Paula Abdul, pop star- turned-choreographer- turned-designer and one of the judges on American Idol, is arguably the most popular element of the hit reality show on the Fox network in the US. In the 2005 edition, though, there's something else that's threatened to steal the limelight from Abdul-the cup she periodically sips from. The cup has Coca-Cola screaming all over. As do the walls of the room in which the contestants wait to get on stage. It's called-what else-the Coca-Cola room. With the soft drink giant making more of a splash on American Idol than most of the wannabe songsters, it isn't surprising that some cynics in the us have dubbed American Idol an infomercial for the world's greatest brand.

Now such product placements aren't exactly alien on Indian small screens, but don't expect to see the judges on American Idol's desi avatar, Indian Idol, sipping on Coke as they suffer countless aspirants. That's because the company with the world's second most recognisable symbol (after The Cross) these days prefers to lie low in the Indian market. One reason for doing so could be the matter of the Indian operations running up losses of close to Rs 1,000 crore. Hindustan Coca-Cola Beverages, the holding company for Hindustan Coca-Cola Bottling India and Hindustan Coca-Cola Marketing, had accumulated losses worth Rs 996 crore as on March 2005. This includes a Rs 539-crore loss in 2004-05 and Rs 457 crore in the year before that. In both these years, sales virtually stagnated (at Rs 1,356 crore and Rs 1,331 crore, respectively). The year-ending March 2005-06 won't be any better, as sales of carbonated soft drinks have dropped by 20-22 per cent again. The company's annual report for 2004-05 alludes to the fact that if non-alcoholic beverages were admissible under the provisions of the Sick Industrial Companies Act, Coca-Cola India could have been declared a sick company.

Pepsi's Bakshi: Fruit juices and snacks business have kept it from going flat

It's not only Coke that's in the doldrums. Rival Pepsi, too, is feeling the heat courtesy a shrinking market. In 2004-05, soft drinks sales dropped to 2002-03 levels of 400 million cases, and per capita consumption stagnated at around 8.7 bottles. It is yet to touch double digits. If Pepsi hasn't collapsed on the sickbed, it's because the company has been able to absorb the shock better, courtesy its thriving fruit juices (a Rs 400-crore industry growing at 30-40 per cent a year) and snacks business (contributing around 40 per cent to the top line). What might have also worked in Pepsi's favour is that throughout this period of crisis, it did not compromise on its share of voice. It ran some of its best campaigns ever with Bollywood stars Amitabh Bachchan, Shahrukh Khan, Kareena Kapoor, Preity Zinta and Saif Ali Khan, and via Sachin Tendulkar in cricket, Pepsi also invested heavily in cricket. The company spent around Rs 400-450 crore between 2002 and 2005 as against Coke's Rs 350 crore. Coke's new President Atul Singh, in fact, admits that cutting ad spends was a big mistake. "Once out of sight, you are out of mind and that's what happened in Coca-Cola's case."

Clearly it's the spectacular failure of the world's best brand (for three years running, according to Interbrand's survey), valued at $67 billion or Rs 3,01,500 crore-Pepsi is valued at just $12 billion or Rs 54,000 crore-that's difficult to ignore. Singh says he doesn't want to "defend things that went wrong in the past. I would rather focus on the future and as I see it, it is very bright". That may be the best option for Singh, yet it's difficult not to look back and figure how the soft drinks giants got it wrong. Consider: Coca-Cola has invested over Rs 5,000 crore in India in a span of 12 years against Pepsi's Rs 3,000 crore over a period of 18 years. Coke's investment not only makes it one of the biggest foreign investors in India, it also makes India a foreign market where the Atlanta-headquartered soft drinks major has made maximum investments. Yet, India remains a bleeding spot for the company.

This is the second time Coke's India business has gone awry since its return to the country in 1993 after a rather unceremonious exit in 1977. It had tidied up its flailing business by the late 90s and was even flourishing at the turn of the century. Along with Pepsi, Coca-Cola had consolidated the Indian soft drinks market, which doubled in size from 200 million to around 400 million cases between 1999 and early 2003. Per capita consumption had risen to 9.5 bottles in 2003 from four in 1994. However, it still remained much behind the US (per capita consumption: 800) and even neighbouring countries like China (28) and Pakistan (24). In 2003, when consumption in urban markets was booming like never before, Coca-Cola decided to take the plunge into the hitherto untapped rural market. The idea was to push volumes and expand the consumer base.

