Twenty five years after entering India, Coca-Cola India decided to have a celebration in Agra, the city where it all started in 1993. Bottlers and company executives turned up to be a part of the fun on December 11 and 12. True to tradition, most of the conversation revolved around sales volumes. It has been an interesting journey for the company starting with the launch of its iconic global brand — Coca-Cola — making a significant buyout, and several management changes. Now, they are pursuing a strategy that is more consumer-centric than ever in its history in India.
They will no more be a one-trick pony. The brand is out for a transformation with different products for different parts of India and across categories such as dairy, hydration and fruit-based drinks, touching various price points. It is stretching the equity of the brand to bring in a set of new consumers. This will be built on its age-old strength of distribution and sales muscle.
The turnaround has become essential. Growth has been hard to come by for soft-drink majors, over the last five to 10 years, with healthier options available in large numbers.
Carbonated drinks, the market for which has grown slowly at 4.31% CAGR between 2012 and 2017, drive 65% of Coca-Cola’s revenue according to industry research reports. In this period of sluggish growth, the company’s share has dropped from 60.8% to 56.3%. The market share of its closest rival PepsiCo remained unchanged at around 33%.
With changing consumer preferences, the soft drink major’s transition into a total beverages company began in India about 18 months ago. Before this strategy kicked in, in FY16, Coca-Cola India had clocked revenue of Rs.17.5 billion with a CAGR of 9.77% over a four-year period. Its bottling arm, Hindustan Coca-Cola Beverages (HCCB) in FY17 had a revenue of Rs.94.7 billion and loss of Rs.2.33 billion; for FY18 its revenue was Rs.90.6 billion with a loss of Rs.1.18 billion (see: Hitting a rough patch). Responding to a query from Outlook Business, HCCB said its numbers for FY17 “were impacted on account of adverse effects of high taxation, commodity inflation, aggressive investments in manufacturing capacity and demonetisation.” In the case of FY18, it attributed it to the accounting impact of GST — excise and other tax costs subsumed under GST. With the company taking a hit on its profitability and a carbonated market that has lost almost all its fizz, a lot is riding on Coca-Cola India’s transformation plan.
Coca-Cola first came to India in 1950 and was growing steadily for nearly three decades. But, it bid adieu in 1977, when the government, in line with the Foreign Exchange Regulation Act of 1973, made it mandatory for foreign companies to dilute their shareholding. In 1993, after the economic reforms, the Atlanta-based company made a re-entry. The brand’s return was marked by a high-profile acquisition of Ramesh Chauhan’s Parle for Rs.1.8 billion — which brought the iconic Thums Up apart from Limca, Gold Spot and Maaza into Coca-Cola’s roster. These along with Coke and Fanta made for a formidable portfolio, which was ready to take on Pepsi.
But, there were hiccups. Chairman of The Coca-Cola Company, Muhtar Kent, recorded in 2013 the challenges they had faced. They had trouble retaining employees, there were hard lessons to be learnt in distribution channels (for example, small corner shops were more important than large grocery stores) and innovations were needed to tackle the erratic power supply. He wrote in the commentary for McKinsey, “If you come to India with some grand, predetermined strategy or master plan, prepare to be distracted, deterred, and even demoralised.” That was the first phase of Coke in India.
Two years ago, the company’s global CEO James Quincey outlined the way forward with a new model. It would stand on two key pillars. One is having a more consumer-centric portfolio, by stepping outside of its core business into brands that are more relevant to a country or region. Two is pervasive distribution.
The movement towards being a “total beverage company” had truly started at least two decades ago. There has been a reasonable level of success in water, juice and iced tea, too. Jonathan Davison, beverage analyst at GlobalData cites the case of Japan, where Coca-Cola has done well in at least two businesses, including flavoured water. Asia Pacific contributes 13.5% of Coca-Cola’s overall revenue. “It has developed unique flavours of I Lohas (flavoured) water. Even in iced/RTD teas there, its Ayataka green tea brand has enjoyed sustained success,” he says. Interestingly, Japan is not a cola-driven market and Coca-Cola’s sales come from selling canned coffee (estimated to be at least 60% of its business here) and innovative products such as Real Gold, a hangover cure.
This success in Japan with alternative beverages, says Jagdish Sheth, marketing professor at Emory University’s Goizueta Business School, comes on the back of one million vending machines, which are all connected by an internal network.
