Monday, March 21, 2016

Why Coke is following PepsiCo?


Coca-Cola India, the country’s largest beverage maker, is to hive off its bottling and manufacturing business in the next few years.

This is part of a strategy to get away from the production lines in major markets, to enable more focus on branding, marketing, improving of margins and profitability.

It seems to be following archival PepsiCo, which earlier sold its bottling operations for north and east India to its largest bottler, the Ravi Jaypuria-led RJ Corp.

Coca-Cola currently manufactures its products in 24 plants in India, through its bottling subsidiary, Hindustan Coca-Cola Beverages (HCCB). Globally, The Coca-Cola Company operates through two major operations – bottling and manufacturing through Bottling Investment Group, and marketing and promotion through various Coca-Cola entities.

However, the bottling and production business has been putting pressure on the company’s margins and profitability for some years. The cola major’s profit fell to $7.35 billion in 2015 from $10.8 bn in 2012. To address the issue, Muhtar Kent, global chairman and chief executive, declared a plan to sell off the bottling business across the world. It will hand over its bottling plants in the US by 2017 and is in talks with buyers in China.

“Manufacturing is a low margin and high investment business, for which one has to maintain huge assets but the returns are low,” a company official said. In this country, Coca-Cola had Rs 509 crore in net profit and


Why Coke is following PepsiCo

A Coca-Cola India spokesperson replied to an email query saying, “The Coca-Cola Company announced accelerated bottling refranchising efforts in North America and China, similar to other initiatives underway in Europe and Africa”. It is not selling plants currently in India, he said. “By working with strong local franchises we are able to strengthen local investments.”

Rs 1,818 crore in net sales during 2014-15, with net profit margin (NPM) at 28 per cent. HCCB posted Rs 241 crore net profit and Rs 7,859 crore of operating revenue, with NPM at three per cent in the same period. The bottling business generates far lower profit compared to revenue than the company’s core business of selling concentrates for aerated beverages and branding.

“We are moving towards a franchise bottling model globally. In India, too, we might get out of the production business eventually,” the company official added. “It will let us fully concentrate on marketing and branding, and improve margins.”

Apart from affecting the return of capital employed for the business, the production business takes away considerable resources, which Coca-Cola will be able to use for its core operations after a selloff, is the thinking.

For both Coca-Cola and PepsiCo, the need for focusing on marketing and branding is more important in India, where per capita consumption of beverages is low. The two majors are working to increase consumption in big markets like India and China. “It is important to change the consumer behaviour related to soft drinks. We need to place these as a regular drink and not only to be consumed during summer or on occasion,” an industry executive said.




GETTING THE BASICS RIGHT

  • Coca-Cola India to get out of low-margin bottling and distribution business as part of its global plan
     
  • Richer dividend from core business encouraging the cola-major to hive off the business
     
  • Plan is to concentrate on developing markets such as India and China to increase consumption
     
  • India, China features among the least soft drink consuming markets – far lower than Bhutan, Brazil, Maldives and Sri Lanka

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