This is fourth post Coca Cola Dissertation Brand Positioning China discuss about Manufacturing and marketing dissertation of coca cola, also see previous parts of this dissertation for enhance your knowledge.
The means of entering chinese market as showcased by coca cola
China, as we all know, is a country with the largest population in the world. That fills the country up with immense potential as far as the market is concerned. Over the years, 1979 onwards to be precise, China has shown an exceptional GDP of around 9% on average. From time immemorial, world’s top multinational companies have rated China as one of the most crucial markets. The carbonated cola manufacturers like Coca Cola and Pepsi Cola were not exceptions. To capture the Chinese market and to gain an upper hand over other market competitors, Coca Cola has devised separate methods for entering the market. These strategies may be broadly categorized into three different stages based on the time frame during which the cola giant captured the market. Those policies are discussed as below:
Initial Stage (1979-84):
In this timeline, Coca Cola used to sell the concentrates to its Chinese counterparts, who were bottlers with their business settled in China. The agents working for those bottlers did all the work, right from the production to the distribution. The agents in the market had other commitments and pre-decided targets and deadlines which they had to fulfill. This lack of commitment and dedicated effort towards the goal cost Coca Cola the contraction of its market share.
Second Stage (1985 – 92):
In this tenure, Coca Cola concentrated on buying the market shares of the bottling companies. These equity shares helped Coca Cola a lot in a sense that it cancelled out the chances of any negligence in the distribution campaigns and production. Being a major stakeholder, Coca Cola now owned a say in whatever the bottling companies did (Chan, Ireland, & Yu, 2006).
Current stage (1993 – present):
In these years, Coca Cola collaborated with two bottling giants, namely Kerry group and the Swire group. To make things happen, Coca Cola took control over the whole procurement process inside the companies (Prahalad, & Lieberthal, 2003). They also managed to channelize the labors in a more productive manner by appointing local supervisory teams. Coca Cola also got hold of the suppliers and their business was on track. This yielded higher revenues in contrast to lesser expenditures (Yu, 2005).
By the end of second phase in 1992, Coca Cola had their bottling plants at ten places in China that too were joint ventures. But by the time they changed strategies in 1993, 18 more bottling plants came under them in form of joint ventures as well. Coca Cola by the time owned major stakes at all these bottling plants. While 25 of them were controlled by the management of the Kerry group and the Swire Group, the remaining three at Shanghai, Tianjin and Hainan were directly controlled by Coca Cola. Currently the cola products are available to almost 80 percent of the population in China, and this became reality only after approximate US$1 billion was invested over the last 20 years. Direct distribution and wholesale of the products via a strong network of distributors and ably supported by equally efficient production units made this possible. By the dawn of the new millennium, market surveys suggested that Coca Cola brands, which included Sprite and Fanta, owned 40 percent of the market of carbonated soft drinks while their nearest competitor, Pepsi Cola was lagging far behind at around 15 percent (Lee & Carter, 1993).
Before 1979, all bottling plants in China were fully owned by China’s enterprises. Only after the Chinese Government opened their doors to the rest of the world through their ‘Open Door’ policy in 1979, Coca Cola approached them and carried on negotiations, an outcome of which saw them getting permission to reach out to the foreigners in China, but only in the cities of Shanghai, Beijing and Guangzhou (Hines, 2003). The government enlisted these cities as ‘economic cities’. In the next 5 years, three bottling plants were established in Xiamen, Guangzhou and Beijing by Coca Cola only to transfer their rights to Chinese Enterprises, since the Chinese Government policies in this sector restricted any foreign companies from owning bottling plants in the country.
The Chinese enterprise owned bottling plants, in return for transferring the rights, started buying the concentrate from Coca Cola, after which they mixed other ingredients like water, sugar, syrup and CO2 gas to make the soft drinks ready for the market. In this kind of an arrangement, Coca Cola played the role of a wholesale supplier while the bottling plants served both as the manufacturer and the distributor (Krishna, 2012). The only earning that Coca Cola enjoyed from this arrangement was the income from selling the concentrates, which was quite limited and below satisfactory level. Moreover, they did not even have any right over the decision making in those plants (Krishna, 2012). Neither they could drive the production volume, nor could they govern the marketing and distribution strategies and a long term plan of entering the Chinese market seemed a distant cry.
Though being the sole distributor of concentrate in the Chinese market, Coca Cola could not get hold of the permission from the Chinese Government for setting up a full fledged business of their own. They also lacked information about the market, how industry was running. Hence they were uncertain and could not devise a long term strategy. Adding to their woes was the fact that they themselves had no control over the plants they set up (Johri & Petison, 2011). The bottling plants had their own set of guidelines and targets which they had to abide by and meet. Therefore, Coca Cola had no control on the output that those plants were manufacturing. Neither the plants nor their state owned enterprises shared Coca Cola’s long term goal of capturing the Chinese market (Krishna, 2012). The responsibilities of the owner were not clearly marked and hence no accountability was in place. These enterprises could not handle the production and their marketing equally efficiently. The promotion policies overlook the production policies. The production took place based on the readiness and availability of the raw materials and other resources. The distributors were supposed to handle the output. On the other hand the distributors assessed the market demands and forwarded the same to the production units, who overlooking those, produced based on their resources. This caused a disparity between the actual market needs and the material produced (Yu, 2005). The residues from the production went wasted since no policy for their claim was in place.
