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The Pepsi Company was founded by an American called Caleb Bradham in 1898 in New Bern, North Carolina and the syrup, currently known as Pepsi, was originally branded “Brad’s Drink” when it was first launched into the US market (Capparell, 2007). The company is the fiercest rival of the world’s number one carbonated soft drinks manufacturer Coca Cola both domestically and globally.
Pepsi Beverage Company (simply referred to as PepsiCo) has spread its product in most countries around the world with the aim of increasing its market share and customer base. However, like any other company that seeks to venture into a foreign country, a well thought out marketing research must be done to inform the company’s management of the appropriating marketing strategy to adopt that would make the venture successful.
The paper attempts to discuss the activities of PepsiCo in Israel; and how the country’s population, culture, political and socio-economic practices influence the product’s, Mountain Dew, marketing plan. The analysis of the business environment of Israel will be done through suitable marketing mix that considers the socio-cultural and politico- economic environments.
The Business Environment of Israel
Doing business in Israel means that PepsiCo masters the dynamics of the business environment of the country and streamlines its marketing strategy accordingly. The ostracization of Israel by most countries in the Middle East is a delicate reality that any foreign country venturing into Israel must consider. Given the strenuous relationship between Arab countries and the state of Israel, a company that wants to go global must choose either Israel with relatively small market share compared to the massive Arabic market share.
For this reason, the two US giant carbonated drinks avoided the Israeli market and instead did business with Arab countries for a long time before Coca Cola pioneered the Israeli market in 1966. The entry of PepsiCo came much later in 1992 (BW, 1992).
PepsiCo manufactures carbonated soft drinks and sells them under the following names: Pepsi, Mountain Dew, 7up and Mirinda, and sells them in the US, its domestic market. Mountain Dew, shortened as Mtn Dew, is a brand of citrus-flavored carbonated beverage that PepsiCo endeavors to market in the Israeli global marketplace.
The company has produced the brand in many flavors since 1980s and the trend has continued in the 21st century. The company has further expanded the brand into specialty, limited its production time, and made it retailer specific. By 2009, Mountain Dew brand had a 6.7% share of the all carbonated soft drinks within the US market; and it constitutes 80% sales of citrus soft drinks in the US (Standard & Poor’s, 2009).
The ingredients used to manufacture Mountain Dew include carbonated water, high-fructose corn syrup, citric acid, concentrated orange juice, natural flavors, sodium benzoate, caffeine, erythorbic acid, sodium citrate, gum Arabic, brominated vegetable oil, calcium disodium EDTA (Capparell, 2007).
It should be noted that the ingredients used to manufacture Mountain Dew varies from country to country and therefore, it will be different in Israel. When entering the Israeli global marketplace, PepsiCo will have to replace sugar with high fructose corn syrup in order to adjust to Israel consumers’ knack for natural products
The company has endeavored to achieve consistency by manufacturing a similar type of products but customized according to the taste of the market. Furthermore, it focuses on different markets with its variety of product mix, which includes both small and large markets. This strategy has made it easier to reach out for customers by providing its product in different sizes.
Israel’s Socio-Cultural Environment
PepsiCo products are mostly purchased by large grocers, discount stores, and restaurants from the company, which then resale the products to the consumers. The social lifestyles of the Israelis have made it easier for the businesses retailing PepsiCo products to continue placing their orders from the company.
The reason being most Israelis enjoy partying and social gatherings, and during such occasions demand for soft drinks tend to be higher hence PepsiCo uses this opportunity to grow its market share and command brand loyalty among its ardent consumers (Hertzog, 2010).
Before launching Mountain Dew in this market, PepsiCo must analyze the social structure of the population to enable it come up with a brand that would be acceptable. Having known that Israelis are conscious about their health, it was necessary that it changes the ingredients of Mountain Dew so as to satisfy the need for a soft drink and at the same time provide a healthy drink.
The company should also realize that it is necessary to start the distribution of the products through wholesalers and retailers before considering backward integration strategy.
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Moreover, Israelis are notorious for obsession with brand and therefore, PepsiCo must make this a priority by positioning its Mountain Dew brand to become a household name. This is possible in this market owing to the covert dislike of Coca Cola, its major rival after the 1966 saga. PepsiCo however has tried, with success, to justify its late preference for the Israeli market, an attempt that has slowly won the loyalty of Israeli consumers to its products (Capparell, 2007).
