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After the Chinese Communist Party (CCP) kicked Coca-Cola and other foreign firms out in
1949, the company remained outside the country’s soft drink market until 1979. Market re-
entry after 1979 was not smooth: Although Coke possessed a strong brand name and array of
products, strict foreign investment restrictions and underdeveloped production infrastructure
limited the company’s growth.

In the 1980s and ’90s, Coke gradually rebuilt its brand profile and production footprint in China
through joint ventures (JVs) with local and foreign firms. At the same time, economic reforms
produced greater disposable income, enabling Chinese consumers to purchase food and
beverage goods. Coke’s ascent in China during this time, steadily winning market share and
breaking away from traditional rival Pepsi, bolstered the company’s bottom line: China
emerged as one of Coke’s most important markets for new revenue, second only to the United

Over time, however, myriad market changes eroded Coke’s competitive position in China.
Chinese consumer preferences gradually changed. Instead of buying fizzy soda drinks, health-
conscious consumers switched to fruit juices, traditional teas and specialty health drinks. As
consumer preferences changed, firms, both in and outside the beverage industry, developed
new drinks to quench this thirst. The new generation of challengers included larger firms with
national reach and brand recognition, such as the instant-noodle giant Tingyi Holdings
Company, and smaller regional firms that primarily produced one or two products.

Changing consumer tastes and industry restructuring led Coke executives to rethink their
existing strategy in China, which relied on carbonated soft drinks. Coke’s initial strategic
diversification response was to acquire Huiyuan Juice, one of China’s leading juice providers.
The Chinese government, however, blocked the M&A transaction based on concerns about
excessive market power. In the aftermath, Coke faced an important strategic dilemma: How
could the firm navigate the rapidly shifting consumer landscape in China with the legacy of its
old business model? Should the company continue on the M&A trail, either abroad or in China,

Erik Tollefson prepared this case under the supervision of Professor Zhigang Tao for class discussion. This case is not intended
to show effective or ineffective handling of decision or business processes.
© 2017 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—
without the permission of The University of Hong Kong.
Ref. 16/583C

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth

in order to offer new products? Or should the company develop healthy drinks internally?
Should it fundamentally reorganize its presence in China?

Coca-Cola (Re-) Enters China

After China expelled all foreign corporations in 1949, Coca-Cola was completely cut off from
the mainland Chinese market for about three decades. In 1978, when the country began
economic reforms, Coca-Cola was among the first foreign multinationals that sought to re-enter
the country. The company, however, faced sizable problems: Although Coke boasted a world-
famous brand, it had only minor brand recognition in China’s major cities and no brand
recognition in rural areas. The company also lacked critical on-the-ground infrastructure, such
as production facilities and a distribution network—the lifeblood of a soft-drink producer.

China’s beverage industry, however, presented ample if untapped opportunities. The industry
was fragmented, with a handful of local producers, such as Arctic Ocean (北水洋汽水) in
Beijing, accounting for a majority of market share in major cities.1 Nationwide distribution of
beverage products was limited. Production processes were also inefficient, bordering on
wasteful, and depended on small-scale production plants that lacked the technology and
economies of scale to produce beverages.2

The Early Years (1979-1990)

Coca-Cola adopted a localization strategy focused exclusively on soft drinks, which evolved
based on Chinese government approval.3 Indeed, the Chinese government served as the main
authority mandating how Coke and other western firms accessed the domestic market. While
the government needed to provide a basic level of market access to attract foreign firms, it was
also playing a long-term game to upgrade domestic firms’ ability to compete. It therefore
initially placed restrictions on the operations of foreign firms.

The company began as a wholesaler. Coke struck an agreement with state-owned enterprise
(SOE) COFCO in 1978 to sell beverage concentrate directly to the firm in Beijing, which then
bottled and distributed it.4 The company opened plants in Guangzhou in 1983 and Xiamen in
1984 under similar arrangements.5 The wholesale business model, as well as restrictions on
selling drinks only to foreigners, limited the company’s control over operations. The result was
predictable: In 1985 Coke’s market share was at roughly 2%, 6 and it had limited if any
management control over bottling plants bearing its name, with Chinese bottlers having little
incentive to expand coverage.

As the Chinese government gradually opened the economy, Coke was allowed to form JVs with
Chinese bottlers. The company established its first bottling JV in 1984 in Zhuhai, and then
established a high-profile 50-50 JV with the Chinese government (Ministry of Light Industry)
in Shanghai, where Coke would independently own its first concentrate plant, in return for
granting ownership of the bottling plant to its Chinese partners.7 In 1993, the company received

Peking University, Tsinghua University and University of South Carolina (PU-TU-USC). (2000) “Economic Impact of the
Coca-Cola System on China,” (accessed 8 December
3 Source: Mok, V., Dai, X., and Yeung, G. (2002) “An Internalization Approach to Joint Ventures: The Case of Coca-Cola in

China,” Asia Business Pacific Business Review, 9(1), pp. 39-58.

