The Power of Franchising: How PepsiCo and Coca-Cola Leveraged Their Bottling Partners to Grow in India
Franchising is a business model that allows a company to expand its market presence and brand recognition by licensing its products, services, or trademarks to independent third-party operators, known as franchisees. Franchising can offer many benefits to both franchisors and franchisees, such as lower capital requirements, faster growth, higher profitability, and greater customer loyalty.
In the beverage industry, franchising is a common strategy adopted by global giants such as PepsiCo and Coca-Cola, who rely on a network of bottling partners to produce, distribute, and sell their drinks in various markets. In India, one of the largest and fastest-growing beverage markets in the world, both PepsiCo and Coca-Cola have used franchising to gain a competitive edge and increase their market share.
PepsiCo entered the Indian market in 1989, after a long hiatus due to regulatory barriers. Initially, PepsiCo operated its own bottling plants in India, but soon realized that it was too capital-intensive and inefficient to manage the complex and diverse Indian market. In 1997, PepsiCo decided to sell its bottling operations in India to Ravi Jaipuria, a local entrepreneur who had been a franchisee of PepsiCo since 1991. Jaipuria’s company, Varun Beverages, became the largest bottler of PepsiCo products in India, covering 22 states and two union territories.
The move to franchise its bottling business in India proved to be a smart decision for PepsiCo, as it allowed the company to focus on its core competencies of brand building, innovation, and marketing, while leveraging Varun Beverages’ expertise in manufacturing, distribution, and sales. Varun Beverages also invested heavily in expanding its production capacity, distribution network, and product portfolio, which helped PepsiCo grow its market share and revenue in India. According to the recent financial reports, Varun Beverages had a revenue of Rs 14,000 crore ($1.9 billion) and a profit of Rs 1,000 crore ($136 million) in 2021, while PepsiCo India had a revenue of Rs 8,200 crore ($1.1 billion) and a profit of Rs 250 crore ($34 million) in the same year.
Coca-Cola, on the other hand, entered the Indian market in 1993, after acquiring the local brands of Parle Beverages. Coca-Cola also operated its own bottling plants in India initially, but faced similar challenges as PepsiCo in terms of high capital costs, operational inefficiencies, and regulatory hurdles. In 2012, Coca-Cola announced its plans to sell its bottling operations in India to its existing franchisees or new partners³, as part of its global strategy to divest its asset-heavy operations and become more agile and flexible.
However, Coca-Cola’s franchising process in India has been slower and more complicated than PepsiCo’s. Coca-Cola faced resistance from some of its bottlers who were reluctant to buy out the company’s plants or invest more in the business. Coca-Cola also had to deal with legal disputes with some of its franchisees over contractual terms and royalty payments. As a result, Coca-Cola has only been able to sell its bottling operations in the north and east regions of India so far, while retaining its ownership in the south and west regions.
Coca-Cola is now planning to sell its remaining bottling operations in India to franchisees in the south and west, which could be completed by the first half of 2022. This move is expected to help Coca-Cola improve its profitability and growth prospects in India by reducing its capital expenditure and operational risks, while enhancing its collaboration and alignment with its bottling partners. Coca-Cola’s financial performance in India has been improving in recent years, with a revenue of Rs 10,200 crore ($1.4 billion) and a profit of Rs 619 crore ($84 million) in 2020.
The cases of PepsiCo and Coca-Cola illustrate how franchising can be a powerful tool for global companies to succeed in emerging markets like India. By partnering with local entrepreneurs who have a deep understanding of the market dynamics, consumer preferences, and operational challenges, global companies can leverage their brand equity, product innovation, and marketing capabilities to create value for themselves and their franchisees. Franchising can also enable global companies to adapt quickly to changing market conditions and customer needs by empowering their franchisees to make decisions that suit their local contexts.
Franchising is not without its challenges though. It requires careful selection of franchisees who share the same vision and values as the franchisor. It also requires constant communication and coordination between the franchisor and the franchisees to ensure quality standards, operational efficiency, and strategic alignment. Moreover, franchising involves sharing of profits and risks with the franchisees, which can create conflicts of interest or incentives for opportunistic behavior. Therefore, franchising requires a strong legal framework and a robust governance system to protect the interests of both parties and ensure mutual trust and cooperation.
Franchising is not a one-size-fits-all solution for every market or industry. It depends on various factors such as the nature of the product or service, the competitive landscape, the regulatory environment, and the availability of suitable partners. However, when done right, franchising can be a win-win proposition for both the franchisor and the franchisee, as well as for the customers and the society at large. Franchising can create a virtuous cycle of value creation, innovation, and growth that benefits all the stakeholders involved.