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CASE STUDY

59

Kola Reals Low-Cost


International Expansion
Strategy
By
Christopher J. Robertson

This case provides an interesting and relevant scenario of a family-owned firm entering the low end
of the cola market in Peru and expanding into other Latin American countries. For a family business
owner, or for an entrepreneur looking for business pathways in Latin America, this look into Ajegroups strategic planning to take advantage of expansion opportunities in the region can serve as
either a cautionary tale, or an avenue toward future growth. The case is accompanied by comments
from practitioner experts. 2008 Wiley Periodicals, Inc.

Background
he Ajegroup Corporation, the new name for Indstria Aaos, was created in the late 1980s in Ayacucho, Peru, a city located at the base of the Andes
Mountains, some 350 miles from Lima. There was a deficiency in soft-drink distribution during this period due to
the lack of access to highways in the region. The situation
was even worse in the city of Ayacucho, where the incessant fight of the terrorist group, the Shining Path, was
centered, and which, between 1980 and 1992, caused the
death of thousands of people throughout the country.
The Shining Path guerrillas did not allow the entrance of
trucks into the Ayacucho region of Peru, especially if they
were transporting foreign products.

While the rest of Peru feared the Shining Paths campaign of terror in the late 1980s, Eduardo and Mirtha
Aaos spotted an opportunity: to produce a low-cost soft
drink, named Kola Real, in their own backyard and sell it
to the local community. Due to chronic terrorism, the city
of Ayacucho only had a small supply of soft drinks. The
Coke and Pepsi trucks that attempted to bring products
from Lima were routinely hijacked by rebels. Eventually,
Coke and Pepsi either halted or significantly reduced the
frequency of distribution to the city of Ayacucho. By 1988,
the Aaos family took out a second mortgage on their
home and started the business of producing and bottling
soft drinks with roughly U.S. $30,000.
In order to penetrate the local soft-drink market, the
Aaos family packed Kola Real in old beer bottles of 620

Luis Eduardo Garcia Saavedra, Adam Champion, Amelia Levy, and Marcelo Perez-Verzini provided extensive research assistance. Please contact the
author if you would like to use the teaching note for this case.

Correspondence to: Christopher J. Robertson, PhD, Associate Professor, General Management Group, College of Business Administration, Northeastern University, 313 Hayden Hall, Boston, MA 02115, 617.373.4759 (phone), 617.373.8628 (fax), c.robertson@neu.edu.

Published online in Wiley InterScience (www.interscience.wiley.com).


2008 Wiley Periodicals, Inc. DOI: 10.1002/tie.20174

60 CASE STUDY

mL, which was the standard for this region of Latin America. In 1991, the family opened a new plant in Huancayo
with a manual machine that enhanced production and
required 15 full-time workers. By the end of 2006, the
company had 14 plants strategically located throughout
Peru in cities such as Lima, Huaura, Sullana, and Trujillo
(Table 1). In 1999, the company had sales totaling U.S.
$31 million, 24% more than the previous year. This
growth was a result, primarily, of market penetration in
Lima and Caracas, Venezuela. By 2001, the companys
revenues amounted to U.S. $38.5 million as a result of
success in other international markets, such as Ecuador
and Mexico. In 2004, the company had sales totaling U.S.
$50 million, approaching double the sales level at 1999 as
a result of the continuous penetration of existing and
new international markets, including Costa Rica. In 2005,
70% of the firms sales were generated by business in foreign markets.
Since its inception, the Ajegroup Corporation financed Kola Real growth with funds generated from op-

TABLE

1 Ajegroup Plants Throughout the World


Kola Real Plants
Year
1988
1991

1993
1994
1997

1998
1999
2001
2002

2004

Countries/Cities
Peru
Ayacucho
Peru
Huancayo
Andahuaylas
Peru
Bagua
Peru
Sullana
Peru
Lima
Cajamarca
Peru
Trujillo
Venezuela
Valencia
Ecuador
Machala
Mexico
Puebla
Puebla
Costa Rica
Catargo
Ecuador
Guayaquil

Thunderbird International Business Review Vol. 50, No. 1 January/February 2008

erations rather than with bank loans. The company also


counted on the support of suppliers, which tended to increase as they realized that the company fulfilled its obligations. In December 1998, the company decided to produce Kola Real in bottles of both 620 and 250 mL. The
company also distributed Kola Real in nonreturnable
plastic bottles of 1,500 and 620 mL.
In early 2006, the Aaos family needed to better define its international growth plans and strategy. The recent success of their products, such as Big Kola, in Mexico, Venezuela, Ecuador, and Costa Rica validated the
assumption that a true, low-end niche in the soft-drink industry existed, especially in Latin America. The pressing
question was where to go next? Which country made
sense from an international expansion perspective? And
could the firm continue to expand while fighting off increased competition at the low end by Coke and Pepsi
products in Ajegroups stronghold and home country of
Peru? Moreover, how long would the company be able to
sustain its competitive advantage without a significant
adaptation of its core low-cost strategy?

Peru
After several years of military rule, Peru returned to a
democracy in 1980 but experienced economic problems
and the growth of violent insurgency groups. President
Alberto Fujimori was elected in 1990, leading a decade
that saw a dramatic turnaround in the economy and significant progress in decreasing guerrilla activity.
Nonetheless, Fujimoris increased reliance on authoritarian measures and an economic slump in the late
1990s led to increased dissatisfaction with his regime.
Fujimori won reelection to a third term in the spring of
2000, but after revelations of corruption, the congressional president, Valentin Paniagua, became interim
president in November 2000. Paniagua led free and fair
presidential and congressional elections and transferred
power to Alejandro Toledo on July 28, 2001 (see Appendix A for more on Fujimori and Toledo). In June 2006,
President Toledo turned the government over to the
newly elected president, Alan Garca, after five years of
sustained economic growth. President Garca won the
election by a slim margin over Ollanta Humala, a leftist
candidate aligned closely with Evo Morales of Bolivia
and Hugo Chavez of Venezuela. Garca was a controversial, polarizing personality in Peru and fled the country
for ten years (spent in France and Colombia) after a previous five-year term as president in the late 1980s that
ended with elevated terrorism, hyperinflation, and currency devaluation.

