Dear Participants,

Please read the case carefully and be prepared for discussion in my next class.

Happy learning!

Prof. Santanu Ray

Coca Cola in ChinaCoca-Cola, the leading soft drinks manufacturer and marketer entered

the Asian markets in the early 20th century. In 1929, it started marketing its products in China, but had to leave the country

following the Communist takeover in 1949. It re-entered China in 1979, following the re-establishment of diplomatic relation between

China and US. Because of the restrictive policies of the Chinese government towards Foreign Direct Investment, the multinational soft

drinks companies including Coca-Cola had to initially encounter difficulties to establish itself. However, Coca-Cola established itself

through its strategy of localization of manufacturing and distribution activities and China grew to become the fifth largest market for the

company.

Soft Drinks Industry in China

Soft drinks industry forms an important part of China’s food and wine industry. For the soft drinks manufacturers, China proved initially to

be a tough market for growth. This was because the Chinese preferred

to drink their own country-made tea. Tea was one of the most popular beverages for the Chinese. Tartary buckwheat tea, ginseng

tea, bluish dogbane tea, persimmon leaf tea, gingko tea, lycium chinensis leaf tea, mint tea, green bean beverage and ginger tea were

the different kinds of tea beverages available in China. These tea beverages contained elements that were considered to be beneficial to one’s health. Hence, the Chinese preferred tea and considered soft drinks to be harmful to their health. However, over the years, people in China started consuming soft drinks. But the consumption of soft

drinks by a Chinese was only 10 cups per year compared to that of an American, which was 40 times more than that of the Chinese. In

China, carbonated and non-carbonated were the two popular types of soft drinks.

Coca-Cola and PepsiCo were some of the main producers of the carbonated soft drinks in China. Modern production machinery and good packaging facilities facilitated in the growth of the carbonated

soft drinks industry. Foreign investments in this industry had also contributed to its development. However, the non-carbonated soft

drinks industry had witnessed a faster development than the carbonated soft drinks industry. Consumers had turned to non-

carbonated soft drinks because of its provision of healthy ingredients like vitamin-enhanced milk, availability of mineral water in areas

where the water was polluted. Ready-to-drink soft drinks, concentrated fruit juice, mineral water, ready-to-drink tea and fruit

juices were some of the non- carbonated drinks popular in China. The soft drinks industry received a setback when the Communists came to power in China and formed People’s Republic of China (PRC) in 1949.

After the Communist takeover, the multinational companies in China were asked to leave the country and all the plants that were owned

by these companies were nationalized by the government. Juzi Qishui was the only carbonated beverage that was available in China.

Production of beverages by any multinational company was not allowed for nearly thirty years after the PRC was formed. During these

thirty years the beverage industry in China witnessed little development. It suffered due to huge shortage, as the domestic

production did not meet the increasing demand. Foreign investment and production by the multinational companies was not allowed until

1978 when Deng Xiaoping, China’s de facto leader, announced the ‘open-door’ policy. This policy was adopted as a part of Chinese

economic reforms to promote foreign trade and economic investment in China.

The ‘open-door’ policy allowed the multinational companies to invest in China. Since then, multinational companies like Coca-Cola Enterprise, Pepsi-Cola International enterprise and Cadbury

Schweppes Plc. Etc. had invested heavily in the soft drinks industry in China. With the entry of multinational companies in to the Chinese

markets, soft drinks industry had witnessed development in both the categories of soft drinks. Apart from the investments by the

multinational companies and increase in the demand for the soft drinks, improvement in technology and infrastructure facilities had

also contributed to the development of the soft drinks industry.

The Chinese government had given considerable importance to technological development, so as to narrow down the gap in

technology between the Chinese and overseas manufacturers. Majority of the Chinese producers had adopted the foreign

technological skills and equipment in their production facilities and some producers imported the production lines from countries like US,

UK and Japan. For technological up gradation and developing new products, many key soft drink companies and research institutes had

invested heavily in research and development. Qinqhai Longzang Biology Technology Co. Ltd. was an example of such a research

institute that conducted research on healthy foods and beverages. With the help of research conducted, the institute was able to come out with healthy products, like Waken Lion Herbage Beverage that

helped to lower blood pressure and increase energy. Some of the soft drinks companies such as the Guangdong Jianlibao Group Co. Ltd. Also came out with a varied range of soft drinks products like lemon juice,

litchi juice, Tianlang pure water, Lechen Cola. In technology development, China had achieved major breakthroughs. The research

helped the institutes to develop the technologies like ferment technology, organism technology, technology to separate membrane.

