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PepsiCo’s new Chinese alliance will not change our business strategy: Coke CEO

By Ben Bouckley , 18-Apr-2012
Last updated on 18-Apr-2012 at 17:34 GMT

Coca-Cola CEO Muhtar Kent has come out fighting during China's Year of the Dragon. Picture Copyright: Mark Crossfield
Coca-Cola CEO Muhtar Kent has come out fighting during China's Year of the Dragon. Picture Copyright: Mark Crossfield

Coca-Cola Company CEO Muhtar Kent says the firm will not change its Chinese business strategy in response to PepsiCo’s new alliance with leading local drinks maker Tingyi-Asahi Beverages (TAB).

Yesterday Coke reported overall revenues of $11.137bn (€8.49bn) for the first quarter (Q1) ending March 30 2012 ($10.517bn: 2010); consolidated net income also rose to $2.067bn ($1.903bn: April 1 2011).

Multinational Coke saw 5% volume growth overall, while volumes grew in every territory: 2% in North America, Eurasia and Africa (9%), Latin America (5%), Pacific (8%) and Europe (1%), although Northwest Europe and Nordics volume fell 1% due to cold weather and tough competition.

Discussing Coke’s Chinese performance (+9% overall volume growth) with investors, Kent said that the firm’s ‘rightsizing’ efforts were driving double-digit growth in sparkling beverage sales in Q1, as Coke rolled-out its smaller 300ml PET bottle further, where this also captured value growth.

New competitive landscape

Sparkling beverage volume grew 4% in the quarter – Coca-Cola 5%; Sprite 4%; Fanta 15% – while still beverage volumes grew 16% for juices and juice drinks and packaged water grew double-digit driven by the rollout of a new lightweight bottle.

During a later analyst call, Bonnie Herzog from Wells Fargo Securities Research Division asked Kent about the new “competitive landscape” given Pepsi’s new strategic alliance with TAB (market capitalisation: $16.99bn, December 2011)  and how this would impact Coke’s business and strategy.

A strategic alliance with TAB finalised on March 29 saw the latter became PepsiCo’s franchise bottler in China, where it will collaborate with the US firm’s other bottlers to make, sell and distribute PepsiCo’s carbonate and Gatorade brands; the deal also involves a cobranding agreement using the Tropicana name.

PepsiCo claims that Pepsi is China’s top-selling Cola, and Herzog asked: “The alliance of the two strong competitors, wouldn’t this accelerate the pace [at which] you execute your game plan?

She added: “Could you also give us some colour on how you will allocate the $4bn investment among your different initiatives there [in China]? For instance, will you spend more on infrastructure than brand building in the next few years?”

Kent replied that Coke’s strategy remained unchanged in relation to industry events. “I want to reiterate that – the strategy is valid and still in place.”

Coke promotes affordability

Instead, Kent said Coke would evolve the strategy “to introduce a wider variety of packages to promote affordability…consumer experience with our brands, all with a focus to drive incremental increased transactions and profitable growth”.

Building brand equity with consumers was critical for Coke, Kent said, adding that around 50% of the $4bn investment would be used for infrastructure and the balance for brand building.

“That’s probably a good split, and if you looked at the past three years, that’s probably where it ended up,” he added.

As part of this investment spend, several weeks ago Coke inaugurated its 42nd bottling plant in China (Yingkou), with an expected annual capacity of 5bn+ servings of sparkling and still beverages.

Economists had lowered 2012 GDP growth rate forecasts for China, Kent said, but he added that Coke was still confident of double-digit growth in the People’s Republic over the long term.

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