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International Business Environment BSc IB, Course Coordinator: Sanjay Peters

Fall, 2013

Gatorade’s expansion strategy in Russia

1. Introduction

In 1965, a team of university physicians from University of Florida was asked by Ray Graves, the head coach of Florida Gators football team why were his players sodehydrated when they played in hot weather. The researchers came up with a carbohydrate-electrolyte beverage which soon got the name Gatorade, after it had successfully helped the University of Florida football teamto defeat important opponents, and later contribute to their first Orange Bowl win.Gatorade started being produced and marketed by Stokely-Van Camp (after securing the rights from the researchers team) and in 1983 it was purchased by Quaker Oats Company. In 2001 PepsiCo added Gatorade sports drink line to its own portfolio, buying the Quaker Oats Company.

Today Gatorade is distributed in over 80 countries, being the number one sports and energy drinks brand in the world (Euromonitor 1, 2013, p. 40)and the 86 th most powerful brand (Forbes 1, 2013). After a re-branding in 2010, Gatorade main products consists of G Series, G Series PRO and G Series FIT (Bleacher Report, 2010).

In this report, I am going to focus on how to expand Gatorade‟s presence into the Russian market. Since the company is already exporting its products there, I will analyse which expansion strategy is the most preferable.

Why Russia?

Russia is the 9 th most populated country in the world (Internet World Stats, 2013) and has the 8 th largest economy by GDP (World Bank, 2013), being one of the BRICS countries. According to Euromonitor, Russia is one of the largest energy drink volume markets, growing 10.9% from 2007 to 2012 (Euromonitor 2, 2013). What is more, Russia is going to host important sport events, namelyThe Russian Grand Pix (ESPN F1, 2010), 2014 Winter Olympics and 2018 FIFA World Cup.

Provided the reasons that Russia has a very large population, that is a fast-growing economy and is going to host some of the biggest world‟s sport events, this country represents a large opportunity for Gatorade to maintain its positionas one of the most powerful sport brands (Forbes 2, 2013) by growing its market share and business in Russia.

In order to conclude the best expansion strategy, I am going to use John Dunnings eclectic paradigm (Hill, 2012, p. 261), to analyse ownership, internalization and location specific advantages. The SWOT analysis helpedme to come up with Gatorade‟s biggest strengths and advantages over competition, which I am going to discuss in the following paragraphs. Then, I will use the PESTEL-analysis to decide the potential of Gatorade‟s expansion strategy in Russia. Finally, I will discuss Hill‟s entry modes based on our company needs and I will analyse its marketing mix.

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International Business Environment BSc IB, Course Coordinator: Sanjay Peters

2. Company Analysis

2.1 Strong Brand & Trademark

Fall, 2013

Being considered the inventor of sports drinks (Eurmonitor 2, 2013), Gatorade represents a strong brand name which is recognized worldwide. Its secret formula and successful sport endorsement campaigns helped the company to consolidate a leadership position in its market.

Gatorade became the official sports drink of major leagues (including NFL and NBA), teams (Chelsea F.C) and athletes (including Tiger Woods). Moreover, there are “two milestones that cemented Gatorade's iconic status once and for all: the ubiquitous Gatorade bath and the Michael Jordan – „Be Like Mike‟ commercial”, as the preview of “First in Thirst” book states (Darren Rovell, 2005).

2.2 Marketing Advantage

Gatorade‟s strong brand and trademark, which I talked about in the last two paragraphs, represents an important advantage when enteringinto new markets or when expanding into the already-present ones. Commercials, associations and sponsorships with important local sport brands could be an effective type of marketing (Euromonitor 2, 2013), especially in the countries which are successful at different types of sports (like Russia).

3. Location Advantages

In order to gain an overview of Russian‟s market advantages and disadvantages, I am going to use the PESTEL analysis(Political, Economical, Social, Technological, Environmental and Legal factors).