4 Ibid.
5 Ibid.
6 Ibid.
7 Ibid.

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth

approval from the Chinese government to build an additional 10 JV bottling plants yielding a
total of 24 production facilities countrywide, which would established a solid base to sell the
company’s soft drink production portfolio, including Sprite and Fanta.8 Coca-Cola also agreed
to develop new products with Chinese partners as part of the agreement. With the Chinese
government’s decision to allow Coke to sell to Chinese citizens in 1985, the company’s strategy
finally paid dividends. Indeed, the company posted its first financial profit in 1990, 9 and,
perhaps more importantly, the JV structure allowed Coke more direct control over its bottling
and distribution system.

Coke’s Anchor Bottle Strategy

Greater operational control allowed Coke to utilize global best practices by implementing an
“anchor” bottling strategy. 10 Under this strategy, Coke directly managed the countrywide
branding and concentrate business, closely partnering with firms, usually through equity
ownership, to handle bottling and distribution. In China, Coke selected two Hong Kong-based
bottlers as anchors and to mediate the relationship between Coke and its Chinese partners:
Swire, covering southern China; and Kerry, covering northern China [see Exhibit 1]. Although
five state-owned bottlers remained outside the anchor bottling system, the formation of the
anchor system was a key development in Coke’s strategy.

At the end of the 1990s, Coke had posted notable accomplishments. The company ranked first
in China’s carbonated soft drink market, with a 40% share: This was 25 percentage points
higher than its rival Pepsi [see Exhibit 2]. The company also gained control of key operational
relationships, which were a source of pain and monetary losses for many foreign firms. Despite
these accomplishments, Coke’s industry position was tested by a combination of new and old
challenges: a changing beverage industry and consumer tastes; and a raft of competitors.

Beverage Industry Dynamics and Changing Consumer Tastes

China’s large size was always the promise and peril of the country’s beverage market. China’s
expanding economy, which posted double-digit average annual economic growth through the
1980s and 1990s, was the main attraction. Years of growth boosted consumer income: While
Chinese consumers’ per-capita income was only around US$200 in 1980, it more than
quadrupled to US$869 by 1999 and was $7924 in 2015.11 Global beverage-makers saw the
potential of a rapidly growing, thirsty middle class, compared with stagnant developed markets,
as the linchpin of their case for market entry.

The reality on the ground, however, offered a far more complex picture. A large population
with growing purchasing power was dispersed across the country, with substantial variation in
the quality of economic institutions, cost of operations, and consumer preferences: The national
beverage market could be understood as an aggregation of numerous local heterogeneous
markets with unique characteristics. 12 While some early movers chose large urban areas,
competition was fierce; rural areas, with less competition, posed challenging operational issues
and possessed drink preferences different from more affluent urban consumers.

8 Peking University, Tsinghua University and University of South Carolina (PU-TU-USC) (2000). “Economic Impact of the
Coca-Cola System on China,” Accessed 8 December 2016.
9 Ibid.
11 World Bank Online Database. GDP Per Capita ($USD). (accessed

4 September 2015).
12 Atsmon, Y., Kertesz,A. and Vittal, I. (April 2011) “Is your emerging market strategy local enough?” McKinsey Quarterly, (accessed 14 September 2015).

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth

Differences between China’s and developed countries’ beverage market

As a result of these regional differences in economic institutions and consumer demand, the
structure of China’s beverage industry has evolved in a different pattern from that observed in
more developed markets, such as the United States, Coca-Cola’s home market.

First, unlike in many developed markets where carbonated soft drink producers comprise an
oligopoly, the Chinese market had a more fluid structure with numerous substitutes, such as tea
and other healthy drinks. Consumers thus had more beverage options to choose from, and there
was greater competition in the beverage market. The competitive dynamic was amplified in
China because consumer income was also increasing quickly, fear caused by food-safety
scandals made branding and quality ingredients more important,13and the influence of Chinese
millennials’ preference for healthier lifestyles was rising.14

The quality of economic institutions was a second differentiating factor. Companies such as
Coca-Cola paid little attention to issues such as intellectual property-rights protection and
contract enforcement in more established markets with consistent legal precedent. In China,
however, these issues assumed paramount significance, as increased government intervention
and intellectual property protection often meant the difference between commercial success and
failure. This was particularly the case in less-developed areas of China, where multinationals
often depended on local partners to supervise and defend their interests.15

Coke’s Competitors
Although Coke had the earliest start in China’s burgeoning soft drink market, the company
faced a broad array of competitors over time, including traditional rivals such as Pepsi, domestic
upstarts such as Wahaha and Tingyi, and healthy drink manufacturers.

Pepsi entered China’s market in 1981, two years after Coke. Due to the company’s smaller size
financially and a different product portfolio, which included soft drinks, snacks (e.g., Frito-Lay)
and restaurants (e.g., Pizza Hut), the company faced more complex strategic challenges in

The Early Years (1981-2003)

Pepsi initially decided to sell only soft drinks and fell behind Coke’s steady pace of expansion.
Pepsi opened up two bottling plants in Guangzhou and Shenzhen in the early 1980s, while the
pace of opening JV plants lagged: Coke had opened 14 JV plants by 1994; Pepsi did not receive
approval to open an additional 10 plants until that year.17 The company’s smaller operational
footprint in China, coupled with lower brand recognition among consumers, meant that Coke
consistently maintained higher market share than Pepsi during the early years of expansion [see

13 Atsmon, Y., Dixit, V. and Magni, M. (October 2010) “China’s New Pragmatic Consumers,” McKinsey Quarterly, (accessed 10 September 2015).
14 Walters, J. (19 June 2015) “A Tale of Two Consumers,” BCG Persepctives,
consumers/ (accessed 10 September 2015) .
Jing Daily (6 July 2015) “Chinese Consumers Boost Spending on Health and Wellness”, (accessed 10 September 2015).
15 Du, J. Lu, Y. and Tao, Z. (2008) “Economic Institutions and FDI Choice: Evidence from US Multinationals in China,” Journal

of Comparative Economics. 36(3), 412-429.

