2014

Case Analysis
Coca Cola in Russia: Fat Growth in a Flat Economy

Economy

Submitted By
Group 1
Deepti Tandon
Katrine
Vipin Muraleedharan
Xavier Leon

INTRODUCTION
The case elaborates on Coca-Cola (Coke), the worlds largest non-alcoholic beverage
manufacturer, and their entry into Russia market. It also highlights the strategies adopted by Coke
to retain a competitive advantage during an economic downturn. The start of Cokes success in
Russia was the result of its effort of not just luring customers but also the Russian officials. The
goodwill that Coca-Cola generated through contextual marketing and employment generation has
also contributed to their stellar performance. Even after all the struggle to retain its comparative
advantage in Russia, the question still remains whether Cokes proactive approach of betting
on growth in a flat economy paid off.
Cokes journey from entering Russia in 1980 and establishing itself as the market leader
has been quite challenging. During 1980s, Russian consumers were not allowed to consume
foreign brands. More so, Russia had adopted an anti-American policy which was not abolished
until the 1990s. During that time when Coke officially entered the market, US products were
perceived as superior quality than their Russian counterparts by the Russian consumers. Pepsi had
entered the Russian market through counter trade agreements and the backing of Kruschev and
was widely perceived as a symbol of old Russian heritage. Coke entered Russia in the aftermath
of Berlin wall collapse and spread its wings though high quality products, strategic partnering
and appealing marketing activities. Coke was accepted among the masses as the flag bearer of
new Russian heritage and soon overshadowed Pepsi in market share.
Cokes success story was not crafted overnight but through a systematic and step by step
business transition. The initial establishment of production and distribution system was
accomplished by strategic partnering with beer-bottlers and independent franchises.
Subsequently, Coke established its presence across all the prominent cities of Russia and
gradually moved to installation of their own manufacturing plant. Acquiring land and
infrastructural amenities was not a cake walk but a tight rope walk that demanded bureaucratic
pampering and diplomatic efficiency.
Economic recession of 1998 took a heavy toll on Coca-Colas sales. However, Coke managed to
defend its position and expanded their business during the recovery phase of the economy by
diversifying product portfolio and catering to the changed tastes and preferences of the Russian
population. During the economic crisis of 2008 where Russian economy had stalled and people
suffered a heavy slash in their disposable income. Their product preferences inclined to low cost
domestic variants accordingly. The demand for non-alcoholic beverages took a dive but Coke
maintained an unflinching commitment to its business expansion. They continued the advertising
activities with same intensity and leveraged better on their transportation and distribution network.
The product portfolio pitched out of non-alcoholic segment to launch Kvas, a drink with traceable
alcohol content. Yet, it is quite remarkable that the industry is shrinking and fair weather is a thing
of the past. The same aspect makes it worth examining the viability of the strategies adopted by
Coke to brace up for the adverse times.
In this analysis of Cokes business saga, we will first examine the growth drivers of the Russian
beverage industry and establish the attractiveness of the industry through a Porters five force
approach. The analysis would further focus on the growth and expansion strategies adopted by Coke.
The study would further take tributaries into the recession specific strategies of Coke and the viability
of the same. Finally the report is concluded with an up to date description of how Coke is doing in
present day Russian market.

PORTERS FIVE FORCE ANALYSIS

Russian beverage industry has had a traditional predilection to alcoholic beverages in backdrop
of their extreme climatic conditions. Even the non-alcoholic segment is highly diversified and
includes bottled water, soda, fruit juices, carbonated soft drinks, fruit pulp, energy drinks and
Ready to Drink Teas. There has been presence of International giants like Pepsi and Coke and also
prominent local players like Wimp-Bill-Dan, Multan etc. Russian consumers have also gained
significant awareness on the health front and their health consciousness has opened a great scope
for bottled water and fruit juices. The per capita expenditure on food and beverages has been on
an upward spiral and people have also exhibited great fascination for foreign brands and
westernised eating habits.
The attractiveness of the Russian Beverage Industry is analysed though Porters five force
framework below.
Bargaining Power of Buyers
1. Price sensitivity of Russian consumers
Russian consumers have been traditionally sensitive to price fluctuations and in an industry
like beverages where no clear cut product differentiation can be commanded, the
aforementioned aspect turns crucial
2. Absence of switching costs involved in switching to an equivalent competitor
Product discontent can easily lead to switching of consumer preferences to another alternative
local/international brand that too at zero cost.
3. The customers turning more health conscious and their affinity to healthy products
The increasing health awareness is giving way to demand for healthy products and
reducing inclination to carbonated soft drinks.
4. Fascination of foreign goods
After being deprived of foreign products for long decades, Russians have shown an unleashed
affinity for foreign products that has particularly favoured brands like Coke
5. Adoption of westernised eating habits
Consumption of fast food, essentially hot dogs and burgers, is becoming prevalent that
facilitates an increased reliance on artificial beverages.
6. Global economic slow-down and reduction in disposable income
The ill effects of recession has made costly beverages unaffordable and people are moving to
low cost domestic variants.
In context of the above, bargaining power of buyers can be adjudged as HIGH
Bargaining Power of Suppliers
1. Great amount of Coke sold through fountain machines
Along with retail outlets, a great amount of Coke is sold through kiosks and fountain machines
managed by Coke themselves.
2. Heavy reliance of vendors and distributors on the truck fleet of Coke
Due to credit scarcity, vendors & distributors are entirely reliant on Cokes truck fleet.
3. Local Bottlers only manufacturing a minimal fraction
Though Coke entered the Russian markets in partnership with beer bottlers and local
businessmen, they is no more part of the picture as Coke is handling majority of its operations
by itself.
4. No unique ingredient required
No unique ingredient is required for production and almost all constituents are
commoditized.