3.1 Political Factors

Russia became an independent country after the collapse of the Soviet Union in 1991 and since then has faced serious challenges in its efforts to stabilize its political structure. One of its biggest problems is the corruption, which is currently affecting the country‟s international reputation and economy. Althoughthere has been a significant increase in GDP per capita since 2000, the corruption remained constantly high, whereas the health, education and infrastructure has stagnated(WEForum - Scenarios for the Russian Federation, 2013, p. 19).

However, Russia is continuously taking steps in order to become a business attractive country for FDI. Firstly, it joined WTO in 2012 after 19 years of negotations. Secondly, Russia is the fifth most tax friendly country in the world (KPMG 1, 2012, p. 3), with a personal income tax rate of 13% for residents, profit tax rate of 20%, and VAT rate of 18% (Invest in Russia, 2013). Thirdly, there are several government financing projects, such as Investment Fund and Russian Venture Company, which are providing support for investment projects and helps accelerating Russian economy.

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International Business Environment BSc IB, Course Coordinator: Sanjay Peters

3.2 Economic Factors

Fall, 2013

Its natural resources helps Russia in consolidating its position as a powerful developing country, without the constraint of any production quotas. There is also a solid workforce which drives the country‟s economy. Furthermore, its fossil fuels serves as a primary source of geographicstrengthinfluence, building important relationship with Europe and Asia.

Euromonitor (Euromonitor 3, p. 3) reported that last year there was an active promotion of sports in Russia, due to the 2014 Olympic Games (Sochi) and 2013 World Student Games (Kazan). In fact, sales value of sports and energy drinks increased by 20% in 2012, reaching RUB 36.6 billion (Euromonitor 4, p. 3) and the sports nutrition saw 9% value growth in 2012, reaching RUB1,675 million (Euromonitor 3, p. 3).We can even anticipate a higher increase in the coming years, since the sports infrastructure will continue to develop. In addition, the Olympic Games (2014) and FIFA World Cup (2018) are going to increase the demand in sports nutrition products, which is a good opportunity for Gatorade to grow their market share and sales.

3.3 Social Factors

Euromonitor estimates (Euromonitor 5, p. 7) that the population aged 20-39 years is expected to experience a decline of 29.9% in 2012-2030. This can affect Gatorade‟s business strategy, since the population aged 15-45 basically represents their two distinct markets (G Series for teenagers and G Series Pro for adults).Nevertheless, Gatorade‟s main target population (15-45 years old) will still represent a huge market opportunity (more than 50 million people in 2030, according to Euromonitor 5, p.18). In fact, the 30-39 age group is the country‟s highest average gross earner and is estimated to remain the same by 2020 (Euromonitor 6, p. 4).

In order to asses the social factors in Russia, I am going to use the Geert Hofstede‟s 4-D framework (Hill 2012, chapter 4), taking into consideration the following factors: power distance (PDI), individualism (IDV), uncertainty avoidance (UAI) andmasculinity/femininity (MAS). The result shows a high PDI (93) and UAI (95) and a relatively low IDV (39) and MAS (36). Although this is a general framework, one can argue that the Gatorade‟s potential in Russian market consists of the way the company is marketing itself based on Russian‟s particular needs.Gatorade launched a special flavor in Russia, named Rainbow. Based on this model, the company can create family packages (due to their low MAS) and can also continue to educate its market (due to their high UAI) about the sport nutrition importance (as we saw an increase trend in sports nutrition products when we discussed the Economic Factors).

In order to fully analyse the social factors and the business ethics in Russia, one may look if Gatorade fulfils Hill‟srights theories (2012, p. 151). PepsiCo, Gatorade‟s parent company, believes that “acting ethically and responsibly is not only the right thing to do, but also the right thing to do for our business” (PepsiCo, 2012, Our Global Code of Conduct: Doing Business the Right Way). Their Code of Conduct addresses various business ethics issues and they also provide annual ethics workshops. What is more, PepsiCo has developed a six guiding principles,

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International Business Environment BSc IB, Course Coordinator: Sanjay Peters

Fall, 2013

in order to make sure that the company respects its commitment to its communities (Pepsi Co, 2013, “Our Values & Philosophy”). Therefore, PepsiCo has been managed to establish a strong ethical culture in its organizations (including Gatorade), constantly trying to improve it.

