An emerging cola brand from Peru schools the giants on how to achieve big growth.

AJE, the Peruvian purveyor of Big Cola, with global sales of $2 billion, has achieved sales growth of an average 22 percent per year from 2000 to 2013. PepsiCo on the other hand, recently outperformed Coca-Cola’s negative 1 percent growth in net sales (and 3 percent decline in profits) by reporting a topline growth of 4 percent. AJE may be a minnow compared to the big cola companies, but it’s outperforming them.

The movie theater business offers insights as to how firms can find new opportunities for turning around dying businesses by understanding consumers and their needs better. For movie theaters in the US and Western Europe, viewership peaked in the late 1940s and has since slid by 80% or more, depending on the market. Television made the initial dent, followed by home videos, and most recently the likes of Netflix and Amazon Prime. A common thread that ties all the competition together is the television set. Given this, movie theaters have recently built on their offering to give movie viewers an experience that cannot be replicated on TV at home.

First came the big screen theaters and sophisticated sound systems, which create a more immersive experience. Technology has provided THX, IMAX, and 3D experiences, experiences that cannot yet be matched on home systems. Some theaters today are offering a 4D experience! At these movie theaters the seats respond to what one is watching on the screen with piped in smells, smoke, and even water sprays!

But, technology is just the beginning. Movie theaters are doing much more to bring back the crowds, and they are succeeding. Recently, my wife and I went for a movie at a theater that offered a dramatically different experience. On arrival at the theater, we were ushered to a table in a thoughtfully lit space laid out with tables just like one might expect at a nice bistro. We were brought a menu that offered treats that were more bistro-like, going way beyond the basic fare of “Coca Cola and popcorn” that has been the mainstay of the snacks and theater revenues. The menu offered the opportunity to have our own bottle of chilled Moet et Chandon champagne, canapes, a cheese platter, burgers, and much more.

We ordered champagne and canapés and were served at our table with the champagne chilling in a bucket of ice. When it was time for the movie we were escorted to our seats inside the theater which was next door. And what a seat it was; they made business class seats on most airlines seem basic an they offered an almost-private viewing experience. Reclining in our plush seats side by side, with our own blankets and pillows, we soon had someone bring the champagne and canapés from the table outside to our theater seat-side.

Sipping on champagne and nibbling canapés, ensconced in a super comfortable seat, and watching a movie together was special. We enjoyed it thoroughly and, importantly, look forward to doing it again! Perhaps not every time we watch a movie, but certainly from time to time, as an evening out on town!

So, what are the lessons here? First, the movie theater industry appears to be segmenting the market and developing targeted offerings. For certain audiences and movie genres, the 4D experience makes a real difference. Think teenagers and young adults at an action or horror movie. For, other audiences, for instance, couples, the opportunity to enjoy a movie accompanied by one’s favorite beverages and finger foods might be a real draw.

Second, in developing the targeted offerings, the theater business is considering the target consumers’ consumption experience. It’s not just the movie and its ability to draw, or the screen size, or the sound, or…, which has been the consideration for decades, but the total in-theater experience.

Third, the benefits combination offered is distinct and, importantly, coherent. The technology (e.g., IMAX and THX) and creature comforts (e.g., seats) are significantly superior. There are entirely new benefits, never previously offered in movie theaters (e.g., 3D, 4D, fine foods, wine and champagne, blankets, pillows). And, earlier mainstay items like popcorn have been eliminated! To create an authentic experience one needs to keep in mind what goes together, offering superior and new benefits on the one hand and balancing it with the reduction or elimination of other and often conflicting benefits. In this case dining while watching a movie and popcorn do not go together, and the movie theater has wisely removed popcorn from its menu!

Last but not least, it’s not focused on technology.  It’s looking around and combining experiential aspects from different industries–restaurants and airlines, to name two, to offer a completely new experience.  If you haven’t been to a movie theater recently to take in a movie, go check it out. You might be in for a very pleasant surprise!

The last fortnight saw the second quarter announcements of performance from both the Coca Cola Company and PepsiCo.

Although PepsiCo significantly outperformed Coca Cola’s negative 1% growth in net sales (and a 3% decline in profits) by reporting a top line growth of 4% (and a higher profit rate), they both seriously underperformed when compared to AJE, the Peruvian purveyor of Big Cola. AJE with global sales of $2bn is a minnow compared to Coca Cola or Pepsico, but according to the Financial Times, “AJE’s global sales grew at an average of 22 per cent a year from 2000 to 2013”!

The AJE Group and its brand Big Cola, interestingly owes its foundation to the reign of terror by the guerrilla movement Sendero Luminoso (Shining Path) in the 1980s, which led the Añaños family to flee their farm. Forced to think of how to survive, and seeing the withdrawal of the soft drink giants from the market, the five siblings (four brothers and one sister) started making an orange flavored beverage they called Kola Real in 1988 in their courtyard, bottling it in recycled beer bottles, and selling it door-to-door to neighborhood residents and mom and pop outlets in the city of Ayacucho!

