January 2018
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On 1st July last year, Swire Beverages completed the acquisition of its new franchise territory in Shanghai, representing the final transaction in the realignment of Coca-Cola's bottling operations in Mainland China. In this edition of Swire News, Pat Healy, Swire Beverages' Managing Director, and Karen So, Executive Director – China Operations, discuss how the realignment positions the company for further growth.

The realignment was the culmination of a refranchising initiative, announced in November 2016, under which all of the bottling territory in China owned by The Coca-Cola Company's Bottling Investments Group has been acquired by Coca-Cola's two franchise partners, COFCO Coca-Cola Beverages Limited (a subsidiary of the state-owned COFCO Corporation) and Swire Beverages Holdings Limited. The deal has expanded Swire Beverages' scale of business on the Mainland by 50 percent. The company now owns 18 plants in 11 provinces and the Shanghai municipality, selling the Coca-Cola family of beverages to half the country's population – over 650 million people.

Contiguity and growth

Reflecting on the franchise system prior to the realignment, Pat Healy says: "The structure of the China franchise has been built up over time, so we had different franchises held by COFCO, Swire and the Bottling Investments Group. This led to inefficiencies and waste within the system. At the same time, The Coca-Cola Company was engaging in a massive global refranchising exercise to refocus its business on consumer research, branding and portfolio development. These two factors created the opportunity to streamline the franchise so that bottlers could optimise their operations."

The realignment has created a more efficient franchise system in China, with Swire Beverages and COFCO each controlling a contiguous territory.
The realignment has created a more efficient franchise system in China, with Swire Beverages and COFCO each controlling a contiguous territory.

Today, the bottling franchises in Mainland China are held either by Swire Beverages or COFCO, with each group controlling a contiguous territory. The Swire Beverages franchise covers a unified region in southern, eastern and some central parts of China. This has created many opportunities. For instance, revenue management is much easier across a single, interconnected area, rather than a patchwork of franchises in different territories. Explains Healy: "We now have the scale and continuity, for example, to make decisions over product launching and pricing on our own and at greater speed. The new system enables us to take full control over pricing and revenue management for the entire territory, which drives improvements in revenue growth and profitability."

The refranchising also helps to drive efficiencies in supply chain management. From a logistical viewpoint, having one large territory, instead of the suboptimal territories of the past, creates more opportunities to service sales centres from the closest possible production and distribution points, helping to reduce delivery costs. Over time, there is significant opportunity to optimise capital allocation too. "Decisions about where to invest in production plants can be taken from the perspective of the whole territory, rather than on a province-by-province basis," Pat Healy says.

Seizing abundant opportunities

In Mainland China, the beverage market is extremely large. Each year, 27 billion unit cases* of beverages are produced, of which 20 billion are non-alcoholic, ready-to-drink ("NARTD") products. Yet despite its size, per capita consumption of Coca-Cola beverages in Mainland China is only slightly more than 40 eight-ounce servings per year, which is relatively low compared with other more mature markets, such as Hong Kong, where per capita consumption is over 200 servings. This provides ample opportunity for growth.
*A unit case comprises 24 eight-ounce servings.

Mainland China's beverage market is also fragmented, with packaged water accounting for 40 percent of total market share, while the remainder is split between sparkling soft drinks, juices and tea, and emerging categories such as coffee, energy drinks and hydration drinks. Currently, Swire Beverages has 65 percent of the market share for sparkling beverages and is number one in the country for juices. For Karen So, the focus is on increasing Swire's share: "We want to make sure our system can roll out more categories, to gain a significant share of the total NARTD market," she says.

Swire Beverages' Managing Director, Pat Healy and Executive Director – China Operations, Karen So.
Swire Beverages' Managing Director, Pat Healy and Executive Director – China Operations, Karen So.

