THE STUDY OF MARKETING STRATEGY OF COCA COLA IN CHINA

Soft drinks development in China is linked to the concurrent development of the sugar industry. The sugar industry has experienced rapid progress since the economic reforms. China has become a major sugar-producing country. In its 40 years of existence, the sugar industry has developed into a comprehensive sugar producing industrial complex covering the growing of crops for sugar source, sugar production as well as to industry utilities such as manufacturing of sugar processing equipment, scientific research and development, sales and marketing. Within the years since the reform, China was able to establish 497 sugar factories. ( 1997)

On the aggregate, these sugar factories are able to process an average of 650,000 tons of sugar per day or 8,500,000 tons per year. Breaking down sugar production activities depending on sugar source, shows that care sugar production accounts for majority of sugar produced. The 411 cane sugar manufacturing companies represent a processing capacity of 560 tons per day or 7,000,000 tons per year while the 86 beet sugar production plants are able to process 90,000 tons per day or 1,500,000 per year. The entire comprehensive sugar producing industrial complex employs and total of 450,000 employees including farmers and engineers. Currently, China has established 25 scientific institutions focusing on sugar-making techniques and sugar-bearing crops research. There are also a number of universities offering courses and vocational studies

specializing on sugar production. There are also a number of beet seed companies and sugar processing machinery producers in China. ( 1997)

With the growth in sugar production, sugar-consuming industries also started to develop such as confectionary, bakery products, soft drinks and snacks manufacturing industries. However, prior to 1991 sugar supply and sales were subject to a strict and planned management. The main industries with the biggest sugar consumption were confectionary, bakery and soft drink producing firms. During the decades of restricted sales, industrial sugar use was limited to around 50 percent of total sugar production. The growth of firms within these three industries continued due to the large sugar sales quota allotment. By 1991, sugar sales quota was relaxed resulting to an increase in the industrial consumption of sugar. Sugar consumption of industries increased to 66 percent by 1995 relative to a consumption of 55 percent in 1991. The concentration of these sugar-consuming industries is in the developing provinces near the coast such as Guangdong and Shanghai, where Coca Cola established its first bottling plant. ( 2001)

Concurrent with the development of the sugar industry is the development of the soft drinks industry, a largely sugar-consuming sector. During the 1970s, soft drinks production was only at the level of 200,000 tons per year with 20,000 ton sugar consumption. In the next decade, output shows a gradual increase due to the growing popularity of soft drinks as a beverage. The gradual increase in production was in part

affected by the continued control of sugar sales for industrial use. By the mid-1990s with the relaxation of the strict sugar allotment for industrial use, total production of soft drinks reached an impressive increase to 6.5 million tons using 1,050,000 tons of sugar. Major soft drink producing geographic area is Guangdong, solely attributed with 30 percent or 2 million tons of soft drink production. The remaining percentage is attributed to production activities in 17 other provinces. In the succeeding years, soft drink production is expected to further increase with greater sugar consumption. ( 2003)

The rapid increase in soft drink producing firms resulted to the growth of Chinas soft drink industry and soft drink consumption in China. To date there are more than eight hundred soft drinks manufacturers in China. This means that the industry is highly competitive. The competitiveness of the industry is largely attributed to the relaxed level of regulation by the government. However, the level or intensity of competition differs relative to the various sectors. Except carbonated drinks, other soft drink sectors such as RTD tea to juices and bottled water are sectors open to new entrants seeking to gain a share in the growing market. ( 2003)

In China, the soft drinks industry is comprised of four sectors, which are 1) carbonated drinks, 2) bottled water, 3) RTD tea drinks, and 4) juice and juice drinks. Products under these sectors are produced by both domestic and international soft drink firms. In China, there are seventeen major players in the soft drinks industry. For the

carbonated drinks sector, the major players in the Chinese market are The Coca-Cola Co., Pepsi Co., Wahaha and Jianlibao. In the bottled water sector, major players include The Coca-Cola Co., Nestle, Tingyi, Wahaha, Robust and Nongfu Spring. In the RTD tea drinks sector, there are more major players such as The Coca-Cola Co., Nestle, Kirin, Asahi, Suntory, Tingyi, Uni-President and Wahaha. The biggest number of major players is concentrated in the juice and juice drinks sectors including The Coca-Cola Co., Pepsi Co., Great Lakes, Kirin, Asahi, Suntory, Tingyi, Uni-President, Wahaha, Nongfu Spring, Jianlibao, Yeshu, Lolo, Huiyuan and Huabang. ( 2001) Table 1: Foreign Domestic Major Players in China