To increase the domestic production, China had set up more plants and production facilities. It established a number of manufacturing

bases throughout the country so as to provide support to the domestic producers. These measures helped the soft drinks industry

in China to develop.

Economic boom in China in the 1990s further led to the growth of the drinks industry. The production of soft drinks had increased at the

rate of 17.3% annually during the 1990s. In 1991, the production value of the total soft drinks industry was 26500 million yuan of which the carbonated soft drink was 8220 million yuan and the non-carbonated

soft drinks was 18280 million yuan. In 1996, the production value increased to 78560 million yuan. Over the years the percentage of

carbonated soft drinks production value had decreased and that of the non-carbonate soft drinks increased. The carbonated soft drinks

decreased to 19392.8 million yuan and the non-carbonated soft drinks production value increased to 59167.2 million yuan in 1996. However, the output of the carbonated soft drinks was more compared to the

no-carbonated soft drinks. The carbonated soft drinks output accounted for 51.8% and non-carbonated soft drinks accounted for

48.2% of the total soft drinks output in 1996.

In 2001, the output and production value of the carbonated soft drinks decreased and that of the non-carbonated soft drinks

increased. The total soft drinks output was 14910 metric tons of which carbonated soft drink output was 4620 metric tons and non

carbonated soft drink was 14910 metric tons. The production value of the total soft drinks was 131380 million yuan of which the carbonated

soft drinks contributed 43285 million yuan and non-carbonated soft drinks 88095 million yuan. The decrease in both the production value

and output of carbonated soft drinks was to the shift in the consumers’ preference for the non-carbonated soft drinks. Due to the

presence of harmful elements in the carbonated soft drinks consumers’ preference gradually shifted to the non-carbonated soft

drinks. Between 1990 and 2000, the non-carbonated soft drinks sector recorded an average growth rate of nearly 20-25%. Because of the

intense competition in the soft drinks industry, the soft drinks manufacturers had focused more on quality improvement. According

to a census conducted in 1991, the average quality rate of the soft drinks was 35.5% in 1991. Since then there has been a steady

improvement in the soft drinks in terms of quality. The quality rate went up to 71.2% in 2001.

In 2004, soft drinks industry growth rate had increased rapidly. Compared to 2003, soft drinks industry yielded a 16% increase in the growth rate in terms of volume, compared to the previous year. The increase in the sales of tea, fruit juices and health-enhancing drinks

had contributed to the growth of the soft drinks industry. The industry predicted that by 2006, the carbonated soft drinks demand would reach 78300 million yuan, at a growth rate of 12.8% annually

and the non-carbonated soft drinks would increase to 155900 million yuan in 2006, at a growth rate of 10.5% per year.

Even through soft drinks industry had developed rapidly during the past decade, it could be affected by the shortage in domestic

production in the future. According to the analysts, China in order to meet the shortage in production has to depend on imports. This would open the market for the new entrants in the soft drinks

industry. However, for these new entrants, China would be a tough market in the presence of established soft drinks players like PepsiCo

and Coca-Cola.

Coca-Cola in China

In the early 1920s, Coca-Cola made its entry in to China, with bottles imported from its plant in the Philippines. In order to reach 500

million Chinese population, Coca-Cola had to transliterate the Coca-Cola trademark in to China’s official language, Mandarin. After some research, it was translated as K’o K’ou K’o Le^, the nearest Mandarin equivalent word to the term “Coca-Cola.” To localize its production, Coca-Cola began bottling operations in 1928 by opening two bottling

plants in Shanghai and Tianjin. It opened the third plant in Qingdao in 1930.

As a result of the Communist takeover in 1949, Coca-Cola had to increase its operations and all its plants were nationalized by the

government. However, immediately after the announcement of the ‘open-door’ policy in 1978, Coca-Cola started negotiations with the Chinese government and expressed its commitment to economic

development and foreign investment in the consumer goods industry of China. In 1979, Coca-Cola re-entered China and became the first US

company to sell its products in China after the government allowed the multinational companies to invest in China. Initially, due to the government restrictions on Coca-Cola prohibiting it from selling its products to the Chinese, Coca-Cola was available only to the non-

locals who purchased it from the select retail outlets, such as hotels and friendship stores. Although Coca-Cola re-entered China by

importing products from other places, it focused on localizing its production and distribution operations.

