RED BECOMING THICKER CASE STUDY ANSWER

 RED BECOMING THICKER

The Backdrop

There seems to be no end to the troubles of the coloured – water giant Coca Cola. The cola giant had entered India decades back but left the country in the late 1970s.  It staged a comeback in the early 1990s through the acquisitions route. The professional management style of Coca Cola did not jell with the local bottlers. Four CEOs were changed in a span of seven years.  Coke could not capitalize on the popularity of Thums Up.  Its arch rival Pepsi is well ahead and has been able to penetrate deep into the Indian market.  Red in the balance sheet of Coke is becoming thicker and industry observers are of the opinion that it would take at least two decades more before Coke could think of making profits in India.

 

The Story

It was in the early 1990s that India started liberalizing her economy.  Seizing the opportunity, Coca Cola wanted to stage a comeback in India.  It chose Ramesh Chauhan of Parle for entry into the market.  Coke paid $100 million to Chauhan and acquired his well established brands Thums Up, Goldspot and Limca. Coke also bagged 56 bottlers of Chauhan as a part of the deal.  Chauhan was made consultant and was also given the first right of refusal to any large size bottling plants and bottling contracts, the former in the Pune – Bangalore belt and the latter in the Delhi and Mumbai areas.

            Jayadeva Raja, the flamboyant management expert was made the first CEO of Coke India.  It did not take much time for him to realize that Coke had inherited several weaknesses from Chauhan along with the brands and bottlers. Many bottling plants were small in capacity (200 bottlers per minute as against the world standard of 1600) and used obsolete technology.  The bottlers were in no mood to increase their capacities, nor were they willing to upgrade the trucks used for transporting the bottle. Bottlers were more used to the paternalistic approach of Chauhan and the new professional management styles of Coke did not go down well with them.  Chauhan also felt that he was alienated and was even suspected to be supplying concentrate unofficially to the bottlers.

            Raja was replaced by the hard – nosed Richard Niholas in 1995. The first thing Nicholas did was to give an ultimatum to the bottlers to expand their plants or sell out. Coke also demanded equity stakes in many of the bottling plants.  The bottlers had their own difficulties as well.  They were running on low profit margins.  Nor was Coke willing to finance the bottlers on soft terms.  The ultimatum backfired. Many bottlers switched their loyalty and went to Pepsi.  Chauhan allegedly supported the bottlers, of course, from the sidelines.

            Coke thought it had staged a coup over Pepsi when it (Coke) clamed the status of official drink for the 1996 Cricket World Cup tournament.  Pepsi took on Coke mightily with the famous jingle “Nothing official about it”. Coke could have capitalized on the sporty image of Thums Up to counter the campaign, but instead simply caved in.

            Donald Short replaced Nicholas as CEO in 1997.  Armed with heavy financial powers, Short bought out 38 bottlers for about $700 million.  This worked out to about Rs 7 per case, but the cost – effective figure was Rs 3 per case. Short also invested heavily in manpower.  By 1997, Coke’s workforce increased to 300.  Three years later, the parent company admitted that investment in India was a big mistake.

            It is not in the culture of Coke to admit failure.  It has decided to fight back.  Coke could not only sustain the loss, it could even spend more money on Indian operations.  It hiked the ad budget and appointed Chaitra Leo Burnett as its ad agency.  During 1998 – 99, Coke’s ad spend was almost three times that of Pepsi.

            Coke is taking a look at its human resources and is taking initiatives to re – orient the culture and inject an element of decentralization along with empowerment.  Each bottling plant is expected to meet predetermined profit, market share, and sales volumes.  For newly hired management trainees, a clearly defined career path has been drawn to enable them to become profit centre heads shortly after completion of their probation. Such a decentralized approach is something of a novelty in the Coke culture worldwide.

            But Alezander “Von Behr, who replaced Short as Chef of Indian operations, reiterated Coke’s commitment to decentralization and local responsiveness.  Coke has divided India into six regions, each with a business head.  Change in the organization structure has disappointed many employees, some of whom even quit the company.

            Coke started cutting down its costs.  Executives have been asked to shift from farm houses to smaller houses and rentals of Gurgaon headquarters have been renegotiated.  Discount rates have been standardized and information systems are being upgraded to enable the Indian headquarters to access online financial status of its outposts down to the depot level.

            Coke has great hopes in Indian as the country has a huge population and the current per capita consumption of beverages is just four bottles a year.

            Right now, the parent company (head – quartered in the US) has bottle full of problems.  The recently appointed CEO-E Neville Isdell needs to struggle to do the things that once made the Cola Company great.  The problems include –

Meddling Board

            Coke’s star- studded group of directors, many of whom date back to the Goizueta era, has built a reputation for meddling.

Moribund Marketing

            Once world class critics say that today the soda giant has become too conservative, with ads that don’t resonate with the teenagers and young adults that made up its most important audience.

Lack of Innovation

          In the US market, Coke hasn’t created a best – selling new soda since Diet Coke in 1982.  In recent years Coke has been outbid by rival Pepsi Co for faster growing noncarb beverages like SoBe Gatorade.

Friction with Bottlers

            Over the past decade, Coke has often made its profit at the expenses of bottlers, pushing aggressive price hikes on the concentrate it sells them.  But key bottlers are now fighting back with sharp increases in the price of coke at retail.

 

 

International Worries

            Coke desperately needs more international growth to offset its flagging US business, but while some markets like Japan remain lucrative, in the large German market Coke has problems so far as bottling contracts go.

            When its own house is not in order in the large country, will the company be able to focus enough on the Indian market?

 

Questions:

 

1.       Why is that Coke has not been able to make profit in its Indian operations?        

2.       Do you think that Coke should continue to stay in India? If yes, why?

3.       What cultural adaptations would you suggest to the US expatriate managers regarding their management style?

4.       Using the Hofstede and the value orientations cultural models, how can you explain some of the cultural differences noted in this case?