Kraar, L. (17 March 1986) “Pepsi’s Pitch to Quench Thirst.” Fortune, (accessed 5 September 2015).
Ip, A. (1995) “Pepsi’s Challenge in China and its Strategic Move into Equity Joint Venture,” Unpublished MBA Dissertation,
Chinese University of Hong Kong, (accessed 10 September 2015).

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth

Exhibit 2]. This was true even in geographical areas where Pepsi boasted it had a more
comprehensive distribution network.18
One of Pepsi’s main issues stemmed from less robust cooperation with local JV partners. Pepsi
established a number of JVs with local partners at least partially based on the goal of achieving
geographic coverage, but many local JV partners contributed little to the partnership beyond
drink production.19 As a result, Pepsi lacked Coke’s strong JV partners, and did not expend
enough effort to unify the company’s 24 regional bottlers, spread across the country, to promote
the company’s strategy.20 Some of the JV partnerships were contentious.

Strategic issues: JV infighting and diversification dilemmas

In 2003, Pepsi’s long-running dispute with a Sichuan JV partner, Sichuan Yunlu, became
publicized when Pepsi, the minority shareholder, accused the bottler of numerous breaches of
contract.21 Although the two had worked profitably since establishing the JV in 1993, at one
point achieving nearly 50% market share in the province, cooperation broke down to such an
extent that the Chinese partner introduced self-branded rival drinks to directly compete with
Pepsi.22 Sichuan Yunlu accused Pepsi of exercising excessive control over the JV’s operations.
The JV was ultimately dissolved through international arbitration in Stockholm.23

Over time, Pepsi also suffered from its less-disciplined management of the supply chain, due
to its looser management strategy. Bottlers’ margins were squeezed as rising raw-material and
concentrate costs hit their bottom lines. Pepsi’s main bottler in China, China Bottlers, lost a
total of roughly US$175 million in 2010 due to these conditions.24

Pepsi’s diverse product portfolio was a more complex issue. Although Pepsi chose soft drinks
as its primary market-entry product, the company also entered the country’s competitive
restaurant industry, opening up KFC and Pizza Hut chain restaurants in 1987 and 1990,
respectively. It also introduced Frito-Lay branded snacks in 1994. The complexities of a
diversified firm operating in numerous markets may have challenged its strategic focus in the
soft drink segment.

These issues arising from diversification have been witnessed in other industries. During the
protracted battle between Polaroid and Kodak in the 1970s and 1980s for the instant
photography market, Polaroid ultimately won in the market due to its focus on one product and
extensive patents, even though Kodak potentially offered more technologically advanced
options.25 Pepsi faced similar challenges in China, as Coca-Cola focused on developing market
share in the soft drink industry, while Pepsi operated numerous businesses in industries with
complex regulation.

Pepsi doubles down on China via investments and partnerships

With greater market share, robust JV partnerships, and a larger distribution network, Pepsi
faced sizable obstacles in challenging Coke’s position without making even more substantial
investments. In 2008, Pepsi announced a US$1 billion investment in China; in 2010, it

18 Ibid.
19 Ibid.
20 Liu, X. (28 November 2011)”Pepsi’s Challenge.” Beijing Review,

11/28/content_408378.htm (accessed 24 August 2015).

Ambler, T., Witzel, M., Xi, C., & Zou, D. (2008). Doing Business in China. London: Routledge. pp. 124.
22 Ibid. pp. 124.
23 Ibid. pp. 124.
Rappeport, A. (4 November 2011) “Pepsi to Sell Chinese Bottling Operation,” Financial Times. (accessed 20 August 2015).
25 Greenwald, B. & Kahn, J. (2005). Competition Demystified: A Radically Simplified Approach to Business Strategy. New

York: Penguin. Ebook.

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth

announced further US$ 2.5 billion investment in the country over three years. 26 Pepsi had
already shifted its strategy in the beverage industry to include healthier drinks such as Gatorade;
however, the company still lacked a nationwide distribution network. Thus, the company relied
on an old strategy: alliances with local companies. The partner, Tingyi Holding Company
(THC) had entered the mainland Chinese market early, in 1991, before many other companies.
Pepsi and TCH formally entered into a strategic alliance in 2011. Under the agreement, THC
acquired the right to serve as Pepsi’s main franchise bottler in China for all Pepsi-branded soft
drinks and Gatorade products; in exchange, Pepsi received a 5% stake in Tingyi’s beverage
unit.27 THC also pledged to help in the distribution of Tropicana and other fruit juices, although
they would be cobranded with Pepsi. The partnership opened the door for more commercial
opportunities, with Pepsi being selected as the exclusive drink of Disney World China in 2014.