The seventeen major players in the soft drink industry either carry the company name as its brand name or market products through different brand names. There are a number of well-known soft drink brands in the market. The Coca-Cola Co. carries the brands Coca-Cola, Sprite, Fanta, Qoo, Sensation, Tianyudi and SMART; Pepsi Co. controls the brands Pepsi, 7-UP, Mirinda and Mountain Dew; Nestle sells its products under the brands Nestle, Drins and Nestea; Tingyi sells under the brands Master Kong, Daily C and Fresh Daily C; Uni-President markets its products under the brands President and Xianchengduo; Nongfu Spring sells through the brands Nongfu Spring, Nongfu, Nongfu Orchard; Jianlibao holds the brands Jianlibao, The Fifth Season, Pal; Huiyuan markets the brands Huiyuan and Zhen; other brands like Great Lakes, Kirin, Asahi, Suntory, Wahaha, Robust, Yeshu, Lolo and Huabang carry the company name as their product marketing brand. These brands are known to different segments of the market depending upon targeted consumers. ( 2001)

Due to the proliferation of different types and brands of soft drink products in the Chinese market, soft drinks have actually become a major part of the daily purchases of Chinese consumers. Consumption has increased to an extent that in 2005 per capita consumption has reached 20 litres. This represents a Compound Annual Growth Rate of more than 15 percent. The growth in consumption has affected production by an addition of almost 27 billion litres. Consumption is greater in urban than in rural areas. Among soft drink consumers, people under the age of 45 represent the highest levels of

consumption, particularly the young people. Younger age groups in the urban areas are bent towards trends making them the convenient target market for soft drink products.

However, recently the soft drink consumption has faced two issues affecting its consumers. First is the issue of the safety of soft drink products in China following medical reports that certain amounts of benzene ingested into the human body could cause cancer. The issue was arrested after The General Administration of Quality Supervision, Inspection and Quarantine conducted a national quality check of both domestically-produced and imported soft drinks. Test results showed that the benzene content of the soft drinks tested was below 10 parts per billion complying with the standard set by the Ministry of Health corresponding with the standard determined by the World Health Organization. ( 2006)

Second is the growing concern over healthy living of Chinese individuals and households particularly in urban areas. Soft drinks, especially carbonated drinks are associated with fast food so that with the advent of fast food in China carrying soft drink brands, concerns over the increasing number of overweight or obese children has also affected China. The growing concern for public health increased the pressure for the companies to develop products with the same taste but without the same amount of sugar as the original products. The global trend of the increasing risk of children to become obese influenced the introduction of diet or light sodas and fruit flavoured pop. The sales

of diet or light soft drinks continue to increase. Both Coca-Cola and Pepsi came out with diet or light version of their products. These companies previously focused on carbonated drinks have also diversified their products to bottled water and juice and juice drinks. ( 2006)

At present, soft drink has gone from a product with minimal consumer value prior to the 1990s to an everyday consumer product after the reforms in 1991 to become an enduring beverage commodity in the Chinese market after surviving the benzene issues and addressing the growing health-oriented perspective of consumers in urban areas. This means that soft drinks are expected to remain a significant consumer product in the future.

Chapter 6 SWOT Analysis of Coca-Cola

Coca-Cola has established the company as a major player in the soft drink industry in China and its brands and products in the Chinese market by developing and maintaining a competitive advantage over its competitors. As an individual business firm, the company has also maintained and even enhanced its viability as a multinational corporation conquering different markets in different regions and countries.

