August 25, 2006

Pop or flop? Coke and Pepsi’s India dreams crash

By Anupama Chandrasekaran

NEW YORK (Reuters) - As Coke and Pepsi defend allegations
of high pesticide levels in soft drinks sold in India, industry
experts are skeptical whether the companies' responses to the
issue will prevent a sales drop in India for the second
consecutive year.

In a report published earlier this month, environmental
group The Center for Science and Environment (CSE) said it
found traces of pesticides far above permissible levels in the
products of the two global beverage companies.

The report by the New Delhi-based group triggered a ban on
the sale of beverages made by the two firms in several Indian
states at or near state-run schools, colleges and hospitals.

"I don't think they realize how negative this type of
problem is for their performance, and hopefully they would have
learned from their past mistakes," said Argus Research analyst
Erin Ashley Smith.

In 2003, CSE came out with a similar study, highlighting
weak food safety laws in the country.

"The thing that makes this issue really, really bad is that
this isn't the first time it's come up," said Al Ries, head of
marketing firm Ries & Ries. "I think the companies are going to
take a big hit in sales over the next couple of years."

In 2005, soft drink volumes in India dropped for the first
time in a decade, according to Canadean, a UK-based beverage
research company.

Soda sales in India plunged 16 percent last year, while
China volumes jumped 14 percent, according to Beverage Digest,
a trade magazine. Per capita consumption in China was three
times that of the Indian consumer in 2005.

"(India) has ... a lot of promise because of its large
population base and also an emerging middle class with
disposable income," said Gary Hemphill, managing director of
research group Beverage Marketing. "I think it has been a
disappointment so far."

India comprises just about 2 percent of volumes for both
Coca-Cola Co. and PepsiCo Inc. and is a negligible part of
operating profit, according to JP Morgan analyst John Faucher.


According to several industry sources, Indian sales of
drinks made by Coke and Pepsi have fallen by about 10 percent
following bans imposed by some states over the report that they
contain pesticides.

Coke and Pepsi almost entirely control the 355-million case
per year Indian market.

"Obviously, this is not helpful to sales," said PepsiCo
spokesman Dick Detwiler. "Our products were absolutely safe
three years ago when this issue was raised and our products are
absolutely safe today."

Both Coke and Pepsi have published newspaper advertisements
to say pesticide levels in their products are below permissible
levels and less than those detected in other foods, such as
tea, fruits and dairy products.

"(We've held) four press conferences, two ads and dozens of
meetings with government officials and concerned parties. Also,
we have organized plant tours and today 300 groups have taken
the plant tours," said Coke's spokeswoman Kari Bjorhus.

On Tuesday, India's health minister said CSE had failed to
prove its claims about the soft drinks.

But CSE denied the statement and accused the minister of
pandering to big multinationals at the expense of public

Having known of the problem for the last three years, Coke
and Pepsi should have worked more aggressively with the Indian
government to develop some sort of routine tests, according to
crisis PR expert Jonathan Funke.

"The problems they are having is that of a credible
authority -- whose tests do you really trust?" said Funke, a
partner at CN Communications, which specializes in crisis
public relations. "It is a very emotional issue whenever you
have something you put into your body."

And Ries agreed, saying that "big companies deal with these
issues with facts rather than with emotions ... If I were the
chief executive I would get on a plane and go to India."

But their spokespeople said they were not aware of any
trips to India planned by soft drink chief executives in the
coming weeks.