Coca cola distribution strategy MM

TEAM 7 P’S

Pallavi Sinha (83)

Paritosh Vijwal Jairazbhoy (84)

Paromita Ganguly (85)

Shantanu Pathak (86)

Poornima Rajan (88)

Swapnil Potduke (89)

Prakash Menezes (90)

2 A Study Of The Distribution Strategy Of Coca Cola.

Executive Strategy

This report is made as a part of Marketing Management assignment at Xavier Institute of Management and Entrepreneurship.

This report intends to study the distribution strategy of Coca Cola Company in tier 1 cities and the rural markets of India. It also contains a comparison of Coca cola vis-à-vis Pepsi. In this report, we find the efficiency and the effectiveness of Coke’s bottling strategy; how the bottling is adapted to the local communities, honouring their identity and distinctiveness. We also find that the most important factor for Coke is the relationship between the local bottlers, customers and community.

Through evaluation of the distribution strategy of Coca Cola, we find that Coke uses both direct channel and indirect channels to optimize itsdistribution channel strategy. It also discusses the critical question of ‘how Coca Cola should evaluate the different channel strategies?’ In the rural markets Coca Cola uses the hub and spoke system and an effective transportation model to minimize the cost disadvantages of distribution in the rural markets. The report also takes note of Coca Cola’s “Parivartan” program for training retailers who are essential parts of Coke’s distribution strategy. A notable creative thinking by Coca Cola was providing low-cost Ice boxes to the retailers in rural markets.

Finally, the report makes a comparison between Coca Cola and its arch rival Pepsi. In this section we find that Pepsi has always “called a spade a spade”. It has a competitor product for every product of Coca Cola. Pepsi has also shown an aggressive marketing strategy as compared with Coca Cola. However, Coke has a better distribution network as compare with Pepsi. Finally, this section of the report concludes by stating that Coca Cola India lacks flexibility because power is centralized at Atlanta and requires approval from there for every major decision.

Group- 7Ps Marketing Management-II March 2011


ContentsExecutive Strategy...........................................................................................................................................................2

Introduction.....................................................................................................................................................................3

About The Coca Cola Company...................................................................................................................................3

The Coca Cola System.................................................................................................................................................4

Bottling History...........................................................................................................................................................4

The Marketing and Distribution Strategy....................................................................................................................5

The Coca Cola System wide performance....................................................................................................................5

Responsible Marketing................................................................................................................................................6

An Introduction to Operation Distribution of Coca-Cola in tier 1 cities..........................................................................6

Coca-Cola’s Distribution Channels in Tier 1 cities.....................................................................................................6

Fig1: Distribution for Large Retailers......................................................................................................................7

2. Indirect Selling.................................................................................................................................................7

Fig2: Distribution for Smaller Retailers...................................................................................................................7

Facilitating the product by infrastructure – Going one step forward from the distribution channel...........................8

How Should Coca-Cola evaluate the different channel strategies that it follows?.......................................................8

Distribution Strategy Adopted By Coca-Cola In Rural India...........................................................................................9

Concluding Remarks: A Comparison of Coca Cola with competitors...........................................................................12

Introduction

About The Coca Cola Company



Headquartered in Atlanta, Georgia, The Coca Cola Company is the world’s largest beverage company operating in more than 200 countries with a portfolio of more than 3500 beverage products including sparkling drinks and still beverages such as waters, juices, juice drinks, teas, coffees, sports drinks and energy drinks. It employs approximately 139600 associates across its six operating groups: Eurasia and Africa, Europe, Latin America, North America, Pacific and Bottling Investments- in addition to Corporate.

The company manufactures the concentrates, syrups and beverage bases and sells them to the bottling operations. The company owns and licenses the brands. To connect the brands to the consumers, the company focuses on marketing activities including print and television advertising, online programs, retail store displays, sponsorships, contests and package design.

Apart from the 139,600 company associates, it takes more than 300 bottling partners and over 20 million customers to produce, deliver and sell more than 500 beverage brands around the world. The Coca Cola System which refers to the relationship between the company and its bottling partners helps conduct business on a worldwide scale while still maintaining a local approach.

