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Case Study: The non-alcoholic beverage market in India. Battleship Coca-Cola

verses Hector Beverage’s “Paper Boat”

Technical Report · October 2018

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 Case Study: The non-alcoholic beverage market in India.
Battleship Coca-Cola verses Hector Beverage’s “Paper Boat”
By Tom McNamara and Irena Descubes,
Technical paper, October 1, 2018
The Rennes School of Business, France

While Coca-Cola is often thought of as being American as baseball and apple pie, it is, in reality,
an international brand, immediately recognizable the world over. One of its most important
markets is India, where Coke is the largest producer of beverages, with a reported 40% market
share in the branded beverage sector. The President of Coca-Cola India and South West Asia, Mr.
T. Krishnakumar, says that the Indian market is vital to the future success of the company and
that his strategy is to eventually make the country one of the top three places where Coke does
business (India is currently Coke’s sixth largest market, after the US, Mexico, Japan, Brazil and
China). An impressive goal considering that India currently makes up less than 1% of Cole’s
global sales and that the majority of India’s 1.3 billion citizens have never tasted any product
made by the company.
This doesn’t deter Mr. Krishnakumar, an unconventional executive who avoids traditional
business suits in favour of more comfortable short sleeved shirts and khaki trousers, and who
starts his morning with hour long prayers and lives in a modest two bedroom apartment. He
emphatically believes that Coca-Cola can eventually provide a value proposition for every single
Indian consumer.
Luckily for Mr. Krishnakumar, according to PWC, a consultancy, the Indian market for non-
alcoholic beverages is one of the fastest growing on the planet, with per capita consumption
expected to double in size between 2017 and 2020. But India has a relatively short cola history,
as compared to the US. And unlike in the States, where soda is often seen as an alternative to
water, carbonated drinks are considered to be somewhat of a luxury product, to be consumed only
occasionally. But PWC believes that the opportunity exists for companies to build a strong brand
image that consumers can identify with, that is, if they have the capacity to effectively compete in
this highly contested and culturally diverse market place.
Today, India is seen as an attractive emerging market with a high potential for success, but that
was not always the case. In the 1970s the country had severe political upheaval, with a state of
emergency existing from 1975 to 1977. Turmoil, and a disadvantageous legal environment for
foreign multinationals, caused many large companies to leave India during this period, Coke
being just one of them. The company would not have the courage to re-enter the Indian beverage
market again until 1993, after a prolonged 17-year absence.

In terms of strategy, Coca-Cola manages its business around five categories of drinks; 1)
carbonated, 2) energy, 3) plant /juice / dairy based, 4) water / sports and 5) pre-prepared coffees
and teas. But the future of India is expected to be juices, with a compounded annual growth rate
of about 17% forecasted between 2016 and 2021.

It is this last statistic, unfortunately, that appears to pose the biggest problem for Coke. Simply
selling more fizzy drinks to thirsty Indian consumers doesn’t seem to be a realistic option. Even
more troubling, global tastes look as if they are changing as well, putting pressure on Coke’s
revenue. Since about 2002, carbonated drinks, as a percent of revenue, have gone from 90% to
approximately 70%, and it is believed that by 2030 soda could make up only 50% of Coke’s
sales. The company needs new products and new markets if it hopes to survive, let alone thrive.

Competition is another serious problem facing Coke in India. Not only does the company have to
deal with its arch nemesis Pepsi, it is also being seriously challenged by a relatively new Indian
startup called Hector Beverages. In an ironic (some might say tragic) twist of fate, Hector
Beverages was founded in 2010 by a former Coca-Cola executive, Mr. Neeraj Kakkar.

An Indian David takes on an Atlanta Giant

While their first product was an energy drink, Hector Beverages’ flagship brand is their Paper
Boat line of “ethnic” or traditional drinks. This segment, according Wazir Advisors, a
consultancy, is estimated to be worth as much as $250 million, and Paper Boat is already the
market leader with a broad array of different flavours for people to choose from (by comparison,
Coke and Pepsi would have only one or two flavours each). Mr. Kakkar is passionate about the
ethnic drinks market, saying that “At Hector Beverages we believe that if we don’t do something
now these recipes will disappear in the next 20 to 30 years.”

Historically speaking, the ethnic beverage market in India was highly unorganized, primarily
being the domain of street vendors or something that people prepared at home. The genius of
Hector Beverages was to come up with the prepackaged and ready to drink format for this
beloved traditional drink. Furthermore, Hector Beverages has been able to readily penetrate urban
markets and increase production as demand has increased as well.

The idea to sell ethnic beverages came to the founders of Hector Beverages in the summer of
2012, when one of them, Mr. James Nuttall, was trying to find the traditional Indian drink Aam
Panna (made from raw mangos) for his parents who were visiting him in India. Not satisfied with
the selection (and hygiene) that was being offered by the traditional street vendors one finds
throughout India, the founders of Hector Beverages “realized that traditional Indian drinks could
have a great market if produced and packaged hygienically. We didn’t do any formal market
research. We just followed our instincts,” says Mr. Kakkar.