In India too — besides growing its core sparkling beverages business — it would get into local and hyperlocal beverages, remodel sourcing-and-distribution channels, and build brands that can be taken global. Some baby steps have been taken too.
Is this version 2.0 for Coca-Cola India? Gently drawing into his filter coffee at Machan, Taj Mansingh’s multi-cuisine restaurant in the capital, T Krishnakumar, the company’s president and CEO for India and Southwest Asia, smiles. He is a low-key boss who speaks the simple language of a salesman. “I am not sure (about version 2.0) but yes, it is a different version. We have to get the best of the old and also do some new interesting things,” says the bespectacled 59-year-old.
On December 12, he spoke to the sales team in the streets of Agra, making his intentions clear. With a larger product portfolio, now starting at Rs.5 (with Vitingo) and its popular Maaza mango drink in a tetrapak at Rs.10, he said, Coca-Cola India had the ammunition to take on competition. It widened their portfolio with 46 brands relevant to the country, with 17 launches done only for 2018. Its new competitors are Amul in dairy, a host of players including Real and Tropicana in juice, and Hector Beverages for ethnic (such as panakam and thandai). It has a good lead in market on its closest competition PepsiCo (see: Turf war).
Two brands, from Coca-Cola India, tailored for the local market was out May last year — Aquarius Glucocharge and Minute Maid Vitingo, both water-soluble powders. They were targeted at the middle class, who want affordable products with clear functional benefits.
Aquarius Glucocharge, says Krishnakumar, was for the consumer looking for a rehydration drink. “This is for those people working on farms or in factories,” he explains. The water-soluble powder, created specifically for the Indian market, was launched in a 200 ml pack and priced at a very competitive Rs.10, putting it right up against Glucon D from Kraft Heinz (the company has since then been acquired by Zydus Cadila) and Dabur’s Glucose-D. Meanwhile, Vitingo, shortened for ‘vitamin on the go’, was a brand that is sold in South Africa as an iron supplement. At Rs.5 for a 18 gm serving, it is the cheapest brand in the company’s portfolio in India. It is after 15 years that Coca-Cola has made an entry into this price band, the last instance being Coke’s 200 ml bottle in 2003.
Aquarius Glucocharge also marks a process change inside the company. It is a launch from the incubation hub, opened in Gurugram few months ago with a core team of six to eight people. The entire process of ideating to the product launch in the case of Glucocharge took six weeks and, a month later, was out in the market. Compare this to the scenario earlier when the company would take six to eight months for an exercise of this kind, with a good chance that the idea would be vetoed in the middle of it. “We asked ourselves, why can’t we operate like a start-up. If competition can launch a product in six to 12 weeks, we should be able to do it too,” says Krishnakumar, who assumed the top job in May 2017 after heading Hindustan Coca-Cola Beverages (HCCB), the company’s bottling arm.
Krishnakumar thinks this approach allows the company to have a limited version of the product and quietly test it in the market.
The need to reach out to a larger population is what spurred the thrust into rehydration with Glucocharge and Vitingo. Simultaneously, Coca-Cola India has decided to get more out of its existing brands such as Maaza and the water business. Maaza is a Rs.25-billion brand and water overall for the company is a Rs.8.5-Rs.9-billion brand. This is really where the India-specific strategy gains form and shape.
The company has segmented India into three — the rich, middle class and climbers. The rehydration offerings, especially Vitingo, are targeted at the climbers.
Two versions of Maaza were launched in 2017. “They allow us to straddle different set of users with the same brand,” says Krishnakumar. End of that year, a thicker version Maaza Gold (with concentrate percentage at 18%, which is 10% for regular juice category) was out in a one litre tetrapak at Rs.120. That was an aspirational product. The company also brought out Refresh (with lesser pulp percentage) in a tetrapak that hit the market at Rs.10, clearly to take on Parle Agro’s Frooti.
In water too Coca-Cola sells four brands — Kinley, Bonaqua, Aquarius and Glaceau Smartwater — across various segments and price points, with mass brand Kinley now selling fruit water as well. “Our strategy is to give a water plus offering. The trick is to move the consumer from water to some level of additional functionality and that’s where the range from Glucocharge to smart water helps,” he emphasises.
According to Ramesh Chauhan, chairman, Bisleri, there is little doubt that flavoured water has taken off across the world. He does not expect the market to open up easily in India though. Here the market is small, no more than Rs.500 million in size, growing at 20-25% each year. Consumer awareness about it is low, and people are likely to go for the basic version, he says.
