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BEVERAGES "New" markets in India and China and an old playbook are offsetting sluggish U.S.

sales The global economy hasn't looked this bleak since the Great Depression. So things must be looking up for the Coca-Cola Co. For the first full year after the 1929 crash, Coke announced record profits and 3% sales growth. TIME called it "perhaps the most remarkable 1930 statement yet to appear." Almost eight decades later, Coke posted sales growth of 3% for the first half of 2009. When consumers can't splash out on pricey items like new cars or even new clothes, they resort to cheaper pleasures, like a cold drink. That logic remains simple, even as Coke's business has grown far more complex. In 1930, Coke had profits of $13 million and operated in more than two dozen countries; last year it was $5.8 billion, on sales of $31.9 billion, in more than 200 countries. An early globalist, the company relies more than ever on worldwide sales. Europe and North America have been stagnant, especially for the company's main brand, Coca-Cola, whose sales have been watered down by an onslaught of New Age drinks--and water. Coke has countered the trend by acquiring brands like Vitaminwater, but total case sales are off 2% in North America this year. Yet Coke has enjoyed 33% sales growth in India and 14% in China in the second quarter of 2009. Coke has always measured its sales potential using the metric of bottles consumed per capita by country, and by that calibration, China and India remain untapped gushers.While the average American drinks 412 bottles of Coke products a year, it's just 28 in China and seven in India. With their billion-plus populations, "they're the future of the company," says Mark Swartzberg, an analyst with Stifel Nicolaus. "There is still a lot of economic development to happen for the world, and China and India are clearly leading the way." China and India have been the future for much of the past. Coke landed in China in 1927, then retreated in 1949, when the People's Republic could not find room for a populist beverage. The company returned in 1979, the year Deng Xiaoping launched his economic-reform drive. In 2001, China was Coke's seventh biggest market; now it is No. 3, after the U.S. and Mexico. Since then, growth on the mainland has been a steady progression of building bottlers and bottling plants along with retail distribution across a vast country. Coke now has distribution in almost every province. Coke brands had a 52.5% share of China's carbonated-drink market last year, according to research firm Euromonitor International, while Pepsi's had 32.8%. Pepsi has held its ground against its bigger rival through sophisticated ad campaigns that have positioned it as the hipper drink in the eyes of many Chinese youths. Coke sponsors sports stars such as NBA center Yao Ming and Olympic diver Guo Jingjing, while Pepsi dominates in pop culture. It recently launched a Chinese music label and sponsors an American Idol--style music competition. In the matchup of flagship colas, Pepsi holds an edge with a 23% market share to Coke's 22.2%. But neither is the leading fizzy drink in China. That honor belongs to lemon-lime Sprite, with a 23.4% share--and Sprite belongs to CocaCola. Coke's climb in India follows years of turbulence. It was the leading soft-drink brand from 1958 to 1977, when India's business environment turned nationalist. After the government demanded that Coke reveal its formula and become a minority owner, the company bolted. Pepsi jumped into India in 1988 as a joint venture with a state-owned enterprise and Voltas, part of the Tata Group conglomerate. In Coke's absence, the company gradually accumulated market share. Coke returned in 1993, after India's liberalization, buying a competitor's bottling network and local soft-drink brands like Thums Up cola and Limca lemon drink. Over the next decade, Coke invested more than $1 billion, turning a profit in India for the first time in 2001. The company hardly had time to celebrate. Two years later, Coke and Pepsi were targeted by a study from an NGO called the Center for Science and Environment (CSE)--a group focused on environmental-sustainability issues--which alleged that samples of the companies' drinks tested high for pesticide residue. Both firms' sales and reputations