Ajegroup S.A.

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Key Dates
1988: Eduardo Añaños and his wife begin making soft drinks in Ayacucho, Peru.
1994: Industrias Añaños has plants in eight cities.
1997: The company enters Lima, Peru's capital, underselling name brand soft drinks.
1999: Industrias Añaños opens its first plant outside Peru, in Venezuela.
2002: The company begins operations in Mexico.
2005: The company, now called Ajegroup, has 15 plants in various Latin American countries.
2006: Ajegroup enters Asia with a plant in Thailand.
2007: The company's Peruvian subsidiary introduces Ajegroup's first beer; Ajegroup has 22 production plants in 13 countries.

Type: Private Corporation
Address: Avenida La Paz Lt. 30, Lima, 15, Peru
Telephone: (51 1) 371-1812
Web: http://www.ajegroup.com
Employees: not available
Sales: $800 million (2006 est.)
Founded: 1988 as Industrias Añaños
NAIC: 311411 Frozen Fruit, Juice, and Vegetable Processing; 312111 Soft Drink Manufacturers; 312112 Bottled Water Manufacturing; 312120 Breweries
SIC: 2037 Frozen Fruits & Vegetables; 2086 Bottled & Canned Soft Drinks; 2082 Malt Beverages

Ajegroup S.A., a Peruvian-based beverage company, produces, markets, and sells, through its subsidiaries, carbonated soft drinks, fruit juices, beer, and water. In only 20 years Ajegroup has made its mark, challenging the Coca-Cola Co. and PepsiCo, Inc., throughout Latin America. By offering beverages similar to but lower priced than those marketed by the two giants, Ajegroup, best known for its Kola Real and Big Cola soft drinks, has won the allegiance of millions of thirsty customers from Peru north to Mexico. The company has also established an Asian presence and has entered the beer business in Peru.

Producing and Selling Soft Drinks Cheaply: 1988-98

Eduardo Añaños and his wife, Mirta Jerí de Añaños, had fled their family farm in southern Peru by 1988, taking refuge from the Maoist group Sendero Luminoso (Shining Path) in the nearby city of Ayacucho. The insurgents were slowly strangling the economy of this Andean highland community by such means as hijacking Coca-Cola trucks. Sensing an opportunity, the couple and their five sons entered the soda business, borrowing $30,000 on their property. Jorge, the eldest son and an agricultural engineer, developed the formula for the main ingredients of the cola drink, which was sold in recycled beer bottles with the labels hand pasted. Another account credits another son, Carlos, a chemist, with developing the "secret formula." The product, Kola Real, proved a hit with the townspeople.

Four of the five brothers soon decided the business could be taken elsewhere. They opened a second plant in Huancayo in 1991 and a third in Bagua in 1993. Industrias Añaños, as the business was then called, next entered northern Peru at Chiclayo, Trujillo, Tumbes, and Piura, and in 1994 opened its first plant on the Pacific coast, at Sullana, near the northern border, from which it exported into Ecuador. In 1997 the company entered Lima, gaining attention by selling its soft drinks as low as half the price of the leading brands. In Peru these were not Coke and Pepsi, but Coke and Inca Kola, which formed an alliance in 1999. By late 2001 Kola Real had about 10 percent of the Peruvian market for soft drinks and sales of about $30 million a year.

The two big brands were facing a challenge in the form of what became known in Latin America as B-brands: soft drinks--not necessarily colas--produced and sold inexpensively by smaller companies. Their production costs were much lower because they did not have to pay royalties to (usually foreign based) brand owners. Putting the product in plastic rather than glass bottles also kept costs low. When these receptacles became available in the 1990s they not only proved to be a less expensive option than glass but also could be made larger in size to achieve economy of scale. Marketing was minimal in comparison with the brand leaders. These savings were passed on to the consumer; in Peru, Industrias Añaños and two other B-brand companies were, in 2001, selling half-liter bottles of their beverages to supermarkets and convenience stores at more than 40 percent below the price of the leading brands.