In order to expand its operations in China, Coca-Cola started bottling and distribution activities by entering in to joint ventures with the

local Chinese companies. Coca-Cola used to build the plants and hand it over to the government. In 1980, Coca-Cola entered in to an

agreement with the state-owned China National Cereals, Oils, and Foodstuffs Import and export Corporation (COFCO) to build a plant in

Beijing and hand it over to the government. Accordingly in 1981, Coca-Cola built and handed over the plant to the government and

availed itself the permission to expand sales and distribution in China. In 1982, Coca-Cola built the second bottling plant in Guangzhou and

handed it over to the Chinese government. In 1984, Coca-cola opened

the third bottling plant in Xiamen. Xiamen was chosen as the city comes under China’s special economic zones, where the foreign

investors were given some tax privileges and other incentives. In the same year, Fanta and Sprite brands were launched that were

produced by this plant. In 1984, Coca-Cola commercial was aired on the television, which was the first foreign commercial to be aired in

the state-run network.

In 1984, China's Ministry of Light Industry and Coca-Cola Company entered into an agreement to jointly set up bottling plants in the cities

of Tianjin, Shanghai and Qingdao. In order to develop its domestic soft-drinks industry, the ministry of Light industry asked Coca-Cola to open a soft drinks concentrate plant in Shanghai and thus contribute to the Chinese economy. The Shanghai plant was fully owned by the

Coca-Cola Company and handled the requirements of the bottlers through this plant. In 1985, Coca-Cola achieved a major breakthrough

when the Chinese government agreed to the sale of Coca-Cola products to the Chinese consumers. Coca-Cola continued to grow the late 1980s. Apart from the localisation strategy, Coca-Cola had given considerable importance to the marketing of its products. It gave the

local managers the freedom to advertise. Its commercials featured the Chinese zodiac animals like dragons and spring festival couplets. The company allotted huge funds for advertising expenses as a part of its growth strategy. Localisation of the distribution system in China was

another strategy adopted by Coca-Cola.

The products of Coca-Cola in China were distributed through the wholesale distributors like the state-owned sugar, tobacco and wine

companies. The independent wholesalers and privately-owned distribution firms had also contributed to the expansion of Coca-

Cola's distribution networks. Apart from the wholesale distributors, the retail distributors also sold Coca-Cola's products. However, the

retail distribution network in China had not grown rapidly.

After ten years of re-entering China, Coca-Cola started to make profits from 1990. By 1990 Coca-Cola had 13 plants in China. In 1993, the

Ministry of Light Industry granted permission to Coca-Cola to set up ten additional new plants. The agreement also required Coca-Cola to produce the local soft drinks along with the Coca-Cola products, so as

to develop the local Chinese brands. In 1993, Coca-Cola formed an alliance with the Hong Kong-based company Swire Pacific and Kerry Beverages Group (Swire). Coca-Cola acquired 12.5% share of Swire

and entered into an agreement with it to produce and sell the products in southern China and in interior regions Of China. Coca-Cola simultaneously entered into an agreement with another Hong Kong-based company Kerry Beverages Group to produce and market the products in northern and interior regions of China. In 1995 Swire

made huge investment in the bottling plants. Its first bottling plant, Xian Coca-Cola bottling plant was opened in 1995. In 1996, it entered the non-carbonated beverages market in view of the increase in the demand for the non-carbonated beverages by launching the product

Tian Yu Di (Heaven and Earth); that included mango and lychee flavours, oolong and jasmine teas, and bottled mineral water. Coca-

Cola also introduced another product of carbonated soft drinks Xingmu (SMART) with flavours of green apple, watermelon, and

coconut in 1997. Over the years, It went on to outsell Tian Yu Di and became one of the top five most saleable brands in the carbonated soft drinks market. Coca-Cola introduced another brand in the non-carbonated soft drinks segment called Qoo, a non-carbonated juice

drink. It soon became popular and was ranked as the Asia's leading juice drink. During the 1990s, Coca-Cola grew rapidly in China, but in 1999 after the US bombing of the Chinese embassy in Belgrade, the sales of American companies including Coca-Cola declined following

the anti-American sentiment. However, the decrease in the sales was not as high as expected by the company and it continued to

implement its growth strategy for the Chinese market.

To implement the growth strategy successfully in China, Coca-Cola continues with its marketing and promotion activities in 2001. It

became the official sponsor of the national soccer team that qualified for the FIFA World Cup finals, which was to be held in 2002. To mark

the occasion, it aired a special TV commercial. Coca-Cola also launched a commemorative can and videodisc called “The road to the

world cup.” In 2001, Coca-Cola entered the tea market in China by introducing Lanfeng green tea, which was first introduced in Hong

Kong. Coca-Cola released a new Chinese script logo in 2003 that signified the start of the "year of coke" in China. From 1979 to 2003,

Coca-Cola had invested $1.1 billion in China. Coca-Cola had also provided financial and technological assistance to the domestic

companies to improve the quality standards of the bottles.