The Coca Cola System

The bottling partners play a critical role in the Coca-Cola system as they are responsible for producing, packaging, distributing and merchandising nearly 500 beverage brands worldwide. They are the main connections with the customers. More than 300 bottling partners worldwide range from international and publicly-traded businesses to small family owned operations- the vast majority of which are not owned or controlled by The Coca-Cola Company. The bottlers work closely with the customers to carry out localised marketing plans developed in partnership with the company.

Bottling History

Coca-Cola originated as a soda fountain beverage in 1886, selling for five cents a glass. Early growth was impressive, but the development of a strong bottling system is what catapulted Coca-Cola into becoming the world-famous brand of today.

The first bottling agreement was taken up in 1899. With the progress of the bottling technology, the efficiency and the product quality improved and a rapid growth was observed from 1900-1909.

In 1916, the straight sided bottle was replaced by the contour bottle in orderto distinguish Coke from its imitators. The contour bottle became one of the few packages ever granted trademark status by the U.S. Patent Office and one of the most recognized icons in the world.

In 1923, the six bottle cartons were introduced which were a huge hit. By the end of the 1920s, bottle sales of Coca Cola exceeded fountain sales.Between the 1920s and 30s, the Company began a major push to establish bottling operations outside the U.S. By the time of World War-II, Coca Cola was being bottled in 44

countries. During the war, 64 bottling



plants were set up around the world to supply the troops. Many of these war-time plants were later converted to civilian use, permanently enlarging the bottling system and accelerating the growth of the Company's worldwide business.

Between the 1950s and the 60s, packaging innovations took place, consumers had choices of Coca Cola package size and type, the traditional 6.5 ounce contour bottle or larger servings including 10, 12 and 26 ounce versions. Cans were also introduced.

During the 1970s and 80s, as technology led to a global economy, the Coke retailers merged and evolved into international mega chains. In order to better serve such giant customers, many small and medium sized bottlers consolidated.

In the 90s, political and economic changes opened vast markets that were closed or underdeveloped for decades, viz. - the fall of the Berlin Wall in Germany, the economic liberalisation in India.

The Coca Cola bottling system has its roots deeply planted in the local communities. This is important because today, people seek brands that honour the identity and the distinctiveness of local markets. Strong, locally based relationships between Coca Cola bottlers, customers and communities are the foundation on which the entire business grows.

The Marketing and Distribution Strategy

The Coca Cola Company has a global business that operates on a local scale. It attributes its ability to create a global reach with a local focus, primarily to the strength of the Coca Cola system, which comprises of the Company and its more than 300 bottling partners worldwide.

The Company operates its system through multiple local channels. It anufactures and sells concentrates, beverage bases and syrups to bottling operations, owns the brands and is responsible for consumer brand marketing initiatives. The bottling partners manufacture, package, merchandise and distribute the final branded beverages to the customers and vending partners, who then sell the products to the consumers.

All bottling partners work closely with customers- grocery stores, restaurants, street vendors, convenience stores, movie theatres and amusement parks- to execute localised strategies developed in partnership with the Company.

The Coca Cola system is not a single entity from a legal or managerial perspective and the Company does not own or control most of its bottling partners.

The Coca Cola System wide performance

In April 2007, associates from The Coca Cola Company and several of its largest bottling partners met for the first time to discuss the development of a core set of performance indicators for the Coca Cola System. Working groups of Company



associates and representatives from the bottling partners were formed to determine the feasibility- due to the legal and management complexity of the Coca Cola System- of collecting and consolidating economic and social data in addition to the environmental data already collected.

Responsible Marketing

The Coca Cola Company is committed towards marketing responsibly, across the globe, across all advertising media and across all its beverages.In 2010, the global Responsible Marketing Policy was evolved to redefine the appropriate audience threshold for children’s programming from audiences that are more than 50% children younger than 12 years of age to audiences that are more than 35% children younger than 12 years of age. This policy applies to all of the Company’s beverages and the media outlets that it uses, including television, radio, print, mobile and the Internet.