were hit hard. In a rare moment of solidarity, Pepsi and Coca-Cola held a joint press conference attacking the NGO. The claims were raised again in 2006, and annual sales of carbonated drinks shrank. An expert panel appointed by the Ministry of Health and Family Welfare later found problems with CSE's testing. The scandal forced the soft-drink giants to defend their products and outline social and environmental initiatives, like conserving water resources. Certainly, PepsiCo CEO Indra Nooyi, a native Indian, was not about to be pushed around by an NGO with an agenda. "If they came out of the tainted phase fast, it was because they were able to demonstrate a certain amount of sincerity and transparency," says Santosh Desai, CEO of New Delhi--based marketing consultants Future Brands. "Sales were affected in the short term, [but] they did a good job of reassuring consumers." Atul Singh, CEO of Coke India since 2005, who once said the company was "continuously challenged" because of its foreign roots, now welcomes that scrutiny. "There's nothing like raising the bar for yourself when you are actually doing well," he says. After the safety scandal broke, Coke and Pepsi relied on small bottles and cut-rate prices to woo customers. The small packages boosted sales but hurt profitability for the companies and their bottlers. In 2005, Singh increased prices 40% to 60% and later introduced new packaging, like 1.25-liter bottles, which boosted in-home consumption. After a drop in sales in 2006, the Indian market began to grow again in 2007. "I can't complain," says S.B.P. Rammohan, owner of Sri Sarvaraya Sugars Ltd., a southern-India Coke bottler. "It's no longer volume at all costs." In China, though, Coke has remained focused on sales volume, selling soda in small bottles for as little as 15. It just introduced a 355-ml bottle--a little more than half the size of its more traditional plastic bottle--for 35 in places like the southern coastal provinces, which have been hard hit by the slowdown in exports. Coke's China president, Doug Jackson, says he'll take what he can get in a tough economy. "If you have a little less kuai in your pocket," he says, using the colloquial word for Chinese currency, "folks look for where do I save that one kuai. Instead of drinking nothing, I can handle that cheaper one. It's just giving them an option." Another key--and another classic from the Coke playbook--has been keeping things cold. In India and China, tradition and a shortage of refrigeration mean that Coca-Cola is often drunk warm. In parts of China where cold drinks are traditionally considered unhealthy, it is even boiled and served with lemon or ginger. So coaxing consumers to drink cold Cokes--the company says 3C is ideal--was part of the estimated $400 million that was spent on sponsoring last year's Beijing Olympics and related advertising. As sales rebounded in India, bottlers added new technology, including superinsulated retail refrigerators that stay cool for 12 hours without power, since the grid is unreliable in rural areas. In India, Coke will invest $250 million by 2011 to expand its infrastructure. The growth-focused model that Deng established in China 30 years ago has given Coke a reasonably stable platform to manage its expansion. "We know exactly where we are going," Jackson explains. "The government says, 'We'll urbanize 20 million people this year, and we'll do it sustainably through to 2020. We'll nearly urbanize the population of the United States over the next 10 years.' I can be very assured that I can place my bets for the company." Of course, Jackson wasn't betting that Beijing would block Coke's proposed $2.4 billion acquisition of Chinese juicemaker Huiyuan, which would have been the largest sale to a foreign company in China's commercial history. But the Ministry of Commerce blocked the deal on antitrust grounds, saying the merger would give Coke too much control of the country's juice market. Though the rejection was widely seen as both a defeat for Coke and a sign of growing protectionism in China, losing Huiyuan might not be all bad. "The regulator's decision spared Coke from overpaying for Huiyuan," says Swartzberg, the Stifel Nicolaus analyst. Now, says Jackson, Coke will build on its own. "Our 2020 goals are the same. We'll build rather than buy and move forward."