Those instincts could prove to be killer. As Mr. V.T. Bharadwaj, an early investor in Hector
Beverages, puts it, “India has a rich history of traditional beverages and it’s a shame that no one
has tried to present them in an attractive and aspirational manner”. Ethnic beverages have the
“potential to transform the beverages landscape in India. It is a category that is waiting to explode
and has the potential to break the back of the cola market”.
Staring in 2013 with just two flavours, Paper Boat now offers consumers 13 different distinct,
and uniquely Indian, flavours in convenient 250-milliliter doy packs (sealed plastic bags
originally designed to be used by astronauts in space), with select products also offered in 500
milliliter tetra packs. Keeping with Indian tradition, Paper Boat uses no preservatives,
carbonation or colour additives. It reportedly takes 18 months for the company to go from an idea
to actually having a product on the shelf, and Paper Boat always tries to have several new
flavours in the development pipeline. Mr. Kakkar says that the secret to Paper Boat’s success is
simple. “We are extremely strong in product development. Whether it is identifying the right
vendors, sourcing at the right time or establishing the right processing standards, we have
developed a very strong knowledge base.”

Paper Boat’s strategy: navigating the ethnic drinks market

Right from the beginning, the brand strategy for Paper Boat was to create something “that our
mothers and grandmothers made, [but] that we don't have the time / recipes / ingredients to make
today, but the taste of which have left a 'limbic print' on our minds.” Unfortunately, the marketing
challenge for Hector Beverages was to find the balance of bringing back fond childhood
memories, while at the same time not being seen as old fashioned. The company addressed this
concern by way of the fun, bright modern design of their packaging, which also provides
convenience as well as adequate shelf life, something that is important in the hot tropical zones of
India. What differentiates Paper Boat from competing Western firms would be the “emotional
benefit” the company has due to the fact that many Indian’s have pleasant memories of drinking
ethnic beverages during the hot months of summer as children. Oddly, the name Paper Boat was
deliberately chosen because it had nothing to do with beverages. It was believed that this would
actually entice consumers by making them a bit curious.

Hector Beverages definitely gets kudos from marketing experts. As one consultant says, “the
company has been innovative in terms of product, packaging and marketing to create the
consumer wow factor. It can certainly take credit for that”. At first, Paper Boat had difficulty
finding space on retailers’ shelves due to the fact that is was perceived as being not upscale
enough. But after a series of advertisements on the front pages of some of the country’s top
selling newspapers, Paper Boat was able to make its way into stores.

Hector Beverages always had an active presence in online media, but has only recently turned to
mainstream media as a way of regularly reaching customers. A positive element that is helping
the company is the trend in India of going from an unbranded to a branded goods market. A key
component of Paper Boat’s brand, according to Mr. Kakkar, is showing consumers that its
products are “authentic” and “alive”. To achieve this, Paper Boat focuses its marketing
campaigns around such simple childhood memories as walking home from school and playing
with paper boats and kites, as well as using well known Indian melodies. Paper Boat also uses
“stories” which it promotes on various digital platforms. According to a marketing executive at
the company, “There are stories that we put up on Facebook, Instagram and Twitter every day
and we keep doing films that are hosted on YouTube. A lot of it is done in-house with some
exclusive partners who help us create those ideas”.
Paper Boat’s potential to spring a leak?

Hector Beverages says that it travels all over India to find the right recipes for Paper Boat. By
interacting with people in small town and villages, the company can get a feel for what flavours
are popular in a particular region. For Hector Beverages, no part of the country is too remote to
find a great idea for a new recipe. But herein lies a major criticism of the company.

The recipes that Hector Beverages uses to make Paper Boat have been taken from vendors
located in such places as railway stations, as well as from temples and people’s homes. They are
not owned by Hector Beverages. This means that the company has almost no Intellectual
Property (IP) to speak of (as opposed to Coca-Cola’s world famous secret formula). But
executives at Hector Beverages disagree. “Our IP is our brand and all the qualities associated
with the product. Our IP is the processes we follow, which make our drinks very different in their
unique way. For example, all our mangoes are naturally processed. No other company is doing
it,” the company says.

Paper Boat can mostly be found in large cities, with the ideal target consumer being someone
between 25 and 40 years old. However, realizing that they are in actuality a niche market player,
proper distribution is a never ending concern. You can therefore also buy their products online (a
link on Paper Boat’s website sends you to Amazon.com). The challenge, as Mr. Kakkar sees it, is
to penetrate the largely untouched rural Indian market, something that Hector Beverages seems
well placed to do. But Indian consumers are very demanding, expecting value for their money,
resulting in squeezed profit margins.

For his part, Mr. Kakkar doesn’t seem to be too worried about competing with one of the largest
soft drinks companies in the world. When speaking of his former employer, he has only nice things
to say about upper management at Coke. Mr. Kakkar says, quite frankly, “They have got in some
of the best performers from Coca-Cola worldwide. This will result in faster decision making”. For
Paper Boat’s sake, let’s hope that faster doesn’t necessarily mean better.

