Automotive/Retail

ENVIRONMENTAL ISSUES Petrol prices

Diesel fuel is gaining popularity in India as more new models of diesel-engined cars are launched. Fuel economy ranks high on Indian buyers list of considerations, and the main factor underlying diesels rising popularity has been the large gap between retail petrol and diesel prices. This price difference has been widening for several years as a result of government control over fuel prices and a policy that has favoured diesel. Although the market is currently dominated by petrol and diesel engines, there is growing demand for alternative fuel sources amid volatile global crude oil prices and increasing environmental awareness. The two most popular alternative fuels are liquefied petroleum gas (LPG) and compressed natural gas (CNG). As part of its plans to increase its share of the Indian market, GM has announced plans to offer alternative-fuel versions of several of its models. sion requirements for cars, but India is still some way behind the standards that apply in the EU. Since 2010 all petrol sold in 13 of Indias largest cities has had to meet the Euro 4 exhaust-emission standards, while Euro 3 standards now apply in the rest of the country.

Alternative energy vehicles

Small cars dominate Indias market owing to their fuel economy and low prices. India specialises in the manufacture of low-cost, small cars, and the country is well placed to benefit from the increasing attractiveness of such cars in a domestic and global environment of high fuel costs and increasingly strict emission controls. After slowing in 2008-09, growth in petrol consumption should recover to an average annual rate of 11.3% in the forecast period. A Japanese company, Honda, became the first vehicle manufacturer to sell hybrid-engined cars in India when it introduced its Civic hybrid saloon to the market in 2008. The launch attracted considerable consumer interest, but initial sales were negligible owing to the models high price. Honda subsequently lowered the cars price.

Alternative fuels are increasingly popular

CO2 emissions
The government is enforcing increasingly strict emis-

India: Oil price and petrol consumption

Petrol consumption (000 tonnes) Oil prices (Brent; US$/b)
Source: Economist Intelligence Unit.

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

2006a 2007a 2008a 9,457 10,526 11,425 65.4 72.7 97.7

2009b 12,425 61.9

2010b 13,711 79.6

2011c 2012c 15,080 16,959 101.0 85.0

2013c 18,901 78.3

2014c 2015c 21,076 23,435 75.5 76.0

Coca-Cola vs PepsiCo

Fizzing up
Coca-Cola is ramping up its Indian operations to take advantage of the markets growth potential. But PepsiCo is still snapping at its heels Things seem to be coming full circle for Coca-Cola in India. In mid-November 2011 the worlds largest beverage company said that it and its partners would invest US$2bn in 2012-16 to ramp up its Indian operations. The move, which will double the companys investment in India to date, hints at the importance Coca-Cola is attaching to the Indian marketalong with China and Russiaas the operating environment gets easier. A look at Coca-Colas history in India shows the extent of the turnaround there. Back in 1977 the company was forced to make a high-profile exit from the country, when a government ruling required it to share its secret formula with its Indian partners and dilute its stake in its Indian unit. The company only re-entered India in 1993, when foreign investment rules were liberalised. Since then, Coca-Cola has invested over US$2bn in India and is now Indias leading beverage company, employing over 25,000 people directly. It acquired several local brands that are now best-sellers, including mango-based Maaza, Indias biggest-selling juice and Thums Up, which, along with Coca-Colas own brand Sprite, remain Indias top two fizzy-drink brands. Over the past five years Coca-Colas India business has grown particularly strongly, registering double-digit volume growth in 15 of the past 21 quarters. Now the company is preparing for an even bigger India presence. Its latest plan represents one of its biggest single-phase investments in one country, after the US and China. The investment, which will come from the company and its bottlers, will be used to set up a new company-owned manufacturing plant. The company already has 50 production facilities, 13 franchise bottlers and one company owned-bottling operation. The investment will also be used to expand the
The Economist Intelligence Unit Limited 2011

