Just one year after China's opening up and reform, Coca Cola became the first international brand to enter this country. After three decades of development, China has become the soda maker's fourth largest market in the world. Tremendous changes have taken place in China's beverage industry over the past thirty years. It was not until 1980 that the country's soft drink market began to take shape, recording an annual production volume of 288,000 tons. This same figure, in comparison, was 176 times larger in 2007. How could foreign soft drinks sell in a country with a fledgling beverage industry? In today's fiercely competitive consumer markets, what is the best way to maintain customer loyalty? To discuss these issues, we caught up with Brenda Lee, Vice President of Coca Cola China.

Brenda Lee began working at Coca-Cola Hong Kong on communications affairs in 1990. Leaving from 1994-1995 to study in Australia, she then rejoined the company in 1996. Named Public Affairs and Communications Director for Coca Cola China in 2000, Lee relocated to Shanghai and is now the company’s Vice President.

China Comeback

  Q: Ms. Lee, welcome to the main talk. L: Thank you for inviting me.

  Q: We understand Coca-Cola had been in China for over 20 years before the establishment of the PRC. What prompted you to come back on 1979? I know you were actually among the first batch of foreign companies to enter china after the reform and opening up policy was announced.

L: The long-standing relationship between Coca-Cola and China in fact dates back to 1927, and at that time, we had our first bottling plant open in Shanghai, and then, we have a second one in Tianjing, the same year, and a third one opened in Qingdao in 1930, and by 1948 Shanghai is the first city market outside the US with sales of over 1 million cases.

  Q: You were fully confident with this market?

  L: In our previous presence in china we have already achieved very big success and that is the reason why we want to achieve the first mover benefit to come back to china as early as possible.

When Coca Cola re-entered China, the Shanghai government took a conservative stance and rejected the company’s request to set up their first bottling plant in the city .Coca Cola’s partner, China Oil and Food Corporation, vacated one of its subsidiaries’ buildings- a roast-duck plant in Beijing for the soda maker.

Q: It was interesting you picked Beijing as the place to build your first factory when you re entered in 1979 because in 1927 your factory was actually in Shanghai. So why did you choose to change location?

L: I think there’s some historical background to that. In the 20’s and 30s, Shanghai is really the biggest trading port in china and that is the reason why many foreign merchants and companies came to that city to expand their business in China. Whereas, after the opening, our bottling partner at that time Cofco, is also having the headquarter office in Beijing and also we need to get all the government approvals and cooperation and communication with various government departments, central government departments and they are all in Beijing. So this is a very natural reason for us to choose Beijing as our first plant location.

Q: Looking back at your decision to come back, some people say that from the very beginning top management actually focused on fast expansion and long term growth in this country and they were not expecting to make profit within ten years. I don’t know how true that was.

L: For any business we need to have some initial investment in our early stage of development but we really do not have a specific time frame that we would not make any profit in certain years. Any business will have bushiness plan with profit in mind and I would say that many of our bottling plants have very good initial response from our consumers and they have been making profits in the very early years of their business. That is the reason we have more money to plow back to china and build more plants in china. From the fist one in Beijing in 1979 to currently we have 35 plants across the country.

Q: As a business corporate executive, you can’t always release your profit figures and even the time when you start to make profit. But what would you say was the key indicator for Coca Cola to establish its foot print in China’s soft drink market?

L: We start our first plant in Beijing in 1979 and in the first decade, we have built about ten plants in China. And in 1993, we got the approval of the ministry of light industries that we can build another 13 plants across the country. And that is a really very important milestone for us to expand our footprint in China. But at the time of 2004, as I would say we recorded the accumulated sales of our products of 100 billion bottles of Coca Cola have been sold in China. This is an astronomical number, which is another milestone of our business here. And by this year 2008, we have already expanded our number of plants to 35.

Q: Those were the milestones. What contributed to these milestones? What contributed to the success of coca cola such fast expansion?

L: This is also a very nice combination of the right place, right time, right people.

  Q: Why would you say so?

L: The opening up of China also gave us the opportunity to come back to the country to develop our business and the improvement of the standard of living in China also allowed a lot more consumers to be able to buy our products. And of course the 1.3 billion number of people in China give us an immense market opportunity in the previous times that we’ve been able to capitalize on the market potential.

Q: Do you consider your growth in the China market better than your other international territories?