6.1 Strengths

As a thriving individual business firm, Coca-Cola holds the position as a major player in the soft drink industry by enhancing its strengths. First strength of Coca-Cola is its establishment of a strong brand name (

2004). The brand name and logo used by

Coca-Cola in marketing in products has been associated with historical and social relevance. In the United States, Coca-Cola has been in existence for more than a century so that the product has become part of the food and beverage culture of Americans. In different parts of the world, Coca-Cola may have just been introduced for several decades but in markets where the product enjoys a large customer base, the brand and product has been integrated into the local culture. This means that the market recognizes the brand, logo and tasted the product. Coca-Cola has also been sentimentalized through shirts, caps, and memorabilia and widely viewed through billboards, advertisements and posters. Even in China, the Coca-Cola brand and logo has enjoyed recognition and cultural relevance over the past decades.

Second strength of Coca-Cola is the development of a good reputation with its customers ( 1999; 2004). The company has faced several complaints on its operations in different markets around the world ranging from human rights and labour issues in

Colombia and China to environmental issues in its bottling plants in the Philippines and in China and even to product quality issues regarding its bottled water under the Dasani brand after the company admitted that it uses tap water for its bottled water products. However, despite these issues the brand proved to be of greater value to offset the negative feedback which may develop from the public response to these issues. The company has also built links with the community by proving itself as a business firm concerned with community issues by dealing decisively with these problems. Apart from this, Coca-Cola has also maintained its international brand-related message of advocacy for tradition and consistency making Coca-Cola a company, brand and product valued through its quality and dependability.

Third strength of Coca-Cola is its enjoyment of cost advantage (1995) brought about by its more than a century of experience in the industry. Its wide experience in operating as a multinational company has also helped the firm determine best practices in market entry and marketing in the international market. In China, the company has reaped the cost advantage of engaging in joint ventures with local companies for its bottling operations and beverage concentrate production instead of establishing a subsidiary company in the country. By entering into joint ventures, the company saves on the establishment of the building infrastructure, expenses for legal obligations required for establishing a subsidiary in China, expenses on human resources, and other necessary expenses in setting up a branch in the local market. In entering the Chinese market, most of the investments made by Coca-Cola were directed towards the technological

advancement of the facilities and equipment covered by the joint venture as well as the integration of quality standards in its operations. With regard to marketing, the company has also saved on the advertising and promotional expenses involved in achieving market acceptability of the company, its products and the company brand and logo since it takes advantage of the market links of its partners in the joint venture. 6.2 Weaknesses

Coca-Cola is part of a highly competitive industry causing the firm to experience several weaknesses in its operations. First weakness is the companys lack of exclusive or advantageous access to resources ( 2001). As mentioned earlier, soft drink production involves large amounts of sugar. For some decades prior to the 1991 reforms, Coca-Cola had limited access to sugar from the domestic market due to the controlled industrial use of the raw ingredient. Control means that the company had to compete with other sugarutilising firms to gain their share of the ingredient. With the removal of control over the industrial purchase and use of sugar, production increased. However, this environment still involves strong competition since all the firms belonging to the various sugarutilising industries have heightened their production levels necessitating the acquisition of larger volumes of sugar and other raw ingredients. This means that Coca-Cola has to gear up for a fiercer competition with the relaxation of the regulation on the industrial use of raw materials than during the period of regulated acquisition and utilisation.

The lack of exclusive access to high quality raw materials ( 2001) constituting Coca-Colas weakness is further supported by the uniformity or similarity of the ingredients used in the production of competing soft drink products. In the case of carbonated beverages, although the taste of Coca-Cola and Pepsi products are different, the ingredients used are the same but differing only in the manner of mixing the ingredients. Even juices and bottled water involve the same raw materials. This implies that all the competing business firms in the soft drink industry are competing with each other for access to the same ingredient suppliers. Although Coca-Cola has engaged in joint ventures with bottling and beverage concentrate producing firms, these firms have to compete for raw materials. Coca-Cola experiences the disadvantage of not having exclusive access to high quality raw materials.

Second weakness is the lack of advantageous access to channels of distribution ( 2001). Although Coca-Cola is widely distributed, so does competing products. Channels of distribution for soft drink products include supermarkets and grocery stores, fast food and other restaurants, vending machines, and event sponsorships. In the case of supermarkets and grocery, Coca-Cola products are displayed in shelves beside its competitors. This means that Coca-Cola does not have an advantage in supermarkets and groceries as channels of distribution and these retail outlets would not want to jeopardize their business relationship with competing companies by providing Coca-Cola with an advantageous position through product display, placement and signage. Fast food and other restaurants are channels of distribution where there may be exclusive distribution

arrangements. Coca-Cola has entered into an exclusive beverage distributions agreement with McDonalds and other restaurants but Pepsi also exclusive beverage distribution agreements with KFC, Pizza Hut and Taco Bell. This does not really provide Coca-Cola with an advantageous distributions scheme.

