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Custom Pepsi-Cola International: Distribution Policy in the Ukraine essay paper sample

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Introduction

In the year 2000, Pepsi-Cola General Bottlers and PepsiAmericas merged under the name PepsiAmericas to become the second-largest Pepsi-Cola anchor bottler globally (Bagh, 2010). This merger led to a trend that has seen PepsiAmericas’ growth strategy through purchase of Central Investment Corporation, which has seen PepsiAmericas US operation spread out to Florida and Ohio. Six years later, PepsiAmericas acquired Pepsi bottler in Romania and in 2007, PCI partnered with PepsiCo in a joint acquisition of Sandora, the largest juice manufacturer in Ukraine, as it sought to build up its presence in Ukraine (Bagh, 2010). PepsiAmericas has gone ahead to sell and deliver more than 200 different beverages to over 200 million consumers in 17 countries around the globe with nearly 18,000 employees generating $5 billion in annual revenue (Bagh, 2010).

Pepsi Bottling Group (PBG) was formed through an initial public offering with operations in the United States, Canada, Russia, Spain, and Greece, and has since become the world’s largest manufacturer, seller and distributor of Pepsi beverages’ (Bagh, 2010). In the year 2002, PBG acquired Pepsi-Cemex, the largest Pepsi bottler in Mexico, as well as Fruko, the exclusive Pepsi bottler in Turkey. In 2007, PBG and PepsiCo formed a joint venture in Russia to take advantage on the growth opportunities in the Russian market, and in 2003, they followed up with another acquisition of Lebedyansky, Russia’s number one juice company (Bagh, 2010). As a result, PBG has doubled its returns and its employees during its decade as a publicly traded company, having handled nearly 60 percent of PepsiCo’s beverage volume in the United States and 40 percent worldwide.

Challenges Faced by the Senior Management at Pepsi-Cola

Change of Laws and slow distribution systems

Pepsi Cola International started its operations in the former USSR regions in about 1973 and has been in the market for about 30 years now and has over 85 bottling plants in the former USSR and Eastern Europe (Konrad, 1992). It’s bottling and distribution is carried out in many of the former USSR countries like Ukraine via contract agreements. Pepsi faced a lot of challenges in the years before its operations in the former USSR including Soviet laws, which barred PCI from repatriating earnings to the US (Konrad, 1992). However, due to the potential of the huge market in the former, PCI were able to come to several agreements with the Soviet Union through having counter trade agreements, which meant that in Russia, for example, PCI received Stolichnaya Vodka as one payment and not hard cash. In turn, PCI were to sell this Stolichnaya Vodka in the United States in order to recover their costs and profits (Konrad, 1992).

In Ukraine, PCI entered into a counter-trade agreement with Crimean shipyard in which PCI would invest its local earnings from sale of PCI products in Ukraine into the shipyard. They would in turn build oil tankers to be sold on the world market for hard currency, of which PCI’s share of the proceeds were not required to return to Ukraine (Konrad, 1992). The countertrade agreements no longer exist in the Ukraine as of today but PCI has continued to maintain its Interest in the Crimean Shipyard maybe as a form of diversification after the collapse of the Soviet Union (Konrad, 1992).

PCI rose to become a dominant cola of choice in the Former USSR because their products were written in the local languages; understood and appreciated by the local population. Because the Soviet population thought of it as a local product, which although it hurt, their image was instrumental in increasing Pepsi’s market share and returns as compared to its competitor Coca Cola (Konrad, 1992).  After the collapse of the Soviet Union, PCI reverted to writing Pepsi bottles in its original form and not the soviet’s way of Cyrillic characters in order to emphasize its western image and try to salvage its image in the eyes of the western consumer (Konrad, 1992).

Distribution systems in Ukraine are quite slow and delays do occur at every step of the way, for example, one can drive the 487 kilometers between Kiev and Odessa in around 60kph while the Rail service is slower with a five day service provided for the same distance (Raphael, 1997). Here, distribution is done by large state transport companies, small private firms with only a few trucks, and individuals who own their one vehicle with little regard for the specialized nature of the vehicle, for example, it is common to see an insulated truck used to haul furniture or dump truck used to haul farm produce. As for the sea ports, they are full of imported cargo that has not been released as a result of payment problems after importers lost their purchasing power as a result of high inflation (Raphael, 1997). The port facilities are only now being upgraded after a long period of neglect by the Soviet governments, but inland facilities are much worse off as containers are being hand loaded since forklifts are nowhere to be found (Raphael, 1997).

Insecurity

Insecurity is also a major problem in Ukraine; because of high standards of living most people are resulting in theft and banditry between cities resulting in loss of cargo and goods of businesses or unavailability of inland transport since most transporters fear for their lives (Raphael, 1997). As a result, transportation charges and operational charges for companies increase since they have to pay more insurance premiums, hire additional armed security details for their cargo or avoid certain towns and markets altogether, translating to lose of potential consumers of their products and hence revenue.