Pepsi’s strategic decision was one born of limited choices. Pepsi was able to leverage THC’s
extensive distribution network, allowing the company to focus on product development rather
than operational concerns. The decision, however, came at a cost: Pepsi was not the only
company looking to diversify product development, nor the only company that tapped THC to
help it sell drinks outside China’s more concentrated urban areas.

Wahaha emerged as one of Coke’s first formidable competitors in the mid-1990s. Started by
Chinese entrepreneur Zong Qinghou in 1987 in Hangzhou, the company started out as a small
milk and ice cream, school-owned enterprise.28 The company produced its first beverage, a
nutritional drink for children, in 1988. The “Wahaha Nutritional Drink” was a mixture of
Chinese herbs to enhance appetite and treat eating disorders.29 The drink was a runaway success
in China’s rapidly expanding economy for families with only one child, putting the company
on the map and earning the firm US$65 million in sales by 1990.30 The company formally
became the Hangzhou Wahaha Group in 1991 after purchasing a state-owned food enterprise
that gave the burgeoning company more resources.31 It began to produce fruit milk the same
year, eventually expanding production to other beverages such as enriched milk and bottled
water: commercial successes that bolstered the company’s reputation and ambitions.32

Wahaha emphasized a strong local production and distribution network, particularly focusing
on coverage in neglected rural areas. Although the company initially produced in Hangzhou
alone, it invested heavily to expand its network: In 1994, the company set up a subsidiary,
Wahaha Fulin Company, in Chongqing, later setting up 20 subsidiary companies in poorer
northern and southern provinces, which accounted for roughly one-third of the company’s
production in the 1990s.33 Due to the company’s large geographical footprint, it also developed
an extensive distribution network, focusing on recruiting distributors who had access to
customers not only through large supermarkets, but also through smaller stores and venues.34

26 Pepsi. PepsiCo to Invest $2.5 billion in China Over the Next Three Years.
to-Invest-25-Billion-in-China-Over-Next-Three-Years05212010 (accessed 8 December 2016).
27 Wong, S. (4 November 2011) “Pepsi Swaps Bottling with Tingyi to Expand Drink Share,” Bloomberg News,
(accessed 2 September 2015).
28 Wahaha Group. Introduction and History. (accessed 25 August 2015).
29 Jing, J. (2000). Feeding China’s Little Emperors: Food, Children, and Social Change, Palo Alto: Stanford University Press,

30 Thain, G. & Bradley, J. (2014). FMCG: The Power of Fast Moving Consumer Goods, Sarasota, Florida: First Edition Design

Publishing. pp. 467.

31 Ibid.
32 Suli, D. & Wang, Y. (2005) Made in China: What Western Managers Can Learn from Trailblazing Chinese, Cambridge, MA:

Harvard Business Press. pp. 150-152.

33 Hamilton, S. & Zhang, J. (2011) Doing Business with China: Avoiding the Pitfalls, London: Palgrave Macmillan. pp.21.
34 Ibid. pp. 21-23.

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth

The company grew physically and financially as a result: In 1996, the company’s revenues
topped Rmb 1 billion, with 200 million in net profits.35

The Danone JV
Wahaha’s expansion and geographical footprint attracted the attention of French giant Danone
Group, which wanted to expand its presence in China: The two signed a JV agreement in 1996;
the two companies initially established 5 JVs that would grow to 39. Danone took a 51% stake
in the JVs36, co-managed with Wahaha, producing bottled (mineral) water, soft drinks, juice,
and snack products. Although commercially successful, the JVs posted US$2 billion in revenue
in 2006, cooperation broke down.37 Danone accused Wahaha of selling Wahaha-branded JV
products through “mirror companies”; Wahaha accused Danone of excessive control and bad
faith.38 After numerous court cases, Wahaha bought out Danone’s 51% stake in 2008.

Disagreement exists regarding the JVs’ ultimate impact on Wahaha’s future trajectory. Some
have argued that Zong artfully used JVs with foreign companies to extricate itself from the
stifling grasp of state control. The JV would allow Wahaha to develop its own path independent
of those who potentially wanted a different future for the company, but did not ultimately
provide the company with anything substantive. Others contented that Wahaha benefited from
the partnership, acquiring a valuable infusion of capital and production know-how in key
products, such as bottled water, from an established industry leader: Wahaha’s production
doubled from 1996 to 1997, setting the stage for the company’s becoming a principal player in
China’s beverage industry.39

“Future” Cola: A bet on the company’s future

The company’s burgeoning confidence crystalized with the launch of “Future Cola” in 1998,
the first domestic alternative to foreign colas. Although Coke had faced domestic competition
since entering the market, this was mostly regional in nature and involved companies with
limited resources. Wahaha, however, represented a different type of competitive threat.

