International -- Cover Story
COKE POURS INTO ASIA (int'l edition)
It's promising huge growth in Indonesia, China, and India. But can it deliver?
Among the stacks of cookies, chips, and cigarettes crammed into the dingy kiosk at the northern Chinese beach resort of Beidaihe, a shiny new Coca-Cola refrigerator occupies a place of pride. Inside the cooler, Coke cans are stacked next to Tsingtao beer, Kesai mineral water, and Jianlibao soda. The store owner, a cheerful woman in her 30s, admits that by including the other drinks, she's breaking a promise she made to Coke. The Atlanta giant gave her the refrigerator in exchange for a pledge that she use it only for Coke products. No matter. Lots of other store owners do the same thing to Coke. "They'll never have a chance to find out," she says with a laugh.
It's in shops such as this that Coca-Cola Co.'s grand Asian ambitions face the reality test. Chairman and Chief Executive Roberto C. Goizueta argues that his company has virtually unlimited opportunities in big developing markets such as China, India, and Indonesia, which together boast 2.4 billion people, almost half the world's total. The promise of sales gains there has helped Coke's shares remain near an all-time high, after soaring a staggering 44% in 1995. While its soft-drink sales in the U.S. have grown at a paltry 4.2% annually over the past decade, Coke executives responsible for the Big Three Asian markets predict that each should double sales roughly every three years for the indefinite future.
Coke courts Wall Street by presenting itself as the best investment vehicle to take advantage of growth in the world's most dynamic region. "Coke tells investors, `Why bother [investing in] all these different [Asian] companies when you can have one-stop shopping with us?"' says Jennifer Solomon, beverage industry analyst at Salomon Brothers Inc. Many analysts are convinced that Coke can achieve its Asian dreams almost effortlessly. "The per capita consumption is so low and the population is so high, the opportunity is incredible," says Roy D. Burry, a beverage industry analyst at Oppenheimer & Co.
Yet as Coke charges into places such as Beidaihe, it is finding that continued rapid growth won't be as easy as advertised. Unlike in more developed countries, Coke often doesn't have the control it needs to make merchants follow the rules. The company also is bumping up against intense difficulties in expanding the distribution of its products because of primitive infrastructure. It faces extensive requirements on transfer of food-processing technology as a price for entry. Quirky regulations limit its ability to deliver in certain places at certain times. Picking business partners and hiring enough local employees are serious challenges. And as one of the premier symbols of American consumer culture, Coke faces the prospect of political backlash from nationalists.
Coke is convinced that the rewards outweigh the risks. The populations of these countries are young, incomes are exploding, and the drink market is undeveloped. Indonesia, with 200 million people, nearly all of them Muslims forbidden to consume alcohol, is "soft-drink paradise," says Goizueta. China and India are larger, and the thirst for better-tasting beverages is every bit as big. In China, sales have grown at a 49% compound annual rate for the past decade, but per capita consumption is still only five servings per year, compared with 343 in the U.S. Coke sees a one-time-only chance to establish dominance in these markets, where hundreds of millions of consumers are reaching for their first colas.
So Coke is pumping up its marketing and manufacturing muscle, teaming up with a handful of cash-rich, politically savvy partners who will put up much of the money to steamroll the competition. Coke and its partners will spend at least $2 billion by 2002 to build state-of-the-art bottling plants and distribution systems--even though many shopkeepers don't have enough electricity to run soft-drink coolers. Coke is splashing out training programs for everyone from senior local executives to route drivers. It's buying refrigerators and trucks. It's upgrading electrical wiring so that more stores can install coolers. And it's offering millions of samples of Coke a year to consumers who have never tasted the sugary stuff.
OLD HABITS. As it charges ahead, Coke has already outmaneuvered archrival PepsiCo Inc., whose international sales push has fallen behind as a result of internal corporate turmoil and troubled local bottlers. What Coke is really running up against is the need to change the drinking habits and lifestyles of millions of new customers while living up to the expectations it has set on Wall Street.
