Dear Participants,

Please read the case carefully and be prepared for discussion in

my next class.
Happy learning!
Prof. Santanu Ray

Coca Cola in China

Coca-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.