The Coca-cola company in China: international business plan & entry strategy

In the context that China, a vast, populous Communist country is aggressively promoting its country as an investment destination, many multinationals like the Coco-Cola Company are raring to invest in it. Now, Coco-Cola has to decide on the approach to investing in China. (In fact, Coca Cola entered China in 1990 itself; but this fact is ignored for fulfilling academic objectives) A decision to invest by any company heavily hinges on the background of the company – primarily its objectives, resources, and competitive pressures. To understand its background, a brief overview of the background of the company is presented in the following

The Coco-Cola Company

The Coco-Cola Company is a US-headquartered, $28- billion multinational beverages company. Along with Coca-Cola, the world’s most valuable brand, the company markets four of the world’s top five non-alcoholic sparkling brands, including Diet Coke, Fanta and Sprite. The worldwide sales of this company account for 10% of the total worldwide sales of non-alcoholic drinks. The important competitors for its business are Pepsico, Nestle, Cadbury Schwepps plc, Groupe Danone, and Kraft Foods.

According to ‘www.thecoca-colacompany.com’, around the world, in almost 90 percent of more than 200 countries, Coco-Cola beverages are produced by local people with local resources. According to the annual report of the company for the fiscal year 2006 (submitted in Form 10- K to United States Securities and Exchange Commission), the net operating revenues and the net income of the Coco-cola Company for the year 2006 are $ 24,088 millions and $ 5,080 millions respectively. Read also IFE matrix of Coca-Cola

 It offers a broad and balanced portfolio of beverages to meet consumers’ tastes and needs. It offers more than 2,600 sparkling and still beverage products, including juices and juice drinks, sports drinks, energy drinks, teas, coffees and water. It manufactures through a network of bottlers and sells through a network of retailers of varied levels- starting from roadside booths to the biggest hotels and superstores.

The company, as stated in their mandatory report submitted to United States Securities and Exchange Commission for 2006, “manufactures beverage concentrates and syrups, which it sells to bottling and canning operations firms, fountain wholesalers and some fountain retailers, as well as some finished beverages, which they sell primarily to distributors. Their company owns or licenses more than 400 brands, including diet and light beverages, waters, juice and juice drinks, teas, coffees, and energy and sports drinks. In addition, they have ownership interests in numerous bottling and canning operations, although most of these operations are independently owned and managed.”

Worldwide, The Coca-Cola Company is No. 1 in sales of juice and juice drinks; No.1 in sales of ready-to-drink coffees and teas; No. 2 in sales of sports drinks; and No. 3 in sales of water.

Marketing and Promotion

The company, besides conducting its own advertising and marketing operations, provides marketing and promotional services or funds to its bottlers. Its spending on advertisement in 2006 is $2.6 billions. In fact, The Company spent, in all, about $ 3.8 billions in 2006 to participate in the promotional and marketing efforts of its bottlers, resellers and other customers.

PESTEL ANALYSIS FOR CHINA

To decide on entry into a new country or a new market, they have to be screened for their business success potential by certain criteria, the important of which are market potential, economic growth, political risk, available natural resources, available labour, and trade barriers ( Onkvist & Shaw, 1997, pp.323). Multinationals use certain strategic tools such as PESTEL to analyse the reasonableness or otherwise of an expansion opportunity in a new country.

PESTEL stands for Political, Economic, Social, Technical, Environmental and Legal environments surrounding a business firm. It is a strategic, analytical tool to understand external forces. A brief overview of each of them is given in the following.

Political Environment

China is still under authoritarian rule but the China Communist Party, according to economist.com, created a wide variety of political institutions to bridge the gap between the state and society; as a result of privatization, a variety of trade associations have been created, which are now exerting influence on the polity. China has joined WTO in 2001 and is aggressively liberalizing. It is encouraging private sector to expand. In the international arena, it is less confrontational and more constructive.

Economic Environment

China is the fastest growing economy. The real GDP growth rate achieved for 2006 was 11.1%. The China government is serious about sustaining this growth. The estimated GDP (purchasing power parity) for 2006 is $7594. But there is a growing economic inequality.

The outlook for the future of China is highly encouraging for the consumer goods manufacturers. According to the findings of a survey reported by confectionarynews.com, the country is set to rise to the level of US; “a majority of the 1,200 small- and mid-sized Asian businesses consulted by UPS – 57 per cent of them (respondents)- expect the country to be on a par with the US in terms of consumer spending within a decade.”

Social Environment

The population of China is 1314.5 billion persons in 2006. Besides size, another population characteristic that causes concern is the ageing population.