First, Wahaha leveraged its extensive distribution network to initially target rural markets in
China, taking on competition where brand awareness of foreign drinks was lower, alternatives
fewer and consumers more price-conscious. 40 Second, Wahaha adopted a high-profile
marketing campaign to back Future Cola, running television commercials and print ads with
popular singers and entertainers such as Wang Lihong ( 王 力 宏 ). Three years after its
introduction in 2001, sales of Future Cola totalled Rmb 1.5 billion and the cola occupied third
place behind Coke and Pepsi.41

35 Larcon, P. (2009) Chinese Multinationals. Singapore: World Scientific. pp. 20.

From 1995 to June 2005, the Chinese yuan was fixed to the US dollar in a fixed exchange rate system at a rate of US$1=
Rmb 8.11.
36 Jinjia, a Singapore-registered company, owned the stake; it was held equally by Danone and Hong Kong investment firm

Peregrine. After Peregrine went bankrupt in 1998, Danone acquired its shares, apparently without communicating with
Wahaha. Danone thus held the majority stake in the JV after 1998.
37 Tao, J. & Hillier, E. (May/ June 2008). A tale of two companies. China Business Review.
fdde482927ac/A_Tale_of_Two_Companies.pdf. (accessed 8 December 2016).
39 Suli, D. & Wang, Y. (2005) Made in China: What Western Managers Can Learn from Trailblazing Chinese, Cambridge, MA:

Harvard Business Press., Ebook.

40 Ibid. pp.152-153.
41 Hamilton S & Zhang J. (2011). Doing Business with China: Avoiding the pitfalls. Palgrave Macmillian: London. Pp. 23.

From 1995 to June 2005, the Chinese yuan was fixed to the US dollar in a fixed exchange rate system at a rate of US$1= Rmb

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth

Although Future Cola ultimately failed to become a serious threat to Coke’s competitive
position in China, Wahaha continued its strategy of product diversification, by 2004 building a
robust portfolio of 30 beverage products in the categories of milk and yogurt beverages, purified
and mineral water, soft drinks, sports drinks, and tea.42 The broad portfolio insured that Wahaha
maintained a share of around 15% of China’s total beverage market (by volume produced)
from 2000 to 2006.43 The company has maintained a competitive position to date. It was the
third-ranked overall producer of beverages in 2013 and the sixth-ranked major juice producer
in 2013 [see Exhibit 4]. The company’s notable ambition and diversification strategy towards
healthy drinks, which helped it to take on Coke, was recently still on display. In 2013, the
company announced strategic plans to start a research institute for healthy food, focusing on
probiotics and organic food production.44

THC45 (顶新集团)
THC began as an instant noodle producer founded by the Wei brothers in Tianjin in 1991.46
THC provided a range of instant-noodle flavors and price points under the “Master Kong (康
师傅)” brand name. Due to the company’s quality and innovative flavor combinations, its
instant noodles quickly rose in popularity.

THC’s diversification into beverages and distribution network

Although not initially a beverage producer, THC entered the ready-to-drink (RTD) tea and
bottled water market in 1996 under the “Master Kong” brand. The decision to enter the
beverage market was a natural one for THC: The company needed to diversify revenue streams
in an increasingly competitive instant noodle market and could leverage its strong brand
recognition with consumers.47 Drinks and noodles were also complementary goods that people
could consume together, increasing the synergy between the company’s products.

The branding element was particularly important, as THC had constructed a network to reach
increasingly affluent consumers in urban areas and surrounding suburbs. The company’s
diversification strategy paid off: The company achieved the number-one position in the RTD
tea category, due to its benchmark green tea and other innovative flavors, starting in the early
2000s. Although Wahaha was one of the first domestic competitor to enter the bottled water
drinking segment, THC established a top ranking in the bottled water segment shortly

THC initially focused on building an extensive network through offering highly advantageous
terms to potential partners: Not only did distributors claim a monopoly over defined geographic
areas, but they also reaped substantial margins for product sales.49 This strategy achieved the

42 Chong, L. (2013) Managing a Chinese Partner: Insights from Four Global Companies, London: Palgrave Macmillian. Ebook.
43 China Beverage News. (12 April 2010). Wahaha: China’s Leading Beverage Producer,
( (accessed September 6 2015).
44 Sugawara, T. (28 March 2014) “Wahaha is a Drinks Giant in China, but CEO Thirsts for More,” Nikkei Asian Review, (accessed 28
August 2015).
45 Although “Master Kong” is undoubtedly Tingyi’s largest brand and the corporate face for Chinese consumers, the holding-

company name is used in his case to signify the company’s overall corporate strategy rather than that for simply one brand.
46 Tingyi Holding Company. History and background.
47 THC (2012) Annual Corporate Report, (accessed
1September 2015).
48 Ibid.
Kuo, Y., Walters, J., and Yang, V. “KangshifuL Three Stages of Distribution,” BCG Perspectives, http:// (accessed 1
September 2015).

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth

goal of building an extensive countrywide network and brand penetration quickly, imperative
for its instant-noodle business to take off in a crowded, competitive marketplace.