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Perus Current Political Situation


In early 2006, just prior to Garcas assumption of power,
Alejandro Toledos approval rating increased after dropping to an all-time low of 7%. Earlier, members of Congress and others in the media called for his resignation.
Toledos response was to announce the creation of a new
politically independent cabinet, his fifth in three years, to
help him finish his term. The citizens of Peru viewed
Toledo as indecisive, untrustworthy, and incapable of delivering on promises to create hundreds of thousands of
jobs.1 Perus recent economic growth had come primarily from mining and oil, industries that produce fewer
jobs; therefore, economic growth was isolated and the
benefits had not trickled down to most Peruvians. Thus,
more than 50% of the population was living on less than
$2 a day, half of these making less than $1 a day. However,
widespread poverty was not the primary cause of Toledos
record-low approval rating, but rather charges of poor
leadership. A Datum poll found that 49% of Peruvians believed that Toledo was personally responsible for the governments bad image.2 The legacy of President Toledo in
the end was more positive, with a good base for future
economic growth and strong relationships formed with
major trade partners, such as Japan, China, and the
United States.

Perus Economy3
Between 2002 and 2005, Perus economy grew at a rate of
over 4.5%, the fastest growth rate in South America during the period. Peru had a complex economy with a relatively modern sector on the coastal plains and a subsistence sector in the mountains of the interior, which was

TABLE

61

isolated by poor transport and communications. Economic power had traditionally been in the hands of an
elite group of European descent. Services accounted for
65% of GDP, while industry, including mining, accounted
for 26% and agriculture 9%. Mining was important for
the balance of payments, providing 48.6% of Perus merchandise export earnings in 2002, a proportion that rose
as new investments came on stream. The manufacturing
sector was fairly diverse, with food, fishmeal, metals, steel,
textiles, and petroleum refining as the largest sectors (see
Tables 2 and 3).
Peru, a country with 26 million inhabitants and with
more than 30% of the population living in Lima, was
largely a land of peasant farmers and underemployed
shantytown dwellers. Of the total workforce, 10% described themselves as professionals, 5% as technicians,
and 6% as office managers and workers. Urban underemployment was classified according to hours worked and
wages received. The depressed state of the domestic economy from 1998 to 2001 was reflected in falling employment rates, and promises of job creation had been one of
the central themes of presidential elections.
The strategy that most large companies pursued during the 1990s, and the first decade of the new millennium, was to target the most profitable segments of the
population: people from high socioeconomic levels of the
country, who could pay moderate to high prices for the
products.
Yet the Ajegroup Corporation was not interested in
undercutting the competition, but rather expanding the
market for soft drinks through the democratization of
supply and price. Essentially, by offering low-price products, the company reached the lower sector of the econ-

2 Peru Economic Data

GDP per head ($ at PPP)

1999
4,581

GDP (% real change pa)

0.85

3.13

0.56

5.24

Government consumption (% of GDP)

10.9

11.17

11.14

10.86

Budget balance (% of GDP)

3.17

3.24

2.54

2.35

Consumer prices (% change pa; av)

3.47

3.76

1.98

0.19

Public debt (% of GDP)

47.09

45.36

45.66

46.57

Labor costs per hour (USD)

1.12

1.14

1.15

1.18

Recorded unemployment (%)

7.4

9.23

8.9

Current-account balance/GDP

2.86

2.93

2.02

1.98

Foreign-exchange reserves (m$)

8,730

8,374

8,671

9,339

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2000
4,748

2001
4,811

2002
5,040

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62 CASE STUDY

TABLE

3 Fact Sheet

Annual Data
Population (m)
GDP (US$ bn; market exchange rate)
GDP (US$ bn; PPP)
GDP per head (US$; market exchange rate)
GDP per head (US$; purchasing power parity)
Exchange rate (av) Ns:US$

2002
26.7
56.9
135.0
2,126
5,048
3.5

Historical Averages (%)


Population growth
Real GDP growth
Real domestic demand growth
Inflation
Current-account balance/GDP
FDI inflows/GDP

19982002
1.6
1.9
0.6
3.3
3.2
2.9

Source: December 16, 2003, Economist Intelligence Unit.

omy, which represented 85% of the Peruvian urban population. Large beverage firms, such as Coke and Pepsi,
cut their prices in response, resulting in diminished profitability.

Ajegroups Strategy
Ajegroups strategy was simple: offer big sizes of highquality soft drinks at low prices. While Coke and Pepsi
bottlers spent 20% of their revenues on beverage concentrate from Coke and Pepsico, the Aaos family made
their own drinks. Instead of maintaining a fleet of trucks
as most Coke and Pepsi bottlers do, Ajegroup hired third
parties for deliveries, even individuals with older, dented
pickup trucks. The company did minimal advertising and
engaged only in an occasional radio spot, relying mostly
on word-of-mouth advertising.
Kola Reals success illustrated how the cola wars were
changing in many markets around the globe. Coke and
Pepsi historically viewed each other as the only competition. Today, both are fending off down-market alternativeseither called B-brands, such as Kola Real, or private-label drinks sold by Wal-Mart and other big retail
chains. These cheaper rivals have been cutting into Coke
and Pepsis profits, making it harder to raise prices. According to the Wall Street Journal, Kola Real has emerged
as an unlikely threat to both Coca-Cola and Pepsi in a region where the two soft-drink giants enjoyed some of
their strongest global profit margins. By cutting out frills
and skimping in areas such as advertising, Kola Real offered ultra-low prices that appealed to the regions poor
majority. As a result, the company captured almost onefifth of the Peruvian market and has made inroads into
Ecuador and Venezuela. Further, Kola Reals entrance
into the Mexican market was impressive. Mexico was the
crown jewel in Cokes international operations and the

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worlds second-biggest soft-drink market after the United


States, with annual sales of roughly U.S. $15 billion.
Coca-Cola had 70% of the Mexican carbonated softdrink market, and the country represented about 11% of
its worldwide sales. In less than five years, the Mexican
version of Kola Real, called Big Cola, had captured
roughly 8% of the market. Coke and Pepsi cut prices in
response, denting their profits. At the Sams Club warehouse store in Mexico Citys upscale Polanco neighborhood, Big Cola was the fifth-best-selling product, narrowly trailing Coke.
One big reason for the surge of the B-brands like
Kola Real was the switch to plastic. In the 1990s, plastic
bottlers largely replaced glass, offering a cheaper alternative that lowered the newcomers cost of entry in the softdrink industry. Plastic also allowed larger bottles that
could be sold cheaply in supermarkets. Supermarkets
provided an important outlet for newcomers, as Coke and
Pepsi often dominated smaller stores.

