Written By Knowledge at Wharton Staff
Is it time to pop the bubbly at Coca-Cola India? After quite a few quarters of decline in volumes, the company seems to be getting its fizz back in the country. At a recent investor call announcing the July-September quarterly results, James Quincey, president and CEO of the Atlanta-based Coca-Cola Company, said: “India returned to growth with volume up 6%, driven by solid performance across the portfolio.” He went on to add: “Our business successfully moved past the recent difficulties related to demonetization and implementation of a goods and services tax during the first half of the year.”
Coca-Cola is India’s largest beverage maker and is estimated to have around 40% share of the country’s branded beverages market. For Coca-Cola overall, India is currently the sixth-largest market after the U.S., Mexico, Japan, Brazil and China. While Quincey’s mandate to his India team — led by T. Krishnakumar, president Coca-Cola India and Southwest Asia — is to move India one notch up in the foreseeable future, his long-term vision is for India to be among the company’s top three markets globally.
In September, in his first visit to India as head of Coca-Cola (he took over the reins of the $42 billion beverage giant in May), Quincey said in a press meet: “We are building the fundamentals of a much bigger business to give the consumers what they want.” Reiterating the company’s global strategy, he added: “We will be guided by what the consumers want …. So, while brand Coca-Cola will be the heart and soul of the company, the company needs to become much bigger by participating in many more categories.”
In the past 15 years, the contribution of carbonated drinks to Coca-Cola’s global revenues has declined from 90% to 70%. By 2025-2030, this is expected to reduce further to 50%. In India, however, carbonated drinks continue to account for a large chunk of the firm’s sales. The new team — the management reshuffle took place nearly a year ago — is now all set to change that. According to Krishnakumar, the management changes were “part of a planned transition process.” Recent appointments, he says, “are in keeping with the company’s approach of creating and leveraging a pool of global Indian talent. The new organization structure is in keeping with economic reforms that have the potential to convert India into a single national market.”
Neeraj Kakkar, cofounder of India’s leading ethnic drinks company Paper Boat and formerly a senior executive at Hindustan Coca-Cola Beverages, Coca-Cola India’s largest bottling arm, notes that Coca-Cola has a “very strong team” in India at present. Says Kakkar: “They have got in some of the best performers from Coca-Cola worldwide. This will result in faster decision making.”
Describing the India scenario, Kakkar points out that it is a high value-for-money market, and consumers are not ready to pay too much of a premium. This impacts profitability. Also, the rural market in India is large and mostly untapped. One key parameter that Coca-Cola needs to focus on for the next few years, he says, is how many new consumers are coming into the fold every quarter. Says Kakkar: “For Coca-Cola to boost its growth it needs to recruit more consumers at the front-end and at a much faster pace than it is doing at present. It needs to bring them into the fold of packaged beverages and then work at moving them up the value chain. One answer to this is product innovation. You have to create new and exciting products which offer high value for money.”
A New Recipe
Krishnakumar has his game plan ready. “The Indian market has tremendous growth potential, and we are working with our bottling partners to leverage this growth,” he says. “We have had a flattish situation possibly for 14-15 months. However, we believe there is serious opportunity that exists simply because we could penetrate a lot more in terms of distribution. We also believe that by expanding our portfolio, we will be recruiting more people into it. And so we are getting into a more segmented portfolio approach.”
According to Krishnakumar, in line with Coca-Cola’s long-term strategy of becoming a “total beverage company,” the India arm, too, is broadening its portfolio across five category clusters. These are sparkling; energy; dairy/juice/plant-based; water/enhanced, water/sports drinks; and ready-to-drink coffee and teas. “The India strategy replicates the global strategy of providing choice. In India, we will localize these choices. You have seen this with the recent launch of our Indian fruit juice-based offerings such as the Minute Maid Mosambi,” he says.
Fruit is one big area of focus for Coca-Cola in India. In June this year, the company announced that along with its partners, it would contribute $1.7 billion to the agri ecosystem of the country over the next five years, spanning the entire supply chain from “grove to glass.” Close to $900 million of this contribution will be towards the procurement of processed fruit pulp and fruit concentrate while the remaining will be invested in creating the required infrastructure including manufacturing lines, juice bottling infrastructure, fruit processing plants and equipment, and agricultural interventions.
“We propose to use fruit products in four ways,” explains Krishnakumar. “One is to develop juices as a category, which is straightforward. The second is that we will be looking at adding fruit to our sparkling products. The third is to introduce newer products in the beverage space. Lastly, we would like to increase the share of our exports to the global Coca-Cola systems that stands at $240 million currently. We are working on all four fronts, which will be a huge 360-degree approach.”