Starting out on a shoestring, the Añaños family members were neither inclined to spread their money around or go into debt. They obtained capital for expansion not from banks but from their suppliers and their own profits. In their business model, the key was the distribution system. Thirty-to-fifty-ton trucks owned by independent contractors carried the products in cases from the bottling plant to distribution centers, where smaller vehicles were loaded for delivery to the company's numerous points of sale. These, too, were operated by independent contractors who provided their own vehicles, often small pickups, and, given the realities of the Peruvian economy, were easy to find and easy to hire. Salesmen as well as deliverymen, they worked on commission, paid for the cases they carried, and could not return the ones that they did not sell.

Plant locations were likely to be in rundown industrial parks where sites were vacant and rents were low. Advertising was so limited that for some time the marketing personnel consisted of two sign painters putting up wall murals with the Kola Real logo. When Industrias Añaños finally began advertising on television, it hired poorly paid freelancers who were said to have produced inferior quality commercials. Executives and managers, too, received salaries much below industry standards. Furthermore, the company was not interested in sponsoring big attractions such as soccer's America Cup, but rather only a few small local events.

Expanding Northward: 1999-2004

Industrias Añaños made its first move outside Peru in 1999, when it spent $4 million to open in Valencia, Venezuela, with a plant capable of turning out 30 million liters a year. By 2003 this investment had reached $12 million to $15 million. The company was distributing Kola Real and a second brand, Big Cola, in all of Venezuela, and had reached 12 percent market share, its original objective. Ángel Añaños, the company's president, told Lucien O. Chauvin of Beverage World, "We are not interested in being market leaders. Our goal is to establish a solid share and maintain that." Ecuador was the next country to house an Añaños plant, in Michala. By 2003, however, the company was nearing completion of a $3 million bottling plant in Guayaquil, the country's largest city. Kola Real and another Añaños brand, Sabor de Oro, said to look and taste somewhat like Inca Kola, had by then carved out an 8 percent market share. According to the company's figures in 2004, its market share had reached 17 and 12 percent, respectively, in these two countries. In Peru, where Kola Real was available in five flavors, it claimed 19 percent.

The Añaños family had its eyes on a much bigger prize, Mexico, by far the largest Spanish-American country and a market for soft drinks second only to the United States. Even the poorest Mexican families directed an average of 7.3 percent of their spending to carbonated beverages, according to a 2005 survey. Carlos and Arturo Añaños were sent in 2002 to oversee the operation, which was based in a new plant in an industrial park outside Puebla, less than two hours by motor vehicle from Mexico City. They began with a single product, Big Cola in an economy sized 2.6-liter bottle. Created by their brother Ángel, a chemical engineer, Big Cola's syrup had a less citric flavor than Kola Real and ingredients, including unrefined brown sugar, intended to make it intermediate in sweetness between Pepsi and Coke.

Once again, costs were kept low, with very few people at the no-frills corporate headquarters and not much in the way of advertising. Some 600 trucks were leased to haul Big Cola from the Puebla-area plant to 24 distribution centers, from which 800 freelance sales personnel labored to distribute the product to 100,000 points of sale ranging from supermarkets to tiny country stores and tortilla stands. Within two years the company, by that time renamed Ajegroup (combining the prefixes of Añaños and Jerí), had won about 5 percent of the Mexican soft drink market through its Ajemex subsidiary. It was offering Big Cola and First, a grapefruit flavored soda, in three sizes, including a 3.3-liter jumbo bottle. Pepsi Cola had been forced to cut its prices by 15 percent, and some of Coca-Cola's 16 bottlers, which dominated the industry in Mexico, had followed suit.

