Wahaha Case Study
QUESTION 1: What “international strategy” and “modes of entry” did COKE/PEPSI use to penetrate the Chinese Market? How effective were these choices? When Chinese markets opened up in 1980’s, Coke/Pepsi focussed on defining several strategies to Differentiate, Market and distribute their Cola products to Chinese consumers. International Differentiation Strategy: Both used two main aspects of this strategy “Branding” and “Cost Leadership“to force local producers to withdraw from the market or establish joint ventures with them.
They invested heavily in Brand recognition and used lots of advertising and sponsoring to support their cola brands. They replicated their global rivalry in China and initially were determined to seize market share from domestic cola producers, even at the cost of profitability. Later, Coke instituted the “Glocal” strategy which means “Think Local, act local but leverage global” but Pepsi instituted its positioning on young consumers. International Marketing Strategy: Coke spent heavily on Marketing to create a sound brand image and included Chinese cultural icons like windmills and dragons in its advertising.
Local films and sports stars were engaged, sponsored National Soccer teams and International Olympic Committee as well with funding up to $1. 1 Billion for Beijing Games. Pepsi also used a great deal of Marketing like using popular entertainers such as Faye Wang, Guo Fuchen as endorsers. Pepsi became the most popular soft drink brand for young consumers due to its focussed Marketing for this demographics. International Distribution Strategy: Both preferred to establish their own distribution networks while setting up Joint Ventures with bottlers and bottlers managing sales in their assigned territory.
They set stringent sales targets for bottlers, and in turn bottlers would set targets for distributors. While in most of the joint ventures, Coke did not have majority shareholding but Pepsi sought a majority share in the joint ventures. Global vs. International Strategy: Coke/Pepsi both maintained a global image and product offerings with a strong level of standardization in terms of Product quality, taste and branding but adapted their marketing strategies as per local market.
For Example, Coke has taken the “think local, act local” approach and localized their marketing activities to be in sync with Chinese consumers. They sponsored National Youth Soccer Team and also extended their sponsorship for Beijing Games to create a sense of belonging among the end consumers. International Collaborative Strategy: Both Coke/Pepsi did collaboration with local Chinese companies and set up joint Ventures which helped them understand cultural, political, competitive and economic differences among various provinces in China.
They were also successfully able to reach end consumers through local companies and create accurate customer profiles which helped them understand complexities in Chinese market. International Diversification Strategy: Product diversification strategy entails any modification of a current product that serves to expand its potential. Product diversification is different from product development such that it involves creating a new customer base, which expands the market potential of the original product. Coke/Pepsi used this strategy quite effectively to widen their customer base and target new segments.
They launched several local products specific to Chinese needs and culture and did marketing in localised manner. For Example: Coke launched Minute Maid Pulpy Super Milky drink and the Sprite Tea drink and both have been regional hits. Both drinks have been developed out by the research and development unit in China. These strategic choices made by Pepsi/Coke were quite effective in China as they had successfully implemented them in other countries and both companies gained combined market share of 71% in Chinese Cola market by 2000.
QUESTION 2: What resources, capabilities and competencies enabled Wahaha to compete successfully against Coke and Pepsi when most other local Chinese soft drink manufacturers had failed? Wahaha was able to successfully compete against Coke and Pepsi due to these factors: Wahaha’s Leadership : Wahaha Group was managed by Zong Qinghou who had a great vision and deep knowledge of markets and consumers in various regions. He had 20 years of sales experience in Chinese rural markets and Wahaha launched Future Cola in rural areas first which was untapped.
Wahaha’s Marketing : Marketing, research and development (R&D) and logistics management were centralized at headquarters, while the subsidiaries were engaged in production. Wahaha’s marketing was clearly home grown and pitched the product as a “Chinese Cola” creating a sense of patriotism among end consumers. Wahaha’s Advertising : Wahaha’s advertising targeted the mass market, and not just the wealthier urban consumers. The prices of its products were usually lower than those of comparable products from its multinational competitors.
They spent half of their advertising on CCTV which had huge rural coverage and credibility among consumers. Wahaha’s Distribution Network: Wahaha had developed unique relationships with distributors over last 10 years and was able to quickly deliver its products, reaching even remote corners of China within days. Wahaha established offices in more than 30 provinces with sales staff co-ordinating operations with the distributors.
