Pepsi Gone Flat
In the space of three days, Pepsi Cola has transmuted in Venezuela into Coca Cola. Oswaldo Cisneros' Embotalledoras Hit has ditched Pepsi Cola, the brand with by far the biggest share of the soft drinks market (42%), in favor of Coca Cola, which has only 10%. Under the 50:50 Embotelladoras Coca Cola y Hit de Venezuela joint venture, Cisneros is to combine his 18 plants and their distribution network, previously contracted to Pepsi, as well as his own brands (Hit, Chinotto etc.) with Coca Cola's brands (Coke, Fanta, Sprite) and a pledged $500 million dollar investment in upgrading plants and marketing etc. Pepsi has countered by filing against Cisneros for breach of contract and monopolistic practices. Pepsi has also pledged $400 million over the next four years to win back the market share that it will inevitably lose.

It is a tale of a failed marriage. After six decades of wedlock, Pepsi was apparently taking its partner for granted. But what inevitably brought matters to a head was the announcement last year by Coca-Cola that it was planning to sink a huge amount of money into the Venezuelan market in a bid to improve quality and build market share. It seems that Cisneros' calls on Pepsi in the U.S. to help fund a counter push fell on deaf ears. Talks between Coca-Cola and Cisneros began over a year ago, but clearly got serious as relations between Cisneros and Pepsi became more strained.It is amazing that Pepsi failed to read the warning signs and prepare a contingency plan.

Venezuela, after all, is not an easy place to keep a secret. Cisneros and Coca-Cola had clearly planned the switch with military precision. A Cisneros' affiliate has been producing Coke bottles for some time, and the paint was on hand to turn the entire Pepsi distribution fleet into the Coca-Cola fleet over the weekend. The contretemps should bring a number of benefits to Venezuela and its consumers. The effective removal of the main brand from the soft drinks market shatters the comfortable oligopoly that has existed for many years. Coca-Cola now has the network to simply benefit from substitution and take over Pepsi's market share, but the market is now more open to new competition. For example, Polar's Golden Cup brands could fight to gain some market share and the sale of Coca-Cola's bottling plants means that a new player could snap up some of the infrastructure needed to launch new lines. Furthermore, the Venezuelan economy gains $900 million in new investment - the kind of figures that are usually only bandied about in oil circles.

Dirty Pool: Alejandro Gonzalez Salazar (a 73-year old private citizen) has sued to have the Banco de Venezuela re-privatization postponed (or cancelled?), alleging that Banco de Santander has access to privileged information because they employed the services of Jacques Vera (former Bco. Venezuela president) as a consultant and because Norys Aguirre (former Fogade president) is now heading Santander's Venezuelan capital markets operation here. The fact is that all the potential buyers have had unlimited access to the relevant information, in what insiders say is one of the best organized data-rooms in Venezuela's history.

Orimulsion: continues its global growth, with the first 52,000 tonne test shipment to China under an agreement signed between Bitor and China National United Oil Corporation in May. The boiler fuel alternative is being tested in a power generation plant supplying steel mills.

Venezuelan Scientists: have made new headway in finding a cure for the deadly Chagas disease, which afflicts 16 to 18 million people in Latin America. Scientists have succeeded in wiping out the disease in laboratory mice, though it is still too soon to know if the drug (DO870) will work on humans.

Suffrage Law Reform: suffered a blow last week that has fractured the Triple Alliance's erstwhile united front. Strong disagreement has arisen over the thorny issue of how to allocate direct and indirect votes among the parties.

VenEconomy is a Caracas-based publication and consulting firm specializing in the study and analysis of Venezuelan economic, political and social issues. Publications edited and distributed by VenEconomy include the VenEconomy Weekly newsletter, VenEconomy Monthly magazine and The Outlook, an annual scenario analysis projecting key trends five or six years into the future. Other group publications include the Law Report (edited by Baker & Mckenzie), the InvestAnalysis Stock Guide (security analysis) and InvestAnalysis Renta Fija (fixed-income securities) edited by Alex Dalmady and Daniel Lahoud and VenEconomy's newest offering, Insight 21 (produced jointly with Consultores 21)

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