The global economy hasn’t looked this bleak since the Great Depression. So things must be looking up for the Coca-Cola Co. For the first full year after the 1929 crash, Coke announced record profits and 3% sales growth. TIME called it “perhaps the most remarkable 1930 statement yet to appear.” Almost eight decades later, Coke posted sales growth of 3% for the first half of 2009.
When consumers can’t splash out on pricey items like new cars or even new clothes, they resort to cheaper pleasures, like a cold drink. That logic remains simple, even as Coke’s business has grown far more complex. In 1930, Coke had profits of $13 million and operated in more than two dozen countries; last year it was $5.8 billion, on sales of $31.9 billion, in more than 200 countries.
An early globalist, the company relies more than ever on worldwide sales. Europe and North America have been stagnant, especially for the company’s main brand, Coca-Cola, whose sales have been watered down by an onslaught of New Age drinks–and water. Coke has countered the trend by acquiring brands like Vitaminwater, but total case sales are off 2% in North America this year. Yet Coke has enjoyed 33% sales growth in India and 14% in China in the second quarter of 2009.
Coke has always measured its sales potential using the metric of bottles consumed per capita by country, and by that calibration, China and India remain untapped gushers. While the average American drinks 412 bottles of Coke products a year, it’s just 28 in China and seven in India. With their billion-plus populations, “they’re the future of the company,” says Mark Swartzberg, an analyst with Stifel Nicolaus. “There is still a lot of economic development to happen for the world, and China and India are clearly leading the way.”
China and India have been the future for much of the past. Coke landed in China in 1927, then retreated in 1949, when the People’s Republic could not find room for a populist beverage. The company returned in 1979, the year Deng Xiaoping launched his economic-reform drive. In 2001, China was Coke’s seventh biggest market; now it is No. 3, after the U.S. and Mexico.
Since then, growth on the mainland has been a steady progression of building bottlers and bottling plants along with retail distribution across a vast country. Coke now has distribution in almost every province.
Coke brands had a 52.5% share of China’s carbonated-drink market last year, according to research firm Euromonitor International, while Pepsi’s had 32.8%. Pepsi has held its ground against its bigger rival through sophisticated ad campaigns that have positioned it as the hipper drink in the eyes of many Chinese youths. Coke sponsors sports stars such as NBA center Yao Ming and Olympic diver Guo Jingjing, while Pepsi dominates in pop culture. It recently launched a Chinese music label and sponsors an American Idol–style music competition. In the matchup of flagship colas, Pepsi holds an edge with a 23% market share to Coke’s 22.2%. But neither is the leading fizzy drink in China. That honor belongs to lemon-lime Sprite, with a 23.4% share–and Sprite belongs to Coca-Cola.
Coke’s climb in India follows years of turbulence. It was the leading soft-drink brand from 1958 to 1977, when India’s business environment turned nationalist. After the government demanded that Coke reveal its formula and become a minority owner, the company bolted. Pepsi jumped into India in 1988 as a joint venture with a state-owned enterprise and Voltas, part of the Tata Group conglomerate. In Coke’s absence, the company gradually accumulated market share.
Coke returned in 1993, after India’s liberalization, buying a competitor’s bottling network and local soft-drink brands like Thums Up cola and Limca lemon drink. Over the next decade, Coke invested more than $1 billion, turning a profit in India for the first time in 2001.
The company hardly had time to celebrate. Two years later, Coke and Pepsi were targeted by a study from an NGO called the Center for Science and Environment (CSE)–a group focused on environmental-sustainability issues–which alleged that samples of the companies’ drinks tested high for pesticide residue. Both firms’ sales and reputations were hit hard. In a rare moment of solidarity, Pepsi and Coca-Cola held a joint press conference attacking the NGO. The claims were raised again in 2006, and annual sales of carbonated drinks shrank. An expert panel appointed by the Ministry of Health and Family Welfare later found problems with CSE’s testing.
