China Consumer

Coke is it (again)

Coca-Cola opens its largest production site in central China

coke-w

Enlisting Buffett’s image in China

In 2004 Coca-Cola endured a PR disaster in the UK amid a £7 million ($8.9 million) marketing push for its Dasani water brand. The bottled water was simply refiltered tap water from Kent but marked-up more than 3,000 times in price, said The Independent.

Worse, it was then discovered that during the modest filtering process, the American soft drink giant was accidentally introducing a cancer-causing chemical, reported the BBC. Eventually, the entire supply of Dasani in the UK was pulled off the shelves.

But Coca-Cola has many other popular brands of water and non-carbonated drinks, and to this end the company has just opened its largest bottling plant in central China – where four of the nine production lines will manufacture water products.

“China is our third largest market by volume and we remain upbeat about the potential for growth throughout the market,” observed Muhtar Kent, the long-serving CEO of Coca-Cola, upon the opening of the new factory.

“Over the past few years, China’s consumer market has undergone significant structural change and we have continued to invest and adapt to ensure we are best serving our consumers and customers in a fast-changing market,” he added.

The plant cost Rmb320 million ($41 million) to build and is expected to have a production capacity of one billion litres by 2020, when all nine of its lines are operational.

The strong emphasis on non-carbonated drinks at this new plant, which is the first Coca-Cola plant in Hunan to produce non-fizzy products, is suggestive of the changing tastes of Chinese consumers.

But the new production facility is also the latest step in Coke’s “structural” adaptation within China.

The plant is a joint venture between Coca-Cola and COFCO, called COFCO Coca-Cola Huazhong Beverages (huazhong means “central China”).

Earlier in April, Coke concluded a restructuring plan for its bottling business in China. Under the changes, Coke sold its minority stakes in a joint venture with COFCO to Hong Kong’s British-run conglomerate Swire.

The sale has seen Coca-Cola forgoing control in a number of bottling facilities in southern and coastal China, which raised concerns when the deal was first announced that the multinational was scaling back in China (see WiC348).

Coke’s latest move in Hunan would suggest this interpretation is not so straightforward. China Daily reports too that Coke has restructured its franchise arrangements to give its franchisees greater control over everyday business, while it focuses on its “core brand strength”.

According to Kent, “[Coke’s] core business is creating the right strategies, best brands and leading a system of bottling partners around the world.”

Coke has had cause to reassess its China strategy. Last year it downgraded its global sales growth forecast from 4-5% to 3% citing poor performance in its “emerging and developing markets, including China and Argentina”. Even for Swire, which agreed to pay out nearly $860 million in the restructuring process, Coke sales look unlikely to be a “growth driver”, First Shanghai Securities chief strategist Linus Yip says.

In addition to the investment in a new plant, which contributes towards the $4 billion total investment Coke pledged to make between 2015 and 2017 in China, the company has also adopted some novel approaches.

In March it introduced its Cherry Coke variety and in order to promote the flavour, Coke put the likeness of Warren Buffett on the packaging (the Berkshire Hathaway chairman is idolised in China – see WiC297). Cans and bottles of the product feature the Sage of Omaha, alongside the message that Cherry Coke is “the choice that Warren Buffett loves”. Buffett, who is well-known as a long time investor in Coca-Cola, will hope his image will boost sales of the sugary beverage in the Chinese market.


© ChinTell Ltd. All rights reserved.

Brought to you by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.