In the near future, Coke's China investments will be massive. The company, which has spent $1.6 billion in China since 1979, plans to invest $2 billion in growth over the next three years. (Last year, Pepsi announced a $1 billion investment in China over the next four years.) Coke opened a $90 million research center this year in Shanghai, where it has developed new products like the grape, lemon and mixed-fruit flavors added to the Chinese version of Minute Maid, a pulpy fruit drink known as Guo Li Chen. It's also expanding in less-developed western regions like Xinjiang and eastern ones like Inner Mongolia, where the company is building its 39th Chinese bottling plant. Bold moves in a downturn? Maybe, but then again, there's precedent. In the 1930s, Coke broke in to 20 new countries and territories, an expansion of 74% from the start of the decade. This decade may not quite be another Great Depression, but the strategy seems worth repeating.

Foray into juice market:


Coca-Cola India has made a foray into the premium juice segment with the launch of Minute Maid, while also introducing frosted bottles of Coca-Cola, Diet Coke and Sprite exclusively for the Mumbai market. 'From a strategic perspective, the launch of these new innovations and offerings harness the efficient execution capabilities of Coca-Cola in India,' said John Ustas, CEO, Coca-Cola Bottling Operations India. 'The entire delivery chain from strategy to market execution has been designed to provide an international beverage experience to all our consumers.' Coca-Cola has also extended the international range of Schweppes into India. Leo Burnett bagged the Minute Maid account in a three-way pitch, which included McCann Erickson and Ogilvy & Mather. McCann will now handle the frosted bottle account, while Sprite will be managed by Ogilvy.

Contamination issues: TWO YEARS AGO WE WROTE ABOUT COCA-COLA'S BATTLE IN India against accusations the firm was selling pesticide-tainted soft drinks. In a country with carbonated beverage consumption among the lowest in the world, the allegations cut sales by half for a brief period. Now Coke has been ordered to shut down its Kerala plant--one of 24 in the country--after the State Pollution Control Board found the plant "does not have adequate waste treatment systems and toxic products from the plant were affecting drinking water in nearby villages." The real culprit, insists Neville Isdell, chief executive of Coca-Cola, is agriculture. The executive in charge of Coca-Cola India has left the company, and Isdell plans to restructure the business there. But Coke still has that other problem: Indians don't go for fizzy drinks. Isdell said that all carbonated beverage consumption in India fell 14% in the second quarter, partly because of pesticide scares. "There were health-perception issues, not real issues," Isdell told investors. Meantime Coke has had pricing issues, too. When we last wrote, it was charging only 11 cents (5 rupees) for a small bottle. A boost to 6 rupees caused "sticker shock at the lower end of the market," said Isdell, and sales fell.

Price cut: Coca-Cola Co.'s Indian subsidiary has cut the price of its canned soft drinks by 28%, citing enthusiastic consumer demand as the reason to exploit economies of scale. However, industry observers claim poor sales prompted the move. The poor performance of its flagship Coke soft drink, however, recently forced Coca-Cola to move the account to Chaitra Leo Burnett from McCann-Erickson. Valentine day promotion: Coca-Cola India launched a multi-faceted promotion offering personalised soft drink cans in the week leading up Valentine's Day celebrations in India. Although Valentine's Day is frowned upon by India's conservative quarters, the soft drinks giant still pushed ahead with its 'Coca-Cola: Truly Yours' promotion. It set up nine redemption zones in key areas across Delhi and the National Capital Region, where couples could have their photograph scanned and printed on a can for US 60 cents, slightly more than an ordinary can priced at 45 cents. The promotion also offered couples an opportunity to enter a lucky draw to win a flight on a chartered aircraft over Delhi. The two-hour flight planned for February 14 was one of several prizes Coca-Cola offered as part of its Valentine's Day promotion. 'To treat a loved one is a dream harboured by many, and we wanted to provide the same,' said Vikas Kochhar, Coca-Cola's senior manager, communications. The soft drinks giant backed the initiative with an integrated marketing and communications push that included print advertising plus radio and consumer activation with Coca-Cola floats across the city. To keep the audience engaged, Coca-Cola also attracted entries for the grand prize through promotions at restaurants, where couples also had the option of playing the 'Coca-Cola Love Game', requiring them to complete heart-shaped jigsaws in 30 seconds.