Big Sizes, Low Prices4


Again, Kola Reals strategy was simple: to offer big sizes at
low prices. In a Carrefour supermarket in Mexico City, a
large display of Big Cola beckoned shoppers with a price
of about 90 cents for a 2.6-liter bottle. Nearby, bottles of
Coke were sold for about $1.30 for a slightly smaller 2.5liter bottle. To keep prices low, the Aaos family had to
run a lean operation. As aforementioned, while Coke and
Pepsi bottlers spend nearly 20% of their revenue on beverage concentrate from Atlanta-based Coke, and Purchase, New Yorkbased PepsiCo, the Aaos family makes
its own concentrate.

Ajegroup Products
The Ajegroup Corporation produced Kola Real, Sabor de
Oro, Cielo, and Big Cola in Peru, Venezuela, and

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TABLE

Ecuador, and the soft drinks First and Big Cola in Mexico,
Costa Rica, Guatemala, and Nicaragua (Table 4).
Ajegroup had not yet offered light/diet drinks, nor
had the firm developed decaffeinated drinks, as the company thought that those characteristics would not be attractive enough to the Peruvian market, or other low-cost
target markets, to add value to the company.

4 Ajegroup Products
Ajegroup Products by Country
Ajeper - Peru
Kola Real
Lemon-Lime
Strawberry
Orange
Pineapple
Big Cola
Sabor de Oro
Cielo

Distribution
The distribution system of Kola Real was done through
small, privately owned trucking companies, which were in
charge of distributing Kola Real by their own means. This
system contributed to the fast growth of sales, as there was
no necessity for the Ajegroup Corporation to invest in its
own distribution system. By 2006, the company had
around 180,000 points of sale in Peru.

Ajeven - Venezuela
Kola Real
Lemon-Lime
Orange
Pineapple
Big Cola
Cielo

Competitors
The U.S. $350 million soft drink market of Peru in 2002
was led by ELSA, with a market share of 31%, followed by
JR Lindley (29%), Embotelladora Rivera (19%), Ajegroup (18%), and other companies (8%) (Table 5).
The Latin American bottler ELSA was a subsidiary of
Coca-Cola Embonor S.A. of Chile. It was organized in
four divisions that, altogether, supplied soft drinks to
more than 90% of Peru. In 1999, Coke made an alliance
with JR Lindley, which provided Coke with 50% of ownership over Inca Kola and 20% of Lindley Corporation.
ELSA bottlers packed and distributed Inca Kola to some
areas in Peru, and Inca Kola took advantage of the situation to increase its market share (Figure 1).

Ajecuador - Ecuador
Kola Real
Big Cola
Sabor de Oro
Cielo
Ajemex - Mexico
Big Cola
First
Ajecen - Costa Rica - Nicaragua - Guatemala
Big Cola

TABLE

63

5 Main Soft Drink Bottlers and Brands in Peru


Bottler

Brand

ELSA

Coca Cola
Coca Cola Light
Fanta
Fanta Pia
Sprite
Kola Inglesa
San Luis
San Antonio
Schweppes

Corporacin J.R. Lindley

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Inca Kola
Inka Kola Diet
Crush
Bimbo Break

Bottler

Brand

Embotelladora Rivera

Concordia
Triple Kola
San Carlos
Pepsi
Evervess

Ajegroup Corporation

Kola Real
Sabor de Oro
Plus Cola
Cielo

Embotelladora Latina

Don Isaac
Fiesta Cola
Agua Luna
Per Cola

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64 CASE STUDY

FIGURE

1 Market Share per Bottler in Peru

TABLE

6 Ajegroup Products in Different Sizes and Prices

Subsidiaries
Ajeper
Ajeven
Ajecuador
Ajemex

Ajegroup Products
Products
Sizes
7
5
5
4
2
5

Tastes
6
4
3
1

Soft-Drink Positioning in Peru


In terms of brands, Inca Kola leads with 26% of the
market, followed by Coke (25%), Kola Real (8%), Pepsi
(7%), and other brands (34%) (Figure 2 and Tables 6, 7
and 8). The period between 1997 and 2002 was critical
for the soft drink industry. The decrease of internal demand for soft drinks, combined with the surge of the socalled B-brands, like Kola Real, intensified the competition among soft-drink companies and instigated a price
war, seriously affecting profit margins across the board.
With a structure of costs substantially lower than that
of competitors, Ajegroup managed to sell products for
nearly 50% less than the shelf price of its major competitors and still gain a margin that allowed the company to
subsist and grow. Competitors tried to imitate Ajegroups
strategy of lowering their prices instead of managing their
costs in a more effective way, as they considered the price
as the sole advantage of Kola Real.
Kola Reals competitors, Coke, Inca Kola, and Concordia, introduced products like Bimbo Break and Kola
Tentacin, to restrain the Kola Real effect. Yet Kola Real
had damaged Pepsis position more than Cokes, in part
because the upstart firm competed more directly with
Pepsi as a lower-cost alternative within Peru.
While Kola Real products relied mainly on word-ofmouth advertising, other companies invested highly in
advertising to position their brands in the market.

