Coca-Cola Co. (KO), the world’s largest beverage company, plans to invest more than $4 billion in China from 2015 to 2017 as it builds factories and adds new products to meet demand and counter rising competition.
The Atlanta-based company is also open to acquisitions in China and may consider deals with complementary businesses, such as makers of juices or plant-protein drinks like almond milk, David Brooks, president of Coca-Cola’s Greater China and Korea business unit, said in an Nov. 6 interview in Shanghai.
“You will see an absolute increase in investment on an annual basis and on a three-year basis,” Brooks said, commenting on the company’s future plan for China. Coca-Cola is investing $4 billion in the country for 2012-2014.
The U.S. soda maker is ramping up its China investment as the company and its bottlers seek to double global revenues to $200 billion in the 10 years to 2020. While it is the country’s largest soft-drink maker, it faces competition from companies including PepsiCo Inc. (PEP) and the local Hangzhou Wahaha Group as it seeks to expand in the most populous nation.
PepsiCo, the world’s second-largest soft-drink maker, is stepping up its push into China. The company has also opened new factories and sought to expand distribution through a tie-up with Tingyi Cayman Islands Holding Corp. (322)
Competition in China’s beverage industry is intense and the sector is one with “low growth and weak profitability,” analyst Jean Chan from Sanford C. Bernstein & Co. wrote in a Sept. 25 report. Sales are typically driven by promotions, she said.
Coca-Cola said in July that its second-quarter sales volume in China was little changed after rising 7 percent a year ago. Sales in the third quarter have shown improvements, and this will continue over the next several quarters, Brooks said.
The Asian nation has pared economic growth projections to an average of 7 percent this decade, compared with 10.5 percent in the previous 10 years.
Coca-Cola plans to open as many as two facilities each year in China over the next decade, Brooks said. In the nearer term, it will invest about $40 million in a new pulp blending factory in Shanghai, and likely open a plant in the southwestern Guizhou province in the next two years, Brooks said.
“The beverage market in China is still very fragmented,” the executive said. “No company has predominant market share, and there is a huge amount of untapped opportunity left to grow.”
The company also plans to expand its offerings of Chinese-style beverages, with traditional Chinese items such as wolf berries and herbal ingredients all being considered in future drinks, Brooks said, declining to elaborate further. It will also roll out more low-calorie and no-calorie drinks as it caters to an aging population, he said.
“People like new flavors,” Chan, the analyst, said. “Going forward, product innovations will help you expand your categories and also drive growth.”
Chinese consumers are buying more juices and ready-to-drink teas and fewer carbonated drinks as they seek a healthier lifestyle, Chan said.
China regulators blocked the Coca-Cola’s planned $2.3 billion buyout of China Huiyuan Juice Group Ltd. in 2009.
Emerging markets are increasingly important to the U.S. company, which got about 79 percent of its operating income outside North America last year, data compiled by Bloomberg show. In the U.S., beverage makers have come under scrutiny in recent years as public officials in several states have looked to curb high obesity rates by slowing consumption of sugary soft drinks with proposed restrictions and excise taxes.
Coca-Cola, which broke ground on the first of its 43 factories on the mainland in 1980, already sells snow-pear fruit drinks and sour-plum sparkling beverages there. On its website, there are suggested recipes including sweet and spicy hoisin spare ribs with Coca-Cola, encouraging consumers to incorporate the carbonated beverage into local cooking.
The maker of drinks ranging from green teas and milk-based Minute Maid Milky Pulpy had a 15.7 percent share in China’s 67.5 billion litre soft-drink market in 2012, according to industry researcher Euromonitor International.
Taiwan’s Ting Hsin International Group, which partly owns Tingyi, ranked second with 12.8 percent, while PepsiCo had 4.5 percent. Wahaha Group, controlled by the nation’s second richest man, Zong Qinghou, had a 7.3 percent share.
Low per-capita consumption and rising incomes will boost beverage demand in China, helping the Asian nation become Coca-Cola’s largest market by sales volume by 2020, from third-largest today, Brooks said.
China’s third plenum, a meeting of Communist Party leaders to discuss economic-policy reforms, begins this week in Beijing. The outcome of the conclave will be closely watched by foreign investors as it would give an indication of the country’s roadmap for the next 10 years, said Brooks, who has lived and worked in Greater China since 1975.
“The overall trend of opening and continuing to become more transparent is very clear,” he said. “Market forces playing a stronger role in the economy going forward is good for all players whether you are a foreign company or state-owned enterprise.”
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