Over time, similar to Coke’s evolution, THC brought together a network to enable greater
control over distribution channels. In addition to placing sales and other staff in key geographic
areas, the company sought to create competition among distributors of its products, which
would lead to promotion of all its key products.50 This change increased margins by reducing
distribution costs. THC also focused on acquiring end-consumer use data, rather than simply
logistical shipping information, which allowed the company to establish relationships directly
with retailers. This strategy succeeded: While in 1998 the company boasted a total network
exceeding 14,000 distributors and 10,000 direct retailers, by 2009 that intermediary network
had shrunk to less than 6,000 distributors, with the company building direct connections to
70,000 retailers.51

Leverage partnerships to diversify products

The company also worked on product development. THC entered the fruit and vegetable juice
market in 2003, with the introduction of the Fresh Daily C and Master Kong juice brands. THC
gradually evolved from a predominant noodle maker with a beverage side-business to a major
player in the beverage sector. While noodles contributed 75% of the firm’s total revenue in
1999, by 2006 beverages contributed more to company revenue than noodles [see Exhibit 5].
Beverages initially provided higher gross margins due to scale and less competition. However,
over time gross margins for beverages and noodles converged, as competition besieged both
the noodle and beverage markets.

By 2007, the company had established a formidable portfolio and position in China’s snack
foods and beverage market: It ranked first in instant noodles and ready-to-drink tea, and fifth
in the biscuits category. 52 In 2007, the company had also passed Wahaha as the country’s
leading soft-drink producer in retail-value terms.53 THC further leveraged an array of joint
ventures and partnerships to bolster its competitive position in China.

In 2004, Asahi Breweries and Itochu Beverages purchased 50% of THC’s beverage unit for
roughly US$420 million in a joint venture that produced fruit juice, coffee, and health-based
drinks.54 The deal provided both sides with benefits: Asahi gained access to a quicker-growing
Chinese beverage market with a leading distributor, while THC gained access to an important
source of R&D and potential new products to offer in the Chinese market.55

Finally, THC reached an agreement with Starbucks in March 2015 to sell RTD beverages in
the Chinese market. Under the terms of the agreement, THC would be responsible for the
manufacturing and sale of Starbucks-branded drinks in China.56 The deal was another example
of THC leveraging its extensive distribution network to increase product selection, while also
maintaining ownership over distribution channels and giving partners a minority share in the

50 Ibid.
51 Ibid.
52 Euromonitor (19 May 2008) “Master Kong: The Master of RTD Tea,”

chinese-rtd-tea_id93901.aspx (accessed 15 August 2015).

53 Ibid.
54 Kahn, G. (5 January 2004) “Asahi, Itochu Will Buy Chinese Drink Business,” Wall Street Journal, (accessed 1 September 2015).

55 Ibid.
56 Jourdan, A. & Rigby, B. (19 March 2015) “Starbuck Partners Drinks Maker Tingyi to Expand in China,” Reuters, (accessed 3 September 2015).

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth

Over the past five years, THC’s strategic partnerships have had a tangible impact on the
company’s position and bottom line. The company held the number-one position in the RTD
tea, bottled water and cola (as Pepsi distributor) drink market, ranking second in the fruit juice

Healthy Drink Competitors

While Coke faced growing competition from larger established firms that were rapidly
expanding into the beverage market, nimbler, domestic firms that experienced fast growth also
emerged as key competitors. Guangzhou Pharmaceutical Holdings (GPH) and Huiyuan were
examples of how beverage firms that offered healthy alternatives in one product segment
challenged Coke and others.

Although GPH purchased rights to produce Wang Lao Ji (王老吉),58 a traditional Chinese
herbal drink, the original formula was developed in 1828.59 After SOE reform in 1983, GPH
acquired the rights to produce the drink, which it ultimately licensed to a Hong Kong
company.60 Success was not immediate: after substantial investments the drink’s popularity
increased. The drink’s annual revenues have grown roughly 80 times from 2002 to 2010:
Starting with respectable revenues of Rmb 200mn in 2002, the drink registered Rmb 16 bn in
sales in 2010. 61 GPH also saw greater expansion opportunities for the brand as Chinese
consumers’ tastes changed. GPH signed a production agreement with 30 enterprises, including
Uni-President, in 2012 to expand the beverage’s sales past saturated retail outlets to on-trade

The rise of drinks such as Wang Lao Ji was mirrored by other domestic companies that
established a competitive position in a healthy drink segment. Huiyuan Juice, established in
1992, developed into one of China’s main juice producers, boasting the number-one brand in
China’s competitive juice market.63 Although growth in China’s carbonated soft drink market
had begun to decelerate from high levels, China’s juice market was posting robust growth.
According to Euromonitor, the 100% juice segment posted a CAGR of 12.9% between 2006
and 2011, while nectars64 and fruit juices posted 10% and 14.3% growth over the same time
period, respectively [see Exhibit 6].

57THC (2014) Annual Report: (accessed 3
September 2015).

赵卓.(30 May 2013). 老吉巨额宣传成本:广告费超 5亿 净利仅 3096万, 时代周报
( (accessed 5 September 2015)) [Zhao Zhuo, (30 May 2013)
Laowangji’s large promotional costs: Ad fees exceed 5 bn rmb, profits only 31 mn rmb, Times Newspaper (accessed 5
September 2015).]
60 A significant trademark dispute erupted between the two companies: Guangdong Pharmaceutical Holdings (GPH) (广药集团)

and the licensee JBD (加多宝集团) . GPH licensed JBD to co-produce the drink in 1995. JBD spent money on new packaging
(a red can) and distribution channels; sales and consumer recognition increased. GPH sued in 2011 to terminate JBD’s use of
the drink’s trademark because the company claimed it did not receive all related proceeds from sales. A Chinese court ruled in
GPH’s favor in 2012 that it was the sole holder of the trademark. It also ordered JDB to pay RB150 million yuan to GPH.