Coca-Cola did not take this incursion lying down. Some of its salespeople threatened to stop deliveries to retailers who had Big Cola on their shelves. A federal commission ruled that some of Coke's practices, such as exclusive contracts, were illegally designed to stem competition, and in 2005 it fined 15 Coke bottlers and distributors nearly $15 million. The Coca-Cola company then turned to inducements, such as offering proprietors free life insurance policies, cooking oil, refrigerators, and cases of Coke if they would reject Big Cola. Most of its salespeople were monitoring the retailers' nearly million Coke display coolers to make sure they did not stock rival brands.

In the midst of this heated competition, a valve in the Puebla plant failed, resulting in the emission of dangerous quantities of carbon dioxide. Suspecting sabotage, executives of Ajemex created a "crisis manual" for supervisors and vendors to counter unforeseen events. The firm's strategy for opening operations in a small community was to arrive unannounced and sign up retailers before the competition could adopt countermeasures. In stores, many times the competition no longer was about which brand sold more but which truck arrived first to sell.

More Countries, More Products: 2005-07

In late 2005 Mexico was accounting for almost half of Ajegroup's sales. Ajemex's 3,000 delivery people were offering nine different products to 310,000 points of sale, including Big Country, a juice line; Mega First in lemon, orange, and apple as well as grapefruit flavors; and Free World and Free World Light, flavored bottled water lightly carbonated and fortified with vitamins, antioxidants, and minerals. The company had five production plants covering every part of the country. Big Cola was believed to have won 10 percent of the market for carbonated beverages. Seventy percent of sales came from small stores, 20 percent from supermarkets, and the rest from dance halls, festivals, and large scale events.

By the end of 2005 Ajegroup subsidiaries had implanted themselves throughout Central America. Ajegroup had 15 plants, 98 distribution centers, and 720,000 points of sale in Latin America.

Then, in 2006, the group entered an Asian country, Thailand, where its affiliate, Ajethai, recorded sales of perhaps $50 million in its first year of producing Big Cola in Bangkok. Cambodia, Laos, and Vietnam were neighboring countries being explored for expansion by the parent company, as well as the area's giant, China. Colombia became, in 2007, the next Latin American country to receive Ajegroup's products.

In Peru, Ajeper held about one-fifth of the soft drink market. Its Cielo brand of bottled water, also marketed in Mexico, Venezuela, and Ecuador, accounted for 40 percent of a market which was enhanced when the government, at the beginning of 2007, dropped the 17 percent selective tax it had imposed on products in this sector. Other products included First and Sporade, a drink introduced in 2004, similar to Gatorade, but selling for only half the price. In 2007 Chip Fruit, a drink made of concentrated citrus juices that was being marketed in Ecuador, was introduced. Later in the year, Ajeper launched the parent company's first beer, named Franca, on a $35 million initial investment. The company, which unveiled roadway billboards featuring a noted Peruvian chef touting the product, was expecting to win a 12 to 15 percent market share during 2008.

In Mexico, Ajemex had been planning to introduce a beer named Big Chela since 2005 but had been dissuaded by Mexico's Congress, which passed a law giving favorable tax treatment to beer in returnable bottles. Companies entering the business and thus challenging the nation's two big brewers, Grupo Modelo, S.A. de C.V., and Fomento Económico México, S.A. de C.V. (Femsa), would either have to pay a higher tax or add investment in bottle distribution, collection systems, and delivery vehicles to their start-up expenses.

Ajegroup was producing beverages in 13 countries in 2007 and had 22 production plants worldwide. Big Cola had annual production of 3.1 billion liters, of which Mexico alone accounted for 2.5 billion.

Principal Subsidiaries

Ajecuador (Ecuador); Ajecen (Costa Rica); Ajemaya (Guatemala); Ajemex (Mexico); Ajeper (Peru); Ajethai (Thailand); Ajeven (Venezuela).

Principal Competitors

Corporación José R. Lindley S.A.; Fomento Económico México, S.A. de C.V.; Grupo Gemex S.A.; Peru Beverage Limited S.R.L; Pepsi Bottling Group, Inc.; Unión de Cervecerías Peruanas Backus y Johnston S.A.A.