Further compounding the problems here are the lack of warehousing facilities since the available ones and not of conventional warehouses but are spare rooms in buildings, basements, and shipping containers (Raphael, 1997). Since the Ukrainian law system is not fully efficient, laws covering private property and laws of contract are not yet clearly defined hence a contract with a landlord is literally only as good as the person that signed it. If a landlord renegades on a contract there is very little that can be done from a practical point of view except to try and renegotiate or try and find a new landlord.

Lack of Infrastructure

With the current low efficiency in distribution channels in Ukraine, PCI has neither delivery trucks plying routes nor drivers to make sure their routes are well stocked, neither do they have Pepsi machines on the streets to provide a refreshing drink to a thirsty Pepsi customer (Raphael, 1997). PCI, however, delivers its concentrate which is shipped by container from PCIs plant in Cork, Ireland to Rotterdam, Netherlands and St Petersburg, Russia to its 12 licensed bottlers throughout Ukraine. PCI has a number of licensed bottling plants in Ukraine including Cherkassy, Khorostkiv, Chernovtsy Kiev, Dnepropetrovsk Mirgorod, Donetsk Simferopol, Yevpatoria Zaporoshje and Kharkiv Van Pur-Kiev. Once this concentrate is in the Ukrainian port, it is either transported by truck or rail to the various bottling plants across the country.

During winter, PCI rely exclusively on rail service since roads poor and often impassable, however, this must be negotiated for in advance of the winter period and must include armed guards to travel in each section of cars (Raphael, 1997). As a result of the extreme cold weather, the cars must be heated to prevent the product from freezing and becoming unusable, this has happened before. After bottling, the bottlers sell the Pepsi within the factory (ex-works), which means that neither PCI nor the Bottler distributes the Pepsi, but the distributor comes to the factory to purchase the Pepsi themselves and distribute it the way they want. This form of ex-works distribution  has its disadvantages and advantages in that there is always a regular supply of Pepsi in Kiev and major cities in Ukraine, but the supply in smaller towns like Ternopol is not regular and shortages of Pepsi is common (Raphael, 1997). The situation is so wanting in some villages such that the only time Pepsi is available in that village is when a person had gone to the city and returned with some supplies to sell in the village.

In terms of pricing, the buyer in the city buys Pepsi at a relatively cheaper price that the one in the village since the Pepsi products goes through a lot of people in the distribution chain with each person charging an extra fee to earn profit. The price of Pepsi is not uniform in Ukraine as it increases as one travels away from the bottling plants. For example, in March 1995, a .33 litre returnable glass bottle of Pepsi was 30,000 Karbovantse in Kiev city, which has a licensed bottling plant as compared to a price of 35,000 Karbovantse in Ternopol without one (1$= 154,000 Karbovantse).

Lack of Political and fiscal stability

The biggest concern for businesses in Ukraine, including PCI, is the lack of political and fiscal stability. There are major political differences between Ukraine and Russia; Russia wants to form a stronger Russia that includes Ukraine, but run by the people in Moscow while Ukraine wants the opposite. In Ukraine, there are no laid out fiscal policies to guide investors or entrepreneurs, thus acting as a great risk for them to heavily invest in ventures in which they are not sure of the returns. This has led to a reduction, if any, of capital investments (long-term) and an increase in short term methods of making money or profit making because most Ukrainians feel that the old guard and ways of the Soviet Union will rise up again.

Another major difference in doing business in Ukraine is the business mentality applied and interpretation and execution of business decisions, for example, if in Ukraine the law does not expressively say one cannot do something, then one cannot do it. On the other hand, the westerners business thought believes that if the law does not explicitly say one cannot do something then one can do it. This business mentality has also affected the decision making process in Ukraine in that, most businessmen and entrepreneurs make short term decisions only, if any. They are only interested in making profit in the short run say around 90 days only.

Due to high taxation of about 90% of the sales, many businesses in Ukraine keep two sets of records in their businesses: one for the official records and the other for actual transaction. This makes it difficult to carry out a feasibility study of how well or bad a business would do in Ukraine because one is not sure if the information provided is accurate or not. This has resulted in very few partnership of foreign companies with Ukrainian companies since it will always be difficult to get any tangible cost/ budget information, meaning companies like PCI have to go it alone in the market without the advantage of a local partner who may relate and understand the local consumer directly as he/she is one of the.

Possible Solutions to the above Problems

Gaining control of their sales and returns

The collapse of the Soviet Union provided answers for PCI to many of the challenges they were facing before. For starters, PCI is no longer required to sign countertrade agreements in order to do business in Ukraine, which means that PCI will get the hard cash resulting from sale of Pepsi directly and not indirectly as before. In return, Pepsi can directly monitor the target markets that are bringing in more money than the other and also identify potential consumers from analyzing sales from different regions in Ukraine (Adamski, 1994). With more control of their sales and returns, Pepsi can also solve the direct distribution chain channels by importing the USA concept to Ukraine now that it’s a free country.