L: China right now is the number 4 largest market in the Coca-Cola global market. We are just behind the US, Mexico and Brazil. But it is surprising to know how fast china has grown. In 1994 we are just 21st market in the global ranking and its just more than a decade that we are rise to the number 4.

Q: Was this something that the company had expected when it made the decision to come back?

L: You know it would be beyond our wildest imagination 80 years ago that China would one day become one of the most important markets for Coca-Cola in the world.

Localization

30 years ago, foreign products were only available in friendship stores. These are the specialty stores in Beijing, Shanghai and Guangzhou that only accepted foreign currencies. In the eyes of most Chinese people, they were the places foreigners went to buy luxury goods.

Q: In 1979, when you first came back, who were your target customers? I mean the general perception was that your precondition was to only sell to foreigners in this country. Was that true?

L: That was not true.

  Q: Not true at all?

L: When we think about china we did not think about foreigners. We think about the mass consumers in this country and that is the reason why we expand our footprint not only in the cities visited by foreign visitors but also places where we have the general consumers. When we first started in Beijing in 1979, at that time the distribution channel was pretty restricted because at that time the products were still to be imported from Hong Kong and that is the reason why the selling price was a bit high compared to the average income at that time.

  Q: That’s about one tenth of the average household income.

L: That is the reason why maybe visitors would be more able to afford the products. But today we have more than 35 bottling plants in the country and the production cost has come down significantly.

Q: What else did you do to make it more affordable to the general public in china?

L: Localization is the key to bring down the cost of production. In 79 when the products were shipped from Hong Kong to china to satisfy the initial market demand but gradually we have localized all the sourcing and currently 99% of the product’s ingredients are sourced in china and we have all this localized production in stead of shipping in. That also has brought down the cost of production and the prices.

Q: You talked about the localization, the production and the bottling process. What about the localization of the flavor?

L: Coca-Cola has a very unique cola taste that makes it so special. I remember that in the 70s or 80s at that time the predominate soft drink flavor is orange flavor water (Q: we all remember that) and when we introduced Coca-Cola to china people, we were not familiar with the flavor and just asking what is this flavor, this cola flavor. It’s so unique.

Q: How were you able to make the Chinese people accept such flavor. I mean it should have taken a long process.

L: At that early time we had a Three A strategy. What we call the availability, acceptability and the affordability. So first of all, you have to allow your products to be available to the consumers when they want to try it. And then when they try it, they like the taste and also they are able to buy it, to make it affordable to them. So with all these considerations in mind we expand our footprint with more bottling plants across the country. We brought down the cost of production and prices and also we have made many good commercials and promotions to promote the popularity of our products.

Q: What kind of commercials? Today we see a lot of coca cola commercials using a lot of celebrities, Chinese celebrities. But at that time what kind of people was endorsing such a brand, such a product and what kind of commercials was shown to the Chinese consumers so they can take it.

L: There is also a change in the use of commercial in China. In the 80s we basically used a lot of TV commercials produced in the US and we brought it to china with adaptation so at that time you see quite a lot of the lifestyles of people in America or international lifestyles and cultures brought in through the Coca-Cola commercials. This is quite novel to the consumers at that time. But gradually we find that we also need to produce some TV commercials with local relevance, things that can resonate with the Chinese consumers. And that is the reason why you see in the mid 90s we started to produce TV commercials in china with Chinese talent, with scenes that Chinese consumers are more familiar with. 

Q: It reminded me that in the early days when Coca-Cola first into china. There was this perception that this product or this brand to a certain degree represents a western capitalist lifestyle and that raised concern for some people. How did you overcome that?

L: That was a very unique historical background when Coca-Cola first reenter China in 1979 and no doubt that Coca-Cola was first born in the US. But as I said the value that it capsulates in fact appeals to people around the world, those values of happiness, optimism, passion for life, friendship. It’s just the way that it is express is just a little bit different from the time when it entered china in the 70’s and 80’s. And at that time Chinese people might have less chance to see the world outside of china.

Q: Coca-Cola is unique in regards to the staffing of its companies. I understand in current days you are 99% localized in your china operation but what portion of your staff were Chinese or local as the time you reentered in 1979?