FIGURE

2 Market Share per Brand in Peru

Until 1997, Coke and Inca Kola, the consumers favorite


drinks in terms of quality and taste, had no imitators in
the Peruvian market. As consumers perceived the proliferation of brands with diverse flavors introduced by unknown companies, they immediately associated those
products with low quality. In order to change this perception, Ajegroup introduced Kola Real as the fair-price soft
drink, suggesting that other drinks were expensive. The
company also showed consumers its modern manufacturing facilities, suggesting that Kola Real had the same quality as the competitors.
Ajegroup had different products that competed with
beverages sold by both Pepsi and Coke. Kola Real, for example, competed with soft drinks like Fanta and Crush.
Caramel color drinks, like Big Cola, competed with Coke
and Pepsi, and the yellow drink, Sabor de Oro, competed
with the traditional Inca Kola. Through this strategy, the
company managed to compete not only in terms of price
and liters, but also in terms of taste.
Overall, the Peruvian soft drink industry was divided
into two groups: (1) expensive soft drinks that targeted
people with high incomes, such as Coke, Fanta, Sprite,
Inca Kola, Crush, and Pepsi, and (2) cheaper drinks that
targeted the population with lower incomes, including
Kola Real, Kola Inglesa, Bimbo, Concordia, Triple Kola,
Don Isaac, FiestaCola, Sabor de Oro, and Plus Cola. Inka
Kola, while positioned at a slightly higher price point, was
still wildly popular throughout Peru, and it was presumed
that when funds were available, many consumers traded
up from Kola Real to this product.

Foreign Markets
In 1999, Ajegroup decided to enter into international
markets to avoid depending exclusively on the Peruvian
market (see Tables 7 and 8 for sample products from
Mexico, Venezuela, and Peru).

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TABLE

65

7 Ajegroup Products in Different Sizes and Prices

Products

Size

Price in Pesos

Price In US$

Ajemex - Mexico
Big Cola
Big Cola
Doble Big Cola
Big Cola
Mega Big Cola

600 and 700 mL


1.280 L
2.6 L
3.1 L

3.5
5
9
11

0.33
0.47
0.85
1.03

First
First
First
Ajeven - Venezuela

2.6 L
3.1 L

0.85

Kola Real
Lemon-Lime
Orange
Pineapple

600ml and 1.7 L


600ml and 1.7 L
600ml and 1.7 L

Big Cola
Big Cola
Big Cola
Big Cola
Cielo
Cielo
Cielo
Cielo
Ajeper - Peru
Kola Real
Lemon-Lime
Strawberry
Orange
Pineapple
Big Cola
Sabor de Oro
Cielo

355 ml
1.7 L
3.1 L
355 ml
600 ml
2.6 L

250, 600, 400 ml and 1.5 and 3.2 L


250, 600, 400 ml and 1.5 and 3.2 L
250, 600, 400 ml and 1.5 and 3.2 L
250, 600, 400 ml and 1.5 and 3.2 L

Ajegroups strategy was to look for countries where


the soft-drink market would have an opportunity to grow.
The company basically chose countries that had a high
concentration of low socioeconomic population and
where the soft-drink consumption was lower in compariTABLE

8 Ajegroup Market Share in 2003


Ajegroup Market Share per Country in 2003
Peru
20%
Mexico
4%
Venezuela
17%
Ecuador
12%

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son to countries like the United States and Mexico. Most


countries in Latin America fit this profile.

Venezuela
The company first decided to enter the Venezuelan market due to climatic factors (high temperatures during
most of the year) and to market size, which was double
that of Peru. Until 1999, soft drinks were packed in glass
bottles in Venezuela. By introducing Kola Real in nonreturnable plastic bottles, Ajegroup gained 12% of the market, an equivalent to 30% market size of Peru. The firms
low-cost strategy was quickly successful in Venezuela due
to a number of factors, such as (1) similar income level
when compared to Peru (Venezuelas 2005 GDP per
capita, purchasing power parity, was $6,186 and Perus

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66 CASE STUDY

$5,983), (2) a larger yet less mature soft-drink sector with


limited local competition at the low end, and (3) major
infrastructure and topographical challenges that were
often perceived as insurmountable obstacles to overcome
by larger multinational firms (yet manageable situations
by Ajegroup due to its experience in the Peruvian highlands). Ajegroup faced local Venezuelan competitors Empresas Polar and Panamco de Venezuela in a country that
embraced locally made products. The local competition
was also working on product extension opportunities
through low-calorie and light products.

Ecuador
The success in Venezuela led to an expansion opportunity closer to home, in neighboring Ecuador. The company began exporting Kola Real and Sabor de Oro from
its plant in Sullana, near Perus border with Ecuador. By
2001, Ajegroup rented a bottling plant in the southern
Ecuadorian city of Machala and subsequently opened a
plant in Guayaquil. Together, Kola Real and Sabor de Oro
captured 8% of the Ecuadorian market. Ajegroups success in Ecuador was attributed to factors similar to those
in Venezuela such as low-income levels, limited competition, and a challenging natural environment coupled
with poor infrastructure. One challenge was that Coke
and Pepsi were deeply entrenched in Ecuador, and their
deep resources enabled the large U.S. firms price flexibility sufficient to compete on any level.

Mexico
In 2002, Ajegroup decided to enter the Mexican market,
for a number of key strategic reasons. First, Mexico had

The low cost of Big Cola allowed the company to take a


share of the market from both
Coke and Pepsi in a situation
in which the market was
not growing substantially.