An Introduction to Operation Distribution of Coca-Cola in tier 1 cities

Coca-Cola India is among the countries top international investors with more than $ 1 billion invested for its operations in India. The company is involved in giving its customers top world class drinks to fill up their hydration, refreshment and nutrition needs. It employs 6000 people directly for its operations across various plants and around 125,000 people indirectly.

The Indian operations comprises of 50 bottling operations, 25 owned by the Company, with another 25 being owned by franchisees. That apart, networks of 21 contract packers manufacture a range of products for the Company. On the distribution front, 10-tonne trucks – open bay three-wheelers that can navigate the narrow alleyways of Indian cities across tier 1cites, tier2 cities and rural India.

Coca-Cola’s Distribution Channels in Tier 1 cities

Coca-Cola uses two primary kinds of distribution strategies for its distribution process in tier 1 cities:

1. Direct Selling In this type of direct selling, Coca-Cola uses its own transport to transfer their products to the different shops. The company owns a fleet of 450 plus trucks that carry the products of Coca-Cola to different retailers across cities. By providing this type of transport, the Coca-Cola Company earns more profit primarily because of the absence of middlemen and other channels partners. This type of a one to one distribution channel between Coca-Cola and the various retailers also allow Coca-Cola to manage the inventory levels automatically. Whenever the number of bottles of Coca-Cola or any of its products keep on diminishing and come below a specified limit, a note would be sent to Coca-Cola for procuring new batches so as to fill the shelves. This type of a one to one Vendor Managed Inventory is followed by Coca-Cola in almost all of the tier one cities. A diagrammatic representation of this type of a model is shown below:



Fig1: Distribution for Large Retailers

2. Indirect SellingIn this type of selling that is done for smaller shops where Coca-Cola products are sold. In this type of selling there are various agencies and wholesalers who are involved in the distribution chain that starts from the manufacturer and ends at the end customer. Since it is very difficult for the company to have its own people transport the products of Coca-Cola to the various small shops across cities, it uses the agencies and wholesalers to assure the customers about the availability of Coca-Cola and its products. By using this type of multi tier approach of distribution Coca-Cola may have reduced profit, but the reach of customers through this type of a multi level distribution strategy is very high when compared to the direct selling distribution strategy that was highlighted in the first case. The diagrammatic representation of this type of distribution chain in shown in the below diagram.

Fig2: Distribution for Smaller Retailers


Big Retailers – like Food world, Nilgiris, Big Bazar, etc

Wholesalers and agencies that act as middle men

Smaller retailers – nearby grocery shops in residential

areas

Manufacturer –Coca Cola

Manufacturer – Coca Cola


3. Other Major Distribution Channels that Coca-ColaSome of the other distribution channels that Coca-Cola uses during the major festivals or events that are held around the cities:

1. Vending Machines or Self serving Slots machines that will be installed at schools, business establishments, railway stations etc to serve the customers at that point of time.

2. Ho-Re-Ca distribution channel which means hotels, Restaurants and Cafes including fast food restaurants, cuisine restaurants. Here the vending machines from where the customers can directly have Coca-Cola products through take away outlets. Also Coca-Cola bottles in various category of SKU’s are available for the customers along with large family packs.

3. Mobile Carts wherein mechanized and non mechanized bottles are available to the customers.

4. Fun zones and Entertainment zones where Coke bottles are made available to the customers in large numbers and are one of the highest profit generating mechanisms for the Coca-Cola Company as people would be tired after the rides and coke will act as major refreshment for this category of very tired and enervated people.

Facilitating the product by infrastructure – Going one step forward from the distribution

channel

For providing the product in a good manner, the company provides various infrastructures for keeping them in the small and medium sized shops in residential areas:

1. Vizi Coolers.2. Freezers3. Display Racks.4. Free empty bottles and shelves for bottles.

How Should Coca-Cola evaluate the different channel strategies that it follows?