The biggest prize, and challenge, is China. To woo the country of more than 1.2 billion people, the company has made unprecedented compromises. In 1993, it entered a marriage of convenience with the Chinese government, gaining wide access to the market--but at a high cost. Coke pledged to keep its predatory instincts in check, promising to do everything from upgrading the local industry to providing cash income to farmers by starting a new line of fruit drinks. Beijing is counting on Coke to provide its expertise in key areas from hygiene to packaging to distribution. In return, the Chinese have allowed Coke and its partners to invest $300 million to build 10 new bottling plants, giving it a total of 23 by the end of 1997.
The first fruits of the company's investment are in sight. Coke says it has grabbed 23% of the soft-drink volume in China and figures on eventually topping 40%. A new study by McKinsey & Co. says Coca-Cola is one of a handful of consumer-goods companies that has a chance to hit $1 billion in sales in China by 2000, thanks to its large, systematic investment in the country.
The problem is, China is so large that Coke can't rely on its usual methods to ensure that all is well. In more developed markets, Coke bottlers distribute all of the product directly, giving the company complete control over its goods. But that's not feasible in China, where some 75% of Coke products go through independent wholesalers. That means it's nearly impossible for the company to police such things as coolers, product display, and pricing. All Coke can do in most cases is ship its product out and hope for the best.
FARM AID. Moreover, Coke doesn't always succeed in staying out of the way of nationalist crosscurrents. In 1995, a group of National People's Congress legislators called for Beijing to restrict the expansion of Coke and Pepsi to protect local manufacturers. This legislative motion spurred an announcement last May that further approvals of soft-drink plants for joint ventures would be put on hold.
Coke takes the threat of a backlash seriously. It recently subsidized a study by Cambridge University Professor Peter Nolan to defuse criticism that it wasn't helping China's economy. Nolan estimated that every job at a Coca-Cola plant leads to six additional jobs elsewhere. The company is spending heavily to build rural schools and libraries. And it has launched the line of fruit drinks even though the premium-priced Tian yu di--"Heaven and Earth"--is a flop, say Coke's sales representatives. They gripe that it's too sweet and too expensive for Chinese tastes. Politically, though, it's a winner, since it provides cash for local fruit growers.
The key to Coke's success has been finding regional partners with the capital, managerial depth, and local knowhow to get Coke into the marketplace. In 1988, Coke brought to China its Hong Kong bottler, the Swire Pacific group, one of the British colony's most powerful hongs, or conglomerates. In 1993, Coke stepped up the pace by bringing in billionaire Robert Kuok, an overseas Chinese from Malaysia. While a newcomer to the bottling business, Kuok could boast unparalleled contacts in China and throughout Southeast Asia. He has used his relations with local Chinese officials to cut through red tape and get bottling plants built in record time.
The alliance with Kuok went a step further last summer. Kuok, who controls the privately held Hong Kong-based Kerry group, put up $530 million to buy an 8.4% share of Australia-based Coca-Cola Amatil Ltd. It is one of Coke's "anchor bottlers," one of the handful of companies spread around the world that Coke relies on to help enter markets.
The marriage with Kuok followed a courtship spearheaded by Douglas N. Daft, the Atlanta-based head of Coke's Asian operations. While on business in Hong Kong, Daft wooed Kuok at the posh Island Shangri-la Hotel, which Kuok owns. The two have cemented the relationship playing golf and hunting for Asian art, a passion both men share. In July, Daft hosted Kuok and his family at the Olympics in Atlanta. Thanks to Kuok's investment, Amatil is in the midst of a $635 million spending program that includes everything from one of the world's most modern bottling factories to fleets of delivery bicycles.
"BEHIND THE CURVE." The goal is to revamp what had been an anemic Indonesian operation. "Indonesia is well behind the curve," admits Amatil Chief Executive Norb Cole. The Australian company recently took over most of Coke's Indonesian bottling plants after Coke jettisoned all but one of its 11 local bottlers, believing that they didn't have the capital or management expertise to carry out Coke's ambitious growth plans.
Finding the right partner has also proved troublesome in India. In 1993, Coke ended a rocky relationship with its original partner, a Singapore-based Indian businessman who later was convicted of unrelated fraud charges and died in jail. Coke then acquired India's top soft-drink company, Parle Exports, for an estimated $40 million. That gave it the local top soft-drink brands and access to Parle's 54 bottling plants. Thanks to that deal, Coke-owned brands have nearly two-thirds of the market, far eclipsing Pepsi.
