July 01,2009

With Troubles at Home, Coke and Pepsi Turn to Herb Formula in China

By CSC staff, Shanghai

Coke CEO Muhtar Kent attended the opening ceremony of a new bottling factory in Urumqi, Xinjiang, on June 24.

Two days later, Pepsi Chair and CEO Indra Nooyi declared the opening of a new factory in Chongqing. The heads of both Coke and Pepsi are more and more aware of the importance of Chinese consumers at a time when carbonated drinks are losing popularity. Adopting a Chinese herb formula may offer them a way deeper into the Chinese market.

Coke, the world’s largest carbonate beverage producer, is facing troubles in many countries. In the beginning of June, Venezuela's Health Ministry suspended the sales of Coke Zero claiming the sweetener used in the drink is harmful to health. In January this year, traces of pesticide were found in Coke’s carbonated drinks in the UK. Earlier, in 2003, India claimed that a higher than allowed level of pesticide was found in both Coke and Pepsi, and some southern areas even banned the two companies?products.

But there is also trouble in the US, home market to the two soft drink giants. Carbonated beverages are gradually losing favor among consumers. In fact, both companies lost have lost market share. 

According to Coke’s 2008 annual report, its beverage sales in North America were 1% down, year on year, and sales income was down 2%. Also in 2008, Pepsi cut 3300 employees and closed six factories to cut costs. The two companies blamed their travails on the global financial crisis, but Coke’s 2008 sales of carbonated beverage were off 3%, year on year, while non-carbonated beverage sales grew by 5%.

The US may be Coca Cola’s home, but it is also the first place to boycott the drink. In 2005, the Center for Science in the Public Interest released Liquid Candy: How Soft Drinks are Harming Americans' Health, in which the author, Michael F. Jacobson, explained in detail the relation between carbonated beverage and obesity and osteoporosis, as well as dental problems and kidney stones. The voice against carbonated beverage has been increasing since 1990s in the US.

Of those of Coke’s beverages whose sales increased in 2008, 42% came from non-carbonated low-calorie beverages, and the other 58% from carbonated beverages. Compared with figures from 2000, the share of non-carbonated and low-calorie beverages grew 8%. Of Coke’s total sales, the percentage of non-carbonated and low-calorie beverages rose from 11% in 2000 to 22% in 2008, up by 100%. In 2008, Coke’s sales in China rose 19% year on year, and the increase in the sales of Meizhiyuan Orange Juice accounted for 30% of the total increase in non-carbonated and low-calories beverage sales.

Chinese consumers are paying increased attention to their health. The Ministry of Health says that from 2008, Coke will have to report the ingredients and calories of its beverage on the bottle.

To prosper, Coke and Pepsi must put more emphasis on non-carbonated and low-calorie beverage.

Pepsi is now promoting "Herb Joy" on the Chinese market, a new beverage made out of typical Chinese herbs such as jujube. Coke has begun to cooperate with the China Academy of Social Sciences to develop an herbal formula beverage.

The two drinks giants actually began to develop non-carbonated beverages long ago, but they wish to go further on the Chinese market, their hope for the future. At the end of last year, Indra Nooyi declared in Beijing that Pepsi would invest $1 billion in China in the next four years. Several months later, Muhtar Kent declared in Shanghai that Coke would invest $2 billion yuan in the next three years in China.

But besides investing and building new factories, Coke and Pepsi need to look to more and different products for the China market. The two have recently witnessed the boom of Wanglaoji Cool Tea, which originated from the south of China, and will undoubtedly choose herb as one new way of development.

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