"At that time it seemed like a winning strategy," recalls a former Coke executive. Indeed, with around 70 per cent of the country's total population and over 40 per cent of its total disposable income, rural India seemed an ideal destination. However, rural consumers being extremely price conscious, making products more affordable seemed obligatory. Hence, prices were slashed across categories by 25 per cent on an average and a new price point of Rs 5 for 200 ml bottles against Rs 7 in 2002 was introduced. This was followed up with a massive marketing and advertising drive. Remember the Thanda Matlab Coca-Cola campaign with Bollywood star Amir Khan?

"We knew the rural strategy was suicidal, but being the competitor we had no option but to follow suit," shrugs Rajeev Bakshi, Chairman, PepsiCo. If Bakshi had said this then, he would have only been ridiculed because rural markets started delivering from day one. The consumer base expanded by 80 per cent in just a couple of months and volumes were up 39 per cent in the first half of 2003-04. Even the urban market grew 30 per cent.

And then came a bolt from the blue.

On August 5, 2003, The Centre for Science and Environment, a Delhi-based NGO, convened a press conference where it alleged that 12 top brands of Coca-Cola and Pepsi contained poisonous pesticides. In a high-profile counter, both Coke and Pepsi fought the allegations tooth and nail, but that didn't help too much. Sales plummeted by around 35 per cent in the second half of 2003-04. Since then the two companies have been running into one problem after the other: These include protests relating to water exploitation in Kerala (Coke's Palakkad plant in Kerala remained shut for most of 2004 and early 2005), Andhra Pradesh and Rajasthan, and other health and pollution-related problems in Tamil Nadu, up and Uttaranchal.

Hot or cold? Coke's rural foray proved an overkill

The controversy hasn't quite died down since then-and has, in fact, resurfaced in the land of The Real Thing. Last fortnight, 50,000 students of the University of Michigan, us, forced campus authorities to suspend the sale of all Coca-Cola products. Their grouse: The soft drinks major is draining local groundwater in India and causing severe water crisis for local communities. A California-based activist, Amit Srivastava, is spearheading this campaign; he intends to take it to other educational institutions in the US and the UK to stir public opinion. "It (Coca-Cola) is destroying livelihoods, stealing water and poisoning land. That is the story of Coca-Cola in India," he told mediapersons in the US. Coke's Singh says: "These activists are leading a false campaign against us. None of his allegations has been proved. We are working with local communities to clear their doubts on these issues."

What's worsened the situation for Coke in India was the gradual realisation that rural penetration is not a good business strategy. "We had ended up subsidising the rich for the poor," says Bakshi. The affordability drive did bring in 39 per cent volume growth, but value-wise, the industry grew only around 20 per cent. "What had happened was that the urban consumer who earlier bought bigger bottles and paid a higher price had now switched over to Rs 5 and Rs 6 categories," says Coke's Singh. Urban household consumption was also on the decline because of the controversies. By the end of 2004-05, the soft drinks industry was back to square one.

Coke's Singh: Despite losses, the company is planning fresh investments

To salvage their sinking bottom lines, the two companies were forced to raise their prices twice in 2005 (see Back To Square One). And now, the duo is speaking in unison once again. "Rural markets in India are all but a sham," says Bakshi. "We will have to have different price points according to the paying capacity of the target consumer rather than having one price for all," adds Singh.

Piled-up losses and a drop in volumes notwithstanding, it isn't quite the end of the road for the cola majors. "Consumers have a very short memory. Once the two companies get their act together, they will regain their lost constituency," says Y.L.R. Moorthi, Professor, Marketing, IIM-B. Experts also maintain that the recent controversies wouldn't have eroded their brand value much. "If a few hiccups here and there were to mar a company's brand equity, Coca- Cola wouldn't have remained the world's top-most brand," points out Ramesh Jude Thomas, Equitor Consulting, an Interbrand affiliate in India. Both, however, recommend re-jigging of the product portfolio, particularly in the case of Coke. Even the Interbrand survey suggests that the company must tap the evolving health and energy drinks market. Coke's Singh, in fact, is already talking about it. "We are making a fresh investment of $120 million (Rs 540 crore) in India to expand our product categories. Health and wellness will be a priority," he says. Pepsi has also lined up investments of around $300-400 million (Rs 1,350-1,800 crore) for the next four to five years and it plans new launches in non-cola categories. Indeed, there's plenty to look forward to for the cola giants: low penetration, a burgeoning middle class, rising per capita incomes and a growing economy are all triggers in favour of an inevitable boom in soft drinks consumption. Unless of course rural Indian folk decide that carbonated sugar water doesn't enhance their life in any great manner and their urban counterparts are convinced that pesticide-laced drinks aren't quite their poison.