Coke is doubling its investment in India

6 Business India Intelligence November 23rd 2011

Retail
companys supply chain and infrastructure, and to double its already-vast retail network of 1.5m outlets, as well as contributing to its marketing spend. core soft drink business has stumbled, particularly in North America, and Coca-Cola still leads Pepsi in many important markets including China and India. In 1988, while Coca-Cola was absent from India, PepsiCo gained entry by creating a joint venture with Indian companies and has since invested over US$1bn in the country. PepsiCo India is now one of the companys top five global operations outside the US. In line with PepsiCos global strategy of focusing on high priority emerging markets, its India business in 2008 was elevated to region status. At the time, PepsiCo decided to invest US$500m in its India operations over the following three years, aiming to triple revenues in five years. Despite all that, by April 2011, Coca-Cola India claimed a 58.4% share of the Indian carbonated soft drink market, while PepsiCos share was under 40%. But PepsiCo is determined to catch up: it increased its sales at double Coca-Colas pace in the first half of 2011. Coca-Cola attributes its slower growth to the fact that it raised prices by 9-15% in the period to cope with higher commodity prices, against PepsiCos increases of only 5-6%. But price is not the only factor. PepsiCo attributes its sales growth to the fact that it expanded its sales force by 25%, distributed more coolers to increase its reach by 20%, raised capacities, and backed that with aggressive marketing and a sharper focus on rural markets. PepsiCo now plans to set up two to three manufacturing facilities in each Indian state. This will keep manufacturing close to consumption, cut transportation costs and keep prices low. PepsiCo also plans to bring healthier variants of its products to India. Apart from their competition, both companies face other hurdles in India. Volume growth has slowed in Indias soft drinks market, on the back of rising commodity prices, high inflation, higher taxes and higher product prices, driving category growth rates down to 13-14%, from 20-30% two years ago. Both companies have also come under fire in the past for depleting ground water and on concerns about pesticides in their beverages. India is indeed a high-potential market, but as Coca-Cola is aware, it will take more than just big investments to maintain a long-term advantage.

Three prongs
According to Coca-Cola, India is already the largest market in its Eurasia and Africa Group in volume terms, and ranks among its top ten globally. By the end of this decade, it could become one of the top five. Growth will be driven by the countrys strong population growth, by urban migration, and by the growth of the middle class. Even ignoring the demographics, the potential is huge: the annual per capita consumption of Coca-Cola beverages in India is currently only one-third of that in China. That growth potential is crucial for Coca-Cola, as for other consumer goods companies facing stagnating growth in the cash-strapped and increasing health-conscious US and European markets. Countries like India, by contrast, are now spending more on beverages and processed foods as their economies prosper. In the third quarter of 2011, Coca-Cola reported strong operating earnings of US$1.03 per share worldwide, a 12% rise from the year-ago quarter, on the back of its strong growth in emerging markets. This growth will be the key to Coca-Cola achieving its 2020 vision, which entails doubling its servings and system revenues globally. To that end, Coca-Cola and its bottling partners plan to invest nearly US$30bn worldwide over the next five years. The focus is on China, where CocaColas sales topped 1bn unit cases in the first six months of 2011, double their level five years ago. In August 2011, Coca-Cola announced that it would invest US$4bn in China over the next two years, taking its total investment in China since 2009 to US$7bn. A month later, the company also said that it and its Russian bottler would invest US$3bn in Russia in 2012-2016. The India investment is thus the third big announcement of this kind in just three months.

Coca-Cola is out in front, for now

The great race

In the race to capture share in emerging markets, Coca-Colas main rival is PepsiCo, another US icon. Since 2006, PepsiCo has increased its focus on healthier products, aiming to more than double sales from such items to US$30bn by 2020. However, its

India: Food, beverages and tobacco consumption

2006a 2007a 2008a 2009b 2010b 2011c 2012c 2013c 2014c 2015c Food, beverages & tobacco (consumer expenditure; US$ m) 197,187 237,403 247,196 263,360 325,793 364,262 399,864 429,626 467,477 507,225 Food, beverages & tobacco (% of household spending) 35.6 35.1 33.6 33.4 33.0 32.3 31.5 30.6 29.7 28.8 Food, beverages & tobacco (market demand; US$ m)d 285,213b 334,813b 354,215b 366,785 443,943 493,196 542,582 586,624 643,773 705,787 Food, beverages & tobacco (market demand; % real growth)d -0.7b 3.5b 2.5b 6.7 4.3 5.1 4.6 5.1 4.6 4.7 Milk consumption (litres per head) 72.4 74.6 76.2 78.0 79.9 81.9 83.9 85.8 87.7 89.7 Coffee consumption (kg per head) 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 Tea consumption (kg per head) 0.6 0.6 0.6 0.6 0.6 0.7 0.7 0.7 0.7 0.7
a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Excludes retail and wholesale mark-up.
Source: Economist Intelligence Unit.

The Economist Intelligence Unit Limited 2011

Business India Intelligence November 23rd 2011 7

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