5. Coke is capable of reverse consolidation

No supplier can exert excessive influence on Coke as it has the financial clout for reverse
consolidation.
In context of the above, bargaining power of suppliers can be adjudged as very LOW
Threat of New Entrants
1. Highly capital intensive industry
Requires millions of dollars of initial investment and credit availability is not an easy task
In Russian environment.
2. Unfavourable environment for starting new ventures
Red-tapes, corruption and friction in starting new businesses are characteristics of
Russian business environment.
3. High barriers to exit
The industry doesnt offer any exit potion other than selling the stakes to its own
competitors.
4. Inaccessibility to distribution channels
Distribution channels have been entirely captured by giants like Coke and Pepsi who offer
sizeable incentives.
In context of the above, threat of new entrants can be adjudged as MINIMAL
Threat of Substitutes
1. Cokes is ubiquitous in Russian beverage industry
Russian beverage industry has a wide portfolio but Coke is present in every segment
possible including bottled water, fruit pulp, juices, energy drinks, tea etc.
2. Growing loyalty to particular brands
Switching to substitutes have slowed down as Coke has started to command brand
loyalty through quality products
3. Threat of alcoholic beverages
Alcoholic beverages, a bigger segment, has considerable presence in Russia and
Cokes presence is limited to kvass in this segment.
In context of the above, threat of substitutes can be adjudged as MODERATE
Rivalry among Existing Players
1. Market stagnation caused by Global slowdown
The total market has reduced after global slowdown and all the players are competing for
the smaller pie. High competition is guaranteed as exit options are infeasible.
2. Presence of local players
Lot of local players act as low cost variants of global brands and threats of them
leveraging on a national sentiment are high.
3. Presence of a global giants like Pepsi
Pepsi, as in any other part of the Globe, is offering tough competition and has equally
good connections with bureaucracy and distribution networks.
Rivalry among existing players is CONSIDERABLE.
In context of the aforementioned analysis, Russian beverage industry shall be considered as
Highly Attractive from Coca-Colas perspective with multiple factors aligned in its favour.

GROWTH AND EXPANSION OF COCA-COLA IN RUSSIA

Transition economies were seen as the hotspots of business in the post globalisation era. Their
contribution to the world GDP had increased amply and the per capita expenditure on food
and beverage consumption was on an upward spiral. Soft drink market which had saturated in
the US had to expand their business to emerging economies to increase their business. In countries
like Russia, which were for long concealed by Soviet Rule, foreign brands were items of
fancy and were received with great fervour.
Challenges faced by Coca-Cola while entering Russia
1. Established inclination to alcoholic beverages
Russians had a great predilection to alcoholic beverages, mainly on account of extreme
climatic conditions
2. Tag of American imperialism
Coke was seen as the flag bearer of American imperialism and was upright rejected by
soviet government from forming counter trade agreements
3. Lack of Bottlers
Most of the bottlers were working for beer industry and Pepsi when Coke entered the
market. Adverse climatic conditions also added to the woes.
4. Red-tapes
Coke found it really hard to acquire land or sign leases due to the stringent dimensions of
bureaucracy
5. Lack of infrastructure
As a foreign brand, it didnt receive infrastructural support for water, power and sewers.
Strategies adopted by Coca-Cola
1. Counter Trade agreements
Coke entered Russia during Moscow Olympics through counter trade agreements facilitated
by Michel ONeill who worked on their behalf to develop contacts in soviet government
2. Attracting Bottlers
Coke offered lucrative incentives and roped in bottlers who had
Tied up with beer companies and PepsiCo earlier
3. Independent operation to businessmen
Coke authorised independent businessmen to bottle and sell coke products and thus established
its distribution system
4. Presence in Key locations
Coke setup its office in cities like Moscow and St. Petersburg to make its presence felt in
Russia
5. Manufacturing and bottling plants
Coke established its own manufacturing and bottling plants in all important cities in the
second phase of expansion
6. Outdoor kiosks
To reduce dependency on local outlets, coke was sold extensively through outdoor kiosks and
fountain machines.
7. Television media
Advertisements on TV was quite new to Russians and the scope of the same was extensively
used by Coke. Launched Drink the Legend campaign in accordance to the local customs
and folklore of Russia.

8. Goodwill Generation
Generated goodwill through youth events, funding of museum restorations, and establishment
of Coca-Cola University and employment generation and acquisition of raw materials locally.
9. Diversified product portfolio
Acquired Multan and entered fruit juice segment. Also launched tea brands and energy drinks.
Prominence was established in bottled water as well.