1. Companies like Coca-Cola need to competitive advantage in the future evolution of sales and distribution channels for their industries through an analysis of: End customer needs - who do the channel serve and what are the emerging needs of that

customer group? Channel economics - What functions are performed by the channel and which ones are valuable

to customers? Are the costs and value in balance? Alternative approaches - What is happening in analogous channels? Where are the best models

of behaviour? Coca-Cola and its approach may have great applicability well outside the food and beverage industry. Who are the other ‘Coca-Cola’ examples?

Emerging competitors - Who is appearing on the periphery of an industry? What alternative approaches are they offering? Do important groups of customers seem to be buying from firms using that new approach?

2. Understanding the situation and the alternatives for selecting a sales and distribution channel requires careful thought, data gathering, and analysis in the context of a coherent business model. As difficult



as it may seem to create a new channel strategy, the prospect of actually changing any existing approach can appear even more formidable. In order to be successful, a company like Coca-Cola recognizing changing sales and distribution requirements in its marketplace must be committed to re-examining, and potentially changing, many aspects of the way it does business. Reassessment and change of this kind typically has ramifications throughout the organization, including: Questioning the concepts underlying past success Requiring new skills and capabilities Threatening loyalties and relationships built up over many years between current management

and the existing channel participants Initiating a messy transition period

Distribution Strategy Adopted By Coca-Cola In Rural India

With its large population & low consumption, and increased purchasing power of rural people due to increase in productivity and better prices commanded by the agricultural products, the rural market represented a significant opportunity for penetration and a critical battleground for market dominance for Coca-Cola India (CCI). CCI believed that the first brand to offer communication targeted to the smaller towns would own the rural market and therefore went after that objective with a comprehensive strategy in small towns and rural areas, comprising the other 96% of the nation’s population.

So, it decided to revamp its distribution and pricing strategy in rural India. These initiatives in distribution and pricing were supported by extensive marketing in the mass media as well as through outdoor advertising.

While setting up the network, it realized that the centralized distribution system used by the company in the urban areas where the product was transported directly from the bottling plants to retailers would not be suitable for rural areas as it would be very costly due to the long distances to be covered as rural India meant reaching 6,27,000 square km and getting distributors to travel 200 km to reach five shops with drop sizes of less than a case.

Coca-Cola’s Rural Initiatives

To increase its production without increasing its own bottling plants, Coca-Cola India follows manufacturer sponsored wholesaler franchise system.

Coca-Cola India doubled the number of outlets in rural areas from 80,000 in 2001 to 160,000 in 2003, which increased market penetration from 13 per cent to 25 per cent. During this period, the number of company’s rural distributors increased from less than 4000 to 5500.

Coca-Cola India was one of the first global majors which spotted the potential spin offs from the country’s rural market in the early 2000’s. It perfected a unique supply chain to cater to India’s vast rural markets hinterland.


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A Study Of The Distribution Strategy Of Coca Cola.

Hub and Spoke Distribution System

Coca-Cola, which considered rural India as a future growth driver, evolved a hub and spoke distribution model to reach the villages.

Fig. 3 Hub and Spoke Distribution System

Under the hub and spoke distribution system, stock is transported from the bottling plants to hubs and then from hubs, the stock is transported to spokes which are situated in small towns. These spokes feed the retailers catering to the demand in rural areas.

To ensure that trucks carry full loads, from the company depot it supplies twice a week, to large distributors who act as hubs and make payment by demand drafts. These distributors appoint and supply, once a week, to smaller distributors in adjoining areas against payment by cash.

The benefit of this strategy is that it allows for larger loads to travel long distances and smaller loads to travel short distances.

Transportation model

Coca-Cola not only changed its distribution model, but also changed the type of vehicles used for transportation. The company now uses large trucks for transporting stock from bottling plants to hubs and medium commercial vehicles transport the stock from the hubs to spokes.