Coke fires shots over the bow of Paper Boat

But Coca-Cola hasn’t remained in business for over 130 years by taking things lying down.
Managers at the company realized that they had made a strategic blunder by not having the “right
product at the right price point” in India. Between 2017 and 2018 Coke went on a counter attack,
hoping to show Hector Beverages that it can beat them at their own game, or at least show them
that they are willing to die trying. The company decided that they would go “hyper local”,
introducing such flavours as orange, pomegranate, guava, litchi and a special variety of mango
that is only grown in West Bengal. All of this in an effort to cater to the highly selective taste
buds of the average Indian consumer.

This reinvigorated strategy for the juice sector builds on what was already seen as previously
favourable results. Between 2012 and 2017, according to research firm Euromonitor, Coke’s
share of the fruit juice market went from about 28.5% to a little over 31%. Not spectacular, but
positive nonetheless. The problem is that profit margins in the juice sector are fairly low. More
worryingly is the fact that this growth might have come at the expense of the company’s flagship
(and more profitable) carbonated drinks sector. During the same period, Coke’s share of the fizzy
drink market went from almost 61% to a still impressive 56.3%. But in another troubling sign
that momentum might not be on Coke’s side, their share of the bottled water market (again,
during the same period) dropped from over 12.5% to almost 10%.

While still in an advantageous position, in terms of brand image and financial resources, Coke is
not prepared to sit idly by and watch its market share slowly erode. In a bold move, the company
has gone “blue ocean” in its strategy, trying to create a whole new market by mixing fruit juice
with some of its carbonated drinks. The advantage here, in addition to quite possibly creating a
new market segment, is that these drinks are taxed by the Indian government at a lower rate. In a
bid to expand its product selection even further, the company has announced a new line of frozen
desserts, again, using local fruits.

Coke: As Indian as cricket and Kaju ki Barfi*? (*a traditional Indian dessert)

In an effort to show the seriousness of its commitment to India, Coca-Cola has announced plans
to spend almost US $2 billion building its own agricultural ecosystem in the country over the
next several years. This will, in effect, create a supply chain that will provide Coke with all of the
ingredients and infrastructure that it needs to go from the “grove to glass”, while at the same time
supporting the local Indian economy. By being more local, Coke should also be able to adapt
itself better to changing market conditions. In 2017 alone, the company launched 17 new
products, the majority of them local, with many more reportedly in development as well. As one
Coke executive says, “The India strategy replicates the global strategy of providing choice. In
India, we will localize these choices”.

Previously, Coke had focused on being in big cities and the urban (and wealthy) market.
However, analysts believe that if the company really wants to grow it needs to reach the almost
650,000 villages that exist in India. That is where the real growth will come from. And this is not
necessarily an impossible task. According to consultant Jagdeep Kapoor, thanks to mass media
and advertising, there is a ready, and thirsty, market waiting for Coke products. The trouble,
however, is that in the country side, consumers prefer fresh juices, not bottled ones.

In an effort to better adapt itself to Indian culture, in July of 2017 Coca-Cola redesigned their
website, employing a story telling format that they call “Journey”. The goal is to better engage
with their target consumers in a way that is more authentic, providing a two-way form of
dialogue. In addition to hosting content created by Coke itself, the site also hosts content written
by consumers. The goal is to better align the company’s marketing strategy with India’s gloried
story telling tradition.

Coke has also engaged in a “mass-personalized” branding initiative by way of its “Share a Coke’
campaign. This involved the use of slogans that celebrate different family and social relationships
(e.g.”Daddy: My teacher. My friend.”, “Mom: Above the rest. Simply the best.”) printed in 12
different Indian languages. An executive at Coke says the idea is to take “a refreshing new look
at relationships. This campaign aims to encourage Indian consumers to celebrate relationships
that have evolved over the years and reignite them by creating a moment of happiness that comes
from sharing a Coke.”
In another sign that it is fully implemented in Indian society, in June of 2018 Coke announced a
recycling initiative to protect the local environment. “We have pledged to recover and recycle
one package for every single one that we put out in the market by 2030" the company says.
Furthermore, Coca-Cola has “adopted” 1,000 schools in socially disadvantaged areas. The
company also does everything it can to encourage diversity in its hiring and promotion decisions;
women reportedly make up a majority of top positions in the areas of quality and innovation at
Coca-Cola India.

But is all of this enough?

As one astute beverage executive puts it, “For Coca-Cola to boost its growth it needs to recruit
more consumers at the front-end and at a much faster pace than it is doing at present. It needs to
bring them into the fold of packaged beverages and then work at moving them up the value chain.
One answer to this is product innovation. You have to create new and exciting products which
offer high value for money.” The executive who said this? None other than Mr. Kakkar, head of
Hector Beverages.

But Mr. Kakkar should be wary. When you play with giants, there is always the danger that you
might get crushed. As Saurabh Uboweja, head of the consultancy Brands of Desire, puts it, the
solution for Coke is quite simple. He believes that, “Paper Boat would be a logical target brand to
buy out at some stage to strengthen their increasingly diversified product portfolio.”

For Coke, it just might be a case of “if you can’t beat them, buy them”.

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