Rahul Narang, founder and chairman, Narang Group, who owns O’cean fruit water, admits that the trade initially did not really understand the product, which affected both placement and distribution. “To add to that, price points were a problem, since on the shelf it was compared to packaged water, but taxed at 40% like carbonated soft drinks.” To his mind, there has been a shift from carbonated to aqua drinks and lot of homes and restaurants are infusing their daily water servings with fresh cucumbers, fruits, limes and other ingredients. “Over time, these consumers will seek a more convenient packaged solution,” says Narang.
At the mass end, of plain bottled water, it is a distribution game, with margins being a challenge. In this segment, Coca-Cola’s brands are up against those of Parle Bisleri, both with a market share of around 8% each. PepsiCo’s share is at around 5%. “Spending a lot on transportation (15 % to 20% of the total cost) in a low-margin business such as water means you need to get the volume right, to succeed,” says Chauhan.
Innovation is at the core of the strategy for Coca-Cola today. Therefore, there was no question of beating existing players at their own game. Take the instance of dairy, which has been the waterloo for many a multinational such as Danone and Lactalis who is still trying to make sense of the Indian market after its expensive buyout of Tirumala Milk Products in early 2014 for Rs.17.5 billion. In bid to strengthen its position, Lactalis agreed to acquire Prabhat Diary’s milk business for Rs.17 billion in January 2019.
Coca-Cola’s initial dairy foray with its Vio brand in 2016, from its global portfolio, was a flavoured milk straight up against a multitude of players such as Amul and smaller cooperatives such as Mother Dairy. Launched with two flavours, almond and kesar, it came a cropper. Now the strategy, Krishnakumar says, is to do it with nutrishakes launched in 2018.
The new offering has been launched with chocolate and banana variants and will be up against ITC’s dairy range Sunfeast Wonderz, where a large part is fruit-based. “We are clear there has to be a strong proposition and a way to be different. That means getting into the commodity side of the dairy business (milk and dahi) is out of the question,” he explains.
According to R S Sodhi, MD, Gujarat Cooperative Milk Marketing Federation (GCMMF), which markets Amul’s products, it will be difficult for multinationals to match the pricing power of local players, especially cooperatives. “They do not source milk from the farmers and that means a higher cost of operation,” he says. According to Sodhi, the impediment is the time involved in identifying farmers, setting up procurement and chilling centres before getting it into the market.
That still is a smaller challenge compared to the real issue of margins. A company like Coca-Cola is used to a 30% gross margin on its soft drinks business, which, says Sodhi, is no more than 6-7% in the dairy business, even for value-added products. To sidestep this, Coca-Cola will identify niches and retail it through a limited number of outlets, hoping they can command a premium.
That is not something that misses Krishnakumar’s attention and he speaks openly about the difficulty in taking on the cooperatives. For now, the approach is to look for specific gaps that exist in the market and then come up with a product, which may not go mass right away. Last September, the company brought in its Minute Maid Smoothie from its global portfolio and fine-tuned it for the Indian market. “We brought in a version with mango and banana, both being popular in India. The milk was made thicker since Indians like it that way,” he explains. At Rs.30 for 250 ml, it is being sold in Tamil Nadu, Kerala, Telangana and Andhra Pradesh.
On Coca-Cola’s dairy foray in other parts of the world, Richard Hall, chairman, Zenith Global, a UK-based food and drink consultancy, points to the US, where it has been selling Fairlife milk since 2015. “It’s a great example of how Coca-Cola took a commodity and added value with ultra-filtration, increased protein and calcium at the same time reducing lactose and sugar. Globally, the company’s focus is primarily on premium, lifestyle brands and it is now looking to achieve this broadly across all beverage sectors,” he says. Media reports in 2016 say that Fairlife saw sales worth $90 million.
What lies ahead
Krishnakumar sees a bigger opportunity in the fruit business. Apart from Maaza, still considered a part of the juice and juice drinks market, the only other presence comes in the form of Minute Maid, a brand that Coca-Cola acquired in 1960. In India, the brand is still insignificant after being around for more than a decade.
In the Rs.130-billion juices market, Coca-Cola has a 31.4% market share, with Parle Agro having a 22.5% share and PepsiCo 17.4%. That said, Minute Maid is a small player in a smaller segment of 100% juice (about 80% of the juice market is juice drinks, which is anything having more than 10% pulp). Coca-Cola’s Maaza is far more successful, which is what drives the company’s market share.
