New Product Review: Inca Kola

NEW PRODUCT REVIEW
October 1998

In the Company of Giants...
Inca Kola
With ingredients borrowed from each other's home turf, Inca Kola and Coca-Cola face off in Peru's version of the "Kola Wars." Now, Inca Kola is taking the battle on the road.

By Eric J. Lyman

Identified with everything from Creole bullfights and rich seafood cuisine to Andean dance parties and Amazon River boats, Inca Kola is an unlikely candidate to be taking on the Coca-Cola giant. But in Peru, the bright yellow drink has been doing it for years.

Now, Inca Kola is taking its show on the road.

With a market share in Peru that about matches Coca-Cola, Inca Kola is one of a tiny handful of national soft drinks to give the American beverage giant a run for its money anywhere in the world. Figures from the two companies don't exactly agree, but both sides give Inca Kola the edge in Lima, Peru's capital and largest city, while Coca-Cola's strong distribution network puts it ahead in the countryside. Nationally, both drinks own about a third of the market, well ahead of Pepsi-Cola's estimated 10 percent market share and the less than 3 percent share for a host of national brands and secondary U.S. brands like Crush and 7-Up.

"As far as the Peruvian soft drink industry goes, this is a two-horse race," Lima-based consumer products analyst Geraldo Montoban says. "It's a clash of styles, with the polished international marketing and distribution machine of Coca-Cola against the unlikely home-spun style of Inca Kola."

Ironically, Inca Kola isn't a cola at all. The taste, available in Peru since 1910 when the company was founded by British immigrant John Lindley (a fifth generation of the Lindley family now works with the company), is based on an Andean flowering plant called Hierba Luisa. Most outsiders say it tastes like bubble gun or a mix of sugar and pineapple, and its jaw-clenching sweetness and

neon-yellow color make it stand out in a crowd.

Its success in Peru is based in part on being identified as the local David against the red-labeled Goliath from the United States. With its slogan of "Es Nuestra!" (It's Ours!), the drink is popular with every Peruvian social class and is considered the drink of choice for several national dishes -- even in fine restaurants.

"The taste is unique, and there's nowhere to get it except by drinking Inca Kola," says Manuel Salazar, the company's chief operating officer. "Peruvians are proud of their national soft drink; people tell me that the first thing many Peruvians want when they return to Peru from abroad is their Inca Kola."

Now, the company hopes that unique taste and consumer loyalty will help it make inroads in other places. The 88-year-old product is a newcomer to markets around the world, with sales in 25 countries, including other parts of Latin America, the United States, and parts of Europe and Asia.

Until recently, the company's international strategy relied on selling the product where large populations of Peruvians were based -- such as New York City and Los Angeles. But over the last two years, the company has taken aim at other ethnic groups and mainstream markets.

Salazar said that Inca Kola has opened bottling facilities in New York, New Jersey, Florida, and California and that sales now reach 16 states. The soft drink is also bottled in Ecuador -- where Inca Kola has around a 13 percent market share -- and is shipped to other countries from Peru-based plants.

"The problem with sales outside Peru is the same one the company has outside Lima -- a lack of a strong distribution network," says Cesar Romero, a Lima-based business consultant. "of course, it takes a while for consumers to get used to the unusual taste, and each market carries its own competitors, but the network problems are central."

Salazar said the company's strategy to overcome the distribution difficulties is through partnerships with foreign companies. In Brazil, for example, the company is discussing a partnership with national beer maker Brahma to make a swap of equity and access to the other's markets. Similar agreements could be in the works for Empresas Polar from Venezuela, Compañia Cervecerias Unidas from

Chile, and, according to one local media report, even Anheuser-Busch from the United States. The company hired investment banker J.P. Morgan to help it find a strategic partner to make international distribution easier.

"The basic plan is to give a foreign soft drink or beer distributor access to Peru's market through our distribution network in return for the same access to their market," Salazar says.

Even at home, the company has had its share of problems. J.R. Lindley y Hijos, Inca Kola's parent company, struggled financially for years. It suffered through the country's war against the Shining Path leftist rebel movement in the 1980s and hyperinflation that topped 7,000 percent per year in the early 1990s before turning its first significant profit in a decade in 1994. Since then, it's been on a roll, with profits last year around $22 million on sales of $260 million.

It also faces competition at home so strange it makes Inca Kola's neon bottle and navy blue label look downright conservative. There is the bright red Kola Inglese, Inca Kola copy Triple Kola, and Susy Kola, a syrupy drink name for Peru's exotic dancer-cum-congresswoman Susy Diaz (in Peru, the word "Kola" is interpreted to mean "soft drink").

One competitor that is no longer on the market is Pasteurina, a drink with a taste that recalled Inca Kola. The company went out of business in the 1940s and was resurrected by Coca-Cola in 1996 in an attempt to beat the yellow champion at its own game. Pasteurina quickly grabbed a 1 percent market share when it was reintroduced, but it stalled at that level and was discontinued earlier this year.

"Making inroads into that market is tough because of Inca Kola's fierce customer loyalty," Romero says.

One problem that Pasteurina, Inca Kola, and the others have faced is low overall soft drink consumption levels in Peru relative to other countries in the Americas. Consumers in the United States drink an average of 650 soft drinks per year -- nearly two per day -- and in Mexico the average is around 450. But in Peru, average consumption is around 70 drinks per year.

Observers say the low levels are tied to economics, as well as a strong tradition of home-made drinks such as Chicha, a deep purple beverage made from boiled dark corn and pineapple rinds.

Combinations of ingredients that unusual aren't unique in Peru. Ironically, Coca-Cola was originally developed using coca, a plant native to Peru's Andes that is also the base for cocaine and is still chewed by the descendants of the Incas as an aid against the effects of high altitude. And Inca Kola has always been manufactured using imported oils -- some of which are manufactured near Atlanta, Coca-Cola's home base.

"There's a shared history between the two drinks that makes the battle in Peru unlike any other," Montoban says. "Between Coke and Pepsi, the United States has its Cola Wars. In Peru (and now a handful of other places), we have our Kola wars."

Eric J. Lyman is a freelance writer based in Peru