PepsiCo must also be cautious when it comes to doing business on the Saturdays. The Jewish religion, which is predominant in the region, considers Saturdays as Sabbath, holy days of worship. Opening business during this day is considered disrespectful to Yahweh and can easily result in a boycott of its products.
In order to be accepted by Israeli consumers, PepsiCo must embrace the religious practices of the Jews and this would only be possible if they employ Israelis, who besides performing other duties, will advise them on the operations within this business environment (Hertzog, 2010).
Ethical consideration is another important factor that is dear to the Israeli consumers. The cultural fabric of this population highly regards moral/ethical issues and will seldom comprise this virtue for anything. Therefore, in order for PepsiCo to succeed in this market, it has to run its operations ethically.
For example, proper disposal of its industrial wastes, reasonable pricing of its products, participation in social affairs of the community, fair employment terms, staff motivation, and provision of good working environment, among others; are ways of boosting its public image as an ethical business entity. Usually, once a company’s image is good people tend to associate with it and this has always resulted in success to the business (Hertzog, 2010).
Israel’s Politico-Economic Environment
The political environment in Israel supports foreign business investments due to the relative internal peace, save for the sporadic attacks on the Gaza frontiers by Palestinians. The government provides tight security for businesses that operate within the state.
This is a very significant consideration that PepsiCo had to internalize before establishing its premises. The policy in Israel allows foreign companies to establish branch offices within the territory for there are no restrictions put only that such a firm is required to register with the Registrar of Companies at the Ministry of Justice.
However, of greatest importance is the government’s entering into trade accords with its international partners that facilitate smooth international business operations. For example, since the unilateral trade liberalization program was rolled out in the 1990s that exposed domestic companies to foreign competition, Israel trade policy has always been aimed at continuing the expansion of its network of bilateral trade agreements (Asher, n.d.).
The US, which is PepsiCo’s country of origin, is Israel’s largest single country trade partner at the moment, constituting 36.7% with $ 36.8 billion of the bilateral trade recorded in 2008; and in that year, Israel was ranked the US 20th largest export market (Asher, n.d.). Initially, the US signed a Free Trade Agreement with Israel in 1985 in which the two parties agreed to implement tariff reductions in phases, which would culminate in the total elimination of duties on all products by 1995.
With this knowledge, PepsiCo found it rather simple to enter into the Israeli market without incurring heavy financial expenses as it would were there no such agreements. In fact, this agreement cushions Israeli consumers from high pricing that PepsiCo would have charged to recover the would-be heavy taxation (Asher, n.d.).
The Israeli government has also formulated friendly tax policy that enables investors, both domestic and international to realize returns on their investments. The tax structure has been made so flexible for companies that operate in the country, which are required by law to pay corporate tax.
This is courtesy of the tax reforms of 2005 that was programmed to decrease as follows: 2008 – 27%, 2009 – 26%, 2010 – 25% (Asher, n.d.). PepsiCo, therefore, is wont to enjoy this corporate tax reduction and employ effective target costing to beat any competitors in the industry in cost leadership. Moreover, the focus on cost leadership is enhanced by the value added tax that the Israeli government has considerably waived on most raw materials that are used in the manufacture of beverages such as fruits and natural flavors.
The economic situation of Israel is significant in the analysis of the market for PepsiCo products. Israel economy is doing pretty well owing to the culture of hardwork and the talented workforce that the country has.
According to the statistics released in 2009, the nominal GDP estimate was $195 billion, annual real growth rate stood at 0.8%, the per capita GDP was $26,178, and the exchange rate was at 3.82 shekels per US dollar (TDS, n.d.). This information is very important to PepsiCo since it will have to evaluate its returns when operating in such economy.
The industry sector contributes a substantial amount of shekels to the country’s economy and it is the sector that has the highest number of workforce compared to other sectors of the economy. Given that PepsiCo will specialize in beverages, Israel is the suitable market for all the ground work is already done besides the excellent infrastructure.
In this economic environment, there are many methods that PepsiCo can use to do its Mountain Dew business. For instance, it can franchise, which is a form of doing business introduced in Israel in the 1980s. Its popularity in the fast food industry makes it all the more suitable for a beverage company such as PepsiCo. Direct marketing is also another method that PepsiCo can employ to distribute its Mountain Dew in Israel.