Other challenges that posed a threat to the growth of Coca Cola were the absence of nationwide network through which wholesale transactions can be performed and the lack of modern transportation. Distributions were still done on tricycle vans, which were slow and inadequate to cover large ranges. This was the condition of the cities; the condition went worse in the outskirts. With this ineffective transportation system in place, the total cost of distribution increased since time was spent more (Krishna, 2012). To counter this, Coca Cola in their earlier stages in the Chinese market, concentrated their set up and sales in the coastal areas where the consumers possessed greater ability of consumption owing to their exposure to the liberalization going around the world (Krishna, 2005). The MNC also walked the path of long term investments and started controlling the distribution and production channels. Most of the inputs including the glass bottle and the aluminum cans were imported since the ones in China were not up to the mark. But soon the local companies began producing inputs of acceptable standard, thanks to the assistance from Coca Cola. This considerably curtled their expenses in a market where it was being difficult to survive. Along with that, Coca Cola also hired labors from local market and this further reduced their costs. Slowly moving, within mid nineties, almost 98 percent of the supplies were from the Chinese local market.
An integral part of the expansion strategy for Coca Cola in China has been staying away from too much involvement in the marketing and distribution of the products. Managing the market through franchises was a much cost effective way to cover the whole market. Through foreign partners acting as franchises, Coca Cola could indirectly control the business (Riadzany, 2010). Thus they teamed up with Malaysia’s Kerry Group and Hongkong’s Swire Group with a vision to expand in the market (Yu, 2005). The Chinese territories were divided between the two; Kerry Group got the southern and central China’s production and distribution rights whereas Swire Group concentrated on the northern and interior China. The partners brought along human resources and capital too. For bottling, the Coca Cola ran its plants as a joint venture between them and the local Chinese partners (Chan, Ireland & Yu, 2006).
Franchising is a procedure through which the franchiser hands over the legal right to run the business in a prescribed manner over a timeframe mentioned in the agreement. In this agreement the franchiser shares the technology with the franchise but the business is run solely by the franchise (O’Barr, 2008). The investment by the franchise makes him more liable towards the business. Though the franchise has his money invested and is running the business on its own, still the franchise is not the owner of the business since it has to run the business with the franchiser’s name and has to run it following some pre decided specific set of guidelines. The franchises bring forth the capital and the manpower which is a huge boost for the business and the franchiser (Krippendorff, 2004). Through this kind of an agreement the franchiser need not take the full load of running the business by providing working capital and the adequate manpower. This franchise arrangement between Coca Cola and the Kerry and the Swire Group laid the foundation of the third phase of Coca Cola’s market invasion in China (Pae, Saimee & Tai, 2002). Along with it, the joint ventures with local partners for operating in the bottling plants also paved way for more and more market penetration. This franchise arrangement along with the partnering up with local partners in form of joint ventures constituted a part of Coca Cola’s model strategy for international finance markets.
The mode of investment using the dual force of franchises and joint ventures bolsters the business of MNC’s like Coca Cola. This provides them with a business which is low in cost, has low risks as well but still has high yields and revenue. Coca Cola had the required technological expertise since they owned the formula to produce the beverage. They also had great marketing minds spearheading the campaigns (Pae, Saimee, & Tai, 2002). But initially the market in China was highly divided and fragile. The transport system was outdated and it made the situation worse. The Chinese government had a strong hold over the beverage sector and was too busy taking care of indigenous industries. Their local partners were not up to the mark (Liu,2002). Neither they shared the same dream nor did they have the willingness to deliver. And because Coca Cola was not allowed to enter the market on their own, they had no other option but to depend on the partners to deliver the goods. The local partners had no strategy as to how to take over the market in the next few years and Coca Cola was not allowed to participate in strategy formation and was forced to stay by the sideline and be a mere spectator to their own loss. When the government allowed Coca Cola to do business in Chinese markets, they were allowed a small stake and that too with the collaboration of local partners who could neither invests, and expand the business nor could help with any long term strategy planning (Yu, 2005). Moreover, since most of the local partner companies were fully or partly state owned every decision that was to be taken needed approval from a number of levels in the ministry. This delayed the whole process and made the situation even more badly (Krishna, 2012). Thus Coca Cola could never expand their empire considerably in China before the nineties. The unpredictable market condition, uncharacteristically changing work environment and the fondness that the Chinese government had for their home made beverage industries was beyond the understanding of the MNC. They realized that to stick around, they need to devise something new and effective (Lieberthal & Prahalad, 2008). Thus they concentrated on the long term investments in the sector. They negotiated with the Ministry of Light Industry and gathered some permission to dig deeper in the production and distribution. To capture the market which was mostly share driven, Coca Cola knew they had to acquire major stakes in the concerns which was only possible if they could control the management. But this involved a considerable risk, which Coca Cola did not want to take at that juncture and hence lent the hand towards two foreign bottlers, the hand of franchiser (Prahalad, 2008). They engaged into a franchiser-franchise relationship and this reduced the risk for Coca Cola who did not have to single handedly take the risks.
