AJE, the Peruvian purveyor of Big Cola, with global sales of $2 billion, has achieved sales growth of an average 22 percent per year from 2000 to 2013. PepsiCo on the other hand, recently outperformed Coca-Cola’s negative 1 percent growth in net sales (and 3 percent decline in profits) by reporting a topline growth of 4 percent. AJE may be a minnow compared to the big cola companies, but it’s outperforming them.

This promising player interestingly owes its foun­da­tion to the reign of ter­ror by the guer­rilla move­ment Sendero Lumi­noso (Shin­ing Path) in the 1980s, which led the Añaños fam­ily to flee their farm. Forced to think of how to sur­vive, and see­ing the with­drawal of the soft drink giants from the mar­ket, the five sib­lings (four broth­ers and one sis­ter) started mak­ing an orange fla­vored bev­er­age they called Kola Real in 1988 in their court­yard, bot­tling it in recy­cled beer bot­tles, and sell­ing it door-to-door to neigh­bor­hood res­i­dents and mom and pop out­lets in the city of Ayacu­cho!

The prod­uct caught on, and in 1991, the Añaños sib­lings founded the AJE Group to bot­tle and expand the busi­ness, expand­ing to smaller cities like Huan­cayo, Bagua, and Sul­lana first, then pretty much through­out Peru in a step-by-step fash­ion, before finally arriv­ing in the Peru­vian cap­i­tal, Lima, in 1999.

In 2000 it began inter­na­tional expan­sion, tar­get­ing neigh­bor­ing Venezuela and Ecuador. In 2002 it entered Mex­ico, fol­lowed by the coun­tries of Cen­tral Amer­ica in 2004. Around the same time, it also started to add to its brand port­fo­lio. In 2001 it added bot­tled water under the brand name Cielo, in 2005 Pulp, a cit­rus fruit drink, and in 2006, Spo­rade, a hydrat­ing drink. That same year, it also set up its cor­po­rate head­quar­ters in Madrid, Spain. In 2010 it entered India, Viet­nam, and Indone­sia. Today, it is present through­out Latin Amer­ica and the United States. In Asia it has expanded in to Thai­land as well. And aside from Kola Real, Cielo, Pulp, and Spo­rade, it also owns Cifrut, Volt, and the Big Cola brands.

Fair prices first

From the very begin­ning, AJE focused on serv­ing less afflu­ent con­sumers, offer­ing lower prices. For exam­ple, to enter Lima in 1999, the Kola Real cam­paign posi­tioned the brand as “The Fair Price Drink”. And Kola Real prices are approx­i­mately 25 percent lower than that of its main MNC com­peti­tors’ offer­ings. To keep prices low, AJE needs to keep costs low. It does so by pay­ing close atten­tion to its entire value chain, strip­ping costs aggres­sively wher­ever pos­si­ble. For instance, AJE man­u­fac­tures its own bev­er­ages, unlike its MNC com­peti­tors like Coca Cola and Pep­siCo, which rely on an exten­sive net­work of inde­pen­dent bot­tlers, because this allows them to pro­duce their bev­er­ages at a lower cost.

AJE was also a first mover in to PET bot­tles (recyclable), which are ubiq­ui­tous today. Not only were these bot­tles cheaper but they were lighter and less frag­ile, mak­ing them much less expen­sive to buy, use, and dis­trib­ute. To keep costs low, AJE invests in part­ner­ing with micro-entrepreneurs who use their own transport to dis­trib­ute AJE’s brands. 92 percent of AJE’s sales are through such direct part­ner­ships, with only the remain­ing 8 percent going through whole­salers, who are more expen­sive. This dis­tri­b­u­tion model not only helps AJE keep costs low, but also enables them to pen­e­trate deep in to its mar­kets, going to remote loca­tions which remain unserved or under­served by their MNC com­peti­tors, and pen­e­trate new mar­kets rapidly.

