Daily Updates

2/16/2001 8:55:07 AM
8:55:07 AM

End in sight for Iran's cola wars

The soft drinks business in one of the world's thirstiest countries has been battered by US policy and clerics, says Guy Dinmore
Financial Times February 14 2001

With hindsight, building one of the Middle East's biggest breweries in Tehran on the eve of Iran's Islamic revolution was not well timed. Twenty-two years later, its towering grain silos still dominate the skyline of the industrial suburb of Karaj but only wild cats roam the disused plant. The brewery never produced a drop.

Shams, the company that had brewed Iran's most popular beer in another plant before alcohol was outlawed, went bankrupt. But its demise and the start of prohibition led to a new chapter in Iran's cut-throat cola wars, involving local producers and the US companies Coca-Cola and PepsiCo.

The fortunes of the cola business in Iran, like those of so many of the country's important industries, have been buffeted by, on the one hand, shifting US perceptions of Iran and on the other, Iranian clerics using hated symbols of American cultural hegemony for their own commercial ends.

Millions of familiar Coca-Cola bottles circulate in Iran but none contains the real thing. Coca-Cola's claims of lost investments and of trademark infringements by Iran-ian producers, such as Noushab in Tehran, are making their way through the courts. A hearing in Tehran this month could lead to a decision by Coca-Cola to speed up its re-entry into Iran.

Over chicken and Noushab-cola, Nasser Davoodzadeh, a Noushab shareholder and managing director, explains the complexity and cut-throat nature of the industry and displays more than a dozen bottles of different colas, brown and orange, produced across Iran and sold in Coca-Cola bottles or ones that look very similar, with logos copying the famous Coca-Cola "wave".

"Iranians are very brand-oriented. You can tell by their shoes. It's the name that sells, not the taste," explains Cyrus Jahan, another Noushab shareholder. Knowing this well, Iranian glass factories are churning out Coca-Cola bottles, complete with logo.

The Iranian soft drinks market is enormous, with more than 63m people in the country, most of them young and unable to pay black-market prices for alcohol. But the barriers are high for foreign investors and local producers, including the powerful clergy, play by their own rules.

Before the 1979 revolution, Pepsi dominated the business. Coca-Cola arrived late but gained ground when an ayatollah in the holy city of Qom issued a "fatwa", or religious decree, banning the drinking of Pepsi, because its main franchisee belonged to the Bahai faith, considered a heretical sect by Iran's majority Shia Muslims.

But when the revolution came, the franchised bottling operations of both American companies were nationalised and swallowed up by the "bonyads", tax-free charitable foundations akin to vast conglomerates and answerable to Ayatollah Ali Khamenei, the supreme leader. Pepsi's former partners are now known as Zam-Zam, while most of Coca-Cola's became Sassan. Between them they have about 80 per cent of the market.

But the minnows are catching up. One of them is Khoshgavar, founded in the northeast city of Mashhad by Mohammad Yazdi, a Coca-Cola franchisee before the revolution who somehow survived nationalisation. ("He was a good Muslim," explains a family friend.) Mr Yazdi wanted to capture the Tehran market and about 10 years ago bought the Shams brewery. The machinery could be adapted to make "Islamic" (non-alcoholic) beer and the plant was well located with a good water supply.

But in 1991 Mr Yazdi sold it to Noushab, a newcomer that had signed a post-revolution franchise agreement with Coca-Cola. The Yazdi family says it was under heavy pressure to sell, because Noushab had powerful connections to the family of Akbar Hashemi Rafsanjani, president at the time. However, Noushab's Mr Davoodzadeh, a nephew of Mr Rafsanjani, denies there was any pressure. He says Mr Yazdi doubled his money by selling the factory. Both Mr Yazdi and Noushab signed franchise deals with Coca-Cola, for the Mashhad and Tehran regions respectively.

After the 1980-88 war with Iraq, it had appeared that a new dawn was breaking in Iran's economy - and in soft drinks. A Saudi sheikh, Hassan Enany, had become the first post-revolutionary foreign investor in Iran, buying a 49 per cent stake in Noushab. Coca-Cola had also agreed to buy a 27 per cent stake for $15m. Iran's most modern drinks plant was built. Another company made 40m Coke bottles. Production began in 1994 and, after a 15-year break, Iranians were drinking Coca-Cola again.