3.4 Technological Factors

Russia is the Eastern Europe's largest communications market and has the largest online population in Europe (Euromonitor 7, p. 1), which facilitates a propitious environment for Gatorade‟s marketing campaigns and commercials. Its technology level is expected to increase, the number of Internet users being poised to reach 94.6 million users by 2020 (a increase by 28.4% over the 2012-2020 period Euromonitor 7, p. 9),

3.5 Environmental Factors

Weather does not representt a concern for Gatorade, since its product can be used for both indoor and outdoor activities. Besides the increased media attention on health and sports (Euromonitor 8, p. 35), local governments are investing in infrastructure (subsidising the construction of new modern sports clubs, tennis courts, stadiums and swimming pools) offering a wide range of sport activities, from which Gatorade will indirectly benefit (by the increasing number of people which are going to practice sport activities).

3.6 Legal Factors

Russia continues to make steps in order to become a business friendly country, fighting challenges like over-regulation, inefficient capital allocation and corruption. Its attractive tax system represents an advantage, but the state dominance of the economy is still discouraging FDI.

4. Entry Strategy

4.1 Entry Mode

Hill (2012) defines six entry modes a company can pursue when entering into an foreign market:

exporting, turnkey projects, licensing, franchising, joint ventures or wholly owned subsidiary.

Given the facts that Gatorade is already exporting its products in Russia and that the country‟s sports products market is going to grow in the coming years, my suggestion would be setting up a new wholly owned subsidiary. Although this strategy is the most costly one and probably the most risky one, I strongly think that it isgoing to get the biggest increase in sales on the long term.

When analysing the other entry modes, one may argue that a licensing agreement or a joint venture are safer than a wholly owned subsidiary. Iabsolutely agree that these two modes will definitely grow Gatorade‟s market share in Russia.And yet,the biggest drawback of licensing is that the company is going to lose its tight control over manufacturing, marketing and strategy,

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International Business Environment BSc IB, Course Coordinator: Sanjay Peters

Fall, 2013

which are the main advantages of Gatorade (as we established the fact that its strong brand and trademark has been built over decades of successful commercials and associations with important sport figures). What is more, Gatorade‟s secret formula and its know-how could not be maintained when dealing with licensing. These disadvantages can also be seen in a joint venture. We should also take into consideration the fact that PepsiCo continues to invest billions of dollars in Russia (Business Week, 2013), gaining knowledge of the Russia country‟s culture and business system, from which Gatorade can benefit.

By investing in a wholly owned subsidiary, Gatorade will own 100% of the stock, having full control over its know-how and operations. This way, the company can develop new products built on this particular market needs and it can focus on creating elaborate marketing campaigns based on the upcoming biggest sport events (Olympic Games, FIFA World Cup, The Grand Pix). Despite of the high costs and risks of this entry mode, the fact that Russia has a growing population and a potential 15-45 age-group market with over 50 million people (Euromonitor 5, p. 8) represents an undoubted opportunity for Gatorade.

Since Gatorade is the leader in sport beverages industry and that there is only one huge direct competitor in Russia (Coca-Cola's Powerade), which can not be acquired (due to PepsiCo vs Coca-Cola rivalry, considered the greatest of all time CNN, 2013) a greenfield venture is the best option. As Hill states (2012, p. 504), the organizationally competencies, culture and skills are easier to embed in a new venture than they are in an acquired subsidiary, thus supporting my argument.

Thus, we are also taking into consideration the last part of OLI-framework, the Internationalization, which is going to gain important advantages to Gatorade, due to the company‟s core competences (strong brand& trademark, secret formula, know-how).

4.2 Time of entry

Since Russian market is aware of Gatorade‟s brand and that in the next 5 years the country will be the host of three of the biggest sport events, increasing sport products‟ market, the optimal time of a greenfield investment is in the coming 2 years. A perfect strategy will combine an increasing focus on marketing and on optimising the delivery system, following a similar model applied in America a few years ago (BeverageDaily, 2010).