杨昊. (28 June 2012) 药签 30家企业代工王老吉 新品已在京穗上架. 网易财经, (accessed 5 September 2015). [Yang Wu, (28
June 2012), GPH signs with 30 enterprises to license Wanglaoji. Net Tease (accessed 5 September 2015).]
63 Huiyuan Juice website: (in Chinese) (accessed 5 September 2015).
64 According to AC Nielsen’s definition, the “nectar” category is for juice beverages between 26% and 99% fruit content,

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth

Coke’s Response: The Huiyuan (汇源集团) Acquisition

Facing changing consumer preferences and intense competition from multinationals and local
firms alike, Coke faced an important strategic decision. While the company maintained a strong
position in the nation’s beverage market, it needed more diversified products to meet shifting
consumer demand on one hand and fend off competition on the other. If this was to be achieved
through organically developing a new line of “healthy” beverages in-house to retain current
consumers and win new ones to its iconic brand, substantial new investments were needed.
Time, perhaps the most valuable commodity, was also needed as competition only intensified.

The M&A Target: Huiyuan

However, Coke faced a key constraint in this respect. As competitors quickly expanded in-
house development, time was not a luxury that Coke had. Indeed, although Coke tried to win
over customers with new beverage offerings such as Powerade and Fuze, the company had a
much larger target in its sights: Huiyuan, which maintained a compelling market position in
this growing beverage segment. At the time of Coke’s proposed acquisition in September 2008,
AC Nielsen estimated that Huiyuan boasted the number-one position in China’s 100% fruit
juice and nectars65 category, with market shares of 43.8% and 42.4%, respectively. 66 Besides
being the number one juice brand in China, with nearly 228 different beverage products,
Huiyuan possessed other advantages that made it a key target for Coke’s ambition. First, the
company boasted an extensive domestic production network of over 31 facilities located
throughout the country, including Jilin, Henan, Shandong, and Jiangxi.67 Huiyuan was slated
to benefit from being included under the Coca-Cola brand umbrella, which included more
sophisticated marketing and the benefits of the bottling giant’s distribution network.

On September 3, 2008, Coca-Cola offered US$2.4 billion in cash for the Hong Kong-listed
juice maker, one of the biggest transactions in the history of Coke and one of the largest in-
bound M&A transactions in China. While Coke had planned for numerous contingencies in its
bid for Huiyuan, one appeared more of a threat: the Chinese government’s approval. Due to the
nature of the horizontal merger, the market power of Coke in the beverage market and Huiyuan
in the juice market, the proposed merger triggered an administrative review by the Ministry of
Commerce under the country’s new antimonopoly law. The law, which was first proposed in
1994 and was finally passed in 2007, roughly 14 years later, by the National People’s Congress,
officially became law on August 1, 2008, just in time for this transaction. The law gave the
Chinese government wide-ranging powers to investigate, fine and prevent mergers that were
deemed anti-competitive.

Chinese government terminates transaction

On March 18 2009, the Chinese Ministry of Commerce (MOFCOM) announced that the
proposed merger was officially terminated. 68 Although no formal document was released
detailing the ministry’s legal reasoning, MOFCOM announced its thinking during a public
news conference. MOFCOM stated that, due to the size of Coca-Cola in the carbonated soda

According to AC Nielsen’s definition, the “nectar” category is for juice beverages between 25% and 99% fruit content, while
fruit juices have below 24% content.
Huiyuan Juice (2008) Interim Report, (accessed
5 September 2015).
Kwok, V. (3 September 2008). “Coca-Cola Sees Juicy Prospects in China,” Forbes,
cola-huiyuan-markets-equity-cx_vk_0903markets02.html (accessed 15 September 2015).
中华人民共和国商务部. (18 March 2009). 中华人民共和国商务部公告 2009 年第 22 号 商务部关于禁止可口可乐公司收
购中国汇源公司审查决定的公告. (accessed 5
September 2015). [China’s Commerce Ministry. (18 March 2009). People’s Republic of China Commerce Ministry’s Public
Notice 22: Regarding preventing Coca Cola Company acquires China Huiyuan Investigation Decision, (accessed 5 September 2015]]

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth

market and Huiyuan in the juice market, a combined entity could potentially exert market power
against retailers, leading to anti-competitive behaviour, adding pressure on SME juice pressure,
and resulting in higher prices for consumers.69

Although a case could certainly be made for MOFCOM’s ruling, the fact that the first rejection
under the nation’s nascent antimonopoly regime involved a high-profile multinational firm
purchasing an upcoming Chinese firm fanned speculation over the law’s true intent. Lawyers
and academics also questioned MOFCOM’s overly broad interpretation of the relevant market
under examination, essentially positing that market position in one market (carbonated soft
drinks) could be used to influence another market (fruit juice).70

The new M&A target and strategic dilemma

Coke, however, despite the notable setback, has not backed away from its ambitious plans in
China. In 2009, even after the transaction was rejected, the company went ahead with an
investment of US$2 billion, which exceeded the amount the company had invested in the
country from its initial entry up to 2008. The investment included the building of a US$90
million R&D center in Shanghai aimed at developing new products for China’s growing class
of consumers. 71 Thus, Coke found itself in a strategic dilemma. In 2015, the company
announced another M&A transaction with China Culiangwang (粗粮王), a local producer of
plant-based protein drinks, for roughly US$400 million in cash and debt. Culiangwang was
established in 1998 in Xiamen. The company built a portfolio of healthy drinks including
green-bean, red-bean, and different types of walnut drinks under the “Green Culiangwang”
brand name. The company became a leading producer in the “multi-grain” drinks category.

