COCA-COLA IN AFRICA
Founded in 1892, Coca-Cola first entered Africa in 1929. While Africa had always been viewed as “Backwater”, it has recently emerged as a major growth market commanding strategic attention. Of the $27 billion that Coca-Cola would invest in emerging economies between 2010 and 2020, $12 would be used to beef up plants and distribution facilities in Africa. Why does Coca-Cola show such strong commitments to Africa? Both the push and pull effects are at work.
The push comes from the necessity to find new sources of growth for this mature firm, which has promised investors 7%-9% earnings growth. In 1998, its stock reached a high-water mark at $88. But it dropped to $37 in 2003. Since 2004, the share price rallied again, rising from $43 to a new peak of $90 in November 2014 (adjusted for a 2:1 share split in 2012). Can Coca-Cola’s stock reach higher?
Its home markets are unlikely to help. Between 2006 and 2011, US sales declined for five consecutive years. Further, health advocates accused Coca-Cola of contributing to an epidemic of obesity in the United States and proposed to tax soft drinks to pay for health care. While Coca-Cola defeated the tax initiative, it is fair to say the room for growth at home is limited. In Europe and Japan, sales are similarly flat. Elsewhere, in China, strong local rivals have made it tough for Coca-Cola to break out. Its acquisition of a leading local fruit juice firm was blocked by the government, which did not seem to bless Coca-Cola’s farther growth. In India, Pepsi is so popular that “Pepsi” has become the Hindi shorthand for all bottled soft drinks (including Coke!). In Latin America, sales are encouraging but growth is limited. Mexicans on average are already guzzling 665 servings of Coca-Cola products every year, the highest in the world. There is only so much sugary water one can drink every day.
In contrast, Coca-Cola is pulled by Africa, where it has a commanding 29% market share versus Pepsi’s 15%. With 65,000 employees and 160 plants, Coca-Cola is Africa’s largest private sector employer. Yet, annual per capita consumption of Coca-Cola products is only 39 servings in Kenya. For the continent as a whole, disposable income is growing. In 2014, 100 million Africans earned at least $5,000 per person. While Africa indeed has some of the poorest countries in the world, 12 African countries (with a combined population of 100 million) have a GDP per capita that is greater than China’s. Coca-Cola is hoping to capitalize on Africa’s improved political stability and physical infrastructure. Countries not fighting civil wars make Coke’s operations less disruptive, and new roads penetrating the jungle can obviously elevate sales.
Coca-Cola is already in all African countries. The challenge now, according to chairman and CEO Muhtar Kent, will be to deep dive into “every town, every village, every township”. This will not be easy. War, poverty, and poor infrastructure make it extremely difficult to distribute and market products in hard-to-access regions. Undaunted, Coca-Cola is in a street-by-street campaign to increase awareness and consumption of its products. The crowds and the poor roads dictate that some of the deliveries have to be done manually on pushcarts or trolleys. Throughout the continent, Coca-Cola has set up 3,000 manual distribution centers. Taking a page from its playbook in Latin America, especially Mexico, Coca-Cola has aggressively courted small corner stores. Coca-Cola and its bottlers offer small corner store owners delivery, credit, and direct coaching – ranging from the tip not to ice down the Cokes until the midday rush to save electricity to helping on how to buy a house after vendors make enough money.
In Africa, US-style accusations of Coca-Cola’s alleged contribution to the obesity problem are unlikely. After all, the primary concern in many communities is too few available calories of any kind. However, this does not mean that Coca-Cola faces no criticisms in Africa. It has to defend itself from critics who accuse it of depleting fresh water, encouraging expensive and environmentally harmful refrigeration, and hurting local competitors who hawk beverages. In response, Coca-Cola often points out the benefits it has brought. In addition to the 65,000 jobs it has directly created, one million local jobs are indirectly created by its vast system of distribution, which moves beverages from bottling plants deep into the slums and the bush a few crates at a time.
“Ultimately”, the Economist opined, “doing business in Africa is a gamble on the future”. Overall, CEO Kent is very optimistic about Africa. In his own words at a media interview.
Africa is the untold story, and could be the big story, of the next decade, like India and China were the past decade. The presence and the significance of our business in Africa is far greater than India and China even today. The relevance is much bigger… In Africa, you’ve got an incredibly young population, a dynamic population. Huge disposable incomes. I mean, $1.6 trillion of GDP, which is bigger than Russia, bigger than India. It’s a big economy, and so rich underground. And whether the next decade becomes the decade of Africa or not, in my opinion, will depend upon one single thing – and everything is right there to have it happen – that is better governance. And it is improving, there is no question.
Sources: M. Blanding, The Coke Machine (New York Avery, 2010), “Coke’s last round”. Bloomberg Businessweek, 1 November 2010: 54-61; “For Indian’s consumers, Pepsi is the real thing”, Bloomberg Businessweek, 20 September 2010:26-27, “Can Coke surpass its record high of $88 a share?” Bloomberg Businessweek, 6 June 2011, 49-50; “Business in Africa” Economist, 9 September 2006: 60-62; “Index of happiness, “Economist, 5 July 2008: 58; “A continent goes shopping, “Economist, 18 August 2012: 57-58; D. Zoogah, M.W. Peng, and H. Woldu, “Institutions, resources, and organizational effectiveness in Africa, Academy of Management Perspectives 29 (2015): 7-31.
1. How does Coca-Cola compete around the globe?
2. How can competitors such as PepsiCo, Nestlé, and local hawkers fight back?
3. What determines the success and failure of Coca-Cola around the globe?