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the second-greatest soft-drink consumption rate per capita


in the world, after the United States. According to
Canadean, a beverage research company, Mexicans consumed, per head of population, 101 liters of Coke per
year, which was only slightly less than the Americans at 113
liters, while Brazilians in contrast consumed only 32 liters
a year. Second, the fact that an equivalent bottle of soft
drink, like Coke, for example, was cheaper in the United
States ($1) than in Mexico ($1.4), a much poorer country,
represented a vast opportunity to launch a similar product
at a cheaper price. Consumers also tended to trade
down in brand purchases during economic slowdown.
Third, by entering Mexico, Ajegroup would become less
dependent on the Peruvian market and would be able to
avoid the periodic stagnation of demand, as the summer
in Mexico takes place between July and August, whereas in
Peru, it takes place between December and March.
Ajegroup invested nearly U.S. $7 million to build a
plant in Puebla that supplied beverages to the cities of
Puebla, Veracruz, and Acapulco. Big Cola, Ajegroups
flagship product in Mexico, was sold in family-sized bottles of 2.6 liters, the largest soft-drink container in the
Mexican market. A 2.6-liter bottle of Big Cola was sold for
9 pesos (90 cents) on average, compared with 12 pesos
for a 2.5-liter bottle of Coke. The low price of Big Cola
was particularly popular among poor and working-class
Mexicans, who were the top consumers of Coke on a percapita basis.
To turn a profit, Ajegroup ran a truly no-frills operation: its Puebla office was as austere as its corporate headquarters. There was a tiny administrative backup team
and very little advertising. The company relied on taste
and word of mouth to promote its product. Again, part of
the reason that costs were kept so low was that the company set up its own distribution system network rather
than relying on and paying others to do the job. A fleet of
600 leased trucks took the bottles from Puebla to 24 distribution centers, where 800 salespeople tried to get Big
Cola into supermarkets and, more important, into corner
shops that dominated the rural retail trade.
The low cost of Big Cola allowed the company to take
a share of the market from both Coke and Pepsi in a situation in which the market was not growing substantially.
By 2005, Big Colas 8% market share in Mexico was equal
to approximately 70% of the Peruvian market.
Interestingly, the large Mexican conglomerate
FEMSA, Cokes local bottling partner, launched a low-cost
soft-drink line, Mundet Multisabores, as a reactionary
move to Ajegroups success with Big Cola. Flavors included apple, tutti-frutti, tamarind, lemon, pineapple,
and mandarin. A related matter in Mexico was the 2005

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Kola Reals Low-Cost International Expansion Strategy

scandal in which major Coke bottlers were fined for anticompetition practices from when the bottlers requested
that their distribution outlets not sell Big Cola.

Costa Rica
Another country that the firm entered in 2004 was Costa
Rica. The company invested U.S. $10 to 15 million to
build its first plant in the country, which produced 1 million liters monthly and served as a first step toward penetrating the Central American soft-drink market. The idea
was to introduce Kola Real, Big Cola, Sabor de Oro,
Cielo, and First as soft-drink alternatives that had better
taste, quality, and the right price. By early 2006, the Costa
Rica plant was fueling sales to nearby Nicaragua and
Guatemala.
According to Enrique Moya, manager of Ajecen (Ajegroup in Costa Rica), political stability, labor quality, the
commercial agreement, and the infrastructure conditions
of the country motivated Ajegroup to expand to Costa
Rica. Ajecen created more than 700 job opportunities

67

around the country and intended to enhance the lifestyle


of the population through the implementation of a program that focused on health, environment, education,
and sports. On the competitive front, the recent partnership between Unilever and Pepsi in Costa Rica was seen as
a potential threat as Pepsi looked to extend its product
line into different niches, including the sports drink category.

The Future
As the management team of Ajegroup looked to the future, a number of opportunities were present. First, the
company had plans to diversify its product line by selling
beer and sports drinks in Mexico. Second, the firm recognized growth options through the Costa Rican plant by
potentially selling to El Salvador, Honduras, Panama, and
Belize. Finally, the opportunity to sell products in Chile,
Brazil, and the United States, via Mexico, were all viable
possibilities for the future growth.

Christopher J. Robertson is an associate professor of international business and a McCarthy Family Research
Fellow at Northeastern University. He has a BS in business administration from the University of Rhode Island
and an MBA and PhD from Florida State University. Prior to joining the Northeastern University faculty, Professor
Robertson taught at James Madison University, La Universidad de Salamanca in Spain, Florida State University,
and La Universidad San Francisco de Quito in Ecuador. He is also a two-time Fulbright Scholar in Lima, Peru.
Professor Robertsons primary research stream is cross-cultural management. His work has been published in
journals such as Strategic Management Journal, the Journal of World Business, the Journal of Business Ethics,
Management International Review, the Journal of Managerial Issues, the Journal of International Management,
Organizational Dynamics, the Journal of Business Research, Business Horizons, and the Thunderbird International Business Review. Professor Robertsons book, Roundtable Viewpoints: International Business, was published in early 2007 by McGraw-Hill.

NOTES
1. Benson, D. (2003, February 13). Perus unpopular president seeks solution to latest political turmoil. Associated Press.
2. Ibid.
3. Part of this section has been drawn from The Economist Intelligence
Unit Research.
4. Drawn from the Wall Street Journal, October 27, 2003, p. A1.

FURTHER INFORMATION
http://www.el-nacional.com/canales/entretenimiento/GastronomiaN.asp?ID=1092.
http://www.gestiopolis.com/recursos/documentos/fulldocs/ger/kolareal.htm.

DOI: 10.1002/tie

http://www.amrop-peru.com/esp/IMAGES/kola%20part1.pdf.
http://www.hacer.org/current/Peru012.php.
http://cl.invertia.com/noticias/noticia.asp?idNoticia=200404281850_
RTI_1083178231nN28534268&idtel=.
http://courses.wcupa.edu/rbove/eco343/Compecon/LatinAmerica/General/031030KolaRoy.txt.
Kola scrapes for market share, Houston Chronicle Publishing Company,
October 28, 2003.
Cola down Mexico way, The Economist Paper, October 11, 2003.
Perus Big Cola to open second plant in Mexico, Global News Bank, May
25, 2004.
Mexico Industry: Grupo KR-Kola Real shakes up soft-drink marketplace,
Country ViewsWire, April 10, 2003.
Peruvian Ajegroup makes progress in Mexican soft drink Market, South
American Business Information, February 11, 2004.
Kola Real se expande Havia Costa Rica, Reuters Investors, April 28, 2004.

