Coca-Cola's marketing challenges in Brazil: global operations and local competition

International Trade: Coca Cola in Brazil

International Trade

The Coca-Cola Company FEMSA

The purpose of this work is to, through research; focus on a firm analysis of the Coca-Cola Company operating in Brazil and to then make comparison to a major indigenous bottler. The analyses will be examined in the context of marketing, political and economical challenges and problems being experience by Coca-Cola in Brazil. Further each analysis will perform a detailed SWOT on the company as well as appropriate financial analysis and ratios. The Financial analysis will include Foreign Sales to Total Sales, Foreign Assets to Total Assets; Foreign Employees to Total Employees and Foreign Equity to Total Equity.

Introduction:

The largest manufacturer, distributor and marketer of non-alcoholic beverage concentrates and syrups worldwide, the Coca-Cola Company has been sold in the United States since 1886 and is sold in 200 plus countries throughout the world. Coca-Cola manufactures and distributes juices and juice drinks and certain water products as well as selling to bottling and operations, distributors, fountain wholesalers and some fountain retailers. The Coca-Cola Company has adopted a business approach that is inclusive of six strategic priorities as follows:

Accelerate carbonated soft-drink growth, led by Coca-Cola

Selectively broaden our family of beverage brands to drive profitable growth

Grow system profitability and capability together with our bottling partners

Serve customers with creativity and consistency to generate growth across all channels

Direct investments to highest-potential areas across markets

Drive efficiency and cost effectiveness everywhere

The company focuses on three "key" value drivers:

1. Profitable growth;

2. Cost management; and 4. Efficient Capital Structure

Bottling of Coca-Cola's beverages and distribution is accomplished through the sale of beverage concentrates and syrups to bottling and canning operations, distributors and fountain wholesalers as well as some fountain retailers. The concentrates and syrups are generally sold to bottling partners authorized by the Coca-Cola Company to manufacture, distribute and sell the Coca-Cola branded products. This is referred to as "the system." The policies and programs of the bottling partners are not controlled by the Coca-Cola Company. The company has over 300 bottling partners.

Literature Review:

Significant investors accounted for by the equity method are Coca-cola enterprises Inc. is the world's largest bottler of the Company's beverage products and ownership in this company is approx. 37% with Net Sales to Coca-Cola Enterprises in 2003 being the approximate amount of $4.7 billion. In 2003, Coca-Cola FEMSA's net sales of beverage products were approximately $3.2 billion. The Latin American market therefore accounts for nearly 70% of all sales for the Coca-Cola Company. "Brazilian operations posted an 8% volume growth. Evidence of Brazil's economic recovery is the fact that approximately 30% of our incremental volume growth came from single serve packages." Reported in the third quarter was that: "Year-to-date the Brazilian operations are generating as much operating cash flow as Argentina and Venezuela operations, underscoring its growth potential."

It was stated that: "In Brazil very specifically after spending the last sixteen months trying to build a new business model with the relationship with the other Coca-Cola bottlers and the Coca-Cola company, and by the way this is a model that I think has been successful. Coca-Cola has a 36.5% share of the soft drink market." Reported Feb 4, 2004 Comtex news Coca-Cola has closed 2003 with an increase of 1.5% market share hitting the record of 33.5% stake in the Brazilian market. The space of the company as a whole also increased from 49.8% in December 2003 to 50.1% in the same period in 2003. Local competitor Ambev, owner of the brands Guarana, Antarctica and Pepsi increased from 16% to 17.2% while local and cheaper brands had their share reduced from 33.7% to 32.5% with Coca-Cola having the best market share in Brazil over the last three years at 33.5%.

Coca-cola employees in the United States totaled 9,200 last year with the total for the amount of employees throughout the world being at 49,000 which were down from 2002's 56,000 total... During the year 2003 the operating segment of Coca-Cola in Latin American steadily adapted to the changing economical and marketing needs of the region through reaffirmation of their commitment to the communities which Coca-Cola serves. Coca-Cola announces that this strategy is evidenced as being successful by the overall performance of the Latin American unit of the company. The net operating revenues for Latin America sere reported growing with "unit case volume increasing 4%."

The net operating revenues were reported at $2.0 billion which reflects the negative foreign currency trends for the year. The company's consistent investments in the region as well as focusing on the strategic execution and introduction of new pricing models and packages the company states a belief that it is "well positioned to benefit as the region regains stability."

Plans for 2004 include the intent to focus on the Coca-Cola, Fanta and Kuat brands. This will be accomplished through "innovative marketing packaging options." The "Total Unit Case Volume" in South American countries was listed for 2003 as: "Mexico 48%, Brazil 21%, Argentina 7%, Chile 5%, and Other 19%." Also reported for Latin America (Net Operating Revenues in millions) was $2,042 for the year- 2003 and $2,089 for the year- 2002 which equals an approximate change of 2%."