The product caught on, and in 1991, the Añaños siblings founded the AJE Group to bottle and expand the business, expanding to smaller cities like Huancayo, Bagua, and Sullana first, then pretty much throughout Peru in a step-by-step fashion, before finally arriving in the Peruvian capital, Lima, in 1999.

In 2000 it began international expansion, targeting neighboring Venezuela and Ecuador. In 2002 it entered Mexico, followed by the countries of Central America in 2004. Around the same time, it also started to add to its brand portfolio. In 2001 it added bottled water under the brand name Cielo, in 2005 Pulp, a citrus fruit drink, and in 2006, Sporade, a hydrating drink. That same year, it also set up its corporate headquarters in Madrid, Spain. In 2010 it entered India, Vietnam, and Indonesia. Today, it is present throughout Latin America and the United States. In Asia it has expanded in to Thailand as well. And aside from Kola Real, Cielo, Pulp, and Sporade, it also owns Cifrut, Volt, and the Big Cola brands.

From the very beginning, AJE focused on serving less affluent consumers, offering lower prices; as an example, to enter Lima in 1999, the Kola Real campaign positioned the brand as “The Fair Price Drink”. And Kola Real prices are approximately 25% lower than that of its main MNC competitors’ offerings. To keep prices low, AJE needs to keep costs low. It does so by paying close attention to its entire value chain, stripping costs aggressively wherever possible. For instance, AJE manufactures its own beverages, unlike its MNC competitors like Coca Cola and PepsiCo, which rely on an extensive network of independent bottlers, because this allows them to produce their beverages at a lower cost.

AJE was also a first mover in to PET bottles, which are ubiquitous today. Not only were these bottles cheaper but they were lighter and less fragile, making them much less expensive to buy, use, and distribute. To keep costs low, AJE invests in partnering with micro-entrepreneurs who use their own transport to distribute AJE’s brands. 92% of AJE’s sales are through such direct partnerships, with only the remaining 8% going through wholesalers, who are more expensive. This distribution model not only helps AJE keep costs low, but also 1. enables them to penetrate deep in to its markets, going to remote locations which remain un- or underserved by their MNC competitors, and 2. penetrate new markets rapidly.

AJE’s success is not just due to lower costs, it also adapts to local markets. For instance, in Asia, it sells a Big Cola without caffeine, to adapt to local market needs. Or when, in Indonesia, the currency weakened, it launched a 300 ml pack priced at Rp 2000 to remain attractive to its target consumers. Today, four short years after entering Indonesia, AJE holds almost 40% of the Indonesian carbonated soft drink market of 1 billion liters per annum!

AJE’s success has drawn the attention of the big MNC operators, who have tried competing by aggressively offering promotional prices and increased spending on advertising. However, this only works in the short term; poorer consumers revert back to AJE’s brands once the promotional prices are withdrawn.

What is interesting is that the dominant MNCs in this space, Coca Cola and PepsiCo, seem unable to deliver growth in the way AJE does or come up with a clear response to AJE’s success. What can we learn from AJE’s success story? There are lessons for both wanna be AJEs, or the so-called EMNCs, as well as for MNCs. These lessons have been detailed in our book The New Emerging Market Multinationals: Four Strategies for Disrupting Markets and Building Brands, and here we review the key points that jump out from AJE’s story:

Lessons for EMNCs

1. Identify a target customer group that is underserved—in the case of AJE, these are consumers at the bottom of the pyramid, who number 4 billion, and those who live in less accessible locations.
2. To avoid head-on competition, penetrate deep in to emerging markets; traditional MNCs target the affluent in the metropolises and bigger cities.
3. Focus relentlessly on costs, stripping costs from all elements of the value chain.
4. Lower costs through owning your own manufacturing.
5. Leverage the lower costs to not only price lower, but also to innovate and localize your offering to meet local needs.
6. Expand slowly but systematically, initially expanding the product range to increase the share of wallet of existing customers.
7. Expand in the next stage by targeting the same target segment as targeted at home, across geographies.

Lessons for MNCS

1. MNCs have vastly larger budgets and thus far it seems that, that is what they are leveraging to try and compete through promotional pricing and brand building. Perhaps they are better off in shifting these vast budgets away from promotion pricing, which does not work with bottom of the pyramid consumers, to brand building.
2. The freed up dollars can be used to develop low cost brands, perhaps leveraging the master brand, and creating a brand architecture that can successfully reach down to the bottom of the pyramid.
3. Exploit the superior market knowledge that has been accrued over the years of presence in many emerging markets to develop localized offerings, again where possible leveraging the brand architecture.
4. Transfer knowledge more effectively across geographies. After all, EMNCs like AJE do not have the organization structures or processes to be able to do this as effectively.
5. Learn from the EMNCs and cut costs relentlessly across the value chain. MNCs simply do not do this well.

Surprisingly, PepsiCo and Coca Cola do not seem to be sensitive to these learnings! The future of growth is in the emerging markets and among the bottom of the pyramid consumers there. Failure to learn these lessons and deploy strategies based on them to compete effectively in these markets and among bottom of the pyramid consumers is likely to be perilous for the future!