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68 CASE STUDY

Coca Cola admite que Kola Real en Mexico Afecta sus utilidades, April
27, 2004.
http://mipagina.cantv.net/jun00704/bigcola/fotos1.htm.
http://www.elcomercio.com/noticias.asp?noid=97208.
http://www.cantv.net/economia/resena.asp?id=35955&cat=5&Fresena=TRUE.
http://www.economia-montevideo.gob.mx/noticias/2004/100204.pdf.

http://www.cronica.com.mx/nota.php?idc=96312.
http://64.233.161.104/search?q=cache:sQnxFXKPO4wJ:www.amropecuador.com/esp/IMAGES/kola%2520part2.pdf+Kola+Real+naranja,+
lima&hl=en&start=9.
http://64.233.161.104/search?q=cache:aw5SY_XlpFwJ:www.economiasnci.gob.mx/portal/noticias/vespertino.pdf+%22First+%22+Kola+Real
++and+2001+and+Mexico+Toronja&hl=en&start=3#7.

Appendix A. Fujimori and Toledo


Alberto Fujimori
Alberto Fujimori was born in Lima, Peru, in 1938 of two Japanese immigrants. He has a degree in agronomic engineering from the Agricultural National University, where he finished at the top of his class. From 1984 to 1989, he was the
dean of the faculty at the university and afterward hosted a television show called Getting Together. This television show
had a political tilt and was the impetus for his future in politics. In 1989, Fujimori started the political campaign Cambio 90 with the simple slogan honesty, technology, and work. In 1990, the socialist left-wing government of Alan Garca was in ruins. The government was completely discredited, and the country was on the verge of collapse. There was
economic chaos, mismanagement, corruption, drug dealing, and guerrilla warfare stemming from a powerful terrorist
group called the Sendero Luminoso (Shining Path).
The 1990 election was a landslide victory for Alberto Fujimori. He quickly established a free-market system where
he deregulated airline, bus, and road transportation. He cut government expenditures while forcing state-owned companies to sell products at market prices. Fujimori also liberalized foreign exchange rates, cut down import restrictions,
and, after stabilizing annual inflation (from 7,650% to 139%), began to regain the confidence of international lenders.
Fujimori was considered a savior, and the economy of Peru began to flourish.
However, problems began to arise when Fujimori used dictatorial tactics to fight the guerrilla rebels known as the
Shining Path. In 1992, after thousands of deaths on both sides, Fujimoris army was able to capture the leader of the
Shining Path, Abimail Guzman. Soon after this capture, amidst his highest levels of popularity, Fujimori suddenly dissolved the Congress, suspended the constitution, and dismissed 13 of 23 Supreme Court justices. His reasoning was that
he needed a freer hand to introduce more economic reforms, combat terrorism, eliminate drug trafficking, and root
out corruption. In 1995, soon after these dramatic events and still benefiting from the capture of Guzman, Fujimori
handily won his re-election.
Early into his second term, another major terrorist movement, MRTA, or Tupac Amaru (the name of the last Incan
ruler who was assassinated by Spaniards in 1572), grew in strength and seized the home of the Japanese ambassador to
Peru. At the time, the ambassador was hosting a party containing 452 guests, including Fujimoris brother, the foreign
minister, the agricultural minister, and many prominent Japanese executives. The rebels demanded the release of several hundred imprisoned rebel soldiers. Over the next few months, the rebels released all of the women and many of
the other hostages, but still 72 remained captured inside. Instead of negotiating further, Fujimori ordered an immediate attack on the house. The attack was a great success resulting in 71 of the 72 hostages being freed (one died of a
heart attack). Only two of Fujimoris soldiers were killed during this battle, while all 14 rebels lost their lives. The criticism aimed at Fujimori was in reference to his order that the attack be shown on televisions and broadcast worldwide.
Minutes after the battle, Fujimori appeared at the battle site on television in order to show other rebels, and the rest of
the world, who was in control of this country. Fujimoris popularity soared again after this ostentatious showing of
power. Amidst his soaring popularity, Fujimori decided to change the constitution for the second time, altering the reelection requirements, giving himself the sole ability to be re-elected for an unprecedented third term. Many of the
Supreme Court justices opposed this change and were summarily dismissed by Fujimoris hand-picked Congress. The
April 2000 election for Fujimoris third term was bitterly contested. Officially, Fujimori failed to get the 50% of the votes
required for an outright victory, and therefore a second round of voting was necessary. However, his opponent, Alejandro Toledo, dropped out of the re-election, citing that the original election was rigged in favor of Fujimori. Toledo, an
outspoken enemy of corruption, refused to continue his participation in the elections and by stepping aside allowed
Fujimori his unprecedented second re-election, for his third consecutive term.

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Kola Reals Low-Cost International Expansion Strategy

69

Fujimoris Fall from Power


Only months into his third term, in August 2000, President Fujimori held a news conference to announce the interception of arms from Jordan to Colombia. The credit for this interception was given to one of Fujimoris closest allies, chief
of the SIN (the Peruvian CIA), Vladimiro Montesinos. Immediately, Jordan claimed that they had in fact sold the arms
to Peru and that it was Peru who had sold them to Colombia. It was soon revealed that Montesinos was in fact responsible for selling the arms to Colombia. This was the first of many accusations of corruption to hit Fujimoris government.
However, a videotape surfaced around the same time that ultimately sealed the fate of Vladimiro Montesinos and Alberto Fujimori.
The videotape that surfaced and led to the political destruction of Alberto Fujimori showed Vladimiro Montesinos
giving a bribe of $15,000 to a congressman, Luis Alberto Kouri, to switch sides in order to ensure that Fujimoris favored
candidate would be chosen as president of Congress. Only months later, Switzerland announced that it was freezing
over $50 million in five bank accounts linked to Montesinos. Other allegations regarding Montesinos bank accounts in
the Cayman Islands, Uruguay, and New York containing over $274 million directly related to arms dealing and drug trafficking were soon uncovered.a Two weeks later, Fujimori arrived in Japan and faxed his resignation to Congress. However, Congress rejected this resignation and instead decided to officially terminate Fujimori because he was morally
unfit to govern. An interim government was erected, and in June 2001 Montesinos was finally captured in Venezuela.
The country was left in shambles as corruption allegations surfaced one after another. The citizens of Peru were
skeptical of their government, and the international community had completely lost confidence in the country. In an
effort to regain stability, the country quickly held a new election between former candidate Alejandro Toledo and former president Alan Garca (19851990). The election was won by a man proclaimed to be of the people.

