Global Business 3rd Edition by Mike Peng

Exercise 18

Already in all African countries, Coca-Cola has committed $12 billion to invest in the continent between 2010 and 2020. Why does Coca-Cola show such strong commitments to Africa?
Founded in 1892, Coca-Cola first entered Africa in 1929. While Africa had always been viewed as a "backwater," it has recently emerged as a major growth market commanding strategic attention. Of the $27 billion that Coca-Cola's chairman and CEO Muhtar Kent promised to invest in emerging economies between 2010 and 2020, $12 billion will be used to beef up the 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
The push comes from the necessity to find new sources of growth for this mature firm, which has promised investors 7%-9% earnings growth. On July 14, 1998, its stock reached a high-water mark at $88. But it dropped to $37 in 2003. In 2011, it rallied 30% over the past year and reached $67 on December 1. 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 further 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 may be limited. Mexicans on average are already 1) This research was supported by the O. P. Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. © Mike W. Peng. Reprinted with permission. 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.
The Pull
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 2010, 60 million Africans earned at least $5,000 per person, and the number is likely to reach 100 million by 2014. 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 CEO 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 how to save electricity to advice on buying 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 Africa is Coca-Cola's marketing Shangri-la, free from any criticisms. It has to defend itself from critics that 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 villages and the bush a few crates at a time.
The Future
"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 this 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.
Case Discussion Questions
What are the drawbacks of making such largescale commitments to Africa?