In this train of thoughts, Coca-Cola is already seeing the Russia potential market, releasing sport commercials and making sponsorships, having a strong focus on Gatorade‟s main competitor, Powerade (Sport Business Daily, 2013). Again, time is a crucial factor when thinking of Gatorade‟s expansion strategy in Russia.

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International Business Environment BSc IB, Course Coordinator: Sanjay Peters

4.3 Marketing Mix

Fall, 2013

We agreed the fact that Gatorade‟s main advantage is its marketing strategy which proved to be a great way to take the company from an idea to a world-wide known brand in the last decades. In order to analyse an ideal marketing strategy, I am going to use The Marketing Mix business tool, synonymous with the four Ps: price, product, promotion, and place.

Product . The Product represents a huge challenge for Gatorade in the Russian market. The increase of sales value of sports and energy drinks by 20% in 2012 (Euromonitor 4, p. 3) and the fact that Russia is one of the most successful countries at a number of sports represents a great opportunity for expansion. However, the Russian market is extremely different from the US one. This is whyenergy drinks companies are making particular favors based on Russian people preferences and tastes. Gatorade Rainbow has been sold just in Russia, whereas Powerade has 5 favors in this particular market (Citrus Charge, Gold, Ice Storm, Cherry and Snow Storm).

One may agree that a good idea will be to create a new package of drinks, based on Gatorade‟s G Series success in US. However, Gatorade‟s rebranding strategy proved to be confusing to its consumers, leading to a decrease in market share, namely 4% in the first quarter of 2010 (DailyFinance, 2010).

In this train of thoughts, I think the best idea for Gatorade will be to work on the one hand with Russian athletes (to develop new flavors and maintain company‟s credibility) and on the other hand with local advertising agencies, in order to understand theRussian sport‟s culture and figure out the best way to market Gatorade products.

Price. Due to the fact that Russia has an attractive tax system and that are no tariff barriers, Gatorade could maintain its product prices to a satisfying level for its consumers. Furthermore, the greenfield investment would able the company to decrease transport and logistics costs.

Promotion . As I said earlier, Gatorade strategy of promotion proved to be an effective one, so I would suggest to continue doing commercials and sponsorships in association with well-known Russian sport figures and teams. Similarly, the company should develop special advertising campaigns based on 2014 Olympic Games, 2014 Grand Pix and 2018 FIFA World Cup.

Place. The green-field investment is going to include the opening of a new plant in Russia, which will serve as a distribution centre for Russia and other Soviet republics, based on PepsiCo strategy to attack other East European countries (Business Week, 2013). Since the majority of the most populated Russian cities are concentrated in the European part of the country in the West, a great location for the new plant would be Nizhniy Novgorod, the fourth most populated city in Russia (expected to have a growth rate of 14.0% by 2030Euromonitor 5, p. 16).

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International Business Environment BSc IB, Course Coordinator: Sanjay Peters

5. Conclusion

Fall, 2013

This report focused on Gatorade‟s possibility to expand its strategy in Russia by making a green field investment in the coming 2 years.

The main advantages of this strategy consists in Gatorade‟s powerful brand, its credibility, its proved secret formula and its successful experience with commercials and sport endorsement campaigns. It is equally important Russian market‟s potential, given its currently developing economy (BRICS), its future sport events which is going to host and its sport infrastructure investments. In addition, the increase trend in sport products market and its target potential of more than 50 million people can create huge long term benefits for Gatorade.

On the contrary, corruption remains one of the biggest problem of Russia in addition to its stagnated health and education. One may also agree that Russia is a hard market to enter or to expand your business, due to its high PDI and UAI (according to Geert Hofstede‟s 4-D framework).

However, being owned by one of the most powerful brands in the world, PepsiCo, which itself has been present in Russian market for decades, Gatorade can grow both its market share and volume sales in Russia in the following years. In other words, the advantages outrun the disadvantages and crucial factor to take into consideration is the time of the entry, since Coca- Cola already invested huge amounts of money in Gatorade‟s main rival, Powerade and since two out of three biggest sport events will be held in 2014.

