India’s Soft Drinks Scenario – The Impact of Super-Fast Per Capita Growth on Multinationals

While China’s economy is slowing down, and Russia and Brazil are struggling, the whole world is seemingly looking at the last brick – India – for growth.

Compared with other major emerging markets such as Mexico, Indonesia or Vietnam, India has a highly underdeveloped soft drinks market, with limited product categories and poor modern retail penetration. India – expected to overtake China as the world’s most populous country by 2025 – is a very promising market for long-term growth.

However, one may ponder what will happen if per capita consumption of soft drinks increases by a CAGR of 25% in 2014-2019 from the baseline Passport forecast of 15%? Euromonitor International has used the Competitor Analytics Framework to explore an extreme scenario and assess the possible impact on The Coca-Cola Company and PepsiCo.

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India – no way near China in next five years

Euromonitor International’s research shows that China’s per capita consumption is around 62 litres in 2015 compared to India’s 13 litres. Given the current huge gap between the two countries, it is safe to say that it will take many years for India to catch up with China. Given that average Indian consumption levels rose by a CAGR of 25% over 2014-19, this intake of soft drinks will not reach even half that of average consumption levels in China by 2019. That said, China will continue to be a very important market for multinationals and provide solid and significant volume opportunities, despite the current slowdown – something for China pessimists to bear in mind.

The potential for category expansion

In India, bottled water is the largest category by off-trade volume sales, with sales at 12 billion litres compared to carbonates (3 billion litres) in 2015. Bottled water will be the growth engine over 2014-2019, meaning the increasing consumption of bottled water will have an impact on players such as PepsiCo and The Coca-Cola Company, which are actively operating in the category. In 2014, Parle Bisleri Ltd led bottled water with a 39% value share, PepsiCo 17% and The Coca-Cola Company 14%.

RTD coffee, RTD tea and sports and energy drinks are small and expected to remain niche categories by 2019. There is still plenty of room for The Coca-Cola Company’s Georgia RTD coffee and Starbucks’s Franpuccino to potentially expand in India. Consumption of juice is set to advance far faster than carbonates, which should encourage The Coca-Cola Company to grow both categories in parallel.

The impact of an extreme scenario

So, what would be the possible impact on multinationals if India’s per capita consumption of soft drinks rises by a 25% CAGR over 2014-2019? How much potential retail value can be derived by this projected increase in consumption?

Figure 1, the column visual demonstrates that The Coca-Cola Company may see a net increase of US$2.5 billion during 2014-2019. This is a significant figure as it may potentially offset The Coca-Cola Company’s losses (also US$2.5 billion) if China is to lower its growth to 3% . The Coca-Cola Company accounted for around 30% of India’s soft drinks by retail value sales in 2014. However, excluding India, The Coca-Cola Company would have an 18% share globally, suggesting sales from India is big but the significant  increase is unlikely to have a huge impact on its global retail share. Indeed, India contributed around 3% of The Coca-Cola Company’s global off-trade volume and 1% off-trade value. In contrast, the country accounted for 5% of PepsiCo’s global sales by volume and 2% by value in 2014. Thus, India carries more weight on PepsiCo’s soft drinks scale than The Coca-Cola Company’s.

Figure 1, the orange colour section also shows that The Coca-Cola Company would make a share gain of 0.1% globally under the extreme scenario while PepsiCo would see a bigger jump 0.14%in global share, assuming PepsiCo will be more exposed to the Indian market in 2019. PepsiCo is likely to be directly influenced by the hypothetical growth.

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Figure 2 shows that the local company Parle Bisleri Ltd may be the biggest winner and hugely benefit from the increase as 87% of its sales came from India in 2014. The company controlled nearly 39% of India’s bottled water sales by off-trade value in 2014 and India is its single most important market. Globally, Parle Bisleri would fetch a 0.17% share gain in overall global soft drinks under the projected extreme scenario in 2019. In 2014, Parle Bisleri was not even visible on the global soft drinks arena.

Short-term obstacles and the long-term prize

Per capita CAGR growth of 25% in India in 2014-2019 is unlikely to give The Coca-Company a drastic boost in terms of global share in 2019. However, if we translate the per capita volume increase into potential retail value sales for The Coca-Cola Company, the net gain (US$2.5 billion) is still significant.

The underdeveloped nature of India’s soft drinks market means that The Coca-Cola Company should expand distribution and cultivate both rural and urban consumers in order to recruit new consumers for solid volume growth. One of the experiences learnt from China’s past two decades’ boom is urbanisation is driving sales beyond first tier cities.  Affordability and availability is still the key for per capita growth in today’s India and over the next few years. With a large and young population (compared to China’s rapidly ageing population), India is proving to be long-term growth market but short-term return on capital expenditure is unlikely.