Bakra beverage negotiation

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PON054

Bakra Beverage

Confidential Instructions for BebsiCo’s Director of Middle East Operations

You are the Director of Middle East Operations for BebsiCo, a multi-billion-dollar beverage company with a number of food and merchandise subsidiaries, and one of the world’s two largest beverage producers. You have been with BebsiCo for three months, and your principal responsibility is negotiating beverage distribution agreements between BebsiCo and its distributors in the Middle East. So far, things have been going well, but your upcoming negotiation will be your most important assignment to date. You will be meeting with the Sales Director of Bakra Beverage, a soft drink (flavored soda) distributor in the Middle Eastern country of Kumar. You want to make sure that your boss, the Vice President for Distribution, is pleased with the outcome.

You met with your boss yesterday, and gathered the following information:

One of the countries for which you are responsible is Kumar, a Middle Eastern country that used to be thriving and prosperous, with an educated middle class and a booming tourist industry. About four years ago the country came under the power of an oppressive fundamentalist regime, and its economy took a turn for the worse. The new government of Kumar expelled all Western companies doing business there, which was obviously bad news for BebsiCo. With the exception of one limited arrangement under which BebsiCo was permitted to distribute its soft drinks in the Kumari province of Melhand, BebsiCo has been unable to reach the Kumari market for the last four years. Last month, however, BebsiCo’s chances of reentering the Kumari market improved dramatically when former government ministers and their allies in the Kumari military led an uprising and ousted the fundamentalist government virtually overnight. Since then, Kumar appears to be on the road to economic recovery, and BebsiCo is optimistic it will once again be able to reach the Kumari market.

Currently, there are three beverage distributors in Kumar. Kabir Cola is the largest, and its operations have remained profitable (and reliable) over the past few years of political

This case was written by Dan Vogel under the supervision of Robert C. Bordone, Thaddeus R. Beal Lecturer on Law at Harvard Law School and Deputy Director of the Harvard Negotiation Research Project and Gillien Todd, Lecturer on Law at Harvard Law School, and is based on the Program on Negotiation role simulation entitled "Sally Soprano I." Copies are available from the Teaching Negotiation Resource Center, online at www.pon.org, by email: tnrc@law.harvard.edu, or by telephone at 800-258-4406. This case may not be reproduced, revised or translated in whole or in part by any means without the written permission of the Teaching Negotiation Resource Center Coordinator, Program on Negotiation at Harvard Law School, 501 Pound Hall, Cambridge, MA 02138. Please help to preserve the usefulness of this case by keeping it confidential. Copyright © 2004, 2005, 2010, 2018 by the President and Fellows of Harvard College. All rights reserved. (Rev. 8/18.)

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turmoil in Kumar because the company has expanded its distribution activities to neighboring countries that continue to purchase Western products. Bakra Beverage is a medium-sized company that has been teetering on the edge of bankruptcy for the past four years, but continues to function, mainly through distribution of locally produced soft drinks. Both Bakra and Kabir have had contracts with BebsiCo in the past, but it is unclear whether Bakra would be as reliable as it used to be these days, given its financial situation. The third distributor, Jayyid Juices, distributes juices and specialty drinks in Kumar and elsewhere in the Middle East. Jayyid has been distributing BebsiCo’s popular line of iced tea (“Wapple Iced Tea”) and its sports drink brand (“Everade”) for years in other countries. Jayyid has no experience in soft drink distribution, however, and has been doing a lousy job with its current distribution responsibilities anyway – to the point that BebsiCo is searching for a replacement for Jayyid to distribute its juice and specialty drink products in the Middle East.

When BebsiCo announced two weeks ago that it would begin a major soft drink distribution campaign in Kumar, Kabir Cola was (not surprisingly) named as exclusive distributor. However, last week BebsiCo received a call from Kabir’s general counsel with some startling news: despite its history of reliable service in Kumar, Kabir’s board had decided to cease operations there and focus on its more profitable businesses elsewhere in the Middle East. You have since learned that Kabir is leaving Kumar because its CEO has just been convicted (in a closed trial) of 56 counts of corporate fraud against the Kumari government and Kumari investors. When this news becomes public, Kabir is likely to become the Enron of Kumar. Kabir was able to rescind its contract with BebsiCo within seven days without penalty, but BebsiCo is now in a bind. According to BebsiCo headquarters, it is absolutely critical that a new soft drink distribution contract for Kumar be signed immediately, because any delay might permit Loca Cola – BebsiCo’s main competitor – to reach the Kumari market first. If you fail to secure a contract, it will certainly mean your job and possibly your boss’s.

Fortunately, Bakra Beverage, a well-known but financially troubled distributor, heard rumors that BebsiCo’s plans to use Kabir were in trouble, and called BebsiCo to inquire whether there was any possibility that they might handle distribution in Kumar. Until now, BebsiCo has held Bakra off, hoping to work with a more financially secure distributor. Unfortunately, that now appears impossible, and your boss is suddenly quite desperate to sign a deal with Bakra. You have scheduled an appointment with Bakra’s agent.