I was at a session some weeks ago on sustainable development, listening to a panel of food industry executives talking about their contributions to society.  While some products that the food industry has made available contribute to society, there is a  dark side that was totally ignored.

Most of the processed food that is on the market is simply not healthy and lies at the heart of the obesity epidemic and its consequences in terms of Type II diabetes, heart disease, and the like.  What is shocking though is how they are sold as healthy.  I was surprised to learn the other day that Coca Cola was promoting a beverage as a pomegranate-blueberry juice although it contained only 0.5% juice!  POM Wonderful the pomegranate industry association, which sells a pomegranate-blueberry juice containing 85% pomegranate juice and 15% blueberry juice, has received a favorable ruling from the US Supreme Court which said that the Coca Cola company sought to “mislead and trick consumers“.

Worse still, to make packaged food appear healthy, we are offered foods that are reduced fat for instance.  While these foods are lower in fat, what is not to the consumer, and wasn’t to me until an industry executive mentioned this to me, is that many low fat foods contain significantly higher amounts of other unhealthy ingredients, e.g., sugar in low fat yogurt.  After all, foods would not sell if their tastes did not suitably titillate our taste buds.

Given the obesity epidemic is of significant consequence for society, it is important that the food industry makes an effort to offer genuinely more healthy foods to consumers or at least cease signalling foods as healthy when they are not.

Generally, less processed foods are healthier than processed foods. However, more processed a food, the better the profit margins for the producer. Given the profit motive that lies at the heart of today’s business, is it possible that food companies can make hard choices that balance the needs of society with those of shareholders?

Yes, there are calls for social responsibility and it is quite the right thing to talk about it if you are the CEO, but given the need for shareholder return, can the industry actually change on its own?  I believe not.

An example from the clothing industry pops in to my mind. Some years ago I wrote about MAS Holdings, a Sri Lankan garment maker for the likes of Victoria’s Secrets, Nike, Adidas, Gap, Marks and Spencer, and others.  What was special about this company was their emphasis on empowering their primarily (90%) female workforce.

I remember a conversation from that time, where a senior executive lamented that notwithstanding all the resources they poured in to being the model of a socially responsible company, a fact that was mentioned by the CEOs of their buyers (e.g., Victoria’s Secrets and Gap), as they made the case of how they bought responsibly, when the purchase managers came to negotiate contracts, they were unable to monetize these investments to gain even a penny per garment.  This is notwithstanding the fact that the branded buyers would mark up the garments and sell them for high double digit margins.

So, the old axiom, talk is cheap, continues to apply.  The only way we are likely to see more socially responsible behavior at the cost to creating more shareholder value is if the government steps in.  Indeed, it is the responsibility of governments to protect their citizens, and consumers need protection as the obesity epidemic suggests. I believe that oversight and regulation to help consumers make better food choices is urgently necessary.  A recent headline screamed out “Sugar is the new tobacco”, perhaps it should have read “Processed food and beverages are the new tobacco” and thus warrants being regulated.

For the last twelve years the case against Bollywood actor Salman Khan, for driving his SUV while drunk and ploughing into five homeless people who were sleeping on the street, killing one and seriously injuring the other four, has been winding through the Indian courts. Importantly, following the event the actor did not turn himself over to the police for eight hours, and is on record saying he was not the driver when the incident occurred, although recently in the Mumbai court proceedings two witnesses have come forward to say that he was in fact the driver of the car and not his bodyguard who claimed to have been the driver, originally.

Why am I talking about this incident? The reason is that Salman Khan continues to act in numerous movies, continues to be a box office draw, and continues to be the spokesperson (or brand ambassador if you prefer) for numerous domestic and international brands. The last one in particular is striking as large corporates from around the world including Pepsico’s Mountain Dew; Coca Cola’s, Thums Up; Suzuki of Japan; Splash, the Middle East’s largest fashion retailer, as well as India’s Hero Honda, Sangini Jewelry, Yatra.com, and many other brands have contracts with Salman Khan!

To me, this is quite surprising because the brand owners are exposing the brands to risk. Indeed, in most markets around the world, even the hint of impropriety leads companies to drop the spokesperson. For example, following Tiger Woods’ car accident in late 2009 and his acknowledgement of marital infidelity, he was rapidly dropped as the spokesperson for AT&T, Accenture, Gatorade (a Pepsico brand), and Gillette (a P&G brand). Why did these brands drop Tiger Woods? According to one report, shareholders of the sponsoring companies lost between US$5 and 12 billion as a result of the scandal with “Investors in the three sports-related companies – video game maker Electronic Arts, Gatorade and Nike – fared the worst, experiencing a 4.3% drop in stock value.”

Most of us I think would agree that negligent homicide is a more heinous crime to be accused of than marital infidelity. If that is so, why is it that after 12 years, leading companies from India and around the world continue to sponsor Salman Khan? Is it that the local subsidiaries of global companies and Indian corporates are less knowledgeable about the potential consequences of using a scandal tainted spokesperson? Or is it that Indian consumers are so star struck with Bollywood actors that notwithstanding the accusations which look more and more true, they continue to adore the stars? Either way, it raises questions about Indian companies and consumers. I’d like to hear from you as to what you think!