Alejandro Toledo
Toledo was elected in June 2001 by a very slim margin over former president Alan Garca. Out of the 75% of the votes
counted, Toledo received 51.99%, while Garca received 48.01%.b The campaign was hostile from the beginning, as
Garca accused Toledo of using cocaine, fraternizing with prostitutes, and abandoning a child he fathered in an extramarital affair. In his defense, Toledo proclaimed that in 1998, agents of the SIN had kidnapped him, drugged him, and
filmed him with the prostitutes in order to blackmail him. Toledos retaliatory accusations against Garca were based
strictly on his political record as president from 1985 to 1990. Those five years were marred by corruption, hyperinflation (over 7,000% ), terrorism, and food shortages. Garca had cut the nation off from international assistance by withholding foreign debt payments. In order to make up the difference, his government simply printed more money and
inflation went out of control. In 1990, the amount of money it took to buy a pack of cigarettes would have bought a new
car only five years earlier.
Alejandro Toledo was part Indian and part Latino; one of 16 children, of which only nine survived, Toledo was born
and raised in a poor village located high in the Andean Mountains. His father was a bricklayer, and his mother sold fish
at nearby markets. At age 16, Toledo applied for a local civic group's scholarship to study in the United States. He was
chosen from among the areas brightest high school students and received a one-year grant. With guidance from members of the Peace Corps, Toledo enrolled at the University of San Francisco on a one-year scholarship. He continued
his education by pumping gas and acquiring a partial soccer scholarship. In addition to two masters degrees, he earned
a PhD in economics from Stanford University. After Stanford, Toledo served as chief economic adviser to the president
of the Central Bank and did a stint at the World Bank. During this time, his political aspirations began to grow and focus
toward returning to Peru and becoming president.
Upon returning to Peru, Toledo launched his presidential campaign around international trade and the labor
movement. He promised to award small business loans to farmers, balance the budget, lure foreign investment, and,
most important, create jobs. However, many among Perus elite are skeptical of Toledo. They don't like him because
they cant accept someone from the bottom becoming president, says Adam Pollak, a Romanian by birth who has made
a fortune in chemical manufacturing in Peru.c While Peruvians don't like to admit it, Toledos race and impoverished
background clearly feed suspicions about his populist actions. Critics view him as a leftist rabble-rouser.

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70 CASE STUDY

The Fall of Toledo


In December 2001, only five months after Toledos election, there were clandestine meetings held between new SIN
chief Cesar Almeyda and a key member of Montesinos corruption network, Oscar Villanueva (known as the Cashier
under Montesinos). Cesar Almeyda was a close confidant of Toledo and was handpicked to lead the corruption-riddled
SIN under the new regime. Many Peruvians felt that Almeyde could not have acted alone and that Toledo was behind
the meeting. The audiotapes revealed Almeyde promising to get Villanueva off the hook by buying off judges if he gave
inside information on the Montesinos corruption network. Villanueva soon fled from Peru and committed suicide in
September 2002. This was the first sign of corruption to blacken the new Toledo regime. The problems with SIN would
continue, and in 2003 Toledo fired Alfonso Paiz, the fourth man to hold the position as head of the SIN in two years.
His departure came after it was revealed that the SIN was illegally tapping Toledos phone calls.
Toledo has been heavily criticized for his direct or indirect role in all of these charges of corruption and nepotism.
He has also been skewered in the press for raising his own salary to an exorbitant $18,000 per month. Fujimoris presidential salary was a symbolic $1,500 per month.
However, the scandal that finally destroyed his credibility was his refusal to recognize his illegitimate daughter,
Zarai. Her mother was forced to take the issue to the Supreme Court before Toledo would finally make his belated admission. His approval rating has steadily fallen since his election, and he continues to ignore the charges against him.
Toledo announced that GDP will grow this year by 4%, with inflation down to 2%.d Clearly, Toledo has lost touch with
the average Peruvian, and although many feel that Toledo will finish his term as president, it is clear that the political
career of Alejandro Toledo is over.

NOTES
a. Davies, R. Alberto FujimoriThe rise and fall. http://www.ex.ac.uk/~RDavies/inca/Fujimori.html.
b. Rowen, B. (2004, April). Alejandro Toledo, Man of poor wins Peruvian presidency. www.Infoplease.com.
c. Peace Corps Online. (2001, March 1). Stanford: Profile of Peruvian President Alejandro Toledo; Bridges, T. (2001, March/April). The Contender.
Stanford Magazine.
d. Peru: The fall and fall of Toledo. (2003, November 25). Latin American Weekly Report.

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CASE COMMENTARY

71

Case Comment:
Kola Real
By
Anthony van der Hoek
he case study of Kola Reals entry into the low-cost
cola market in Latin America provides an overview
of an entrepreneurial company that clearly shows
how and why they started. It then goes into a brief
overview of how it leveraged its home market and the
strategies it incorporated to launch into international
markets. These tactics and strategies were consistently
reused in other markets, especially those markets with
similar consumer and competitor characteristics.
The case discusses some of the fundamental competitive aspects of Ajegroups business and how it changed the
marketplace in every country that it has entered. Its basic
competitive positioning is based upon three core aspects:

1.

To have low-cost and low-priced products, typically


larger sizes sold at lower prices, targeted to low-income consumers;

2.

Minimized marketing to word of mouth and in-store


display activity only, principally around price-point
comparisons; and

3.