The management here started to push Maaza really hard around 2002-03. After managing to strike deals to source pulp, Coca-Cola managed to create a market through the year. All of this ensured that sales numbers took off.
The approach to the fruits business is slightly different and Krishnakumar calls it the “fruit circular economy.” Circular economy, according to the company, is a grove-to-glass approach — in short, being there from the nursery till the time the product finds its way into the glass/PET bottle or any other container.
The company has already announced an investment of $1.7 billion over the next five years — of this, $800 million will go into the procurement of processed fruit pulp and the other $900 million will come from HCCB in setting up infrastructure for juice bottling, fruit processing plants and agricultural interventions including sourcing the fruit, processing it and getting it ready for the market.
Indians, according to him, relate to fruits and milk quite easily. “Fruits in India are available only for 45 days on an average but there is demand through the year,” says Krishnakumar. Barring Africa, where Coca-Cola does some work with fruit, India is the country where the circular fruit economy will be tested.
The first phase of this project is for mango, for which Coca-Cola has inked an agreement with Jalgaon-based Jain Irrigation. According to Anil Jain, vice-chairman and managing director, Jain Irrigation, a key feature of this is to use the Ultra High-Density Plantation Technique (UHDP). “The yield is 3x more using half the water,” he says. Besides, the gestation period for mangoes will be down to three years, from seven. Training the farmers and supplying the planting material will be his company’s responsibility and the first phase has 2,000 farmers across 2,500 acres. “The two partners will assure 100% offtake of the produce at the prevailing price,” he adds.
Project Unnati, as the agreement is called, was extended to procurement of oranges (the deal for mangoes was signed in 2014) in the Marathwada and Vidharbha regions of Maharashtra last year.
The plan is to go for the obvious fruits such mango and orange in the first phase and then customise it for each region later. “That means we can look at the specific offerings such as Kesar in Gujarat, Neelam in Tamil Nadu or Dasheri in UP,” he says. In January this year, they launched Minute Maid Colour in Tamil Nadu, a sparkling drink with the “goodness” of grape juice. Coca-Cola has been toying with localised versions of Minute Maid frozen desserts too.
“Fruit gives us tremendous flexibility to increase my product portfolio. The challenge will be in getting it right on the supply chain for each fruit. This model can be taken to any country,” he says. Fruit contributes to over 30% of Coca-Cola India’s revenue.
The juice market has been seeing some serious shifts, with a host of new players managing to identify a clear niche. Anuj Rakyan, founder and MD, Rakyan Beverages, the owner of the Raw Pressery brand, recalls a phase three years ago, when there was no place on the shelf for a brand like his (Raw Pressery is cold pressed juice, where a hydraulic press is used to extract juice from fruits and vegetables). He thinks there is a marked difference since then with many innovative products coming in. “From being a supply led market, it’s now demand led,” he says, adding, “our innovation was not about longer shelf life and added sugar, but instead was on cold pressing, to keep the juice fresh.”
That was easier said than done with issues such as having a robust cold chain being a serious challenge. In today’s context, he does not believe juice is a low-volume business anymore. Raw Pressery is at the top-end of the market, with its 250 ml starting at Rs.100. “There is an opportunity for a clean label, good for you, hygienic products, which give consumers a sense of origin and sourcing,” he says.
It is precisely this kind of potential that convinces Krishnakumar of how much can be done in India. While Coca-Cola was in the race to acquire Kraft Heinz’s India portfolio, which would have given it Complan and later, GSK, which had Horlicks, his mind is, in fact, convinced about the organic story in India. “There is a significant growth opportunity here and each of the categories we are present in has huge headroom to do that,” he says. On the anvil is a foray into coconut water, with its Zico brand. This year, an imported version is being sold and the plan is to make it locally over the next few months.
RimZim, a jeera-flavoured carbonated drink that came through the Parle acquisition, will be Coca-Cola’s entry into the ethnic beverages business — it is here where it will be in direct confrontation with the likes of Hector Beverages’ Paper Boat.
For the workaholic Krishnakumar, it will mean only more time out there doing market visits. By his own admission, he says at least ten days a month are spent talking to the trade. “I will not leave a city without visiting 10-15 outlets and I prefer doing it alone. Nothing to me is more exciting than a market visit,” he says with a twinkle in his eye.