Wahaha JV’s and Acquisitions: In order to obtain world class production technology and survive competition from both local and multinational companies, Wahaha chose to partner with French giant Groupe Danone and both established several production oriented Joint Ventures(JV’s) which resulted into revenues and profits growing more rapidly. Wahaha also made several acquisitions such as loss making companies which were larger but poorly managed and it supported geographic expansion and production in local provincial markets.
Wahaha’s R&D : Wahaha co-operated with R&D institutes and leading domestic flavor producers to ensure that its cola would be of a high quality and conducted thousands of taste tests worldwide. Its taste was designed to be close to international colas, but a little bit sweeter and stronger to cater to the Chinese consumers’ taste. Wahaha’s Production: Unlike Multinational companies, Wahaha had set up its own bottling plants as subsidiaries which allowed it great flexibility and also opened 68 production lines over China in various provinces.
Wahaha’s Competitive Edge: The biggest competitive advantage which Wahaha had over Coke/Pepsi is that being a local company it understands the Chinese culture diversity pretty well and also their unique relationship with distributors in even remote parts of China. They identified the opportunity in rural markets which was untapped by big multinationals and advertised heavily on local TV Channels, especially CCTV to create a solid Brand image in minds of Chinese consumers.
Above all, since Wahaha had successfully sold many products like bottled water, flavoured milks, children’s nutritious drinks before launching Future Cola so it had enough experience, network and capital to support its Marketing, advertising expenses unlike other local Chinese soft drink manufactures who failed. QUESTION 3: What were the relative “Strengths & Weaknesses” of the three competitors in the Chinese Cola War? | Strengths| Weakness|
Coke| International ExperienceStrong presence in urban areasExcellent sales force Huge capital to support price warsWide Range of productsIncreased local market knowledge| Weak Rural presenceCross territory sales by distributorsRivalry with Pepsi| Pepsi| International ExperiencePopular among young consumersProven Strategy in other marketsStrong hold on main cities| Weak Rural presenceJoint Venture conflictsRivalry with Coke| Wahaha| Understanding Chinese Culture DiversityRelationship with distributors in rural areas68 Production lines over ChinaJoint Venture with DanonePricing flexibility due to production by own subsidiariesChina’s own Cola| Week attendees in main citiesSales force|
Wahaha seems to be winning the Cola war if they build on the strategies and implement them successfully in urban areas as well where multinationals have strong presence and also continue protect their current market share in rural areas. Another reason why Wahaha seems to be winning over because it has branded its products as “China’s own Cola” Made in China products and which resulted into a sense of belonging and loyalty among the Chinese consumers and it can be successfully implemented in big cities like Beijing, Hong Kong as well. QUESTION 4: Describe the Competitive Strategies and Tactics each company (Wahaha/Coke/Pepsi) used to gain Market Share in China.
Did any company appear to be winning the cola war? Support your answer. We can describe the competitive Strategies and Tactics used by each company to gain market share using Porter’s Five Force model. Industry Rivalry: When Chinese markets opened up in 1980’s, Coke and Pepsi invested heavily in Brand recognition and used lots of advertising and sponsoring to support their cola brands. They replicated their global rivalry in China and initially were determined to seize market share from domestic cola producers, even at the cost of profitability. They either forced local producers to withdraw from the market or establish joint ventures with them.
Wahaha decided to target the rural market first because it knew and understood this market, and because it was not the focus of Coca Cola and PepsiCo. It focussed on the mass market of 1. 1 billion people in rural areas. Suppliers: Pepsi and Coke preferred to establish their own distribution networks while setting up Joint Ventures with bottlers and bottlers managing sales in their assigned territory. They set stringent sales targets for bottlers, and in turn bottlers would set targets for distributors. They used this model successfully in many countries. Their bottlers will map every place where their products can be sold and create one of them most accurate customer profiles.
Coke had 28 bottling plans with Joint ventures (Minority shareholding) but Pepsi had 16 bottling plans with Joint ventures (Majority shareholding). Bottlers had little Supplier Power since they were into joint ventures with Coke and Pepsi. Wahaha did not had any suppliers since it had set up its own bottling plants as subsidiaries which allowed it great flexibility with its sales team and resulting into more price flexibility. It had more than 40 WOS and majority holding companies in 23 provinces. Buyers: Chinese cola consumers were segmented into two broad areas urban and rural, while urban market was captured mostly by Coke and Pepsi and Wahaha had excellent rural reach due to its unique relationship with its distributors in remote parts of China.