McEwen et al (2006, pp.68-76), while referring to the Gallup poll which was done on Chinese consumers from 1994 to 2004, observe that the Chinese consumers want to work hard to get rich, and cherish self-satisfaction and self-expression as personal goals. They further report that “their aspirations are growing to outstrip their ability to satisfy them”. The Chinese consumers desire in deed to have a great many goods and services. All this suggests that they are positively predisposed to the consumption of beverages unlike when they were in the Maoist cocoon.

Legal Environment

The judiciary is in the political control. The freedom of press is little. Though intellectual property laws have been made, their implementation requires a lot of improvement.

Interestingly, the China legislature has passed the private ownership bill giving the investors greater rights over their operations. This step is expected to drive the economic growth.

Technological Environment

China had, for long, an economy with focus on production of low- cost goods and maximum utilization of the plenty of labour available. The technology in use till now was low-end with little emphasis on quality and branding. Now there is a shift towards higher quality, branding and high technology. The Coco-Cola Company, given this technological scenario, has to invest or bring in high-end technology.

Natural Environment

China, owing to its overemphasis on economic development, has the dubious distinction of being one of the largest contributors to global pollution.

Water resources for industry, agriculture and public consumption are an important concern staring in the face of China. Economy and Lieberthal ( 2007a, pp.88-96) quoted China Daily as saying that two-thirds of China’s 650-plus cities do not have enough water and 100 are facing severe shortage. In the light of this information, the bottling plants of Coke which require a lot of water have to be located at carefully chosen points only.

COMPETITIVE (MICRO) ANALYSIS FOR COCO-COLA IN CHINA (PORTER’S FIVE FORCES MODEL)

To understand the kind and degree of competition, the main sources and characteristics of competition have to identified and analysed. This analysis will help the company to be vigilant about the competitive forces and also in formulating a suitable strategy. Prof. Michael Porter (Qtd. Thompson and Strickland, 2003, p 79-93) propounded that five competitive forces are faced by any industry or a firm. I will examine each of them one after the other as follows.

Competing sellers: Companies producing similar products may become more  aggressive and put pressure on the company. Wahaha in association with Danone is now in control of 24% of non-alcoholic beverages market in China (Miller, 2007, www.chinabusinessreview.com). Wahaha, Pepsico, Uni-President Enterprise Corp and Tingyi are the important competitors who may put pressure on Coco-Cola in terms of price, quality, distribution and promotions.
New Competitors: Nestle, Cadbury Schwepps plc, and Kraft Foods may enter China to compete with Coco-Cola with new price points or new product varieties.
Industries producing substitute products: Industries producing goods serving the similar purpose may encroach into non-alcoholic carbonated beverages market. For example, mineral water or beer producing companies may foray into the market for the beverages akin to Coke. The company has to be alert to such moves.
Suppliers becoming producers: The bottling companies with which Coco-Cola is going to have a production arrangement may terminate the contract and start producing for other competitors or may have developed an innovative beverage recipe either similar or superior to what Coco-Cola is producing and start producing them.
Customers becoming producers: The major customers such as retailer chains, restaurant groups and so on may engage themselves in the production of a similar or superior beverage.

SWOT ANALYSIS

SWOT, an acronym for Strengths, Weaknesses, Opportunities and Threats, is an analysis to identify what it can rest assured and what it has to fear. Strengths and Weaknesses are internal to the company or industry and Opportunities and Threats are external to it.

Strengths

The Coco-Cola Company’s competitive strengths, according to their annual report, include powerful brands with a high level of consumer acceptance; a worldwide network of bottlers and distributors of Company products; sophisticated marketing capabilities; and a talented group of dedicated employees.

In regards to China, it is a highly populated country with 1315.50 million persons who are all potential customers (Economist.com, China Fact Sheet).

Weaknesses

The income levels in China are low and, besides that, there is a wide inequality in the distribution of income. There may be shortage of water. The current technologies in China are low-end and hence Coco-Cola has to invest more on technologies. It may be difficult to locate willing bottlers. The local unbranded drinks may be a hurdle for penetration.

Ruimin, Zhang, (2007, pp.141-146) opines that “China is short of talented human resources to manage an enterprise.” In view of this, Coca Cola, which has to operate through local bottlers who may be short of managerial talent, has to build this important resource for them.

Opportunities

China is inviting multinationals to set up their factories in their country. The country has eased the tax rates by offering different concessions. The people are eager to improve their living standards in a ‘globalised’ economy by utilising the employment opportunities.

Threats

The company’s competitive threats include strong competition in all geographic regions and, a concentrated retail sector with powerful buyers able to freely choose among products, products of competitive beverage suppliers and individual retailers’ own store-brand beverages.

In regards to Chinese public opinion on multinationals, Economy & Lieberthal, ( 2007b, p 89-96) observe that “multinationals are viewed with suspicion by nongovernmental organizations and the Chinese media when it comes to environmental issues.” While expanding into China, the Company has to consider this phenomenon; Coco-Cola has to do the necessary to safeguard the environment.