6.3 Opportunities

Despite Coca-Colas enjoyment of increasing sales in the Chinese market, there are still areas of opportunity open to the company. First is expansion of distribution to rural areas. So far, Coca-Cola has successfully captured the urban market but there are still potential markets in rural areas. This opportunity is created by the increasing transfer of manufacturing firms to the rural areas due to the trend of shifting from agricultural production to manufacturing. This in turn has brought about by the entry of China into the world market influencing the re-establishment of the economic activities that the country would prioritize in order to achieve competitive position in the world market. The establishment of manufacturing firms in the rural areas would mean income opportunities for rural residents drawing the entry of various businesses such as fast food and beverage firms.

Coca-Cola could take advantage of this opportunity by expanding its distribution channels to rural areas by aligning with fast food companies or wholesale and retail distribution channels. Coca-Cola can successfully capture the rural market by linking the company, product and brand with the community practices. The company could start by sponsoring community affairs or engaging in community welfare services. The company could also form retail partnerships with local restaurants and stores to provide better visibility and greater access to Coca-Cola products of targeted rural market.

Apart from expansion to the rural market, Coca-Cola also is faced with the opportunity of furthering its product diversification schemes in order to gain a wider customer base. At present, Coca-Cola has already entered the four major sectors of the soft drink industry, which are: 1) carbonated drinks; 2) RTD tea drinks; 3) bottled water; and 4) juice and juice products. All these products and product brands are presently available in China. However, apart from carbonated drinks the company has only a number of products in the different soft drink sectors. Due to the growing health consciousness of Chinese customers, Coca-Cola may want to expand its product line in the other three soft drink sectors. An innovative opportunity for the company may even be to engage in food products to complement its beverages. This opportunity is supported by the strong brand equity of the company which can adequately support this venture.

Another area of opportunity is in the bottling system and packaging of its products. One venture open to Coca-Cola is the expansion of its bottling and beverage concentrate production in the rural areas in order to support its expansion to the rural market as well as to gain possible cost savings from the lesser expenses incurred in operating in rural areas. Another venture for Coca-Cola is the evaluation of the packaging of its products in the other soft drink sectors. In relation to carbonated drinks, the colour red for coke has helped in product recognition. The company should consider evaluating the packaging of its other products, especially those with sales lower than company expectations, covering the colour scheme, brand name, and bottle shape and size. 6.4 Threats

Although Coca-Cola has gained strength as a soft drink manufacturing company in China, the increasing number of food and beverage products being introduced in the market result to a certain degree of threat to the company. One threat is the shift in the tastes of consumers. Individuals and families in urban areas are increasingly joining the health consciousness bandwagon based on their experience and as influenced by the international campaign against obesity. If this further strengthens, this means that the consumption of Coca-Cola products could be affected. Since Coca-Cola carbonated drink has sugar and caffeine contents, customers seeking to cut back on the consumption of these products could drop out of the companys customer base. Apart from this, the association of Coca-Cola carbonated products with fast food restaurants could mean that customers withdrawing from fast food consumption could also decide to lessen intake of

carbonated products. If the company does not strengthen the saleability of its products in the other soft drink sectors, it could face an even bigger threat from companies offering substitute products.

While it is true that Coca-Cola has introduced diet cola, marketed as having the same taste as the original cola but with lesser sugar content, this single product innovation may not be sufficient to retain the customer pool that changed its customer preference in the direction going away from Coca-Cola products.

Concurrent with the recognized change in consumer preferences, substitute products are being introduced in the market such as tea, juices, coffee, hot chocolate and coffee that all fit the consumer taste for healthy living. These products serve as threats to Coca-Cola products. The company has to enhance brand equity by strengthening its noncarbonated products in order to retain its customer base and gain additional customers seeking alternative products to carbonated drinks.

