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Kotabe/Helsen, Global Marketing Management, 5e Case 8

Case 8

The - Company in Japan*

A financial crisis gripped most of Asia in July 1997. Originating in Thailand, the Asian Financial Crisis spread to countries throughout the region sending them into deep recessions. The crisis had originated from financial institutions lending with little or no credit analysis to financially unworthy companies that did not have the capacity to repay their debts.

As the crisis spread through Asia, companies across the business spectrum were threatened.

Companies and executives feared the worst. However, Douglas Daft, head of Coca-Cola’s Asian operations, saw this time as an opportunity for growth. The beverage industry in Japan, which featured unprecedented speed in product development and product turnover, operated with razor-thin margins; thinner than were found in other parts of the world. But Coca-Cola already knew that local attitudes toward foreign multinationals were changing and that acquisition opportunities would become more abundant because of the Asian crisis. Daft saw it as a chance for the company to be stronger than ever in the region, particularly Japan, because the company was such a nimble competitor and innovator.

Daft planned a series of workshops with top executives to explore opportunities. As Daft worked to gain market share in Japan, he did so with the necessary decentralization from headquarters. The Coca-

Cola Japan subsidiary was given the freedom to create new products and bring them to market without the market research that its US subsidiary was used to. In Japan, product after product is launched, and many of them fail. Corporate acceptance of the fact that there will be many failures among some successes is a necessity that Coca-Cola Japan enjoyed.

* This case was prepared by J. Patterson Calhoun, Tim Fitzpatrick, Gwen Joe, and Greg Silvesti of the

Fox School of Business and Management at Temple University under the supervision of Professor

Masaaki Kotabe for class discussion rather than to illustrate either effective or ineffective management of a situation described (2009).

Kotabe/Helsen, Global Marketing Management, 5e Case 8

As it explored new opportunities, Coca-Cola purchased a bottling business in South Korea, giving it better regional access. In addition, it abandoned its country-specific market strategy in favor of a more regional strategic view. It also bought several locally branded coffee and tea drinks to exploit regional economies of scale and to keep up with changing consumer preferences. During much of its tenure in

Japan, Coca-Cola dominated the soft drink market. However, the 21st century showed signs that competition was catching up. Coca-Cola saw diminishing share in key sectors, specifically, RTD (ready- to-drink) tea and coffee as well as Asian specialty drinks. Due to its broadened regional focus, Coca-

Cola’s success in other parts of Asia offset declining Japanese sales, which contribute 20% of the company’s annual profit. But Coca-Cola executives started asking themselves how to maintain its number one position in Japan as competition crept in.

History of the Coca-Cola Company

Since its advent in 1886, Coca-Cola Company has arguably been a marketing genius, dominating the global soft drink market. Dr. John Slyth Pemberton, a pharmacist in Atlanta, invented the Coca-Cola beverage in 1886 as a drug to help people feel better, and sold it out of the pharmacy where he worked.

The pharmacy was owned by Frank M. Robinson, the man who coined the name we know today, Coca-

Cola. After Pemberton died in 1888, Frank M. Robinson and two brothers, Asa and John Candler created the Coca-Cola Company. Asa Candler was a marketing master who promoted the beverage by painting walls, clocks, posters, and serving trays and handing out coupons for free Coke. Sales increased, and soon people were calling the product by the now-iconic “Coke.” In 1894 the company opened its first syrup manufacturing plant outside Atlanta in Dallas, Texas. The following year plants opened in Chicago and

Los Angeles. Three years after the Coca-Cola Company’s incorporation Asa Candler announced in the annual report: “Coca-Cola is now drunk in every state and territory in the United States.”

In 1919, Asa Candler sold the Coca-Cola Company for $25 million to an Atlanta banker named

Ernest Woodruff. At that time, the company was reincorporated and 500,000 shares were sold for $40 per share. In 1923 Woodruff’s 33-year-old son, Robert Woodruff, was named president of Coca-Cola

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Company. During his tenure Robert Woodruff promoted Coke by insisting on nothing but the highest product quality standards. In 1930, quality control standards were implemented to ensure consistency in the syrup across all locations where Coke was sold. 1944 marked the year when the one-billionth gallon of Coca-Cola syrup was sold. Throughout the mid-1950s, the company sold one product, Coca-Cola, in one or two bottle styles. In 1953 the two billionth gallon of Coca-Cola syrup was sold. Woodruff’s tenure also marked Coca-Cola’s international expansion. In 1943, plants opened in Northern Africa and Europe near fighting fronts because Dwight Eisenhower wanted to boost morale of American soldiers abroad.

Expansion continued, and Coca-Cola entered the Japanese market in 1957.

In 1960 the Corporation merged with the Coca-Cola Company. As a result, ,

Sprite, , and , the first diet soda, were introduced to the American market. Four years later

Duncan foods merged with Coca-Cola, and in 1967 the Coca-Cola Food Division was born by merging

Minute Maid with Duncan.