INTERNATIONAL MARKETING OBJECTIVES OF THE COCO-COLA COMPANY

The main objective of the company, as stated in its mandatory report, is to leverage its assets- its brands, financial strengths, strong distribution system, and the strong commitment of the human resources- to become more competitive and increase the shareholder value.

EN TRY & DISTRIBUTION STRATEGY

In order to pursue its goals of being competitive and increasing shareholder value, it wants to spread its tentacles to China. In terms of H.Igor Ansoff’s Product/Market Expansion grid which lists four expansion strategies ( See the diagram below) ( Qtd in Kotler& Keller, 2006, pp.45-48), the Coco-Cola Company seems to have chosen market development.

Diagram

Market penetration
Product development
Market development
Diversification
Igor Ansoff’s Product/Market Expansion Grid

The different modes of entry into China, while pursuing market development, include exporting, licensing, franchising, joint venture, contract manufacturing, overseas sales branches, turnkey projects, and foreign direct investment. (Woods, Margaret, 2001, pp.195-204)

Exporting involves sending of manufactured goods to China. Coca-Cola beverages require wide distribution, heavy promotion and safeguarding of its trade secrets. Besides, beverages are bulk products and competitively priced. The logistics are very critical. Hence, exporting does work because of the aforesaid conditions. Selling through overseas sales branches also will not work for the same reasons.

Licensing and franchising routes too, which involve parting with the intellectual property rights and monitoring of operations, are considered and dropped. But some important features of these routes such as involvement of local experts and third party investment will serve the purpose of Coco-Cola Company. Contract manufacturing, another option to entry is also considered. Its advantage is that investments need not be committed in fixed assets and hence the contract-awarding company is free to walk out of the arrangement. But, a marketing-critical and distribution-intensive, branded product company can not choose this route, since high commitment in terms of investment and growth, strategically critical, is shied away in this route. Turnkey project route, which involves a complete transfer of technology, is also dropped since trade secrets are risked and moreover, marketing aspects are ignored. Joint venture involves combining of resources of more than one company and working together to achieve the objectives of all those involved in it.

A route which is a mix of foreign direct investment, licensing, joint venture and contract manufacturing is desirable in the context of Coca-Cola’s expansion project. It is explained in the following.

Coco-Cola Company’s Operations through Bottling Companies

The company enters into agreement with its bottlers who, according to it, buy from Coco-Cola Company or its authorized suppliers syrups or concentrates for making the designated Trade Mark Beverages.

The Coco-Cola Company’s relationship with and Investment in the bottling companies falls under three categories.

Bottlers in which the company has no ownership interest
Bottlers in which the Company has invested and has a non-controlling ownership interest
Bottlers in which the Company has invested and has a controlling ownership interest.

The company for its expansion in China has to choose one of the above models depending on the bottlers coming forward to work with it as manufacturers and distributors. The company can rope in bottlers without any investment, which is the first mentioned option. But, it depends on the willingness of a bottler to work for Coco-Cola without the latter’s stake. Otherwise, the other options- second and third mentioned above- will be taken up.

INTERNATIONAL MARKETING MIX

Marketing decisions centre around seven areas, which are referred to as ‘7 Ps’ of Marketing. The 7 Ps are Product, Place, Price, Promotion, People, Process and Physical Evidence. The Coco-Cola Company’s approach to each of them is explained in the following.

Product

Product refers to the tangible benefits, features, variety and packaging. Product should be tailored to the needs and expectations of the customers.

The company primarily sells its concentrates and syrups to the authorized bottling and canning enterprises to be bottled and canned as beverages.  ‘Company Trademark Beverages’ (Annual Report 2006) are those beverages bearing their trademarks and certain other beverage products licensed to the Coco-Cola Company for which they provide marketing support and from the sale of which the company derives income.

Place

Place refers to the way the products are made available to the consumers. Beverages are usually intensively distributed through a network of small shops, restaurants, malls, cinema hall, and bars and so on.

Price

Price refers to the charge collected by the company for the product given. The price should cover all manufacturing and selling expenditure besides profit to the company. Usually at the entry stage, penetration price should be charged. Penetration price which means premium-less price will induce trial of the product by the consumers and thus market penetration is facilitated.

Promotion

Promotion refers to the activities of informing, persuading and reminding the present and potential customers. It primarily involves advertising, sales and consumer promotions, public relations and personal selling. Coco-Cola being a branded product has to be advertised through varied means. Besides, the bottlers and retailers have to be assisted by the company in their sales efforts.

