An important contribution to the literature of economic development, this book presents case studies of productive entrepreneurship in contemporary Africa and Latin America. It looks at the growth of Kenya's chain stores and one-person kiosks, the rise of barter clubs in Argentina, and Nigeria's clothing-design industry to illustrate economists' insights about entrepreneurship and the role that government regulations often play in impeding economic development.
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About the Author
Alvaro Vargas Llosa is the director of the Center on Global Prosperity at the Independent Institute; a lecturer on world economic and political issues at such venues as the World Economic Forum, the U.S. Chamber of Commerce, the Council on Foreign Affairs, and the Inter-American Dialogue; and has contributed to the BBC World Service, the Los Angeles Times, the Miami Herald, the New York Times, Time magazine, and the Wall Street Journal. Among his books are The Che Guevara Myth, the award-winning Liberty for Latin America, and The Madness of Things Peruvian. He lives in Washington, DC. James D. Gwartney is professor of economics, holder of the Gus A. Stavros Eminent Scholar Chair, and director of the Stavros Center for the Advancement of Free Enterprise and Economic Education at Florida State University. He lives in Tallahassee, Florida.
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Lessons from the Poor
Triumph of the Entrepreneurial Spirit
By Alvaro Vargas Llosa
The Independent InstituteCopyright © 2008 The Independent Institute
All rights reserved.
Amid Hopelessness, Hopeful Investment
The Case of the Añaños Family and Kola Real
In the late 1980s, the Añaños family made their living from a small farm in the department (province) of Ayacucho, Peru, the cradle of the Maoist terrorist movement known as Sendero Luminoso, or Shining Path. The region's isolation, caused by the civil war, gave the Añaños an opportunity to found Kola Real in 1988. They never imagined that twenty-five years later they would be the main transnational manufacturers of nonalcoholic beverages in Latin America, with subsidiaries in Mexico, Venezuela, Ecuador, four Central American countries, and, soon thereafter, Thailand, placing Big Cola, their regional brand, right behind Coca-Cola, Pepsi, and Sprite, with more than eight million consumers in 2005. Today, the Añaños have fourteen manufacturing plants with a total installed capacity of two billion liters per year; they employ eight thousand workers, they own one hundred distribution centers, and their sales are estimated at US$1 billion. The Añaños case demonstrates that even in the environments most hostile to investment, free enterprise can allow people to achieve unimaginable development goals.
Many in Peru look back on the 1970s and 1980s as the worst decades in recent memory in economic, political, and social terms. They were twenty years of socialist and populist experiments, by the end of which most of the companies in the export and public service sectors had been taken over by the state, and a radical agrarian reform had expelled entrepreneurs from the countryside. The predominant public policies of the time included almost all of the components of typical state intervention in Latin America: price controls, prohibitive tariffs, exchange controls, fiscal deficits, a central bank captured by the politicians, and so on. The per capita gross domestic product (GDP) was 60 percent of what it had been in the early 1970s, growing inflation became hyperinflation in the late 1980s, and a social convulsion occurred that was so violent that a terrorist movement of Communist origin, the Shining Path, came to threaten the very center of political power.
