Strategic Issue

How can BC Cola position itself to grow and gain greater market share in a growing Mexican market in order to increase its profitability and profitability for its bottlers under price controls? Analysis: The political environment is unlikely to change soon in Mexico. While working with the government to ease price controls for soft drinks, BC will have to operate under the current price controls for the foreseeable future. On the other hand, there is economic growth in Mexico, and this means potential growth in sales of BC’s cola product.

Since the margins will not grow under the current price controls for a bottle of cola, BC and its bottlers can only achieve growth in profits by increasing sales through maintaining or increasing market share in a growing market. It is, therefore, important to identify where the growth for the cola market will come from; that is, which segment(s) will grow the fastest. Increasing margins through cost-cutting operations seems unlikely, because glass bottles, the containers currently used, are the cheapest containers due to their reusability, and the ingredients cannot be changed.

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BC’s bottling plants are already more efficient than the competitors’, but the bottling plant owners do not wish to invest to expand capacity due to small margins. One issue, therefore, is if this market is large and profitable enough for BC to help its bottlers to invest in order for BC cola production to increase and grow with the growing market. Mexico’s population is around 100 million. Per capita soft drink consumption is around 1000 8-oz. bottles per year. This translates to 666. 67 12-oz. bottles per person per year and, with 12 bottles per case, to 55. 6 cases per person per year. That means that in Mexico 5,556 million cases of soft drinks are consumed per year. Half of this, 2,778 million cases, is cola based drink consumption. BC has 48% of this market, that is, its sales per year come to 1,333. 34 million cases. Since the gross margin per case is 15 cents on the average, this adds up to a total gross margin of 200 million USD per year for BC. While per unit margins are low, the total gross margin is not one to be tossed aside. BC should try to develop strategies to maintain its presence and grow in the Mexican market.

The market is segmented into four income classes, A, B, C, and D, as discussed in the case. SC, BC’s main competitor, has 48% of the market share based basically on its success with the income classes A and B, where SC has established a successful high status image. This image seems to have some success in classes C and D as well. Currently, BC is trying to trade up to classes A and B, which make up 8% of the population. Clearly, BC’s success in having 48% of the market is based in its image in, especially, the C class – since D class currently has little income to spend on soft drinks.

A and B classes must be buying much of its cola drinks in large quantities, whereas C and D classes are buying colas on one-at-a-time basis at outlets that supply them refrigerated, to drink on the spot. This may mean that to increase sales among classes C and D, more refrigeration units in outlets are required. Alternatives: Continue to go after the A and B classes by developing an up-scale image. This seems like a viable alternative since the A and B classes are the ones with the high purchasing power and their buying patterns enable more efficient distribution.

However, these classes constitute only 8% of the population and given the income distribution, average per capita consumption of colas (double that of the US), and the fact that SC has 48% of the market share based on its success in these classes, it is evident that these people are already drinking too much cola and that the increase in cola consumption will not come from this segment. Furthermore, SC already has established an image that is very strong in these classes, and a head to head competition to beat SC’s image will be extremely costly for BC. Position BC for the C and D classes.

Clearly, these are the classes where cola consumption is going to grow. BC already has strength in its positioning for these classes. It can take advantage of its current image in these classes and refine it to fit the growing aspirations and psychology of consumers in these classes given the economic growth and subsequent increase in their disposable incomes. Thereby, BC can aim to have the lion’s share of the growth in the market, thus increasing its overall market share and sales at a faster rate. We also need to consider alternatives for expansion of bottling capacity in Mexico and for distribution of cola bottles.

Ask bottling plants to invest and increase capacity based on the strength of the growing market. This is unlikely to occur, since bottlers have little incentive to use small margins for further investment. Invest in bottling plants yourself. This is a possibility, but BC traditionally is a syrup producer, and taking on bottling operations in Mexico may require higher than usual investment due to a lack of know-how and local business practices. Provide low interest capital loans to bottlers or go into joint ventures in investing for capacity expansion.

This will improve incentive on the part of the bottlers and resulting growing total gross margins are likely to give the bottlers renewed interest in fighting for BC. Possible distribution alternatives are (1) to increase the refrigerated trucks to serve BC customers, (2) to install free refrigeration units in small and mid-size outlets, and (3) to install many vending machines in high traffic areas. Recommendation: BC should position itself for the C and D classes, provide low interest capital loans for its bottlers for expanding capacity, and install refrigeration units in small and mid-size outlets.

It is important that BC positions itself strongly, and distinct from SC’s high status image, by discovering the emotions that accompany changing life conditions among lower middle and lower income classes in Mexico and bond the BC image to these. BC should become the “people’s” cola. Providing capital loans to bottlers will enable BC production capacity to grow with the market and create positive relations between BC and its bottlers. Putting refrigerator units into outlets with BC signs on them will help increase the bottles available so that outlets do not run out, and will act as free advertisement at points of purchase.