In 2004, Coca-Cola recorded an increase of 22% in the sales volume of the soft drinks, of which carbonated soft drinks accounted for 15%.

The launch of the products Nestea Ice Rush and Minute maid Orange juice in 2004 had helped Coca-Cola's non-carbonated segment to

increase its unit case volume by 51%. Extensive advertisements and promotions of the products and introduction of the 200-ml coke had

helped Coca-Cola to record double-digit gains in 2004. However, Coca-Cola had to face considerable competition in the Chinese market.

Coca-Cola had faced competition from the domestic players as well as from the other multinational companies, especially from PepsiCo

(Pepsi). Coca-Cola and Pepsi were the two main beverage companies in China. They together occupied a major share in the soft drinks

market in China. In terms of market share, according to the analysts, Coca-Cola was the number one soft drinks company in China, but in

few regions Pepsi had given tough competition to Coca-Cola over the last few years. Coca-Cola’s strategy had been to provide the

consumers with a good taste and low price cola. Pepsi also produced the soft drinks catering to the consumers' taste. Like Coca-Cola, Pepsi also invested huge amounts of money on advertising and promotions. As a part of its marketing strategy, Pepsi targeted the youth in China

and had been successful in increasing the sales. According to the industry observers, Coca-Cola's failure to target the teenagers had led to make Pepsi popular among the youth in China. However, to tackle this problem Coca-Cola immediately changed its marketing team in

2004 and strengthened its marketing efforts. Apart from Pepsi, Coca-Cola also faced competition from the domestic players, especially the

Zhejiang based Hangzhou Wahaha Group (Wahaha). Through its marketing techniques Wahaha had been able to increase its market

share in the beverages market. It played the patriotic card and appealed to the consumers to purchase its products so as to promote

the national brand. However, Coca-Cola remained the leading soft drinks producer in China and in 2004 China became the fifth largest

market for the company.

The Future

Paul Etchells, the president and CEO of Coca-Cola China, had announced in 2004 that Coca-Cola would invest heavily in China to

expand its business in the following years so as to offset the decreasing sales in the US and Europe, which are expected to remain

stagnant in the future. The company expects a growth of 20% in 2005, compared to 16% growth in 2004. In an interview, Paul Etchells said

that he wanted to increase the geographic coverage of the company’s bottling plants by establishing six more bottle companies in China by 2008 besides establishing more than 34 manufacturing facilities, 600

sales centres and having over 1.1 million customers in the near future in China. Coca-Cola expects that the total soft drinks output would reach 2.26 million tons in 2005, growing at a rate of 10% annually. Driven by the expected increase in the sales in view of the Summer

Olympics to be held in 2008, Paul Etchells predicted that China would become the third largest market by 2008, surpassing that of Brazil and

Japan. Coca-Cola bye making use of its vast experience intends to expand further and provide the local customers with a wide range of new quality products. Experts are also optimistic that China would be

a major growth driver for Coca-Cola in the future.

According to a study conducted by Morgan Stanley, China will contribute 25% of the global soft drinks growth and 16% of the Coca-

Cola's growth by 2010. The growth of the soft drinks market will come from the non-carbonated drinks, such as mineral water, juice, and

ready-to-drink tea, and not from the carbonated drinks. It is estimated that by 2008, 90% of the market growth of the soft drinks would come from the non-carbonated soft drink. The decline in the market share of the carbonated soft drinks is a cause for concem for Coca-Cola as 80% of its total sales comes from the carbonated soft

drinks. Coca-Cola, in the non-carbonated segment would also face competition from the local producers.

The untapped rural market would be the primary area for Coca-Cola to improve its growth rate. Cola-Cola is working on to capture the

rural market in China through its more than 600 sales stores. It intends to introduce all its brands, including Coca-Cola, Nestea and Minute Maid to the rural markets. But according to the analysts, it

would not be easy for Coca-Cola to tap the potential in the rural markets, as it has to face competition from the leading beverage

companies such as the Wahaha Group and Master Kong, which has large sales network across the country. According to an independent

analyst, Coca-Cola may not be able to beat its competitors in the rural markets, because of the wide sales network that its competitors have

which Coca-Cola lacks.