Media Relation Coca-Cola India haschosen Perfect Relations to strengthen its media outreach a strategic decision to buffer the expansion of its distribution network. According to Coca-Cola India, the development is not a consequence of recent controversy surrounding pesticide residues found in branded soft drinks by the Centre for Science and Environment (CSE). Perfect Relations' retainer win follows the announcement by the Ministry of Health and Family Welfare that Coca-Cola and PepsiCo soft drinks are safe. Sunil Gupta, division president, Coca-Cola India, said: "No agency was handling the account. We were on the lookout for a partner to strengthen our media outreach. In the last 12 to 14 months we have been on a major expansion spree in the rural areas. We've touched upon thousands of new villages as we signed more retailers as part of our affordable strategy. As we penetrate further into rural regions it is imperative to focus on vernacular media." No details on the pitch process were disclosed. Dilip Cherian, consulting partner at Perfect Relations, said: "We will be handling the entire account (Coca-Cola India) and it's a long-term development plan. The discussions were on for the last three months and this development (of Perfect Relations winning the account) is not at all related to the recent crisis." The agency has 11 wholly-owned offices in the country.

Cherian added: "We will be working on communications strategy for the brand, corporate comms, crisis strategy and community relations." The account's geographical focus spans from Kashmir in the North to Kanyakumari in the Southern region, he said. Coca-Cola India undertakes CSR primary education projects, rainwater harvesting projects and provides free medical care. According to Gupta, the relaunch of its India website (www.myenjoyzone.com) is the first time corporate information, besides product safety announcements, has featured. "We have a very elaborate customer relationship programme which comprises of telephone, fax and letters, (which) we intend to make more interactive through our localised portal." Coca-Cola's crises have included a blast in a bottling plant in southern India in late 2001, demonstrations against alleged ground water problems in the south and the infamous "rape of the rocks" charge for daubing rocks with ads in India's northern hill zones. The company finds its footing in India after years of missteps You might think selling soft drinks in India would be a romp for Coca Cola Co. The country has a billion-plus consumers, a growing middle class, and the climate is hot, hot, hot. Look a little more closely, though, and this market is more minefield than mother lode. Sure, Coke's various beverages have more than half the market. But its flagship brand--Coca-Cola--ranks a distant third among colas, with an estimated market share of 16.5%, far behind arch rival Pepsi-Cola's 23.5%. "The environment in India is challenging," says Alex von Behr, a Briton who is president of Coke India. "But we're learning how to crack it." The learning curve has been steep. In 1993--15 years after being thrown out by India's socialist government--Coke stormed back into the country with big plans to wrest control from Pepsi and the local beverage makers that had arisen in its absence. Instead, the company spent years on the defensive after overestimating the size of the market, misreading consumers, and battling with the government. It has suffered losses in India for years, and although execs won't reveal financial details, Coke wrote down the value of its Indian bottling assets by $405 million in 2000. Finally, though, Coke is starting to