The Communist Party of Peru–Shining Path movement made news in the early 1980s when it began to set off bombs in the rural areas of the department (province) of Ayacucho. Less than ten years later, its attacks shook the entire country, and merchants avoided entering Ayacucho for fear of being identified as oppressive capitalists and murdered. The Añaños family, small landowners in the interior of Ayacucho, had their property attacked and sought refuge in the city of Huamanga, the capital of Ayacucho. As reported by writer Mario Vargas Llosa in 2003,
How could one make a living in that land ravaged by terrorism and counterterrorism, which, from being poor in the 1980s went to miserable, with thousands of jobless and marginal people begging on the streets? The Añaños studied their surroundings and noticed that, because of terrorist actions, Ayacuchans had been left without carbonated beverages. Coca-Cola and Pepsi-Cola trucks from Lima, which went up the central highway, were constantly attacked by the Senderistas or by common criminals who passed themselves off as guerrillas. Sick of the losses they suffered, the respective companies stopped their shipments or cut them back in such a way that the beverages that did arrive were insufficient to satisfy the local demand. One of the five children of Eduardo and Mirta Añaños, Jorge, an engineer and agronomist, devised the formula for a new beverage. The family mortgaged the house, borrowed money everywhere and put together US$30,000. With that sum, the Añaños founded Kola Real in 1988 and began to manufacture soft drinks in the backyard of their home, which they themselves poured into assorted bottles and labeled. (Vargas Llosa, 2003)
Fifteen years after its beginning, the Añaños Group occupied a privileged space in the market of nonalcoholic beverages in Latin America, having used a competitive strategy that broke with the traditional patterns of the soft drink industry. The experience of marketing their own formula — which was exempt from the royalties that the Coca-Cola and Pepsi-Cola bottlers were obligated to pay — to low-income consumers in Ayacucho led the Añaños to bet that they could "democratize" the consumption of carbonated beverages by offering a product similar to the well-known brands but at a very low cost. Their business model was not to take market share away from Coca-Cola and Pepsi but instead to take advantage of a new market, at the base of the "social pyramid" — those who could not typically afford the more expensive brand-name soft drinks. Little by little, they learned about the industry and the market spurned by the traditional producers, and they began to open plants in other provinces of Peru, reaching Lima in 1997.
Based on their experience in Peru, their entrepreneurial intuition, and their ability to reach their target market, the Añaños realized that what they had achieved in Peru could be replicated in the rest of Latin America. To expand internationally, the Añaños gambled on two large markets — Venezuela and Mexico — in addition to smaller markets that could be penetrated rapidly, such as Ecuador, Guatemala, Nicaragua, Costa Rica, and Honduras.
Soon after expanding into the huge Mexican market, where they withstood a dirty war from Coca-Cola distributors, the Añaños were billing more than the sales of Peru's entire soft drink market. As of this writing, the group's sales are approaching US$1 billion, and the Añaños are rapidly making incursions into new, emerging markets, such as energy drinks, sparkling water, and citrus drinks. In addition, they are making forays into the East Asian market through their new investment in Thailand. From the beginning, the Añaños' philosophy has been guided by the market. Their increasingly global perspective is reflected in the name of their sparkling water: Free World.
In this chapter, we look at the Añaños phenomenon from three perspectives. First, we analyze the group's history against the backdrop of recent Peruvian history. Next, we study their expansion into international markets. Finally, we look at the Añaños Group as a business case study, analyzing the factors that have been crucial to the group's competitive success.
THE AÑAÑOS FAMILY'S BEGINNINGS IN PERU
In recent years, the Añaños Group has become Peru's main transnational company. Its impressive growth in sales — which approached US$1 billion in 2002 — has been due largely to its expansion into international markets (see Figure 1.1). Nevertheless, the success of the group's entry into the markets of Mexico, Central America, Venezuela, and Ecuador would not have been possible without its previous growth within the provinces of Peru and eventually Lima.
The history of the Añaños Group and Kola Real, its first and emblematic product, begins in the midst of a civil war unleashed by a messianic far-left group, the Communist Party of Peru–Shining Path, in the late 1980s. Because of the disruption caused by the conflict, other beverage distributors had almost abandoned the market in Ayacucho, leaving room for the launching of Kola Real. However, the emergence of the Añaños Group as a national company did not come until after the military defeat of Shining Path. And it was the company's growth on a national level, beginning with the provinces, that laid the foundation for the Añaños Group's leap from a Peruvian enterprise to a global enterprise.
Peru in the 1980s
Peru in the late 1980s was a country where all the imaginable social ills came together, due to terrorist violence and the consequent social chaos, as well as the worst economic crisis experienced since at least the 1930s.