In 1981 , a Cuban-born chemical engineer, took over the company and accelerated its growth through acquisitions and expansion into new markets. In 1982, Coca-Cola

Company launched , the first-ever extension of the Coca-Cola trademark. In 1985, the company introduced “,” which was based on a different recipe than the original. Due to a consumer backlash, the original recipe returned to the market within three months, as Coca-Cola Classic. Sales hardly missed a . In 1992 Coca-Cola Company introduced . The company entered the Arab market and ended ’s dominance there. It also established operations in Moscow and re-entered India after resolving issues in that country. Over the next few years Coca-Cola signed exclusive deals to sell

Coke at the summer Olympics in Atlanta, at Yankee Stadium, and at Blockbuster stores. Before his death in 1997, Robert Goizueta saw the company’s value rise from $4 billion to $145 billion.

In the late 1990’s M. Douglas Ivester ran Coca-Cola Company. He struggled to leave the same legacy that Goizueta did. The company faced a decline as it dealt with the Asian market crisis, collapsing economies in Russia and Brazil, and strong competition with PepsiCo. Coke's earnings fell two straight years under Ivester’s tenure. Coca-Cola was also plagued with other problems. In the spring of 1999,

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2,200 African American employees charged Coca-Cola with racial discrimination, resulting in a

US$192.5 million settlement in November 2000. In 1999, Belgian schoolchildren became sick after drinking Coke with contaminated carbon dioxide. Then a fungicide was found in cans of Coke shipped from France. The contamination problems turned out to be relatively minor, although Ivester was faulted for not acting quickly to calm jittery European consumers. He was forced out in 1999.

In 2000 Douglas Daft took over and announced that the company needed to become more decentralized to quickly respond to market demands. Through internal restructuring, acquisitions, and strengthened partnerships, Daft hoped to turn Coca-Cola around. Coca-Cola Company then started expanding into the health drink sector by concentrating on bottled water, tea, and juice. Coca-Cola completed two key acquisitions in 2001. It purchased Mad River Traders, which produced specialty iced teas, lemonades, and juice cocktails, and Inc, known for fruit and vegetable drinks, spring water, nutritional bars, and organic milk sold in health stores. During this time Coca-Cola continued signing exclusive deals with such companies as AOL, Proctor & Gamble, and .

In 2004 E. Neville Isdell became the CEO of Coca-Cola, and in 2005 Coca-Cola began targeting a younger, more health-conscious market by introducing a zero calorie cola. In that same year, sales in

Japan and China helped to push third quarter profits up 37% to $1.28 billion. The company continued to sign deals, namely with Bally Total Fitness, the PGA Tour, and Papa Johns. Continuing its concentration on the health-conscious market, in 2005 Coca-Cola began its plans to introduce a new green-tea based diet soda named . Developed with Nestle, the product reportedly boosts metabolism and burns calories. Coca-Cola also began to develop products with less , like Diet Coke with Splenda. 2005 also marked Coca-Cola’s return to Iraq after a 37 year absence. During this time, Coca-Cola restructured its overseas operations into three operating units: European Union Group; North Asia, Eurasia, and

Middle East Group; and Southeast Asia and Pacific Rim Group. At this time, international sales accounted for almost 80 percent of the company's operating income and more than 70 percent of beverage volume.

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In 2006 Coca-Cola trademarked “Coca-Cola Green” and “Green by Coca-Cola” as it continued its concentration on green tea based beverages. Then in 2007 the company expanded its line-up of tea, juice, and energy drinks via the acquisition of . It also acquired Vitamin Water in 2007.

Proving its commitment to international expansion and customer satisfaction, Coca-Cola established a research center in China to develop beverages based on traditional Chinese herbs. By 2007, Coca-Cola grew to include more than 400 brands manufactured and sold in 200 countries--or virtually every nation on earth-- with sales reported at US$29 billion.

Case Exhibit 8-1

Financial Information

Case Exhibit 8-2

Coca-Cola Japan Ltd.

¥ million 1997 1998 1999 2000 2001 2002

Net Sales 115,408 117,991 164,731 207,827 220,203 223,866

Operating 10,737 12,533 15,160 17,449 NA NA

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Profit

Net Profit 5,428 5,872 6,823 5,700 NA NA

Profit Margin 4.7% 5.0% 4.1% 2.7% NA NA

Note: net sales estimated 2001-2002

Financial year end: Mar

Dynamics of the Japanese Marketplace

Japan is a high context culture, where the interpretation of messages rests heavily with cultural cues, in terms of age, gender, and balance of power. Japanese culture also tends to be group oriented with groups having similar expectations and experiences. Results from the NMI’s LOHAS Consumer trends Database show Japanese consumers are more likely than US and EU consumers to choose products from firms whose values are like their own.

Case Exhibit 8-3

Japan’s increasingly improving economy is causing consumers to emphasize quality over affordability. This can be seen in the beverage market where premium ready-to-drink coffees and teas as well as juices with real fruit or premium grapes are growing. The population is also aging, triggering a

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