However, the method is not popular with Israeli consumers of soft drinks but it can always be tried out. Finally, the company can use joint ventures, which is highly encouraged by the Israeli government since a five-year agreement is given with an automatic renewable clause therein (Asher, n.d.).
The Israeli foreign exchange market can be described as stable since there is high probability that a trade is informed for foreign financials; while for other customers, the same probability may be relatively low. It means that foreign investors have more information about the market dynamics than local investors do.
The rationale here is that the order flow from different parties such as foreign or domestic banks, big or small banks, leverage or no-leveraged companies have different influence on the equilibrium exchange rate (Onur & Demirel, 2009).
Such a foreign exchange market will be suitable for PepsiCo because it will be able to float its stock at a time when it fetches good returns given that it is a foreign financial. Even though, PepsiCo may be planning to invest in Israel, there has been a decline in foreign direct investment (FDI) in the country with only about $3.9 billion coming as compared to $10 billion three years ago.
With the word’s FDI standing at $1.11 trillion in 2009 compared to $1.77 trillion in 2008, a 64% decrease in Israel’s FDI points to something serious that is wrong with the country, which PepsiCo should find out before committing its funds in the business (TDS, n.d.).
Manufacturing Mountain Dew in Israel
As earlier mentioned, the ingredients for manufacturing Mountain Dew varies with countries of production. In Israel, consumers are known to prefer natural products given the healthy lifestyle they are leading and this will make the company to manufacture a unique brand of Mountain Dew that takes into account this concern. Fortunately, most of these ingredients are available in the country and with the good infrastructure, it will be easier to procure them.
In fact, there are many suppliers that PepsiCo can contract to deliver raw materials for the manufacturing of Mountain Dew for the Israeli market. The presence of other companies such as Coca Cola that deal in carbonated soft drink presupposes the availability of reliable suppliers that PepsiCo can also contract owing to the near-similarity of the raw materials that are used in the industry.
The labor force that PepsiCo will need is also available in Israel but the company must adhere to the labor laws of the land before doing any recruitment. According these legislations for instance, the employer is required to give the employee a written document within thirty days from the first date of employment specifying the terms of employment.
Secondly, the employer can dismiss an employee for any reason apart from reasons of discrimination of any kind. The right of employees to willingly form labour unions is stipulated in the constitution; and for a foreign employer, drawing the greater percentage of domestic workforce relative to expatriate workers is also provided for within the labor laws (Navot, 2007).
As explicit in the discussion, there are a lot of factors a company should take into account when intending to operate in a foreign environment and become successful. The socio-political environment is the bedrock of business operation coupled with the country’s economic status. The reason being, the product, Mountain Dew, must be made appealing to the Israeli consumers whose lifestyle must be integrated in the manufacturing of the soft drink.
As a foreign company, PepsiCo must painstakingly consider the political dynamics of Israel, the bilateral agreements that it has enacted with its parent country the US and how such agreements favor its business.
The economic status of the investment country must be evaluated as to whether it can support the business and enable the company to get handsome returns on investment. In this consideration, foreign exchange market, FDI, currency exchange rate, tax structure, and inflation rates, are analyzed to gauge the viability of the venture.
Asher, N. (n.d). Israel’s Business Environment. Economic consul, Government of Israel Economic Mission to the Midwest.
BW (Business Week) (1992). Business week, Issues 3296 – 3299. New York, NY: McGraw-Hill.
Capparell, S. (2007). The real Pepsi challenge: the inspirational story of breaking the color barrier in America business. Wall Street journal book. New York, NY: Simon and Schuster.
Hertzog, E. (2010). Perspectives on Israeli anthropology. Raphael Patai series in Jewish folklore and anthropology. Jerusalem, Israel: Wayne State University Press.
Navot, S. (2007). Constitutional Law of Israel. Jerusalem, Israel: Kluwer Law International.
Onur, E. & Demirel U. (2009). Measuring the Amount of Asymmetric Information in the Foreign Exchange Market. Retrieved from: https://www.csus.edu/indiv/o/onure/PIN%20Project.pdf
Standard & Poor’s (2009). Standard Poor’s 500 Guide 2009. New York, NY: McGraw-Hill Professional.
TDS (Travel Document Systems) (n.d.). Economy: Israel Asia. Retrieved from: https://www.traveldocs.com/world-atlas/Israel-atlas108#Economy