The Terrorism of Shining Path
In the late 1980s, travel in Peru's interior was almost a suicidal prospect. Shining Path was a threat in practically all the country's provinces. The group's leader, Abimael Guzmán, seeking to impose a Communist revolution, had begun advancing from the countryside to the cities, using the strategy pursued by Stalin and Mao Zedong. Estimates of the casualties related to the attacks and armed confrontations between the terrorists and the police range from 24,000 to 70,000 (Government of Peru, 2003).
In Ayacucho, the department (province) where Kola Real's entrepreneurial adventure began, the estimate of dead and missing people was 25,000.
In 2000, the Peruvian government asked a group of prominent citizens to draw up a report that came to be known as the Report on Truth and Reconciliation. The report describes how the Communist Party of Peru–Shining Path (referred to throughout as Shining Path) initiated what it called a people's war against the Peruvian government, with fierce attacks on the civilian population.
Although the report does not state this clearly, the movement's origin was a Marxist intellectual movement at the state university at Huamanga, the capital of Ayacucho. The group of intellectuals who founded Shining Path in the 1970s took advantage of the poverty, ignorance, and weakness of Ayacucho's rural population to begin recruiting "cadres," gradually forming a sizable army. Contrary to the report, Shining Path's origin was due neither to the poverty nor to the inequities that existed and still exist in the region. As Figure 1.2 shows, the per capita GDP in Ayacucho is about 56 percent of the national average. Figure 1.3 shows that 65 percent of the population is poor, with 25 percent living in abject poverty. The existence of similar levels of poverty before and after the Shining Path movement suggests that the incidence of poverty alone does not explain the development of such groups. The Marxist Shining Path group was able to exploit these conditions, sparking the emergence of the antigovernment movement.
Shining Path possessed a particularly efficient ideological apparatus that fed on the frustrations of the rural poor, who tend to be of indigenous origin, as opposed to the "Western" population of native-born whites, known as criollos. But the origin of Shining Path was neither rural nor indigenous. It was urban and criollo, as personified by Abimael Guzmán, the leader whose nom de guerre was President Gonzalo.
According to the commission report, the civil war between the terrorists and the rest of society went through five major periods:
1. The start of the attacks (1980–1982), which the government of Fernando Belaúnde Terry minimized, failing to take appropriate action.
2. The militarization of the conflict (1983–1986), during which the armed forces began a war against the terrorists, but without an adequate system of intelligence. During this period, many innocent civilians received brutal treatment.
3. The spread of violence nationwide (1986–1989), during which Shining Path occupied areas throughout the country, established alliances with drug traffickers, and was complemented by another terrorist movement, the Tupac Amaru movement. The Añaños family founded Kola Real at the end of this period.
4. The extreme crisis (1989–1992), when terrorism reached Lima, generating a sense of fear among many Peruvian citizens that ended abruptly with the capture of Abimael Guzmán, thanks to an intelligence strategy developed by the national police. Three years after the founding of Kola Real, Peru was nearly peaceful again, and the company could begin to expand.
5. The dismantling of terrorism (beginning in 1992), during the ten-year regime of Alberto Fujimori. Fujimori was criticized for his authoritarian practices and for corruption within the National Intelligence Service, which was led by Fujimori's adviser, Vladimiro Montesinos. During this period, Kola Real succeeded in becoming a transnational enterprise.
The Economic Crisis
The period of terrorist violence during the 1980s coincided with one of the worst economic crises in the history of Peru. The military government of General Juan Velasco Alvarado, in power from 1968 to 1975, had created policies that denied economic freedom and ran counter to the rule of law. A great many of these measures were not reversed until the early 1990s. Some of the most prominent of these included the following:
The nationalization of a large number of major companies, including mining, fishing, industrial, and service enterprises, to the extent that at one point state-owned companies accounted for 40 percent of the GDP. These companies incurred large deficits that had to be assumed by the state.
Agrarian reform measures that involved expropriating agricultural property and turning it over to peasants, resulting in the bankruptcy of much of the modern agricultural production. This phenomenon led to the spread of poverty in the rural areas.