L: It’s just natural that we bring in an international team to help the transition and also to bring in the management know-how, the technology know-how and the marketing know how. At that time there were very few of these professionals in china available, but we have a firm commitment and policy to localize our staffing in china because we cannot forever import talent form other parts of the world. Especially there are so many good talents in China. And we believe that with the systematic training, they would be able to lead our functions, to lead our business in a locally relevant way because the local insights, the local understanding is also a key to our success.

  Competition

The escalating market demand drove the creation of a variety of soft drink categories, ranging from carbonated drinks, to herbal drinks and fruit juices. Producers from the Chinese mainland, Hong Kong, Taiwan, as well as foreign countries have since then swarmed into the market to grab a slice of the pie. Today, there are 1371 soft drink manufacturers actively competing in the Chinese market.

Q: How would you define the development stages that the china’s soft drink industry has experienced over the past 3 decades?

L: It’s a very interesting journey. In the late 70s and early 80s, I think there’s very limited choices for consumers in China and the number of companies that are competing in china was not as many as today.

  Q: There was limited number of players. 

L: Limited number of players in the market. And gradually because with the growing population and the market demand in China, more and more players internationally, locally, regionally all come to china to compete in this market and compete for the share of stomach of our consumers. And nowadays you see that there are many types of products in our market, be it carbonated sparkling drinks, be it tea, juices, water, coffee, energy drinks. We can see that that also responds to the consumers demand for choices, for varieties, for their changing lifestyles and this is what we see that the market has changed from few players, few products to a whole lot of product choices and with a significant increase of number of players in china.

Q: When did these producers start to swarm into this country? Around what time?

L: In the 90s, starting to have more players to come into china. And in the 21st century, the growth has been very significant when you now go to the supermarket, you can see that in the beverage aisles, you can see all sorts of products you can imagine whatever you like, there is a product to suite your needs.

Q: In terms of the development of each player you know the first stage is definitely infrastructure building. You had to build your factories, your bottling facilities, your distribution channels. And the second stage was probably to promote your products. Let people know more about your product. What about now? What’s the competing factor in the industry today? Is it innovation?

L: First of all you need to have a good product, good quality product, with good choices as well. And Coca-Cola products are known for their safe and quality standard. And this is also a vote of confidence that has been voted by our consumers. And secondly we need to have good marketing. Especially we are talking about integrated marketing that we use different channels and different marketing mix with good consumer insights that we know how to position our products through what promotion mechanism. So we understand the different passion points of our consumers. What they like? Whether it is sports? Whether it is music? Whether it is different lifestyle attractions tourism?

Q: Today if you look around the world, where does china stand? I mean how do you compare the China market to other more mature or developed market?

L: China in fact is in a very good position though it’s a developing market but its potential is huge. If we compare the sales volume of china to the first three leading markets in the US, in Mexico and Brazil, we find that the per capita consumption per year in China is very low. It’s just 24 servings per year.

Q: What about in the US?

L: In the US you would be surprised to know that it’s more than 400 servings a year. So that is the reason why we say that China has such a huge potential for our business growth. But we also look at the spending power or what we call the disposable income of consumers. China right now has a much lower disposable income than other developed markets like Japan, like the US.

Q: Per capita.

L: Per capita but that is changing very quickly because with the growing number of middle class with a very large mass of middle class in china and that help us to have a very rapid business growth in the past years.

Q: But how is such a reality affecting your strategy or decision in terms of product offering?

L: There is some impact on the product offerings, but it is not critical.

  Q: What kind of impact?

L: Those higher value products like 100% juice right now is very small in China because comparatively it is expensive. And that is why we have a larger juice drink market in China.

Q: What about new product introduction? I know that’s very often in countries like the United States or Japan. What about in China?

L: In China as well, because with the market maturing, consumers will naturally ask for more choices since they have more disposable income.

Q: How do you think China’s opening up and reform over the past 30 years or past decades changed your personal life, personal or career life?

L: When the country is opening up, our company decided to move our China headquarter to Shanghai in the year 2000. I was able to come over to Shanghai and now I’ve been living in this city for 8 years. It’s a fascinating experience for me to be able to work here, to have first hand experience and holistic understanding of this country.

From the first bottle of Coca Cola that came to China in 1979 to the tea drinks specifically tailor for the China’s market, and the sugar-free Coke Zero designed for young People, the company has never stopped localizing and innovating in order to meet market demand.