Adaptation to other emerging markets

AJE’s suc­cess is not just due to lower costs, it also adapts to local mar­kets. For instance, in Asia, it sells a Big Cola with­out caf­feine, to adapt to local mar­ket needs. Or when, in Indone­sia, the cur­rency weak­ened, it launched a 300 ml pack priced at 2000 Rupiah to remain attrac­tive to its tar­get con­sumers. Today, four short years after enter­ing Indone­sia, AJE holds almost 40 percent of the Indone­sian car­bon­ated soft drink market of 1 bil­lion litres per annum!

AJE’s suc­cess has drawn the atten­tion of the big MNC oper­a­tors, who have tried com­pet­ing by aggres­sively offer­ing pro­mo­tional prices and increased spend­ing on adver­tis­ing. How­ever, this only works in the short term; poorer con­sumers revert back to AJE’s brands once the pro­mo­tional prices are withdrawn.

What is inter­est­ing is that the dom­i­nant MNCs in this space, Coca Cola and Pep­siCo, seem unable to deliver growth in the way AJE does or come up with a clear response to AJE’s suc­cess. What can we learn from AJE’s suc­cess story? There are lessons for both wannabe AJEs, or the so-called emerging multinational companies (EMNCs), as well as for the multinational companies (MNCs). These lessons have been detailed in our book The New Emerg­ing Mar­ket Multi­na­tion­als: Four Strate­gies for Dis­rupt­ing Mar­kets and Build­ing Brands, and here we review the key points that jump out from AJE’s story:

Lessons for EMNCs:

1.     Iden­tify a tar­get cus­tomer group that is under­served — in the case of AJE, these are con­sumers at the bot­tom of the pyra­mid, who num­ber 4 bil­lion, and those who live in less acces­si­ble locations.

2.     To avoid head-on com­pe­ti­tion, pen­e­trate deep in to emerg­ing mar­kets; tra­di­tional MNCs tar­get the afflu­ent in the metrop­o­lises and big­ger cities.

3.     Focus relent­lessly on costs, strip­ping costs from all ele­ments of the value chain.

4.     Lower costs through own­ing your own manufacturing.

5.     Lever­age the lower costs to not only price lower, but also to inno­vate and local­ize your offer­ing to meet local needs.

6.     Expand slowly but sys­tem­at­i­cally, ini­tially expand­ing the prod­uct range to increase the share of wal­let of exist­ing customers.

7.     Expand in the next stage by tar­get­ing the same tar­get seg­ment as tar­geted at home, across geographies.

Lessons for MNCs:

1.     MNCs have vastly larger bud­gets and thus far it seems that, that is what they are lever­ag­ing to try and com­pete through pro­mo­tional pricing and brand build­ing. Per­haps they are bet­ter off in shift­ing these vast bud­gets away from pro­mo­tion pric­ing, which does not work with bottom of the pyra­mid con­sumers, to brand building.

2.     The freed up dol­lars can be used to develop low cost brands, per­haps lever­ag­ing the mas­ter brand, and cre­at­ing a brand archi­tec­ture that can suc­cess­fully reach down to the bot­tom of the pyramid.

3.     Exploit the supe­rior mar­ket knowl­edge that has been accrued over the years of pres­ence in many emerg­ing mar­kets to develop local­ised offer­ings, again where pos­si­ble lever­ag­ing the brand architecture.

4.     Trans­fer knowl­edge more effec­tively across geo­gra­phies. After all, EMNCs like AJE do not have the orga­ni­sa­tion struc­tures or processes to be able to do this as effectively.

5.     Learn from the EMNCs and cut costs relent­lessly across the value chain. MNCs sim­ply do not do this well.

Sur­pris­ingly, Pep­siCo and Coca-Cola do not seem to be sen­si­tive to these learn­ings! The future of growth is in the emerg­ing mar­kets and among the bot­tom of the pyra­mid con­sumers there. Fail­ure to learn these lessons and deploy strate­gies based on them to com­pete effec­tively in these mar­kets and among bot­tom of the pyra­mid con­sumers is likely to be per­ilous for the future.

Amitava Chattopadhyay is The GlaxoSmithKline Chaired Professor in Corporate Innovation at INSEAD. He is also co-author of The New Emerging Market Multinationals: Four Strategies for Disrupting Markets and Building Brands. You can follow him on Twitter @AmitavaChats.