The excessive growth of the state without tax revenues to support it and a very large foreign debt that in the long run accelerated the bankruptcy of public finances.
The prohibition of many imports and an increase in tariffs and other barriers to trade.
The rejection of foreign investment.
The creation of policies that discouraged exports by exerting artificial control over the rates of exchange.
The crises triggered by this social-populist economic model followed one after another from the mid-1970s to the late 1980s. Peru's GDP grew very slightly during both decades (at a slower rate than the population growth, so per capita GDP actually fell), but, as Figure 1.4 shows, it was during the last three years of Alan García's administration that the GDP dropped in real terms. As can be seen in Figure 1.5, that drop in the GDP was accompanied by a process of hyperinflation that reached 7,650 percent per year in 1990.
Neither the military government of General Francisco Morales Bermúdez (1975–1980), who reestablished democracy, nor the second administration of Fernando Belaúnde Terry (1980–1985), whose first administration had been overthrown by Velasco, changed the populist economic model, which led the Peruvian economy to continue its decline. However, the administration of Alan García (1985–1990) carried the populist model to an extreme. Its policies led to a record-setting fiscal deficit, squandered credit through the state bank, filled the ministries and public enterprises with members of García's party, tightened controls over currency exchange, increased trade barriers, and attempted to nationalize private enterprises, to name only a few. In sum, it created a "perfect storm" that battered the economy and contributed to the spread of poverty. According to Nelson Shack, of Peru's Ministry of Economy and Finance,
Surveys of living standards in metropolitan Lima indicate that in 1991 the population reduced its consumption by 48.5 percent in comparison with 1985. The effects of the economic crisis were felt most strongly in the low-income sectors. Between 1985 and 1991, the poorest decile of the population experienced a contraction in its level of consumption that exceeded 60 percent. ... Between 1985 and 1991, the percentage of the population in a state of poverty rose from 43 percent to 59 percent nationwide. The increase of poverty was particularly notable in the urban sector, where it rose from 36 percent to 53 percent. Likewise, in the rural sector, the percentage of people in a situation of poverty rose from 55 percent to 80 percent. (Shack, 2004)
In this context, the carbonated beverage industry — in which the two main companies, Coca-Cola and Inca Kola of Peru, currently hold 71.4 percent of the market — fell into a major decline, along with the rest of the nation's industries. The industry recorded its lowest levels of consumption ever. With consumers' purchasing power declining, the prices of carbonated drinks had to be lowered. The idle installed capacity of the traditional beverage manufacturers rose to about 50 percent. There was room for a different type of carbonated beverage company to emerge, one that might succeed in the context of recession and plummeting purchasing power.
The Beginnings of the Añaños Group
It was in the very center of that stage of violence and extreme economic crisis that Kola Real was founded, an enterprise that, fifteen years later, would become one of Peru's most important transnational corporations. Terrorist violence and the economic crisis encouraged the Añaños to come up with a product that was different from the existing soft drinks — one aimed at low-income consumers.
Excerpted from Lessons from the Poor by Alvaro Vargas Llosa. Copyright © 2008 The Independent Institute. Excerpted by permission of The Independent Institute.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
ContentsForeword James D. Gwartney,
Introduction: Lessons from the Poor Alvaro Vargas Llosa,
1 Amid Hopelessness, Hopeful Investment Daniel Córdova,
2 Defeating Poverty Doing Business Daniel Córdova,
3 Nakumatt: A Kenyan Supermarket June Arunga and Scott Beaulier,
4 The Nigerian Clothing Design Industry Thompson Ayodele,
5 Barter Clubs in Argentina Martín Simonetta, Gustavo Lazzari, and Gabriel Gasave,
6 Freedom, Entrepreneurship, and Economic Growth Joshua C. Hall and Russell S. Sobel,
About the Contributors,
Praise for Lessons from the Poor,
About the Independent Institute,
Independent Studies in Political Economy,