VIABILITY OF THE STRATEGIES ADOPTED BY COCA-COLA

Many economists had assumed that emerging economies would provide a safe cushion for the business
ambitions of corporates even during recessionary times. However, this story turned out to be false and
Russia too couldnt escape the agonies of economic recession which witnessed a high reduction in
disposable income and deterioration of GDP. Coca-Cola was also a victim to the scenario as it lost
market share to local competitors which appeared as affordable variant for the public. But Coca-Cola
went ahead with its marketing campaign tailoring it to suit the new scenario. One of the key motives
behind this intent was that Russia was the twelfth largest market by volume and Coke didnt want to
give up on it that easily.
Firstly, in this economic situation, firms have to offer consumers more products in order to
give them more options from where to choose, otherwise other firms would do it. So CocaCola launched 25 new products just for the Russian market. These new products were meant to
compete with Russian products, and for example Mug and Barrel was made to compete with
the Russian drink Kvass. In particular this beverage achieve a 1.7% of market share after 10
months of being in the market. This also represented Cokes product diversification pitch into
the alcoholic beverage segment as well. Experts speculate that investments made in recession
periods are good for the company as it helps them consolidate their efforts post-recession.
Secondly, Coca-Cola renovated its distribution and marketing activities. By using its own truck
fleet, Coke was able to distribute its products to 480,000 stores across Russia. By doing so, the
firm did not have to depend on third party companies of distribution that were struggling to get
financing from banks and other financial institutions. This also helped Coke gain the trust of vendors
and distributors which would prove beneficial in the long run. By maintaining same intensity of
advertisements, Coke tried to grab as much market share as possible from the competitors who had slashed
their advertisement spending as part of cost cutting. This was possible as Coke didnt have to rely on internal
financing from Russian operations but could utilize its deep pockets from global operations.
Coca-Cola also paid attention to the bottle sizes. They focussed more on big bottles to cater to
changed consumer patterns and to promote home consumption. It was perceived as a cheaper option
by customers. Moreover, they introduced an eight oz. can for those who saw the unit price of a
big bottle as a high price.
Though Coke had braced up for the adverse times, the decrease in sales was unavoidable to an
extent. Russian beverage industry shrunk by 7% and cokes sales volume by 8%. Russian
government had also raised alarms about a GDP contraction by 2.2% in the coming year.
Though these facts are discouraging at the moment, Cokes efforts are definitely set to pay off in the
long run. Its constant focus on distribution channels and marketing activities has helped them
consolidate their position in the market and improve their market share. Also, the financial
inadequacies of other companies can be exploited by Coke who has a globally sound financial base.
It can also be treated as the best time for acquisitions and further diversification.

CONCLUSION & RECOMMENDATIONS

Based on our comprehensive analysis, a few recommendations that can help Coca-Cola establish their
domination and set the runway for further progression are listed below
1. Acquisition of prominent players
Coca-Cola has always shown great penchant for business expansion through acquisition
in transition economies. Acquisition of thumbs-up in India, Multan in Russia etc. are its
quintessential examples. Economic recession is a hard time for all players as they all
compete for a smaller pie. They get cash strapped and would be ailing in an industry where
exit barriers are high. This situation can be exploited by Coca-Cola who can use their
deep financial pockets in acquiring these companies and thus absorbing a prominent
customer base.
2. Accommodating intense Russian nationalism
In the wake of growing unease between Russia and the west, many protests have been
staged, most of them targeting the American brands. McDonalds, Coca-Cola etc. have
been victims to typical protests termed as Food Patriotism of late. To counter these
protests and prevent migration to domestic brands, Coke should conceal its US identity
and paint itself in Russian nationalism. More goodwill should be generated through
employment opportunities and advertisements should be targeted at connecting the brand
with Russian heritage.
3. Targeting youth population
Russia has a considerable youth population and targeting them would provide benefits for
the company on a sustained basis that too for a greater duration. Youth population is
adopting westernised eating habit and if coke is established as an indispensable part of
their diet, it can provide a dedicated customer base for the company for decades to come.
4. Social Media Campaigning
Social media is seen as the biggest advertising hotspot of the day and Coke shouldnt shy
away from using it. All avenues of social media shall be exploited and viral marketing
campaigns should be launched. This is also the best way to reach out to the youth.
Russian market has always presented uncertainties and turbulent fluctuations in the business
environment right from the beginning. Coke has been able to tide over all these adversities right
from its inception in the Russian market and has also managed to emerge the clear winner. Coke
has lived with administrational inefficiencies and bureaucratic hostilities in Russia. Even in the
ages of anti- American feelings, Coke has protected its business interests and thrived forward. It
has also proclaimed its unabated commitment to the Russian market through multiple product
launches and prominent acquisitions. It has upheld its love for the market even in the recessionary
period through intense marketing and distribution strategies. Our study reveals that Coke will
further consolidate its position in the Russian market in the coming years and its efforts would
pay off amply and lucratively once the economy recovers out of the crisis.