Chapter 7 Marketing Strategy of Coca-Cola

Coca Colas marketing strategy in China is linked to its place in the history of China distinguishing the company and its product in the Chinese market. The introduction of coca cola into the Chinese market was initiated after the conclusion of the First World War with the establishment of the companys first bottling plant through joint venture with Hong Kong based business firms. However, in terms of product marketing Coca Cola became the first US based company to distribute its products in the Chinese market immediately after Deng Xiaoping catalyzed the opening of China to foreign investors towards the end of 1970s. Since then, Coca Cola has maintained a significant and growing market share in China. At present, Coca Cola holds ownership interest in twenty four bottling plants through join ventures with Hong Kong based companies that the company also owns in part such as Kerry Group and Swire Beverages. Apart from joint ventures, Coca Cola also holds ownership interests in a completely foreign-owned firm, based in Shanghai, which produces beverage concentrates. It is also through this company that Coca Cola entered into a joint venture with another beverage concentrate producing firm located in Tianjin. Coca Cola has utilized joint venture in establishing twenty four bottling operations and several beverages concentrate producing operations in mainland China and Hong Kong. (2001)

It was Coca Colas long-term goals of localizing production and building of infrastructure through strategic partnerships with domestic companies as well as the Chinese government have pushed the company to achieve nationwide operations resulting to strong market presence. Due to these strategies, the company has control of

35 percent of the countrys carbonated beverage market. Coca Cola is also able to generate yearly sales amounting to $1.2 billion. The company earned an increasing profit from sales in China since 1990. Thus, Coca Cola has established a hold over the Chinese economy by contributing 15,000 employment opportunities and supporting the viability of various supply, distribution, wholesale and retail companies employing around 400,000 people. Apart from this, Coca Cola has also contributed to the technological enhancement of the beverage industry in terms of the updating of old facilities, introducing of quality testing, and providing training programs for managers involving $1.1 billion worth of investments into the Chinese market. ( 2001)

7.1 Market Segmentation and Product Positioning

Coca-Colas market is distinguished according to geographic location and age. Geographic location pertains to determination of whether the consumer comes from the rural or urban areas. Although, there are more potential consumers in the rural areas, most of Coca-Colas customer base is located in the urban areas. This manner of segmentation is supported by the economic diversity of China so that it is imperative that

it should not be considered as a single market. Chinas market diversity stems from the disparity in income between rural and urban areas since the per capita disposable income in urban areas is at a level of three times more than in rural areas. Apart from this, there is also a disparity in income among urban areas based on the level of economic development and the concurrent standard of living. The imbalance in economic development in different geographical regions of China affects the purchasing power of consumers in the different regions. In considering the top four largest cities in China, these accounted for only 4 percent of the population but responsible for 15 percent of retail sales while the remaining small cities and provinces represent 80 percent of the population accounting for a little more than 50 percent of retail sales. ( 2003)

Age as the other criteria for market segmentation of Coca-Cola consumers refers to the segmentation of the companys consumers according to consumers below 45 years old and 45 years old and over. The age distinction is based on the young generation during the time of the reintroduction of Coca-Cola in China in the 1970s. It was this generation, aged 45 and below, that comprised the initial customer base of Coca Cola and integrated consumption of company products into their food and beverage purchases. The generation before them do not have a similar attachment to Coca-Cola products.

Coca-cola has a strong brand equity ( 2005) attached to its products. The value of its brand comes from the reputation of the company of developing a good tasting soda

beverage that families and friends can share. Coke is all about tradition and stability. This was observed by the consistency of the companys approach, message and product development. The strengths of coke come from its ability to be consistent, a product that is always there. When coke introduced New Coke in 1985, a product with a sweeter taste, the public reaction to the change was devastating to the company. The change represented a deviation from the values of stability and consistency attached to the brand equity of the company. Coke relies mainly on its brand equity to sell its products. Although, coke also got involved in celebrity endorsements, it withdrew from this race and continued with its equity-based campaigns. Thus, Coca-Cola has positioned itself in the international market and in China as a traditional and consistent company that will always be there to provide its products to the market.

7.2 Marketing Mix

The marketing mix of Coca-Cola comprises the factors that the company controls in order to provide customer satisfaction in the targeted market segments. Through the strategic blending of these factors, Coca-Cola ensures that it is able to generate a positive response from its targeted market segments.