For transporting stock from spokes to village retailers the company have adopted a model in which all possible means of transport like trucks, auto rickshaws, cycle rickshaws, hand carts to camel carts in


Bottling Plant

Hubs

Spokes

Retailers RetailersRetailers

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Rajasthan and mules in hilly areas are used to cart products. This was done to overcome the narrow rural roads that could not accommodate large motorized vehicles.

In 2001, it purchased 5,000 new trucks and auto rickshaws for boosting its rural distribution. Through its rural distribution initiatives, CCI was able to increase its presence in rural areas from a coverage of 81,383 villages in 2001 to 1,58,342 villages in August 2003.

The “Parivartan” Program- targeting Retailers

In 2007, Coca-Cola came up with the concept of Coca-Cola University that would focus on training its retailers on displaying and stocking products well. It named it “Parivartan” program (meaning "Change" in English). Presentations (including audio/visual technology) in local Hindi language helped small retailers to better understand the concepts involved. The idea is to help the retailers develop skills to survive, compete, sustain and grow in a fast changing retail scenario in the country.

To reach to the rural retailers, CCI extended the concept to ‘Coca-Cola University on Wheels’ that covered small towns such as Hoshiarpur, Mukeria, Nakodar, Phagwara, Nawanshahar, Malerkotla, Barnala, Khanna, Moga, Jalandhar, among others. After achieving tremendous success, plans were laid out to extend this program in other parts of the country as well.

The program, not only lead to over 6000 trained retailers in rural India but also increased Coca-Cola’s rural penetration.

Refrigeration for Retailers

Coca-Cola India noticed that because of the erratic power supply most grocers in rural areas did not used to stock cold drinks. CCI introduced low-cost ice boxes in the rural areas where there was lack or no supply of electricity. In some cases it provided a tin box for new outlets and thermocol box for seasonal outlets. It provided the retailers with coolers that operate with a brine solution that allows the product to remain chilled for 12 hours even without electricity.

To overcome the problem in rural areas where there was electricity but the retailers could not afford refrigerators, in 2003, CCI distributed around 200,000 refrigerators to its rural retailers.

Results

Coca-Cola India achieved 39% volume growth in 2002 while the industry grew 23% nationally and the Company reached breakeven profitability in the region for the first time. The rural market today accounts for 80 per cent of new Coke drinkers and 30 per cent of its volumes. In 2003, the rural market for Coca-Cola grew at 37 per cent over the last year, against a 24 per cent growth in urban areas. Due to the new pricing strategy the per capita consumption in rural areas also doubled in just two years. Its rural penetration increased from 9% in 2001 to 25% in 2003.


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Concluding Remarks: A Comparison of Coca Cola with competitors

One of the major competitors of Coca Cola is Pepsi. If we observe closely, Pepsi has always taken the lead in developing new products, new advertising ideas and newer risks. For instance, in certain countries, consumers wanted a soft drink that was low in sugar, yet did not have a diet taste or image , Pepsi responded by developing Pepsi Max. It is also a well-known fact that Coke focused more on International brands where as Pepsi focussed on its growing snack business. For every product of Coke, Pepsi has one competitor. For example, Diet Pepsi Vs Diet Coke, Pepsi Max Vs Coca Cola zero, Sprite Vs Mountain Dew, Nestea Vs Lipton and Tropicana Vs Minute maid, Aquafina Ethos water Vs Dasani, Smart water, Kinley, Eva,similar competition can be seen in categories like cherry flavoured cola, Vanilla flavoured cola, Lime flavoured Cola, Lemon Cola etc.

While Pepsi targets customers that go to consumer stores, Coca Cola scored a big coup by winning the soft drink business at Subway.

If we see Pepsi ads they focus more on positioning Pepsi as “The Choice of a New Generation”. In 1975, Pepsi began showing people doing blind taste tests called Pepsi Challenge in which they preferred one product over the other, and then they began hiring more and more popular spokespersons to promote their products. In their hope to win the Cola Wars a Concorde was painted blue with Pepsi written across it in white lettering.