While expanding its fruit-based portfolio is largely perceived as a move by Coca-Cola to dilute its “unhealthy” tag, Krishnakumar is quick to defend. “I must first state that none of our beverages is really unhealthy. What we provide is choices for different occasions. Some of our products are meant for indulgence, some for nutrition, while some provide functional benefits. We will play our part in shaping choice but, eventually, it is for the consumers to decide.”
Industry experts believe that expanding its portfolio in India is a smart move by Coca-Cola. They point out that unlike in the U.S., where carbonated drinks are often a substitute for water, in India drinks such as Coca-Cola and Pepsi from rival firm PepsiCo are used more for occasional consumption. Their pricing is considered premium, and these brands fall in the luxury and aspirational category. They also face competition across the country from local cola drinks such as Bovonto (in the southern state of Tamil Nadu), Jayanti Cola (in the northern state of Rajasthan) and Xalta Cola and Campa Cola (New Delhi) that are priced cheaper.
In addition, like in other parts of the world, in India, too, there is a strong move towards healthy alternatives. “Regional players will play on price and undercut Coke. There is also probably the fakes market in rural areas. Besides, there are shrewd local players like Paper Boat, which has a smart ethnic story, and Patanjali Ayurved, which is selling the story of India going back to its roots. Not just price, but credible alternatives for consumption and a slowing fizz drink consumption can make it a tough battle,” says Y.L.R. Moorthi, professor of marketing at the Indian Institute of Management Bangalore.
Pointing to what he sees as “more locally relevant offerings from domestic competition such as Paper Boat,” Devangshu Dutta, chief executive of consulting firm Third Eyesight, suggests: “To succeed in India, and I would say worldwide, Coca-Cola needs to let go of the monolithic approach founded on its past growth in the U.S. and truly engage with the markets of the future and the local consumers’ needs.” Harminder Sahni, founder and managing director of consulting firm Wazir Advisors, adds: “I am certain that Coca-Cola needs to focus beyond carbonated drinks if it wishes to achieve its growth target in India. The general awareness about sugar and carbonated drinks is the major reason for stagnation of the category and hence Coca-Cola’s slower growth. Believing that Indians will consume these drinks as Americans do, just because of westernization of lifestyle and clever advertising, is far-fetched. ”
What Will Work?
Nitin Gupta, professor of marketing at the Institute of Management Technology (IMT) at Hyderabad, feels that unless Coca-Cola “successfully broadens its assortment of products, the goal that CEO Quincey has in mind seems quite ambitious.” According to Gupta, Coca-Cola can probably “fare well” in the dairy/juice/plant-based segment, but other segments like sparkling, energy, water/sports drinks, he says, are currently “too niche” in India and would continue to be so in the near future. Ready-to-drink coffee and teas, he feels, “can be considered, but the competition in this segment is huge, and Coca-Cola’s success with its current offerings has been very limited.” Suggesting that the best bet for Coca-Cola in India could be packaged juices, Gupta says: “The going would be tough for Coca-Cola in the packaged juices market in India, but that’s where the future lies. I feel that this initiative of Cola-Cola, though expensive at the outset, would reap future benefits.”
Kakkar agrees that fruit juice as a category has a lot of potential, but he warns that the ecosystem and the market need to develop. The biggest challenge in the ethnic drinks category, he adds, is lack of scale. He goes on to elaborate: “Take jamun (black plum), for instance. At Paper Boat, we are happy if we source and sell 200 tonnes a year. But for Coca-Cola, it doesn’t make sense to do anything less than 10,000 tonnes to begin with. Otherwise, it will simply get lost in the overall portfolio and will not get the required management attention. But to source jamun at this scale will be a challenge because at present farmers don’t grow so much of it. Of course, just as the ecosystem and the market for mango drinks have developed over the years, it can be done for other fruits also. But it will require time, effort and investment.”
Kakkar sees potential in ready-to-drink tea. He points out that in China and Japan, which have high tea consumption like India, the conversion to packaged tea has been huge; it is one of the biggest categories of packaged beverages. “Some of the highest selling brands in beverages in Japan and China are in packaged tea. I believe that there is a lot of scope for product innovation in tea in India. There is a huge opportunity to move consumers from unpackaged to packaged tea. It’s not that others [like Pepsi Lipton and Nestle] have not tried in India, but it has not worked out so far. I think if Coca-Cola makes the effort, it has the wherewithal to make it work,” he notes.