The company markets four of the top five of the world's favorite soft drink brand which is inclusive of Diet Coke, Fanta and Sprite. Products include waters, juices, sports drinks, teas and coffees. The first Coca-Cola was sold in 1886 in Atlanta in a neighborhood pharmacy. An estimated 50 billion beverage servings of all types are consumed each day worldwide and 1.3 billion of those servings being Coca-Cola products. Ownership interest in Coca-Cola FEMSA was approximately 40% as of December 31, 2003. Coca-Cola FEMSA is a "Mexican holding company with bottling subsidiaries in the Valley of Mexico, Mexico's southeaster region and a substantial part of central Mexico, greater Buenos Aires in Argentina; Campinas, part of Matto Grosso do Sul, Santos and greater Sao Paulo in Brazil, most of Colombia, all of Costa Rica;, central Guatemala, and all of Nicaragua, Panama and Venezuela Reported for 2003 by Coca-Cola FEMSA for "net sales of beverage products" equaled approximately $3.2 billion, 60% of the unit case volume of Coca-Cola FEMSA was Coca-Cola trademark beverages, 33% of its unit case volume was other Company trademark beverages and 7% of its unit case volume was beverage products of Coca-Cola FEMSA or other companies. Endnote: Coca-Cola FEMSA, S.A. de C.V. (Coca-Cola FEMSA)

Foreign sales for 2003 accounted for 13,700 million of the total 21,044 million for 2003. Double-digit earnings were reported for Brazil in 2003. The Brazil location of the company worked in coordination with the partners in bottling for new packages offerings in refillable as well as one-way presentations for the express purpose of providing consumers choice as well as being "based on channel strategies to drive revenue and profit growth." decline of 6% was reported during the year in unit case volume and was accredited to "weak economic conditions and the greater focus on balancing volume growth with margin expansion." Brazil is the third largest market for the Coca-Cola Company after Mexico and the United States. Reportedly Coca-Cola has scheduled R%550mil resources to Brazil in 2004. The plans include new plants, products and marketing campaigns with the budget 10% up the 2003 (R$500mil) One of Coca-Colas major indigenous competitors in Brazil is the beverage company named Ambev which moves R$10bil per year. The Company reported a 6% decrease in sales and a 4% decrease in volume in Brazil for the third quarter of 2003 which contradicted the global results. The Company's rival, Ambev, reported 12% fall in sales during the same period. Global profit for Coca Cola was reported at U.S.$1.22 billion.

Coca-Cola Strengths, Weaknesses, Threats and Opportunities:

The Coca-Cola Company has identified water as being a key item in projected risk possibly impacting the future financial results. Water quality and quantity are threats to the future of the Coca-Cola company and as well other listed threats are: "restrictions on imports and exports and sources of supply; duties or tariffs; and changes in governmental regulations as well as "the imposition of additional restrictions on currency conversion and remittances abroad; and policy concerns particular to the United States with respect to a country in which the Company has operations." The Company's operations, at times, could be adversely affected by restrictions on imports and exports and sources of supply; a prolonged labor strike; duties or tariffs; changes in governmental regulations; the introduction of additional measures to control inflation; changes in the rate or method of taxation;

Opportunities

Opportunities have been listed by the Company as:: "growth potential for all nonalcoholic beverage categories -- carbonated soft drinks, waters, juices and juice drinks, teas, coffees and sports drinks; new product introductions, intended to contribute to higher gross profits; premium packages, intended to generate strong revenue growth; significant package, pricing and channel opportunities to maximize profitable growth, especially in North America, Japan and other key markets; and proper positioning to capture industry growth -- we believe more than 80% of worldwide incremental industry growth through 2007 will be from locations outside the United States." (U.S. Securities and Exchange Commission Annual Report No. 1-2217)

Economical and Political Influences:

Economical and political conditions in the international market place include: "civil unrest, product boycotts, governmental changes and restriction on the ability to transfer capital across borders." It is very possible that the current instability in economic and political conditions in the Middle East, North Korea, Iraq or elsewhere as well as continued terrorism could adversely impact the Company's financial results in business."

Other factors include: "Changes in the nonalcoholic beverages business environment which is inclusive of changes in consumers preferences due to health or nutrition aspects, competition pressures in product and pricing competitive product. Other changes such as changes in foreign currency fluctuation and interest rates as well as other capital market conditions, weather conditions adversely effecting the Company by a reduction in demand, variations in effectiveness of advertising, marketing and promotions. Fluctuations on cost and availability of raw materials as well as variables in energy costs and transportation costs as well as other necessary services along with the variables in maintaining supplier arrangements and relationships. Natural disasters will be possible threats due to power disruptions and labor strikes. Other variables in business are: "Our ability to effectively align ourselves with our bottling system as we focus on increasing the investment in our brands; seeking efficiencies throughout the supply chain; delivering more value for our customers; and better meeting the needs of our consumers. Changes in laws and regulations, including changes in accounting standards, taxation requirements