Bakra has distributed soft drinks for BebsiCo in the past, but the last time was two years ago for a limited distribution of its products in the Kumari province of Melhand, pursuant to a special governmental exception to the Western products boycott. Bakra received $1.87 million for that one-year contract and met its distribution goals. Five years ago, when Bakra was a leading distributor in the Middle East, the company received $3.3 million per year for distributing BebsiCo products in Kumar. That was regarded as extremely high at the time, justified only by the fact that Bakra was by far the most successful distributor in Kumar, which is certainly not the case anymore. On the other hand, over the last five

Copyright © 2004, 2005, 2010, 2018 by the President and Fellows of Harvard College. All rights reserved. (Rev. 8/18.)

Bakra Beverage: Confidential Instructions for BebsiCo’s Director of Middle East Operations

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For the exclusive use of N. Martinez, 2020.

This document is authorized for use only by Nadreen Martinez in MS in Logistics & Supply Chain / Negotiating Fall 2020 Version 1 taught by NICOLO ALAIMO, Florida International University from Aug 2020 to Nov 2020.

Bakra Beverage: Confidential Instructions for BebsiCo’s Director of Middle East Operations

years, inflation and the increased cost of beverage distribution (due to increased production costs in the Middle East in general) have brought about almost a doubling in the average contract price for top beverage distributors.

As a matter of policy, BebsiCo does not generally disclose the fees that its distributors receive. However, for negotiating purposes, you have been given some information on the yearly fees BebsiCo has paid its soft drink distributors in Yoman, a country with exactly the same population as Kumar and identical to Bakra in almost every way for distribution purposes:

BebsiCo’s Soft Drink Distribution Fees in Yoman

Five years ago $3.3 million

Four years ago $2.625 million

Three years ago $3.07 million

Two years ago $3.15 million

Last year $3.6 million

BebsiCo wants to be sure that its beverages are distributed to as many retail outlets as possible within its target market. Distributors, especially in the Middle East, often fall short of successfully distributing to every single outlet, due to such factors as inclement weather, security concerns, and bureaucratic delays. In most Middle Eastern countries, BebsiCo reaches around 75% of its target market per year, which is only slightly above its break- even point of 70% (taking into account marketing and other non-production costs). In good years BebsiCo succeeds in reaching 95% of its Middle Eastern market, give or take 5%. Anything less than 60% would cause BebsiCo to lose a substantial amount of its financial investment as well as its distribution outlets and customers. Hitting only 40% or 50%, while unlikely, would be a disaster. These kinds of figures probably explain why Bakra has received so little business in the last few years; companies like BebsiCo are anxious to avoid even the smallest chance of an off year. In addition to its distribution goals, BebsiCo also would like to improve its image in the Middle East, and throughout the world, for supporting the economies of developing countries and especially for promoting humane labor conditions for its workers. (Recently, several large multinational corporations operating in the Middle East have suffered from boycotts of their products in protest of the alleged use of “sweatshops” and other unfair trade practices.) Finally, BebsiCo is keenly aware of the need to improve its brand name recognition in the Middle East, and is always looking for ways to satisfy that need. Kabir was to have been paid $4.5 million for its soft drink distribution arrangement with BebsiCo. In view of the situation and the great desire of your boss to engage Bakra

Copyright © 2004, 2005, 2010, 2018 by the President and Fellows of Harvard College. All rights reserved. (Rev. 8/18.) 3

For the exclusive use of N. Martinez, 2020.

This document is authorized for use only by Nadreen Martinez in MS in Logistics & Supply Chain / Negotiating Fall 2020 Version 1 taught by NICOLO ALAIMO, Florida International University from Aug 2020 to Nov 2020.

Bakra Beverage: Confidential Instructions for BebsiCo’s Director of Middle East Operations

Beverage, BebsiCo headquarters has authorized you to offer Bakra up to $6.75 million, but only if such an amount should be necessary. If Bakra holds out for more than that, then BebsiCo will use Jayyid Juices and hope that Jayyid rises to the occasion of distributing soft drinks. In that case, BebsiCo estimates it would have to pay Jayyid Juices $5 million for its services, given the lack of alternatives. You should also bear in mind the potential adverse impact on future negotiations with other distributors should an unusually high fee for Bakra become public knowledge.

Your boss wants Bakra, despite its shaky financial situation. With the backing of a company like BebsiCo (and a little luck), Bakra could work out extremely well. As it is, the delay in launching the distribution campaign in Kumar may adversely affect BebsiCo’s chances of beating Loca-Cola to the Kumari market, which would be extremely bad for BebsiCo.

Prepare for your meeting with Bakra’s Sales Director.

Copyright © 2004, 2005, 2010, 2018 by the President and Fellows of Harvard College. All rights reserved. (Rev. 8/18.) 4

For the exclusive use of N. Martinez, 2020.

This document is authorized for use only by Nadreen Martinez in MS in Logistics & Supply Chain / Negotiating Fall 2020 Version 1 taught by NICOLO ALAIMO, Florida International University from Aug 2020 to Nov 2020.