7.2.1 Product

Coca-Cola has been able to diversify its products to include carbonated drinks such as Coke Classics and other soda products such as Sprite, Fanta, Barqs Root Beer and Dr. Pepper as well as bottled water, RTD tea drinks and juice drinks under the brand names Qoo, Sensation, Tianyudi and SMART. The diversification to other soft drink sectors was influenced by the growing demand for healthy beverages in its targeted market.

The diversity of the quantity of demand and the cost of packaging has also affected the products of the company. The companies packaged their products in glass bottles of different sizes and shapes. However, after the development of plastic containers the packaging shifted to plastic containers especially for larger volumes of soda making it lighter when carried. At present, the demand for better convenience resulted to the packaging of sodas in cans. Coca-Cola products are sold in glass bottles, plastic containers and cans. 7.2.2 Price

The pricing strategy of Coca-Cola is based on the pricing dynamics relative to its competitors as well as the value of its products. In China, as is true in the international market, the fiercest competitor of Coca-Cola is Pepsi so that pricing is in a way influenced by the interplay of these competitors in a given market. However, Coca-Cola holds the advantage in pricing because it had a head start of several years giving the company a stable market share relative to Pepsi, which suffered several bankruptcies. The product price of Coca-Cola became the industry benchmark. The strategy of Pepsi then was to sell its products at half the price of Coca-Cola. The company was able to gain a share in the market. ( 2003). This pricing dynamics between Coca-Cola and Pepsi continue today. In supermarkets, the price of coke is still higher by 15 to 20 cents when compared to Pepsi.

The higher price given by Coca-Cola to its products is supported by the value of the brand equity of its different soft drink products. Coca-cola was able to sell at a higher price than its competitors because of its stable share market share due to its marketing communications message linked to brand equity of product stability. This makes CocaCola a true leader in the industry due to its ability to determine the industry pricing benchmark. Despite its slightly higher pricing, it is still able to maintain a market share by establishing a high value for its products through associations with consistency and dependability. 7.2.3 Promotion

Coca-Cola applies consistency and dependability even in its promotional activities. The company actually makes use of pattern advertising ( 2003). The company develops advertisements containing its determined marketing communications message. The manner of advertising adheres to various specific audiences. However, despite the consistency of its advertising framework for its different markets around the world, CocaCola also implements local adjustments. The adjustments cover the 1) translation of words and lyrics in the local dialect of particular markets and delivered in a manner appropriate and acceptable to the local culture, 2) basic adjustments to the advertising format such as the use of locally significant words, phrases, messages and the arrangement of these elements to deliver a cohesive promotional campaign aligned with the basic marketing communications message of the company; 3) audio-visual adjustments made to the advertising format such as colour scheme, character selection, video stream and other audio-visual aspects of the campaign.

Apart from pattern advertising, Coca-Cola also adheres to product differentiation ( 2003) by withdrawing from the explicit cola war with Pepsi. The cola war persisted until the late 1900s with taste-tests and celebrity endorsements of competing personalities. In succeeding years Coca-Cola reverted to its marketing strategy of appealing to the stability and consistency found in the value accorded to family and friendship differentiating the company, product and brand from its competitors.

7.2.4 Place

All the soda brands are marketed in the common channels of distribution except in the exclusive retail venues that companies bid to have. In supermarkets, these brands are sold side by side in the display shelf not giving a single brand any edge relative to the buyer. The rivalry over the channels of distribution was elevated to obtaining exclusive selling contracts in restaurants, places for vending machines, recreation areas, and popular events.

In China, the focus of Coca-Cola is in direct-to-retail distribution through the establishment of a minimum of one sales centre in cities with a total population of 1 million. The sales centres that also serve as warehouses are completely owned and operated by Kerry, Swire and other bottling firms with which the company has entered into joint venture agreements. For logistics support, delivery trucks numbering around twenty in large cities are on standby in the sales centres to cater to retail orders. Apart from its own distribution centres, Coca-Cola also partners with large wholesalers with valuable experience in the area of retailing and independent wholesalers able to reach out to local communities. Apart from this, Coca-Cola also builds strong partnerships with government units by sponsoring welfare programs.