The scandal forced the soft-drink giants to defend their products and outline social and environmental initiatives, like conserving water resources. Certainly, PepsiCo CEO Indra Nooyi, a native Indian, was not about to be pushed around by an NGO with an agenda. “If they came out of the tainted phase fast, it was because they were able to demonstrate a certain amount of sincerity and transparency,” says Santosh Desai, CEO of New Delhi–based marketing consultants Future Brands. “Sales were affected in the short term, [but] they did a good job of reassuring consumers.” Atul Singh, CEO of Coke India since 2005, who once said the company was “continuously challenged” because of its foreign roots, now welcomes that scrutiny. “There’s nothing like raising the bar for yourself when you are actually doing well,” he says.
After the safety scandal broke, Coke and Pepsi relied on small bottles and cut-rate prices to woo customers. The small packages boosted sales but hurt profitability for the companies and their bottlers. In 2005, Singh increased prices 40% to 60% and later introduced new packaging, like 1.25-liter bottles, which boosted in-home consumption. After a drop in sales in 2006, the Indian market began to grow again in 2007. “I can’t complain,” says S.B.P. Rammohan, owner of Sri Sarvaraya Sugars Ltd., a southern-India Coke bottler. “It’s no longer volume at all costs.”
In China, though, Coke has remained focused on sales volume, selling soda in small bottles for as little as 15¢. It just introduced a 355-ml bottle–a little more than half the size of its more traditional plastic bottle–for 35¢ in places like the southern coastal provinces, which have been hard hit by the slowdown in exports. Coke’s China president, Doug Jackson, says he’ll take what he can get in a tough economy. “If you have a little less kuai in your pocket,” he says, using the colloquial word for Chinese currency, “folks look for where do I save that one kuai. Instead of drinking nothing, I can handle that cheaper one. It’s just giving them an option.”
Another key–and another classic from the Coke playbook–has been keeping things cold. In India and China, tradition and a shortage of refrigeration mean that Coca-Cola is often drunk warm. In parts of China where cold drinks are traditionally considered unhealthy, it is even boiled and served with lemon or ginger. So coaxing consumers to drink cold Cokes–the company says 3°C is ideal–was part of the estimated $400 million that was spent on sponsoring last year’s Beijing Olympics and related advertising. As sales rebounded in India, bottlers added new technology, including superinsulated retail refrigerators that stay cool for 12 hours without power, since the grid is unreliable in rural areas. In India, Coke will invest $250 million by 2011 to expand its infrastructure.
The growth-focused model that Deng established in China 30 years ago has given Coke a reasonably stable platform to manage its expansion. “We know exactly where we are going,” Jackson explains. “The government says, ‘We’ll urbanize 20 million people this year, and we’ll do it sustainably through to 2020. We’ll nearly urbanize the population of the United States over the next 10 years.’ I can be very assured that I can place my bets for the company.” Of course, Jackson wasn’t betting that Beijing would block Coke’s proposed $2.4 billion acquisition of Chinese juicemaker Huiyuan, which would have been the largest sale to a foreign company in China’s commercial history. But the Ministry of Commerce blocked the deal on antitrust grounds, saying the merger would give Coke too much control of the country’s juice market.
Though the rejection was widely seen as both a defeat for Coke and a sign of growing protectionism in China, losing Huiyuan might not be all bad. “The regulator’s decision spared Coke from overpaying for Huiyuan,” says Swartzberg, the Stifel Nicolaus analyst. Now, says Jackson, Coke will build on its own. “Our 2020 goals are the same. We’ll build rather than buy and move forward.”
In the near future, Coke’s China investments will be massive. The company, which has spent $1.6 billion in China since 1979, plans to invest $2 billion in growth over the next three years. (Last year, Pepsi announced a $1 billion investment in China over the next four years.) Coke opened a $90 million research center this year in Shanghai, where it has developed new products like the grape, lemon and mixed-fruit flavors added to the Chinese version of Minute Maid, a pulpy fruit drink known as Guo Li Chen.
It’s also expanding in less-developed western regions like Xinjiang and eastern ones like Inner Mongolia, where the company is building its 39th Chinese bottling plant. Bold moves in a downturn? Maybe, but then again, there’s precedent. In the 1930s, Coke broke in to 20 new countries and territories, an expansion of 74% from the start of the decade. This decade may not quite be another Great Depression, but the strategy seems worth repeating.
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