, the result is similar to Coca Cola. In the Wall Street Journal David Luhnow and Chad Terhune reported:

The family
kept distribution costs low by using old beer bottles and pasted labels on
by hand. The operation grew slowly, with the family reinvesting profits
and looking for cost-saving ways to grow, such as buying plants abandoned
by other bottlers. The company expanded to the Peruvian capital, Lima, in
1997. When Peru’s economy stalled in 1998, Kola Real’s low price appealed
to cash-strapped consumers. By year’s end, Kola Real and other B-brands
more than doubled their market share to 21 percent.

The Ananos family next targeted Coke and Pepsi bottlers in Ecuador and then Venezuela. Within a year after entering Venezuela, Kola Real had nearly 10 percent of the market. Coke’s biggest bottler there at the time, Panamerican Beverages, was forced to cut prices.

The Ananos sons, who now largely run the business, saw the promise of Mexico. Last year both Carlos and Arturo moved to Mexico to oversee the company’s $7 million investment — its biggest yet — for a state-of-the-art plant near the central city of Puebla.

In per capita terms, Mexico is the second largest consumer of cola drinks in the world and Coke owns 70% of the market. So naturally Coca Cola didn’t want to encourage the competition. Before long distributors were being accused of bullying small store owners into taking Big Cola off the shelves. According to the Wall Street Journal:

Kola Real’s foray into Mexico has put the two beverage giants [Coke and Pepsi] on the defensive. Jose Bustamante, owner of the small Santa Cecilia store in Mexico City’s middle-class Roma neighborhood, says his local Coca-Cola salesman recently threatened to stop delivering Coke unless Mr. Bustamante removed Big Cola from his shelves. Mr. Bustamante says the salesman also offered two free cases of Coke a month. "I agreed," Mr. Bustamante says. "I can’t afford to stop selling Coke."

Earlier this year, two Mexico City stores lodged a complaint with Mexico’s antitrust commission, alleging similar tactics by Coke. Authorities are investigating the allegations. Last year, the antitrust commission ruled Coke was abusing its dominance of Mexican retailers and ordered it to stop certain sales practices designed to keep out competitors, such as exclusive contracts. Several Coke bottlers in Mexico have challenged the government decision in court.

Jose Octavio Reyes, president of Coke’s Latin American division, says accusations of bullying are "urban legends" and "simply not something that we would do."

Today newspapers around the world are carrying the story of Raquel Chávez and her victory. For Chávez it was a matter of pride. When her Coca Cola distributor tried to persuade her to stop selling Big Cola she told them "You may call the shots everywhere else, but I’m the boss in my store" (AP). Eventually they stopped delivering Coke to her store and she was forced to buy it from wholesalers and unload it herself. Now things are different. As an AP story on Aljazeera.Net explains:

Her husband now waits on customers as Chavez proudly shows off her court papers. Almost on cue, a bright red Coke truck pulls up and smiling, courteous Coke employees unload Chavez’s twice-weekly delivery. They say she is a good customer.

"I thought that we would lose this case, and when we did, it was going to be like ‘Look, little ant, we crushed you,’ because the powerful always win," she said. "Now I feel proud. Maybe now people will start standing up for themselves."

Chávez keeps her pride but it’s the Mexican government that will keep any fines paid by Coca Cola. Even these may be reduced on appeal. But on top of any fines to the local bottlers and distributors there’s the damage to Coke’s reputation. This won’t be confined to Mexico

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Peter Kemp
Peter Kemp
2022 years ago

Yeah, globalisation helps the poor people, right?

saint
2022 years ago

Heh. I like the way the Central and South Americans defy categorisation at times.

Coke’s infamous battle with Peru’s Inca Kola is another case in point. Coke never could outdo Inca Kola in market share, even when it bought into the company.

observa
observa
2022 years ago

While I don’t have a lot of time for big business and big unions(the latter of course feed well on the practices of the former which the left seem to applaud when they do)this situation is more complex than first glance suggests. What the courts are effectively saying is that a supplier must sell to all comers. In other words no restricted distributorship. Now there may be mutual benefits for the supplier and distributor in having such an arrangement, the most obvious case being the motor vehicle dealership. Without a certain distribution territory, the dealer may have little incentive to hold spare parts, invest in the special tools and particular diagnostic equipment, etc. In the case of Coke they often supply refrigerators at subsidised terms to supply their products. They would rightly be concerned about freeriding here. As well, they like all suppliers, have a vested interest in maintaining economies of scale, which ultimately flows to their consumers in cheaper prices. ie those who prefer Coke to any other brand. Notice that that lower pricing can also satisfy some more consumers who would prefer Coke, but not while the prices are higher. Basically Raquel wants to be a Lexus dealer here for obvious reasons, with the right to knock out Daewoos on the same lot. Lexus are saying to him if everyone does that the appeal and profitability of the Lexus brand won’t last. There is a fallacy of composition here Raquel.

Too bad say the simpletons on the left. Coke and Lexus should be forced to supply all, irrespective of their setup or expertise, etc. OK then, but at what price? Should Coke have to sell to all at the same price? Coles and the Raquels. Logically if you take that view, I should be able to walk into Coke factory and buy a carton of Coke for the same price as Coles. The manufacture and supply of goods, to satisfy the greatest number of consumers at the cheapest price is not so simple than first appears to the layman. What is good for one is not necessarily the best for all. It’s called the fallacy of composition.

Nicholas Gruen
2022 years ago

Thanks for your advice to the layman Observa.

Of course if you assume that an important ingredient of the value of a product is it’s ‘image’ for luxury, and it’s exclusivity, then a fair few of the assumptions that underpin your analysis go out the window too.

It is of course true that there are no restrictive rules one can apply to trade that can be guaranteed to produce welfare gains in all circumstances. But some have the broad support not only of the lay public but of those with professional training. The rule against collusion on prices has its costs – especially given that firms that would be allowed to merge are nevertheless prevented from colluding.

Likewise rules against third line forcing and exclusive dealing are generally speaking supportable, particularly where the conduct of concern is used to limit competition, even though it is possible to think of ways in which it could intensify competition and so lead to costs exceeding benefits.

The way we’ve finessed those issues in Australian law is that many apparently restrictive trade practices are not prohibited unless they substantially lessen competition and/or are perpetrated with that intent/effect.

I find it hard to believe that preventing Coke’s exclusive dealing here isn’t welfare improving – the lay fraternity’s presumed support for the same view notwithstanding.

In Australia, I’d like to think that a court would come to the same conclusion, on account of the strong likelihood in this case that exclusive dealing is being used with the intent to and the result of reducing comptition.

Yobbo
Yobbo
2022 years ago

Exclusive dealing goes on throughout the Australian liquor industry, and the government doesn’t feel the need to step in.