Then, in 1995, disaster struck. Declaring Iran a threat to national security, US president Bill Clinton passed a series of executive orders that in effect barred all trade between the two countries.

"We woke up one morning with no concentrate [from which to make Coca-Cola]," explains Mr Davoodzadeh. Noushab was left with a spanking new factory, lots of bottles, 450 workers and a vast market. But it could not import the Coca-Cola formula and lost the managers installed by Coca-Cola.

Shortly afterwards, Noushab and Coca-Cola went to court. Coca-Cola's Bahrain-based spokesman in the Middle East, Bashar Alkadhi, is unwilling to talk about the case. "There is a trademark infringement case and money owed to us," he says."I cannot comment. We have a few cases. It is bottles and other things."

An Iranian court ruled that Noushab could continue to use the 20m Coca-Cola bottles it already owned - with its own fizzy drink inside - if it put the Noushab name on the cap and advertised to let Iranians know what they were drinking. Noushab's chemists have developed Coke and Fanta taste-alikes, plus other products, including a sports drink.

To the surprise of those suspicious of the Iranian judiciary, a court later ruled that Noushab should pay back the $5m or so that Coca-Cola had already invested before sanctions were imposed. Noushab appealed and also sued Coca-Cola for financial losses. "We have many court cases," laments Mr Davoodzadeh, accusing Coca-Cola of having caused a tangle of overlapping legal cases.

He points out that when the two companies signed their agreement, Noushab agreed to put up the plant as collateral until Coca-Cola's shareholding was legally formalised. This was a tricky process because at the time no Iranian company could be more than 49 per cent foreign-owned and Noushab already had its Saudi shareholder.

"We feel there is a conspiracy to let the company go bust and take it over. Maybe Coca-Cola doesn't want the case resolved. It is afraid of us being free and does not want another rival in the market," says Mr Davoodzadeh.

The "rival" is Mr Yazdi's Khoshgavar, which was able to renew its relationship with Coca-Cola after Mr Clinton lifted the ban on selling foodstuffs to Iran in 1999. This is when the Coke bottles in circulation became a problem. Noushab insists it uses only the old bottles it already owned and even accuses Khoshgavar of stealing its bottles from retailers and taking them back to Masshad, a charge Khoshgavar denies. Coca-Cola is aware of such goings-on and Mr Alkadhi says it is trying to put a stop to it: "The biggest infringer is Noushab and we are starting there."

Curiously, though, Coca-Cola does not seem to be putting pressure on its partner Khoshgavar to stop filling 300cc Coke bottles with fake Coke. The real drink is sold only in smaller, 250cc bottles at three times the price, because of Iran's high import tariffs. Word is beginning to spread in Iran that only Khoshgavar's smaller and more expensive product is real Coca-Cola and the Mashhad company is starting to sell in Tehran.

Inevitably, perhaps, that has led to yet another court case. Mr Davoodzadeh insists his contract with Coca-Cola is still valid and that Khoshgavar is encroaching on his territory. This turf war could be resolved in court this month, an important step that could lead to Coca-Cola expanding its presence, especially if President George W. Bush later this year eases remaining sanctions, as Iranian businesses hope.

"Iran is a big market for us," the Coca-Cola spokesman comments. "We can ship concentrate there and as things ease up we can expand our operations. We are looking at it seriously."

The French drinks company, Castel, is also interested in extending its Coca-Cola franchise to Iran. It has bought a majority stake in Damavand, an Iranian mineral water company that was Perrier before being nationalised and taken over by a clerical foundation.

Noushab says that various foreign companies have approached it with a view to striking a deal if the court cases are settled. Mr Davoodzadeh says he would even be willing to renegotiate with Coca-Cola if both sides showed good faith.

And one day, if Noushab can find a foreign investor to produce non- alcoholic beer for the Middle Eastern market, the unused German machinery at the former Shams brewery may be switched on. If so, let us hope that this time there will be no court cases.