PCI can introduce their own trucks to carry Pepsi to wholesalers directly, assign specific drivers specific routes to ensure they are well supplied or create good relationship marketing with consumers and distributors alike (Konrad, 1992). This will ensure that Pepsi is available in every corner of Ukraine. By being in control and doing the distribution themselves. PCI can also apply the pricing strategy, in that they can control the price charged to consumers in different parts of Ukraine either as a uniform price of price differentiation, whereby PCI will charge a different price for the same Pepsi product in different markets (Adamski, 1994). Ukraine is now developing and improving its infrastructure with the help of the west in terms of building new roads, rails and improving facilities in the port (Raphael, 1997). This translates to a reduction in the clearance and transportation of Pepsi goods from one area to another hence an increase in efficiency in the distribution system.

Investing in Storage and Warehousing facilities

Another way PCI can reduce the challenge of storage facilities and warehousing facilities is through direct and indirect investment in these facilities (Adamski, 1994). This involves PCI going out to identify areas, towns or cities of strategic importance to them or areas without licensed plants and building their own storage and warehousing facilities according to their own needs specification and requirements. Although this is not PCIs core business, the efficiently and effectiveness that such a facility will bring to PCI will give it a competitive edge over its competitors in Ukraine (Adamski, 1994). Indirect investment in warehousing and storage means that PCI will identify local Ukrainian companies and individuals who will co-own the facilities with PCI and exclusively loan it out to PCI in some form of partnership, such that when PCI leave Ukraine these facilities will remain with the local shareholders (Adamski, 1994). 

Analyze Ukraine’s economy

As the Ukrainian economy is growing with renewed energy its population will also increase appropriately in terms of their needs and satisfactions. During the Soviet era, most people were preoccupied with survival only that is obtaining adequate food, shelter and clothing. As the economy grows, a bigger group of middle class emerges who will seek greater quality in their food, housing and clothing and may be specific in what they want to consume at all times (Raphael, 1997). Once the economy is fully developed, the population will have more per capita income to spend buying things in the market that are relatively of high quality, seek convenience goods, quality items processed food and buy time saving appliances (Raphael, 1997). On the other hand, when the economy is fully grown, consumers become very choosy and want customized goods and hence spend a premium to satisfy their needs.

PCI needs to do an analysis of the economy of Ukraine in order to identify the stage that it’s in at the moment and come up with individual designed items that area appropriate with the level of demand in the economy at that time (Raphael, 1997), for example, coming up with smaller versions of Pepsi that can be sold in the villages at a lower price. PCI can come up with its identified marketing mix; which area set of marketing tools that PCI can use to pursue its marketing objectives in the target market like Ukraine by creating and delivering value (Adamski, 1994). Marketing mix is classified into four broad groups called four Ps of marketing which include: product, price, place and promotion, and the decisions made here go a long way in influencing the trade channels, as well as the final consumers (Adamski, 1994).  In coming up with the marketing mix, PCI will put in place a strategic plan of operation that will ensure that there is a road map for the corporation to follow, which helps to guide PCI management in times of risk and uncertainty (Adamski, 1994). It serves as an identification of opportunities to utilize, and weaknesses to avoid. It also ensures that the resources that are available in PCI in Ukraine are properly and creatively utilized in vital areas of interest to the company and its goals.

Analyze Pepsi products life cycle

PCI should also carry out an analysis of the Pepsi products life cycle since at each stage the products exhibits different characteristics, which PCI can use to maximize profits (Adamski, 1994). Firstly, there is the introduction stage where the product is first brought into the market and consumers are starting to try it out (Adamski, 1994). As a result no profits are resulting in this stage majorly due to heavy expenses incurred when introducing the product to the market with the company only seeking to break even. Secondly, a product can be in the growth stage in which the product is being accepted by the consumers after they tried it out, and first profits are being experienced by the company (Adamski, 1994). Thirdly, the maturity stage is where sales slow down because of market saturation with profits stabilized or reduced because of increased competition.  Finally, the fourth stage is decline, where the product no longer attracts attention of consumers, high competition is dominant and profits have declined considerably. In identifying the stage that a product is at, PCI management can come up with proper plans to boost sales and profits in at each stage as the product moves along, for example, if the product is in the growth stage, PCI can use a lot of marketing tools, pricing and product differential to grow their market share and generate more sales from current and potential consumers (Adamski, 1994).

Conclusion

I believe it will be in the interest of PCI if its management analyzed the entire distribution channel and operation plan of PCI so as to come up with long term goals and more efficient distribution channels that can help maintain its large market share over its competitor Coca Cola, who have also opened a bottling plant in Ukraine. They need to come up with a good distribution and pricing policy, and also decide on how to deal with Ukraine’s macro and micro environment, which is volatile and changes every so often.

With the new reformation, privatization and democracy taking place in Ukraine, PCI can take advantage of the situation by perfecting and correcting the mistakes they had made for the last 30years they have operated in the country (Raphael, 1997). However, Ukraine is changing so fast that what was applicable yesterday may not be so today. Being among the first soft drinks companies from the west to operate in Ukraine, PCI is advantageous in terms of investments already on the ground, business association it has build with its distributors, people accepting its product and the good will from the government for it to operate peacefully.

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