Coke billed the acquisition as a way to “refresh” the soft drink’s product portfolio. But was the
transaction too little, too late, even if it ultimately passed regulatory scrutiny? Did the
incremental approach of a bolted-on acquisition make sense at this stage, or should the company
undertake more fundamental reform to target increasingly health-conscious consumers in China?

70 Knowledge at Wharton. (1 April 2009) “Coca Cola’s Failed Bid for China Huiyuan Juice: The Return of Protectionism?”
(accessed 10 September 2015).
71 Wall Street Journal. (6 March 2009) Coke Steps Up China Cola Wars With $2 Billion Investment Plan.

( (accessed 10 September


16/583C Coca-Cola’s Challenge in China: “Healthy” Growth


Coca-Cola China

12.5% investment 12.5% investment

Swire Group Kerry

(Responsible for (Responsible for
southern China) northern China)

Directly managed Directly managed

JVs in Anhui, JVs in Beijing,
Fujian, Henan, Chengdu, Dalian,
Guangdong, Harbin, Kunming,
Jiangsu, Xian, Nanning,
Zhejiang Qingdao,
Taiyuan, and

Source: Peking University, Tsinghua University and University of South Carolina (PU-TU-USC).
(2000) “Economic Impact of the Coca-Cola System on China,”
(accessed 8 December 2016).

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth


Year Coke Pepsi

1992 12 5

1993 12 7

1994 19 N.A.

1995 23 N.A.

1996 26 9

1998 33 11

2000 40 15

Source: Mok, V., Dai, X., and Yeung, G. (2002) “An Internalization Approach to Joint Ventures:
The Case of Coca-Cola in China”, Asia Business Pacific Business Review, 9(1), pp. 39-58 (Table
3). .

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth


RMB BILLIONS) , 2012-2015

Dec 2012 Dec 2013 Dec 2014

Carbonated soft 84.8 (18.0%) 78.2 (14.6%) 80.3 (13.9%)


Bottled and canned 82.3 (17.5%) 101.4 (18.9%) 113.2 (19.6%)


Fruit, vegetable 107.4 (22.8%) 111.5 (20.8%) 121.0 (20.9%)

juice and syrup

Milk and vegetable 74.9 (15.9%) 89.5 (15.9%) 103.9 (18.0%)


Solid beverage 44.3 (9.4%) 48.8 (9.2%) 49.9 (8.6%)

Tea beverage 77.9 (16.5%) 98.4 (18.3%) 110.2 (19.0%)

Industry revenue 472 528 578

(yearly growth)

Note: Market shares may not equal 100% due to rounding.

Source: China General Customs Data

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth


Top 10 Beverage Manufacturers Top 10 Juice Manufacturers

1) Coca-Cola 1) Coca-Cola

2) THC 2) THC

3) Hangzhou Wahaha 3) President Enterprises

4) Nongfu Spring 4) Beijing Huiyuan

5) Pepsi 5) Coconut Palm Oil Group

6) President Enterprises 6) Hangzhou Wahaha

7) Shenzhen Cest Bon Food 7) China Green Holdings

8) Guangdong Jiaduobao Beverage 8) Beijing Qianshou Fruit and


9) Guangdong Robust Group 9) Nongfu Spring

10) Guangdong Wanglaoji Group 10) Pepsi Co

Source: Euromonitor

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth


Instant noodle, beverage, baked and other goods revenues as a percentage of

THC’s total revenues, 1999-2014
Noodles Beverages Baked and other goods





1999 2001 2003 2005 2007 2009 2011 2013

Source: THC’s annual reports (1999-2015)

Instant noodle, beverage, and general gross margins, 1999-2014

50.00% Noodles Beverages Overall




1999 2001 2003 2005 2007 2009 2011 2013
Source: THC’s annual reports (1999-2015)

16/583C Coca-Cola’s Challenge in China: “Healthy” Growth


Year 100% Juice Nectars* Juice drinks**

2006 173.3 1,114.0 6,624.3

2007 195.1 1,253.2 7,962.0

2008 211.9 1,357.0 8,972.7

2009 229.1 1,476.4 10,152.5

2010 269.1 1,621.3 11,595.8

2011 317.5 1,788.8 12,941.1

CAGR 12.9% 10.0% 14.3%

*”Nectars” is defined as beverages from 25%-99% fruit juice.
** “Juice drinks” is defined as beverages with up to 24% fruit juice.
Unit: Litres mn

Source: Euromonitor