How can the Coca-Cola system make hay in Indonesia? - Comment
Indonesia is widely-believed to be one of the next wave of emerging markets for drinks producers to target
This month, Ray Rowlands of Drinksinfo Ltd puts the spotlight on Indonesia and examines The Coa-Cola Co’s commitment, and that of its regional bottler CCA, to investing in this potentially bountiful Asian market.
Much as Coca-Cola Amatil (CCA) is headquartered in Australia, the company, which is one of Coca-Cola Co's top five bottlers worldwide, extends it influence well beyond Australasia. CCA operates in six countries - Australia, New Zealand, Indonesia, Papua New Guinea, Fiji and Samoa. However, the company has experienced a rough time recently. In 2014, its net sales slipped by 2%; more significantly, net profits plummeted by 25% with a similarly disastrous impact on its share dividend.
This year's H1 results were more promising but a slowdown in Indonesia, one of its important growth markets, remained of serious concern.
On the face of it, this country offers good sales opportunities. It represents an audience of close to a quarter-of-a-billion inhabitants, equivalent in number to more than half the population of West Europe. Many are young, implying a large income-generating work force with money to spend. In addition, there is a rapidly-emerging middle class with a growing interest in consumer goods. Moreover, being largely a Muslim country, competition from alcoholic drinks is limited.
However, economic indicators are less supportive. For a start, the Indonesian rupiah has continued to weaken against the bullish US dollar. Between January and August, it depreciated by almost 9%, thereby significantly lifting the price of imports. Also, inflation is rising. It has stood at over 7% since May and economic development is faltering. In July, monthly GDP growth hit a new low of under 4.7%.
An added burden for Coca-Cola and Coca-Cola Amatil is the strength of competition in the Indonesian soft drinks market. The Danone Group is by far the biggest player, largely thanks to its strength in bottled water. Its Aqua brand is not only the biggest selling bottled water, but is also the leading soft drinks brand overall. Even when all are combined, Coca-Cola products lie in very distant second place in volume terms.
The Coca-Cola system is represented in Indonesia by the local arm of CCA – PT Coca-Cola Amatil Indonesia (CCAI). Hovering close to CCAI, in soft drink volume terms, are various local companies such as PT Sinar Sosro and PT Tang Mas.
Looking at an individual category level, Coca-Cola’s water interests, in the form of the Ades brand, are hampered by the strong image that Danone has created for Aqua. As a result, its presence is fairly marginal despite bottled water being by far the most popular soft drink in the country.
The second biggest category is iced tea. Coca-Cola does have more of a presence here with Frestea, and CCAI also sells Nestea under licence, but its market position is far from overpowering. The same observation applies to sports drinks despite the fact that both Aquarius and Powerade are available in the country. Burn had attempted to gain a foothold within the energy drink market but was defeated by the overwhelming presence of local brands like Extra Joss and Kuku Bima.
Coca-Cola's main strength lies in its sodas, which is unsurprising. Brand Coke has been available in Indonesia for over 80 years. Local production began in 1932 and since that time other brands – Fanta Sprite and Schweppes - have come to join it. As a result, Coca-Cola has a controlling share in the Indonesian soda market which, like much of Asia, has continued to grow. Elsewhere, demand has tended to flatten out, as in East Europe and Latin America, or has fallen into actual decline, as in many developed Westernised economies. Consequently, Coca-Cola and Coca-Cola Amatil are both keen not only to protect their interests here, but to build on their present position, which is supported by more than 8,000 company employees, ten manufacturing facilities and over 100 distribution centres supplying half-a-million retail units.
The two companies have made a pledge of long-term investment in Indonesia and they have been good to their word. In March 2015, it was reported that in the previous three years alone, CCAI had commissioned 18 new production lines, deployed 150,000 coolers and built three "mega-distribution centres" for a total investment exceeding US$300m. Concurrently, it was announced in late-2014 that Coca-Cola was to pay US$500m for a 29% stake in CCAI in order to help build demand for its brands. Using part of this financial injection, CCAI has recently announced that it is constructing a fourth “mega-distribution centre” on its existing Pandaan Distribution Centre in Surabaya, East Java, which currently supplies 30% of the group's national volumes. The new facilities will increase total production capacity to 885,860 bottles per hour. Even a conservative estimate equates this to almost 1bn litres a year.
Of course, this is all positive stuff, but are Coca-Cola and Coca-Cola Amatil overly fixated on the country's soda category? In all, CCAI has around a dozen soft drinks in its portfolio and half of these are sodas. Whilst the juice and nectars categories are rather stunted, generally being too acidic for local tastes, opportunities still abound in the dilutables market. Okay, maybe company strength does not lie in this direction, but what about bottled water? Whilst Ades may be small, Coca-Cola has a healthy raft of alternative, volume-generating brands that it could offer CCAI including BonAqua, Dasani or even Wilkins, which is popular in nearby Philippines. Or, what about Neverfail, which Amatil sells in Australia?
The important point is for Coca-Cola and Coca-Cola Amatil not to put all their eggs in one basket. Over-reliance on a dominant position in the soda market could spell disaster as the anti-obesity lobby and consumer health trends gather momentum.
On several occasions in recent months, I have come across media headlines proclaiming that “Coke is losing its fizz”. Perhaps now, in Indonesia, it is time to follow a development strategy that actually gives prominence to alternative, uncarbonated soft drinks.
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