Coke aims to give Pepsi a roasting

Coffee has become the new battlefield between Coca-Cola and PepsiCo, the US soft drinks multinationals that have long been engaged in fierce cola wars. With the market for traditional carbonated soft drinks coming under pressure, they are both turning to the bitter taste of coffee to bolster their sales.

Not the normal cup of hot coffee, espresso or cappuccino most people are accustomed to drinking, but something bizarrely called ready-to-drink coffee. These are cold milk-and-coffee concoctions often sold in cans or bottles at grocers or vending machines.

A Japanese company created the first RTD coffee, as the beverage is called in the trade. Japan is today the biggest single market for these cold coffee drinks – a market led by Coca-Cola’s Georgia Coffee brand. About $12bn worth of RTD coffee is sold every year in Japan, compared with only about $1bn for the US market, where a decade-old partnership between Starbucks and PepsiCo dominates.

As a sign of changing consumer tastes and the move from carbonated soft drinks, deemed by many to be fattening, soft drinks companies expect the RTD coffee market, excluding Japan, to keep growing by about 10 per cent a year. Again excluding Japan, it is currently worth just under $10bn.

So the stakes are high. Last month, PepsiCo and Starbucks extended their US partnership to cover other international markets, starting with China. Starbucks develops the products – such as its popular Frappuccino and DoubleShot canned and bottled coffees – and PepsiCo provides its distribution and marketing firepower.

Outside Japan, the PepsiCo-Starbucks venture has taken a clear lead over Coca-Cola. This has only encouraged the latter to become more aggressive in spite of some setbacks, such as a coffee-flavoured soda called “Blak” launched a year agoand discontinued at the end of August.

Coca-Cola has now taken a decisive step to challenge its US arch-rival by enlisting the support of one of Italy’s most venerable names in coffee – the family-controlled Illycaffe group. The pair are forging a partnership to challenge Starbucks-PepsiCo in the global market for premium RTD.

The fact that the Trieste-based coffee roaster, which has been striving for decades to educate and introduce consumers worldwide to the fine art of drinking genuine Italian coffee, has opted to join forces with Coca-Cola is a clear, if somewhat disconcerting, sign of the times.

Illy was founded in 1933 and invented the precursor of today’s espresso makers. It developed a new packaging system for preserving coffee in cans and was the first to produce individual coffee pots for preparing quality coffee at home or at work. It has invested heavily in training around the world on how to handle an espresso machine properly.

Seven years ago it opened a university of coffee in Trieste to teach consumers and professionals the art and culture of coffee.

The Italian company’s chairman, Andrea Illy, says he is proud to be associated with Coca-Cola to offer the “Illy taste” to a new range of consumers, as well as for existing ones to experience “new consumption moments”, whatever that may mean.

Black coffee purists should be bracing themselves for dark days ahead.

Outsourcing challenges

Another quarter, and another set of milestones for India’s fast-growing information technology outsourcing companies. Infosys Technologies, the industry’s second-largest operator, which reported its results for the three months ended September last week, booked its first quarter in which its revenue topped one $1bn. Meanwhile, Tata Consultancy Services, the country’s largest computer services group, crossed the 100,000 employee-mark.

And there was plenty more to be pleased about. After a tough first quarter for the fiscal year ending March 2008, when a rapid rise in the rupee reduced margins in the industry by several percentage points, TCS and Infosys rebuilt their operating margins back to previous levels of nearly 25 per cent and 27.5 per cent respectively. Even with these achievements, however, there was a feeling that India’s IT companies are getting a taste of things to come.

The industry founded itself on labour-cost arbitrage – using low-cost workers in India to perform tasks once done in the high-cost developed world. But the stronger rupee is a reminder that this cost gap will one day disappear.

Not only are Indian salaries increasing, but the country’s strong economic performance is attracting investment inflows that are placing upward pressure on the rupee and on land prices, driving up costs across the country.

India’s outsourcers will need to become more innovative in the services they offer and begin developing more of their own intellectual property if they are to sustain the growth and margins that have made them so popular with investors.

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