Wazir’s Sahni expects Coca-Cola’s water, juice and dairy products to do much better than other categories. “These are already large and growing, and Coca-Cola can use its research, innovation and branding power to dominate the segments. The other segments are too niche, and India isn’t rich enough yet to have significant volumes in them,” he says.
But even in the growing categories, it may not be all that easy. According to data from Nielsen, from October 2016 to September this year, the share of Coca-Cola’s mango-based brand, Maaza, which is the market leader in the juices, nectars and still drinks category, declined from 35.4% to 33.1%. During the same period, Pepsi’s mango drink Slice fell from 13.9% to 9.6%, while Indian firms Parle Agro and Dabur increased their shares. Parle Agro’s Frooti moved up from 14% to 15.7% and Dabur’s Real brand of mango juice inched up to 9.8% from 9.2%.
In an interview with business daily The Economic Times, Nadia Chauhan, joint managing director at Parle Agro, said: “While we have been extremely aggressive with our overall marketing strategy, we have also worked on building an extremely advanced go-to-market strategy.” Mayank Kumar, marketing head of juices and beverages at Dabur, said: “Our understanding of the Indian palate and preferences has helped us stay ahead of the curve.” Dabur is estimated to have more than 50% share of India’s packaged juices segment.
Meanwhile Coca-Cola’s arch rival, PepsiCo, is also on a similar track of expanding its portfolio. It recently launched two vitamin-fortified flavored drinks. In a recent interview with business daily Business Standard, Vipul Prakash, senior vice-president beverage category at PepsiCo India, said: “Value-added dairy, hydration and juices are the three growing categories now. Any beverage company that wants to be successful has to play in all these three product segments.”
Moving Up the Hierarchy
So, can Krishnakumar achieve Quincey’s target? Sahni of Wazir Advisors thinks that “while it is ambitious, it is achievable…. The challenges are manifold, starting from incumbents to creative startups, but Coca-Cola has many strengths like its distribution muscle, marketing prowess and deep pockets. It can also go inorganic and acquire some of the interesting startups. Further, it has a fantastic brand portfolio across categories and is an innovative company and can create new categories, products and brands.”
Kakkar, too, believes it is “very achievable.” Says he: “The per capita consumption story in India is very low and not yet fully played out. Once that happens, consumers will typically start spending more on non-essentials, and impulse purchases will go up.”
Kakkar points to another aspect. While there is a definite shift away from carbonated drinks towards health and wellness in India, this is primarily among the top 100 million population. For the next 400-500 million, the wellness move is from “unpackaged to packaged beverages.” This, he notes, is a huge market waiting to be tapped. However, he points out that while Coca-Cola has a very strong relationship with the retailers and is very strong in on-the-ground execution — their chillers are very clean, the brands are readily available and the products are placed very well — the category excitement has been missing in the past few years. “For instance, during the 2004-2007 period, the marketing and advertising campaigns captured the attention of the consumers. That has gone missing. They need to bring it back,” Kakkar notes.
Jagdeep Kapoor, chairman and managing director of Samsika Marketing Consultants, feels “the unsaturated nature of the Indian market and aggressive marketing by Coca-Cola” can be a winning formula for the beverage firm. Kapoor was director at Parle Agro, the makers of cola drink Thums Up, from 1989 till 1994. He had a ringside view when Coca-Cola acquired Thums Up in 1993 when it re-entered India after a gap of 17 years. Interestingly, Thums Up continues to be the top cola drink in India.
Kapoor lists four recommendations, which he says could be used to boost the top-line and bottom-line growth of Coca-Cola in India. “First, India is not a ‘soft drink’ market. It is a ‘cold-drink’ market. Refrigeration is going to be a key element in this tropical country, and it needs to be enhanced. Second, the focus on distribution and penetration must be increased. India has 8,100 towns and 650,000 villages…. These need to be penetrated. While visibility and taste are important in a country like India, availability is extremely important. Third, in order to increase sales, the company needs to move consumers from occasional consumption to regular consumption. Fourth, India being a diverse country with various languages and consumption behavioral trends, regional sensitivities need to be crafted into marketing strategies.”
According to Kapoor, the five beverages clusters are “a sensible portfolio of categories.” He says: “Each of these categories has tremendous potential for growth, but care needs to be taken to appropriately use segmentation and positioning for each of them.” Moorthi adds another note of caution: With all of its initiatives, Coca-Cola might be able to offer an interesting story in India. But, he adds, “it is unlikely that the company will have a walk over. The market will get them to slog for every rupee.”