But the Coke-Parle alliance was fated for trouble. In 1994, Coke accused Parle of breach of contract for making soft-drink concentrate without consulting Coke. Parle executives claim that they were making soft drinks only out of old, leftover stock. The issue became a full-blown war, with Ramesh Chauhan, Parle's chief executive, exchanging harsh words with Jaydev Raja, Coke chief of Indian operations at the time. Raja subsequently left India, and his leavetaking seems to have helped. Coke executives say they won't comment on "ancient history," pointing to the company's 65% share of the softdrink market as proof that the matter has been resolved.
CRICKET CONNECTION. Now Coke is trying to make up for lost time in India. Over the summer, it won permission to inject $700 million into its Indian operations. That would make it one of the country's largest foreign investors. As a first step, Coke plans to build 20 to 25 new bottling plants in India over the next several years, says Andrew P. Angle, who runs the company's southwest Asia unit. Just as it brought Swire and Kuok into China, Coke is likely to bring another anchor bottler into India, Singapore-based F&N Coca-Cola (Pte.), Ltd., as its partner.
To win Indian hearts and minds, Coke aggressively invests in cultivating a local image. It was the official soft drink of World Cup Cricket, a favorite local sport. Local television spots did away with actors and used Indian cricket fans to promote Coke products. "We'll determine what the local fashion is and then find a way to connect with it," says Vinita Bali, an Indian-born global brand manager of Coke in Atlanta.
Wherever it goes, Coke brings a missionary zeal to selling its sugary fizz and to weaning the locals from such traditional drinks as tea and mineral water, which have dominated the market in Asia's three big markets. Coke's teams around India spruce up shops, trying to spread the gospel that good retail presentations will increase sales. The company hosts massive gatherings of up to 15,000 retailers to showcase everything from the latest coolers and refrigerators, which Coke has for loan, to advertising displays. And its salespeople go house to house in their hunt for new customers. In New Delhi alone, workers handed out more than 100,000 bottles of Coke and Fanta last year.
In Coke's effort to conquer Asia's Big Three, politics presents a tricky obstacle. After all, Coke was once forced to withdraw from China by the 1949 communist takeover and from India in 1977 by New Delhi's demands for access to the company's secret formula. Today, as it makes its expansion plans in India, Coke is keeping its eye on the rumble of anti-multinational sentiment from the Bharatiya Janata Party (BJP), the Hindu nationalist opposition party whose members sometimes smash Coke bottles at rallies. The BJP enjoyed a brief moment in power earlier this year, but that government quickly fell, replaced by a center-left coalition that is far less antagonistic.
In China, Coke says the ban passed by Beijing earlier this year won't affect its current agreement to develop 10 plants. "They want to see the results, and then we will discuss further development," says Daft. Coke figures on winning approval to build another 10 bottling plants once construction on the current batch finishes.
Coke is less worried about political ups and downs than it is about hiring the tens of thousands of people it needs to be successful. "Our biggest challenge is finding people," says Goizueta. In China, Coke adds more than 100 new hires weekly. It is sending 60 executives to a short-term course in Shanghai, where students are drilled in the basics of finance, labor relations, and even assertiveness training. The training bill in China alone will top $2 million for the more than 1,800 people that Coke will put through the paces in various programs this year.
LONG RUN. Obstacles aside, most observers are betting that Coke's juggernaut will continue. In markets characterized by long distances, huge populations, and difficult politics, quick jabs alone won't be enough. The big capital commitments that Coke and its bottlers are making around the region is evidence that the company knows it's just starting a marathon run.
Even where Coke does not have all the control it wants, it's still doing well. At the Beidaihe kiosk along the Chinese seashore, the proprietor isn't obeying Coke's strict instructions about exclusive use of its coolers. But she's still selling far more Coke cans than she did in years past. If Coke's past record is any indication, she'll be selling a lot more a few years from now. Given the amount of money and marketing muscle that Coke is putting into countries such as China, the U.S. company just might be able to live up to its Wall Street hype.By Mark L. Clifford in Hong Kong and Nicole Harris in Atlanta, with Dexter Roberts in Beidaihe and Manjeet Kripalani in BombayReturn to top