Coke target market was large population centres, rolled out its products in cities based on population with up to 85% distribution penetration, Pepsi focused on key markets and cities, youth segment and had 65% distribution penetration but increasing faster than Coke. Wahaha focus initially was on smaller cities and rural areas which was yet untapped by big multinationals. Wahaha priced its products quite lower than Coke and Pepsi since rural consumers had more price sensitivity than urban buyers. It spent heavily on CCTV advertising which had huge rural coverage and credibility among consumers. They did the Marketing of their products as “Made in China” which made consumers more loyal towards it.
Pepsi/Coke made money from sale of concentrate while Wahaha made it from sale of final products due to its own subsidiaries doing production and so Wahaha had high pricing flexibility than Coke/Pepsi and was able to undercut multinationals. Potential Entrants: Coca Cola and PepsiCo’s success against the domestic Cola producers in the early stages and their strong brand name and sales network in big cities formed a high entry barrier for new competitors. However, later Wahaha successfully competed against them due to good knowledge of Chinese culture, sound distribution network and excellent Brand Management and timely launch of quality products in rural areas which was untapped by big companies. But, still sector has high entry barriers there by resulting into limited potential entrants.
Substitutes: There are several substitutes to Cola like Iced Tea, Sports and Energy drinks, Non – Carbonated drinks, juices, packaged water etc which pose a great challenge to Cola Industry and growing at a higher rates up to 10% in comparison to 2-4% growth rate in Cola drinks. This has resulted into Coke, Pepsi and Wahaha launching several other products in these categories Value Creation for Shareholders: While Coke/Pepsi endorsed local film stars, included cultural icons in its advertising and sponsored various Chinese Sports programs to localise their marketing as per Chinese consumers but Wahaha focussed on advertising using TV Ads especially on CCTV which had huge coverage and credibility and also sponsored Soccer World Cup and spring festivals. QUESTION 5: What future strategies should Wahaha consider to compete successfully against such large multinational enterprises?
There should be a Four Step Action Plan which Wahaha should consider to compete successfully against such large multinational enterprises: Step1: Wahaha need to maintain and protect its leading position in Rural market since both multinationals Pepsi/Coke are going to improve their distribution network, product offerings and further localise their Marketing to penetrate rural market. It can do it by increasing Marketing activities in rural areas and projecting its “Chinese Cola” brand image more comprehensively. Step2: It need to target main cities where multinationals have strong presence and fetch market share so that it can maintain its overall market share in case of downside in rural market share. Step3: It needs to explore new markets which are yet untapped fully by multinationals and are similar to Chinese ulture since it can brand its products successfully in similar manner as it did in China Step4: It needs to broaden its product line and enter into other substitutes category like Iced Tea, Bottled water etc which are posing a threat to Cola segment by registering higher growth rates. It can also start research on new product segments like Alcoholic drinks etc to see if market potential exists or not. Strategy| Actions| Protecting and maintaining leading position in Rural Market| * Increase Marketing activities in rural areas( Sponsor for local events and ads) * Offer Bounce system to maintain distributors loyalty . | Market Penetration| * Target Main cities first where Wahaha has good reputation like Beijing, Hong Kong etc. Promotional campaign every quarter for Brand Recall| Market Development| * Expand in neighbour countries with similar Chinese culture since it can use similar marketing and branding strategies in those countries which Wahaha has successfully implemented in China. * Use the Danone JV to enter in markets where Danone has good presence. | Product Development| * Prepare new production line for non – carbonated soft drinks since other substitutes like Iced Tea, Juices, Bottled waters are showing a higher growth rates than Cola segment. * Start Study to produce alcoholic drinks like Beer. | References: 1: International Trade & Academic Research Conference (ITARC ), 7 – 8th November, 2012, London. UK. on “COCA-COLA: International Business Strategy for Globalization” 2: Porter’s Five Force model of Competition: http://www. managementstudyguide. com/porters-model-of-competetion. tm 3: Cola Wars in China: Case Study Analysis Source: Strategy Analysis and Practice 2005 McGraw Hill Education Europe 4: Cola Wars in China : The Future is Here ; Case Study by Nancy Dai at Richard Ivy School of Business. 5: Cola Wars – UTS 21715 – Strategic Management Lecture 3 University of Technology Sydney 6: Alon, I. , Littrell, R. F. , & Chan, A. K. (n. d. ). Branding in China: Global product strategy Alternatives. http://www. aabri. com/OC09manuscripts/OC09002. pdf 7: Espitia E. , Manuel and Ramires A. , Marisa The impact of product diversification strategy on the corporate performance of large Spanish firms. Spanish Economic Review Volume 4 Number 2. P. 119-137 2002.