Utilizing a homegrown distribution model for tackling inherently poor country transportation infra-

structure and topographical challenges by using


fleets of smaller third parties or individuals, or leasing their own fleet.
As the company has grown, it is interesting to note its
shift from an insurgent guerrilla distributor of cheap
products to one that is concerned about consistency and
quality of its products, and to now engaging in developing
their own brands (beer and sports drinks) and beginning
to market on platforms of health and wellness. All developments made the company more sophisticated and more
elaborate in nature, but potentially more sustaining over
the long term.
In addition, the case study hints at the competitive response to their arrival. The larger competitors are either
buying (Inca Cola) or creating (Mundet) their own lowerpriced brands to compete and hold in check Ajegroups
growth. Although small market shares in these larger international markets far exceed the comparable share the
sales would correspond to in their home market of Peru,
they are still at risk from their larger competitors. Defending their share will become increasingly difficult as Cott
Industries has found, being a B-brand and private label
manufacturer in the North America.

Correspondence to: Anthony van der Hoek, Director, Strategy and Business Solutions, Wal-Mart Global Account Team, The Coca-Cola Company, One CocaCola Plaza, Atlanta, GA 30303, vanderhoek@yahoo.com, tvanderhoek@global.t-bird.edu.

Published online in Wiley InterScience (www.interscience.wiley.com).


2008 Wiley Periodicals, Inc. DOI: 10.1002/tie.20174

72 CASE COMMENTARY

Anthony van der Hoek is the director of strategy and business solutions for the Wal-Mart Global Account Team
at the Coca-Cola Company. His career at Coca-Cola started by reengineering and bringing SFA to the U.S. food
service sales force through marketing research, channel marketing, and, for the last seven years, in large global
customer management. He has developed strategies and implemented enabling analytical systems that have
grown customer relationships and expanded joint profitable business with every large international market, and in
2006 Wal-Mart Inc. nominated the Coca-Cola Company as International Vendor of the Year.

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73

Case Comment:
Perspective
By
Rhonda Kallman
or Ajegroup, the Peruvian environment has made it
very difficult for competition to get a foothold, enabling the company to use its proximity/location in
the country to get to market. Theyve built the foundation of their company from the bottom up, using a bluecollar workingmans strategy, which has given them a
point of difference and some long-term loyalty from their
customers and an extremely solid foundation to build on.
Ajegroup will likely face some challenges with its lowcost strategy because developed nations seem to be less
price-sensitive. They get more influence from advertising
and marketing, therefore making image more important.
If Ajegroup wants to get a bigger share from their competition, they will need to spend more on shelf placements,
promoting, and advertising. The best way for a company
to increase profits is to increase their top line (i.e., raise
prices and put some profit back into marketing).
With regard to their plans to launch a low-cost beer
in Mexico, Ajegroup faces a different set of challenges.
For one thing, beer brewing uses an entirely different
process than soda, therefore requiring greater capital investment for tanks and equipment. It also takes longer to
make, sometimes as long as four weeks. Despite having
the distribution system in place, however, it is a totally different business and different segment of consumers. A
wiser strategic course would be to purchase an existing
brand and/or import one, not develop one themselves.

Lets look at the U.S. market for low-cost beers. In my


estimation, it is very crowded. The bulk of the volume is divided among low-income consumers, senior citizens, and
college-age consumers looking for value. There is little
margin for the entire chain to share (i.e., distributors and
retailers). The brewers make money on these brands due
to efficiencies with greater volumes at the brewery. These
brands enable brewers to run at or close to capacity, which
makes the invested capital more productive.
If I were advising Ajegroups top management team
with regard to new market expansion and entry into the
U.S. market, I would point out that a decision looking at
focus versus diversification is a tough one because while
you can sometimes increase sales and profits with more
SKUs, more brands, and new market entries, at the same
time you also increase complexity, lose focus, and perhaps
create confusion with all the constituencies. The complexity of production, logistics, and, most important, marketing programs can be overwhelming. However, in the
case of beer in the United States, some brands have opted
for focus rather than complexity (i.e., fewer brands and
SKUs) and still maintained market share.
The U.S. market is difficult to maneuver in due to differing laws in each of the 50 states. In addition, the threetier system (manufacturer, distributor, retailer) also
makes it more complex than in other countries. In the
United States, the nonalcoholic beverage companies are

Correspondence to: Rhonda Kallman, Founder and CEO, New Century Brewing Co., P.O. Box 1498, Boston, MA 02117, 781.963.4007 (phone), 781.658.2640
(fax).

Published online in Wiley InterScience (www.interscience.wiley.com).


2008 Wiley Periodicals, Inc. DOI: 10.1002/tie.20174

74 CASE COMMENTARY

required to pay large fees for shelf space. However, its illegal to pay for shelf space with alcoholic beverages (considered inducement). Therefore, large marketing dollars
need to be spent to drive the consumers to purchase at re-

tail. All in all, there is much to consider as Ajegroup pursues an expansion strategy. The news is not bad, but the
complexities serve to remind the company that much
care is required as they proceed.

Rhonda Kallman started in the beer industry in 1985 as founding partner and the first employee with The Boston
Beer Company, makers of Samuel Adams. Within a year, the companys expansion required more sales initiatives, and Kallman took on the role of vice president of sales. Sales increased by 30 to 60% each year in the companys first decade. Ten years later, the company went public, and Kallman took on the role of executive vice president. By 1999, she felt that her impact at The Boston Beer Co. had been fully realized and she decided to move
on. However, Dr. Joseph Owades, the brew master credited with the invention of light beer in 1967, inspired her
to start another beer company. On April 20, 2001, New Century Brewing Co was incorporated. Dr. Owades developed a light beer made from scratch to be light, not a watered-down version of any other. Kallman named it Edison and launched the brand on September 10, 2001. In May 2004, New Century Brewing Co. launched Moonshot, the original premium beer with caffeine. Both brands are distributed in select markets, restaurants, and bars
throughout the United States, with a primary focus in Boston and New York City.

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