Whether it’s pesticide, a sexual harassment allegation, or a Pallakhad, anything about Coca-Cola India (CCI) has always created a stir. Not surprisingly, when the soft drink major took the first ever initiative to tackle the ticklish issue of pricing in the soft drink industry with its Thanda Matlab Paanch or affordability mantra, it drew considerable flak from one and all.
The Rs 5 strategy, cynics had pointed out will soon hit the company’s bottomline so much so that towards the end of the year 2003 industry was a buzz with rumours that Hindustan Coca-Cola Beverages had taken a massive write-off on 200ml products post the summer season due to its price cut strategy.
That CCI silenced its critics—at least on this count—with its performance based results stated by the parent company The Coca-Cola Company (TCCC) in its fourth quarter (Q4). The Q4 results, announced recently, stated that the company has stabilised growth in India, noting a unit case volume growth of 22 per cent during the year 2003.
Amongst others, the company also talked about its ‘affordability strategy’ being pursued in India. “In India, the resilience of the company’s single serve affordability strategy and diverse portfolio of local and international brands was proven, as unit case volume grew 22 per cent during the year.”
So how has Coke’s affordability strategy worked in 2003 if it couldn’t work earlier? After all, the industry had been resorting to price cuts earlier, too, on and off. “The soft drink industry was growing in fits and starts till about 2001 that’s because price cuts were never used as a strategy,” Mr Sanjiv Gupta, president and CEO, Coca-Cola India reasoned.
‘Strategy Not A Price Drop’
For, Coke, first and foremost task was to change the mindset of all its stakeholders towards the pricing issue. “This is a strategy and has to be sustainable in the long run; this is not a price drop; we have to make it inherently viable; explode volumes, get new users, outlets/geographies, instill fiscal discipline or else it would get reduced to a price drop which is a first and easiest casualty to bottomline pressure.” CCI told its customers way back in the beginning of 2003.
So while the contribution of Coke’s consumer connect and single minded thematic price messaging to its affordability success is well known, what’s perhaps is not so well known is its focus on costs.
In fact, the single important thing which could have helped in making the model viable is Coke’s ‘maniacal’ focus on costs. At the core of its strategy, is what its calls “unleash the demand, rein in the costs, innovate’.
So while $100m in 2003 were pumped in to expand the pipeline by enhancing supplier capability, increase manufacturing capacity/glass (by 30 per cent) and distribution infrastructure, cost reduction strategy was largely pursued through procurement initiatives, expanding supply base; introducing light weighting bottles and thereby derive savings and driving operational efficiencies through freight reduction initiatives.
The company, for instance, while investing in 200-ml bottles, introduced lightweight 200 ml bottles so as to save approx 4-5 per cent cost. From the current weight of 330gm, it reduced the weight to 300gm, thus yielding a saving of $1million in 2003 to the company.
Similarly, on procurement, it opted for reverse auction for some items including transportation while it zeroed in on few key suppliers for sugar and glass.
The affordability model, internally called ‘Doing Paanch: The Coca-Cola Way’, CCI claims claims has worked like ‘magic’ and has ensured high volume, low cost; low margin, healthy ROCE for the company.
While refusing to share company-specific results, CCI claims that in the last 15 months, consumer base for soft drinks has grown from 160 million to 240 million, while per capita consumption has touched 9.5 per cent per annum from 7.8 per cent per annum in 2003. Nevertheless, Mr Gupta assures: “Agreed that the Rs 5 model is a low margin per case model, but it’s viable.”
Viable or unviable, CCI feels there’s enough potential and the real issue is how to tap it. “We have just touched the tip of the iceberg with affordability.” And, the real challenge in the year ahead it feels is to realise the untapped potential, FAST and cost effectively.