After the economic reforms of 1979, China has been looked upon as one of the most successful countries in terms of incoming wealth via Foreign Direct Investment (FDI). Ministry of Foreign Trade and Economic Cooperation marks the figure at US$385 billion till October 2001 (Noel, 2009). Foreign Investments most likely came in the form of Equity Joint Ventures (EJVs) and till the above mentioned date, there were about 213780 of them in China. The above figure makes about 56 percent of the total FDI firms in the country (Riadzany, 2010). If EJV along with contractual and joint R&D ventures, joint ventures that are owned by Chinese concerns in collaboration with foreign firms are combined, that would reach up to 69 percent of all firms that have foreign direct investment. 119589 Wholesale Operator Service (WOS) make up to 31 percent of all firms with FDIs (Yu, 2005).
The decision of Coca Cola to invest in Chinese markets shows us the way of how to invest in an environment that is not perfect and hostile at times and even then come out with the best of results. In course of doing that they had to use different models to adapt to the market (Vanmesday, 2000).
5.7 competition in china: future cola
Future cola is a typical aerated soft drink which has copied Coca-Cola, in terms of product specification, packaging, labeling and distribution. Future Cola represents themselves as “coke by the Chinese”, and Coca Cola considers future Cola to be the only competition in Chinese soft drink market (Fombrun & Ran, 2006). Future Cola was marketed with a view to wash out the foreign companies, and it played with Chinese soft hearts, by invoicing Future Cola to be a patriotic brand, which is invariably associated with joy and happiness. Future cola has made use of the wide distribution network which was already existent in the country, 2000 retailers, whole sellers and distributors across the nation, and paved its way into the farthest corner. Future cola targeted rural segment, as for both Coca Cola and Pepsi, the rural market was underdeveloped (Chan, Ireland & Yu, 2006). The company promotes their brand heavily by emphasizing the patriotism factor, and as it is a local brand owned by Chinese it easily gets the prime time slot at a low expense. Though coca Cola is still the largest brand in soft drink market in China, but the future Cola has already defeated Pepsi in terms of volume of expansion, profit, market share. Future Cola follows a low cost strategy or a cost leadership strategies, by lowering the price of the soft drinks by 20% than coke and Pepsi (Yu, 2005). The major target audiences of future cola are low income groups, peasants in villages and semi rural areas, therefore with this low cost leadership model future Cola is gaining tremendous popularity in implementing mass market tactics.
Future Cola though tremendously popular in rural area, it has not been proved equally desirable in Urban areas. Due to coke’s presence in urban areas for decades, the consumers are well aware about coca-cola’s tastes (Krishna, 2005) Also future Cola was promoted as a rural product which by the urban people was rejected, due to the low socio-economic association. Initially coca-cola did not respond to Future Cola’s mass marketing strategy as the urban sector gave coke huge profit. Eventually it was important for coke to tap the rural market, as 80% of Chinese population lives in rural or semi rural areas. Coke started with opening a number of retailer shops, gave free refrigerator to the retail shop owners, lowered the prices of product significantly. It started selling bottles at $0.12, saying, “one-yuan Coca Cola”. The advertisement became more Chinese centric, usage of Chinese language, culture, which can tug at the heartstring of rural Chinese minds (Chan, Ireland, & Yu, 2006).
As the analysis continues it can be seen that Coca Cola has followed cost leadership strategy to enter into rural markets both in China, and in India. Where in Urban India the Coke has focused on market penetration, being a successful and established brand in china, Coke only maintained it’s brand loyalty and market dominance (Yu, 2005).
Coca Cola has intelligently use it’s massive world appeal in marketing and positioning the brand, by enjoying the benefits of standardization. The product’s image, colour logo, is so recognized across the world that it establishes a tremendous brand recall strategy. This gives coca Cola the opportunity to position themselves as an admired and loved brand. Coca cola has never followed a single marketing or branding strategy, but always used a concoction of standardization and adaptation practices (Kotler, & Keller, 2012). Coke has made use of its brand strength, well coordinated network, smooth operational flow, and customized it based on coutry to country. The choice of media, types of advertisements, campaign, is also different in cross borders. Coke always have believed in Think global Act Local concept and it has became the company’s success mantra in becoming a truly global brand.