inject some fizz into its Indian operations. On Feb. 28, the company plans to sell 49% of its Indian bottler, Hindustan Coca-Cola Beverages, for $41 million. The sale won't be the domestic stock listing that some in New Delhi had sought. Instead, the shares will be sold in a private placement with institutional investors and employees. But it puts to rest an issue that had chilled relations with the government, which wanted Indians to own part of Coke's local operation. And Indians appear to be developing a taste for Coke products: The company's overall sales in India jumped 24%, to $940 million, last year. "Coke lost a number of years over errors," says Jagdeep Kapoor, chairman of Samsika Marketing Consultants in Bombay. "But at last it seems to be getting its positioning right." That will come as a great relief at Coke headquarters in Atlanta. India, with soft-drink consumption of just seven 8-oz. servings per capita annually, holds more potential for growth than just about any market on earth. By contrast, neighboring Pakistan hoists an average of 14 servings per year, and in Mexico, the world's hottest soda market, it's nearly 1,500 servings. Determined to boost growth, Coke this year cut prices by 15% to 25%, forcing Pepsi to follow suit. "India is the beverage battlefield for 2003," says Ronald S. McEachern, PepsiCo's Asia chief. Key to Coke's battle plans is operations chief Sanjeev Gupta. After being promoted from marketing director three years ago, the boyish, straight-talking Gupta persuaded his Coke bosses to change the way they do business. Gupta's first step: revitalizing Thums Up, a sweeter local cola that Coke acquired in 1993 but proceeded to neglect.The brand's market share slipped from more than 60% of carbonated beverage sales to just 15% by 1998. After Atlanta gave the green light to push local brands as much as Coca-Cola, Gupta spent $3.5 million to beef up advertising and distribution for Thums Up. Within a year, he built it into India's No. 2 soda. Then Gupta persuaded Atlanta to revamp pricing and advertising for CocaCola. In 2001, he launched a new size, a 6.8 oz. bottle for 10, aimed at rural areas and lower-income urban markets. This year he reduced the price of a 10.1 oz. bottle to 17 from 24. The price cuts were key to boosting sales and the little bottle was a big hit.Gupta expects it to represent 50% of sales by volume this year. And last year, Gupta's team introduced a new ad campaign that equates Coke with "thanda," the Hindi word for "cold," which caught the imagination of Indians. Breaking with Coke tradition, Gupta also hired a celebrity spokesman, Bollywood movie star Amir Khan, to pitch the brand. "Coke had to break a lot of its rules for India," recalls Ashok Jain, the former head of Cadbury Schweppes PLC in India, who quit Schweppes after Coke bought it in 1999. The company has been cutting costs, too. Although Coke owns 70% of its bottlers, many of them were outdated operations inherited from the Thums Up purchase.Over the past three years, it has shut down eight of them, which helped trim the payroll by 23%, to 5,000. And it saved 57% on import duties by using more local raw materials. "We have turned a corner," says N. Sridhar, Coke India's finance director. "This will release our energies to concentrate on building market share." Next up: A $150 million investment to expand Coke's bottling and distribution network. The subcontinent isn't a mother lode for Coke yet. But the company sure is trying to make it one. LOCAL HERO Operations chief Gupta stood up to U.S. bosses and changed pricing, ads, and products to appeal to local tastes COKE IN INDIA: ROOM TO GROW