6. References

Books

Hill, Charles W. L., 2012. International Business, “Competing in the Global Market Place” 9th edition. New York: Washington University

Darren, Rovell, 2005, “How Gatorade Turned the Science of Sweat Into a Cultural Phenomenon”, AMACOM Books

Reports

Euromonitor 1, 2013, “Pepsico Inc In Soft Drinks (World)” (10/04/2013)

Euromonitor 2, 2013, “Global sports and energy drinks: where consumer lifestyles and “lifestyle branding” meet” (18/04/2013)

Euromonitor 3, 2013, “Sports Nutrition in Russia” (11/05/2013)

Euromonitor 4, 2013, “Sports and Energy Drinks in Russia” (19/08/2013)

Euromonitor 5, 2013, “Russia in 2030: The Future Demographic” (21/02/2013)

Euromonitor 6, 2012, “Income and Expenditure: Russia” (25/10/2013)

Euromonitor 7, 2012, “Technology, Communications and Media: Russia” (24/12/2012)

Euromonitor 8, 2009, “Growth Market for the Future” (29/01/2012)

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International Business Environment BSc IB, Course Coordinator: Sanjay Peters

Fall, 2013

WEForum, 2013, “Scenarios for the Russian Federation” -

http://www3.weforum.org/docs/WEF_Scenarios_RussianFederation_Report_2013.pdf

KPMG, 2012, “Competitive Alternatives” -

http://www.competitivealternatives.com/reports/2012_compalt_report_tax_en.pdf

Webpages

Forbes 1, 2013, “The World's Most Powerful Brands” – http://www.forbes.com/powerful- brands/list/

Forbes 2, 2013, “The Forbes Fab 40: The World's Most Valuable Sports Brands” -

http://www.forbes.com/pictures/mlm45jemm/5-gatorade/

Bleacher Report, 2010, “Gatorade Conquers Hydration: Debuting "G Series" Technology at Super Bowl XLIV” - http://bleacherreport.com/articles/337710-gatorade-concurs-hydration- debuting-g-series-technology-at-super-bowl-xliv

Internet World Stats, 2013, “The world population and the top ten countries with the highest population” - http://www.internetworldstats.com/stats8.htm

World Bank, 2013 - http://data.worldbank.org/data-catalog/GDP-ranking-table

ESPN F1, 2010 - http://en.espnf1.com/f1/motorsport/story/31127.html

Invest in Russia, 2013, “Key Advantages of Investing in Russia” - http://invest.gov.ru/en/why/reasons/

PepsiCo, 2012, Our Global Code of Conduct: Doing Business the Right Way - http://www.pepsico.com/Company/Global-Code-Of-Conduct

Pepsi Co, 2013, “Our Values & Philosophy” - http://www.pepsico.ca/en/Company/Our-Values- and-Philosophy.html

Buesiness Week, 2013, “PepsiCo's East European Snack Attack” -

http://www.businessweek.com/articles/2013-02-28/pepsicos-east-european-snack-attack

(28/02/2013)

CNN, 2013, “50 greatest business rivalries of all time “ -

http://money.cnn.com/gallery/news/companies/2013/03/21/greatest-business-

rivalries.fortune/2.html (21/03/2013)

BeverageDaily, 2010, “PepsiCo plans to distribute Gatorade direct to retailers” - http://www.beveragedaily.com/Markets/PepsiCo-plans-to-distribute-Gatorade-direct-to-retailers

Sport Business Daily, 2013, “Coke sets sights on Russia” -

http://www.sportsbusinessdaily.com/Journal/Issues/2013/09/02/Global-Special-Issue/Coke-

Olympics.aspx

Daily Finance, 2010, “Gatorade's Rebranding: So Confusing It Requires an Ad to Explain It” -

http://www.dailyfinance.com/2010/05/06/gatorades-rebranding-so-confusing-it-requires-a-new-

ad-to-expl/ (06/05/2013)

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