In China, Coke Fights to Stay Ahead of Pepsi

NANCHANG, CHINA - In an industrial park near this city of 4.9 million, umbrellas in bright Coca-Cola (KO) red line the road. On a hazy June morning, Coke CEO Muhtar Kent is in Nanchang to open a $14 million bottling plant, Coke's 37th in China. Dragon dancers perform as firecrackers explode in front of the factory, while techno music punctuates a laser show inside. "We have unbending faith in China's future," Kent tells the throng.

Only one detail mars the festivities: Behind the red umbrellas is a blue fence. Pepsi blue. A new Pepsi bottling plant is under construction just down the street. Only two days after Kent visited Nanchang, PepsiCo (PEP) CEO Indra K. Nooyi was in the western city of Chongqing to inaugurate a facility there and announce plans for five more, part of a $1 billion push in the mainland. "This is going to be a massive market for us," promises Nooyi.

The cola wars in China are heating up. Neither company releases sales or profit figures for the country, but analysts say Coke has 52% of the carbonated soft drink market, vs. Pepsi's 32%. Coke also has the top soda brand, Sprite. But Pepsi-Cola is No. 2, while Coke's flagship, Coca-Cola, is third. And Pepsi's marketing has won praise, with the company sponsoring a battle of the bands competitions for user-generated ads, and a "Go China" campaign during last summer's Olympics. "Pepsi is more viral and gets to young people better," says Shaun Rein, managing director of China Market Research Group in Shanghai.

Coke had hoped to bolster its efforts with a foray into juices. In September it offered $2.4 billion for the mainland's top juice company, China Huiyuan. After sponsoring the Beijing Olympics, opening research and development centers in Beijing and Shanghai, and planning $2 billion in Chinese investment over three years, Coke seemed a shoo-in for the deal. But amid a nationalist outcry, officials in March vetoed the tie-up, saying it would violate antitrust law.

That leaves Kent, who became CEO just weeks before the Huiyuan deal was announced, to focus on Plan B. For starters, Coke is aggressively expanding production of its core brands. "We understand the rules of the game," Kent says between sips of a Coke Zero. "Our way forward is organic growth." The day after the Nanchang opening, he was in the far western city of Urumqi to open yet another plant.

Given Pepsi's big effort, Coke is hoping to hold its rival at bay with better marketing. To reach younger soda sippers, the company in June announced a partnership with Shanghai-based Shanda Interactive (SNDA), a Nasdaq-listed company that offers online games in China. The campaign will promote Coca-Cola Zero in Shanda Internet cafés; Coke's Web site will give Shanda gamers prizes; and Coke is sponsoring a contest aimed at drumming up story lines for Shanda games.

Kent also hopes to boost sales of noncarbonated beverages. Last year, Coke launched Yuan Ye ("original leaf"), a ready-to-drink tea. And it aims to get into juices with its Minute Maid brand. The company developed Minute Maid Pulpy Orange, a drink with about 10% juice and pulp, in China in 2004 and now offers it in six countries. All told, Coke has four Minute Maid flavors in China—orange, pink grapefruit, tropical fruit, and grape with aloe vera pulp. "The fact is," says Kent, "we have developed a strong juice brand that we can continue to build on."

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