One trend that will help Swire Beverages seize many more opportunities is that consumer tastes are changing. As Healy confirms, "The beverages market in China is becoming more premium, so there are opportunities to introduce new brands in new categories and in premium packages. Our capacity to maximise revenue growth is becoming greater." A case in point is packaged water. While packaged water accounts for a significant share of the market, much of it has a retail value as low as RMB1 per bottle. However, as Karen So identifies, a shift in preference is underway: "The water market is becoming more premium, with water being launched that costs consumers between RMB2 and RMB5 per bottle. This segment will continue to grow at a double-digit level for the next few years, so there are opportunities for us to upgrade our offerings in this market," she says.

As consumers in Mainland China increasingly look for premium products, opportunities exist to develop different types of packaging in order to drive greater profitability. "Even in categories where we're strong, the packaging offered to consumers is still quite limited, compared with markets in Latin America and North America. Therefore, we have to put a lot of effort into expanding our packaging portfolio, so our consumers will always be presented with the right product and the right packaging to suit the occasion," explains So.

New brands in new categories are being introduced to the China market to drive greater profitability from the growing consumer segment that values premium products.
New brands in new categories are being introduced to the China market to drive greater profitability from the growing consumer segment that values premium products.

Bolstering market penetration will also help to drive sales, although this is currently a challenge due the vast array of different types of retailers in what is a huge country. So adds, "At present, our distribution network only covers about half of the total number of stores; there is plenty of room to optimise our route to market and further strengthen our distributer and wholesaler system, and to better organise our sales force in order to cover more outlets where our products are sold."

Harnessing innovation and technology

In former times, bottlers ran on simple business models, with a small number of brands and categories. Today, however, the competitiveness and complexities of the industry and an ever-expanding portfolio mean that it is essential to apply increasingly sophisticated technology to bottling operations. In particular, sales teams are now equipped with smartphones that contain all the data they need to service their customers throughout China.
For Healy, this is transformational: "The power of technology is exciting. Coolers and fridges now communicate with our sales representatives. When they walk into an outlet, the fridge connects with their hand-held device and uploads information such as how often the door has been opened and at what time, what traffic has been like and which products have been sold." This data can be broken down according to region and used to create valuable insights about Swire’s customer base.

From a consumer perspective, technology is also radically changing the business. "In China, more and more vending machines are cashless, with consumers opting to use Alipay and WeChat Pay. These vending machines also communicate directly with our bottling plants and tell us exactly which products need to be restocked. In many ways, China leads the market in the application of technology because of the huge innovations that we can leverage, plus a very young and tech-savvy customer base," says Healy.


Striving for a brighter future

As with any merger, the realignment has faced a number of initial challenges. This is hardly surprising considering the vast expanse of China's geography, as well as the very real issue of integrating systems, processes and even company culture across a newly acquired workforce from other bottling franchises.

So describes the process followed during the transition: "We study what is going on in the new bottling plants we have acquired. We do not say, ‘This is Swire and you need to do things our way.' During the first three months of any transition, we deploy a lot of resources – both people and time – so we can understand, learn and record how our newly acquired plants do business and why they are at their current stages."

Full integration is still a work in progress, as each plant provides its own unique challenges, and not all of the new acquisitions will be fully incorporated into the Swire system until late this year. In addition to ensuring new employees embrace Swire's culture, it will also take time to align operating systems to achieve uniformity across the entire territory. Nevertheless, progress is being made in these areas, laying the foundations for future success.

For Swire Beverages in China, the future looks undeniably bright. "The relationship between Swire Beverages and Coca-Cola is one of a long-term, strategic partnership. The fact that Coca-Cola has allowed us to increase the scale of our business by a factor of about 3.5 in the United States and by 50 percent in Mainland China is a very strong statement of trust," says Healy. As the newly aligned China System settles into its first full year of operation, Swire and The Coca-Cola Company are committed to deepening and strengthening this historic partnership and making the most of the exciting prospects on the horizon.
SwireNews January 2018 issue
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