In the late 1990s, Pepsi launched its most successful long-term strategy of the Cola Wars, Pepsi Stuff. Consumers were invited to "Drink Pepsi, Get Stuff" and collect Pepsi Points on billions of packages and cups. They could redeem the points for free Pepsi lifestyle merchandise. After researching and testing the program for over two years to ensure that it resonated with consumers, Pepsi launched Pepsi Stuff, which was an instant success.

Coca Cola and Pepsi, engaged in a "cyber-war" with the re-introduction of Pepsi Stuff in 2005 & Coca-Cola retaliated with Coke Rewards. This cola war has now concluded, with Pepsi Stuff ending its services and Coke Rewards still offering prizes on their website. They were loyalty programs that gave away prizes to consumers after collecting bottle caps and 12 or 24 pack box tops, then submitting codes online for a certain number of points. However, Pepsi's online partnership with Amazon allowed consumers to buy various products with their "Pepsi Points", such as mp3 downloads. Both Coca-Cola and Pepsi previously had a partnership with the iTunes Store

One important thing must be noticed that Thumps Up is a strong brand in western and southern India, while Coca Cola is strong in Northern and Eastern India. Thumps Up accounts for 40% of Coca Cola Company’s turn over, followed by Coca Cola which has a 23% share and Limca which accounts for 17% of the turnover of the company. Coca Cola India has positioned Thumps up as a beverage associated with adventure because of its strong taste and also making it compete with Pepsi as even Pepsi is associated with adventure, youth.

Coke may have gained an early advantage over Pepsi since it took over Parle in 1994. Hence, it had ready access to over 2, 00,000 retailer outlets and 60 bottlers. Coke has had a better distribution network, owing to the wide network of Parle drinks all over India. Coke has further expanded its distribution network. Coke and its product were available in over 2, 50,000 outlets (in contrast with Pepsi's 2,00,000). Coke has a greater advantage in terms of geographical coverage. But Coke has had


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problems with its bottlers as the required profits for the bottlers have not been forthcoming. This is more so because Coke has hiked the price of its concentrate by Rs. 8. This is straining the relationship between the Coke and its bottlers. The company had decided to create a fund to reimburse performing bottlers for the extra costs incurred on account of the hike in prices of soft drink concentrates. It was also realized that India is a price sensitive market and the company would have to absorb in the increase in excise duty and said that in the long run Coke will have to slash prices for the benefit of the consumers and said that they were considering a cut in the prices of their fountain soft drinks. Coke and Pepsi have devised strategies to get rid of middlemen in the distribution network. However, 50% of the industry unfortunately depends on these middlemen. Bottlers of the 2 multinationals have strongly felt the need to remove these middlemen from the distribution system, but very little success has been achieved in doing so.

Despite being a global brand, Pepsi has built its success on meeting the Indian consumer’s needs, particularly in terms of making the brand synchronize with localized events and traditions. Instead of harping on its global lineage, ergo, it tries to plug into ethnic festivals, use the vernacular indifferent part of the country, and blend into the local fabric. Pepsi is using both national campaigns-such as the Drink Pepsi, Get Stuff scheme, which offers large discounts on other products to Pepsi-buyers as well as local. Also, one of the strongest weapons in Pepsi’s armoury is the flexibility it has empowered its people with. Every manager and salesperson has the authority to take whatever steps he, or she, feels will make consumers aware of the brand and increase its consumption.

Instead of creating a bond with the customers through small but high-impact events, Coca-Cola chose to associate itself with national and international mega events like the World Cup Cricket, and world cup football. But now coke is also entering into local actions. Coke is also trying to make their brand synchronize with localized events traditions and festivals. Coca-Cola new tag line in this advertisement is “Real shopping, real refresher” or showing celebrations of various occasions especially Diwali in its ads.

But, flexibility is what Coca Cola lacks, fettered as it is by the need for approvals from Atlanta for almost everything. In the past, this has shown up in its stubborn insistence on junking the franchisee network it had acquired from Parle; in its dependence on its own feedback mechanism over that of its bottlers;’ and on its headquarters-led approach.


Coca cola distribution strategy MM

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