People

‘People’ refers to the human resources who run the show of the company. The company should take care of its human resources whose way of presentation of the product and their effort to sell will make a difference for the consumers and consequently the company. The human resources should be correctly selected and trained. In the countries like China where population is large but the quality of workers is poor, special efforts have to be made to orient and develop the people towards good delivery of products and services.

Process

Process refers to the methods and approaches employed in manufacturing, distributing and delivering the goods. The manufacturing methods, the distribution system and the decision-making systems should be responsive and quick to demands of the market and goals of the company. Any delay or laxity will drive away the customers and same may be taken advantage of by the competitors. Designing efficient processes for manufacturing and delivery, use of the state-of-the-art technology, use of information technology, implementations of six-sigma and so on are the today’s marks of good processes.

Physical Evidence

Physical evidence refers to the quality of equipment and the tidiness of the manufacturing and delivery places. Beverages are something suggestive of health. They should be clean and neat. A good drink being sold in squalid surroundings will surely repel any moderately educated consumer. Hence, it is necessary to see that there are not only good bottles, enough cases, sufficient refrigerators and so on, but they are also tidy and clean.

BUDGET (Marketing Spend as a Percentage of Expected Turnover)

The Coco-Cola Company’s global expenditure on marketing constitutes 16% of the total revenues in 2006. (The company’s revenues for 2006 are $ 24.088 billions and its spend on marketing is $ 3.8 billions.) It can be targeted that the company’s revenues share from China for 2008 are $ 3.5 billion (arbitrary) which is roughly 15% of its total global revenues. The marketing spend on $ 3.5 billion at 16% works out to $ 560 millions. (This is just a ballpark figure. The base of marketing spend percentage may be incorrect. The sales estimate for China is arbitrarily made due to lack of reliable data and hence it should not be assumed to be close to reality)

CONTROLS (Balanced Scorecard)

Balance Score Card is a strategic management tool and a system of measuring the results of the company. Since financial figures don’t tell the truth behind the rosy picture of high sales but grumpy and learning-stagnant workforce, this approach takes care of such intangible areas. This new measuring system developed by Kaplan and Norton of Harvard Business School is founded on the understanding that what is not seen through accounting figures also holds the key to the performance of the organisation and that has to be measured. The four important areas that should be measured are: 1) Financials 2) Customer 3) Internal business processes 4) Learning and growth.

Financial Perspective: Financial figures are no less important. But the main question which must drive the company’s effort is ‘To succeed financially, how should we appear to the shareholders? Shareholders’ interests are paramount. Timely and accurate funding data, risk assessment, and cost-benefit data have to be provided along with the conventional metrics like profit and loss and so on.

Customer Perspective: The main question that must drive a company’s efforts is ‘To achieve our vision, how should we appear to our customers such as distributors, bottlers and importantly the ultimate consumer?’ Some important sub-areas are the kinds of customers, methods of giving service, level of satisfaction and so on.

Business Processes Perspective: The main question that must be asked about this area is ‘To satisfy our shareholders and customers, what business processes must we excel at?’ Processes involved in the delivery of service or goods either speed up or hold back the performance. Design of processes which support achievement of mission or service delivery should be carefully done.

Learning and Growth Perspective: People, the cutting-edge resource of a company, have to learn and grow. The key question that helps the people at the helm search their souls on this area is ‘To achieve our vision, how will we sustain our ability to change and improve? The important sub-areas to be monitored are learning, growth, training and mentoring.

Balanced Scorecard helps the Coco-Cola Company to keep track of its strategic objectives such as increasing shareholder value and remaining competitive amidst tough competition.

CONCLUSION

The $ 28-billion Coco-Cola Company raring to invest in China with a view to increasing its shareholder value by geographic expansion can foray into China. China is encouraging multinational companies to set up their factories with a view to providing employment to its vast population starved of reasonable standards of living.

The Coco-Cola Company with many a brand in its stable, strong and committed management talent and wide product portfolio can take advantage of the huge China market. However, it has to compete with multinationals and the local companies too.

Since Chinese entrepreneurs are now ambitious and starved of business opportunities, the Coco-Cola Company can easily find partners for bottling and distribution. The company can have tie-up with the bottlers without equity or with equity but having no controlling interest or equity with controlling stake.

The products should be in line with the aspirations and financial ability levels of the Chinese consumers. The products, though it has many, should be launched gradually as understanding about the profile of the consumers is developed. The manufacturing plants have to be set up by the bottlers at the particular locations where there is no water shortage or where existing water users are not put to grief.

The initial pricing approach is that of market penetration with a reasonable price so as to induce trial. The revenue target for 2008 can be set at $ 3.5 billions from the China market. The marketing spend to be allocated works out to $ 560 millions which constitutes 16% of the targeted revenues.

Towards achieving strategic objectives and keep track of its performance, a system known as ‘balanced scorecard’ can be adopted.

References

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