Coca-Cola suffered a reversal of fortune in Germany in 2003 when it refused to adapt in the face of new recycling laws. But reform of the packaging legislation, coupled with a major marketing push last year and the ongoing consolidation of its bottler network, has left the soft drinks giant in much better shape in a key market tipped for growth. Annette Farr reports.

With more soft drinks being consumed in Germany than in any other European country it is no wonder that Coca-Cola regards the country as key. Yet, although Coca-Cola ranks first in the list of German soft drinks and fruit juice manufacturers (MEG is second and PepsiCo third) its performance has been chequered.

Coca-Cola's problems in Germany can be traced back to 2003 and the Pfand (deposit) packaging laws which required retailers to take back all types of non-reusable drinks packaging sold in their stores. Consumers were issued with a refund of EUR0.25 for all containers returned.

Retailers baulked as it meant they were forced to issue refunds for bottles or cans bought at other stores. The large discount stores such as Aldi and Lidl withdrew big brands from the shelves to promote their own-label products and established their own internal recycling arrangements called 'island solutions'.

By taking back only the containers that they sold and by specifying bottles of a particular shape they avoided the need to participate in expensive clearing systems. Many retailers simply stopped selling carbonated drinks in cans. The trade association Beverage Can Makers Europe says that can sales in Germany fell from 7.5bn in 2002 to below 500m in 2005.

Unlike PepsiCo, Coca-Cola refused to alter its iconic packaging to conform to retailers' own internal recycling systems. Vast quantities of Coca-Cola products were withdrawn from supermarket shelves and PepsiCo gained a marketing edge along with rising cola sales.

By 2004, Coca-Cola sales had fallen 11% and dropped a further 15% in the first quarter of 2005. Neville Isdell, the company's chairman and CEO, said "the problems in Germany have held back our European operations", referring to the situation as "rather dramatic".

A series of events has since restored Coca-Cola Deutschland's fortunes. First has been the reform of the deposit system, abolition of 'island solutions' and subsequent new distribution arrangements with Lidl and Plus.

Second came the very hot summer of 2006 and the extensive marketing campaign undertaken by Coke under the slogan 'It's your home game - make it real' during the World Cup tournament. Andrew Dixon, sales and marketing director at analysts Canadean, says that activity created a 60% awareness of the Coke slogan amongst German consumers. Coca-Cola Deutschland used the occasion to relaunch the Coke can in a souvenir set featuring16 players from the German soccer squad which coincided with the Pfand reform.

Additionally, the tournament provided an opportunity to improve the market share of Coca-Cola's sports drink Powerade.

Also in 2006, Coke Zero was rolled out providing an all-important boost to carbonate sales, and the company acquired Apollinaris, one of Germany's oldest and most renowned mineral water brands, thereby establishing a foothold in the important mineral water segment. The brand is ranked No 17 in the top 39 mineral waters list compiled by the business publication Lebensmittel Zeitung.

At the same time, the company had been looking to consolidate its bottling operations, streamlining the introduction of new products and distribution. Executives in Atlanta had issued notification to its regional bottlers that contracts due to expire between 2007 and 2011 would not be renewed, allowing the largest bottler, Berlin-based Coca-Cola Erfrischungsgetränke (CCE AG), which Coca-Cola owns, to take control of all bottling.

The 'contract' has been a troublesome document for the US head office since the company relinquished the expense and messiness of running a bottling operation to independent bottlers at the beginning of the 20th century. Those were halcyon days for Coca-Cola with everyone making vast sums of money as the availability of the increasingly popular Coca-Cola (in those early days enriched by cocaine) spread from soda fountains into bottles.

The bottlers, working at parochial levels, became fiercely protective of their wealth-creating contracts.

In 1986, under Douglas Ivestor's leadership, Coca-Cola set about acquiring the bottling operations, amalgamating bottlers and forming Coca-Coca Enterprises, in which TCCC owned a 49% stake. It became known as the '49% solution plan' giving Coke executives an unprecedented influence over the bottler.

And now Germany's merger of its nine bottlers with CCE AG handling bottling and distribution across the country is being recorded as "a major milestone for the Coca-Cola business," by Isdell. "A single German bottler will be able to act far more rapidly and flexibly in the market and create the best selling and distribution system for Germany," Isdell says.

The German soft drinks industry is in a healthy state. According to German analysts Gesellschaft für Konsumforschung (GfK), sales of all soft drinks grew by 10.1% in 2006. A particularly strong performance has come from the bottled water sector with schorles (the juice and sparkling water combination drinks popular in Germany) rising by 26.2%, flavoured waters up 95.5% and 'near' waters up 77.9%.

The country, renowned for its high juice and nectar consumption, experienced a slight decrease in this segment of 1.3%, which was attributed to the escalating prices of raw materials, particularly orange juice, although nectars managed an increase of 5.7%.
 
The crucial carbonates sector, which Coca-Cola leads, showed a modest growth of 3% across colas, lemonades and flavoured carbonates, but grew 13.1% across the low or zero calorie diet variants.

Philipp Schroeder of the country's soft drinks trade association, Wirtschaftsvereinigung Alkoholfreie Getränke, observes that overall consumption trends are towards "convenience, taste and low calorie".

No doubt CCE AG will be examining its product portfolio so that recent new drinks, either developed or acquired by Coca-Cola, can swiftly be brought to market. Growth opportunities exist in the bottled water sector (Canadean figures show that Germany's bottled water consumption grew from 8.4bn litres in 2000 to 10,366 in 2006) and the ever-popular juices and nectars segment where 3.3bn litres were consumed in 2006 compared to 1.5bn litres in the UK.