ANNUAL PER CAPITA CONSUMPTION OF SOFT DRINKS, 8-OUNCE SERVINGS, ALL BRANDS INDIA PAKISTAN CHINA RUSSIA SOUTH AFRICA BRAZIL JAPAN GERMANY U.S. MEXICO 7 14 89 124 278 471 565 984 1,404 1,484

It entered the market just as Indians were engaging with the West Coca-Cola India offered to buy Rajesh Yadav a refrigerator for his New Delhi store if he would sell only the company's drinks. He kept his part of the bargain, and lines of Coke and Diet Coke cans glisten behind the fridge's glass front. A red-and-white banner, featuring Bollywood film star Aishwarya Rai chugging a bottle of

the cola, adorns his storefront. Yet Yadav doesn't mention his partner when he describes his shop. "I sell Pepsi and cigarettes," said Yadav in Hindi, elongating the first syllable to pronounce the word "Pay-psee." Yadav isn't reneging on his deal with Coke. Pepsi became a common synonym for cola in India's most widely spoken language after having the market to itself in the early 1990s. PepsiCo's linguistic advantage translates into higher sales for its namesake cola. Atlanta-based Coke has larger total beverage sales in India because it owns a host of non-cola drink brands there. Yet the 4.5 percent share of India's beverage market held by Pepsi's cola market share eclipses the 2.6 percent share of Coke's flagship drink, says consultant Euromonitor. That's a notable exception to much of the rest of the world, where Coke's cola roundly beats its rival. History explains part of the imbalance. Coke had a small presence in India before pulling out in 1977 after new government regulations would have forced it to partner with an Indian company and share the drink's secret formula. In 1988, PepsiCo formed a joint venture with two Indian companies and introduced products under the Lehar brand. (Lehar Pepsi was introduced in 1990.) Coke re-entered the market in 1993, after Indian regulations were changed to allow foreign brands to operate without Indian partners. Coke's time out of India cost it dearly. "Pepsi got here sooner, and got to India just as it was starting to engage with the West and with Western products," said Lalita Desai, a linguist at Jadavpur University who studies how English words enter Indian languages. "And with no real international competition, 'Pepsi' became this catch-all for anything that was bottled, fizzy, and from abroad." In much of the Hindi-speaking belt of northern India, home to three of the nation's five most populous states, children begging at street corners will point to bottled juices and plead for "Pepsi." Mahipal Singh, a 42-year-old truck driver who plies a route between New Delhi and Bihar, calls his rest stops "Pepsi-wepsi" breaks, regardless of what he is drinking. "Saying 'Pepsi' connotes getting a soft drink," said Kiran Bhushi, an anthropologist at Indira Gandhi National Open University who researches consumption patterns of India's middle class and who has consulted for both companies. "How exactly does someone like Coke dislodge this idea from a consumer's brain?" Coke aims to accomplish the feat by broadening its stable of products to take advantage of the growth of the entire beverage category in fast-growing India. When it returned to the country in 1993, Coke acquired three local brands: Thums Up cola, a lemon drink called Limca, and an orange drink known as Gold Spot. It has since added more drinks to its portfolio. Today, Coke's top three products in India by sales volume are Kinley bottled water, Thums Up, and Sprite, according to Euromonitor. The Coca-Cola brand, which fuels the company's market share growth in much of the rest of the world, ranks No. 5 among its Indian products. "Pepsi is bigger than Coke as a brand [in India], but Coke as a company has very smartly introduced other brands that have done very well," said Harish Bijoor, who runs a brand strategy consulting firm in Bangalore. Atul Singh, Coke's president for India and South West Asia, says the blanket approach is a key part of the company's strategy. "We want every part of our portfolio to grow, so that any consumer, on any occasion, anywhere in India, makes a choice to drink a Coca-Cola product," he said. That approach to beverages is in sync with Indians' overwhelming preference for noncarbonated drinks. About 90 percent of India's beverage market is composed of tea, milk, and coffeebased drinks, with bottled soft drinks at less than 5 percent, according to Bijoor. Coke has introduced tea- and milk-based drinks, and is also making headway in sodas. Sales by volume in India surged 31 percent in 2009, Coca-Cola Chief Executive Officer Muhtar Kent said in February. And Indian sales of Coca-Cola, Diet Coke, and Coke Zero grew 25 percent last year, according to the company's annual report. Coke last year turned a profit in India for the first time since reentering the country in 1993, according to Kamlesh Sharma, a New Delhi-based spokesman. Meanwhile, PepsiCo Chief Executive Officer Indra Nooyi, who was born in India, says she will invest "aggressively" in emerging markets including the subcontinent. Retail sales of the company's products in India, including Frito-Lay potato chips, Quaker Oats, and fruit juices such as Tropicana, totaled $1.5 billion last year. "The Pepsi brand becoming the default name for the cola category is certainly a big positive," said company spokesman Sandeep Arora. "It can also be a double-edged sword if the marketer is not able to differentiate the brand from the rest of the category." Perhaps that's why Coke seems to be playing the local linguistics game as well. Coca-Cola has run an advertising campaign called "Thanda Matlab Coca-Cola," which translates to "Cold Means Coke." North Indians speaking in Hindi regularly use "thanda," the word for cold, as a noun when offering someone a drink. "It was definitely a good idea," said Bhushi, the anthropologist. "If Pepsi means cola, then emphasizing that a 'thanda' means Coke is perhaps the best way to gain control of the vocabulary." The bottom line In much of India, the Pepsi brand has become synonymous with cold beverages. Coke uses a portfolio of drinks to counter that advantage.