Our distribution is as good as HLL's: Coke CEO

Q&A/ Sanjiv Gupta

Sanjiv Gupta

Sanjiv Gupta, the 43-year-old president and CEO of Coca-Cola India, is a compulsive traveller, his troublesome back and cola controversies notwithstanding. He can often be found travelling on a second-class ticket to mofussil towns and villages, getting a feel of the market.

Before he left for the dusty plains of Bareilly on a hot May afternoon, Gupta spoke to

Business Standard about his company's journey since he took over in June last year.

It is nearly a year since you took over as the CEO of Coca-Cola India. How has this period been for you and the company?

It has been a good period of growth for us. Last year, our sales grew by 23 per cent. The first quarter of this year, too, has also been extremely good and we have achieved strong, double-digit growth. All our efforts have been directed towards driving the affordability and lower price points strategy.

We believe that we have a robust, growth-oriented strategy in place. From fighting for a few marketshare points and volumes with our competitor some years back, we are now fighting for increasing the user base and trying to enlarge the pie. With greater penetration, our capacity utilisation has shot up to 86 per cent in 2003, from 67 per cent in 2002.

Besides carbonated soft drinks, our juices have done well, too, and we are in the process of adding capacity. Our packaged water brand Kinley continues to do well. I think our water business has now begun to realise its value potential. Georgia, our tea and coffee business, is small but remains strong.

You won the Gordon Woodruff award in 2002 for the highest growth in the Coca-Cola empire worldwide. At that time, you had said that Coca-Cola India will try to bag it in 2003 as well. But it didn't happen. What went wrong?

China got the award this year, although we were close to it.

Was it because of the pesticides controversy?

Sales did go down by around 20 per cent for a month or so. But we were soon back to our normal levels of incidence, which is a measure of the number of Coke drinkers in the past 24 hours.

Have you recovered 100 per cent of the lost ground?

If you look at the incidence, yes.

Coca-Cola has posted growth at a time when most FMCG companies have been hit by downtrading. What was your survival mantra?

If you look at the Indian FMCG market, there is a huge topline pressure on companies. Sales in July and August last year were down for 15 out of the 20 core categories such as soaps, detergents and toothpaste. Food companies were growing at less than 5 per cent.

Despite the upswing in the economy, the consumer sector did not see any buoyancy. The low cost local players forced price cuts for bigger companies and squeezed their margins.

We had anticipated this problem early in 2001. Volume in the soft drinks business in India was growing in fits and starts. Only 50 per cent of the 300 million people who could afford to consume soft drinks were economically active.

Our research showed that the contribution of rural sales for soft drinks was just 21 per cent compared to 35 per cent for FMCGs. The potential was there but the question was how to tap it.

We realised that the key issue was pricing. Soft drinks continued to be 2.5 times more expensive per serve than homemade options like lassi (buttermilk). In 2002, the cost per serve of buttermilk was Rs 4, and that for carbonated soft drinks was Rs 10. The answer to that was the Rs 5 price point, which we introduced in 2002.

For Coke, the new price point was not a price drop, but a sustainable business model. In a short span of two years, the Rs 5 pack accounts for nearly 50 per cent of our total soft drink sales. In fact, a number of other FMCG companies have copied our Rs 5 mini package.

Was it the lower price point alone that helped you increase your penetration?

More than penetration, it was important to get our logistics, the distribution frequency and the entire backend in perfect order. We had tried dropping prices even earlier. But then, with every case sold, we bled. In the past two years, we have worked extremely hard on getting our logistics right.

We realised that in rural markets, the shopkeeper does not have the capacity to buy large stock on credit. So, it was important to get the supplies to such outlets more frequently.

In 2001, on an average, our service frequency to such outlets was 2.5 times a week. Now we reach them 3.5 times and will soon take it up to 4.5 times a week. To service the most remote areas, we have even started to use what are known as jugaad vehicles (locally-assembled makeshift carriers).

We also had to find innovative ways to chill the glass bottles. Chillers just wouldn't work in rural areas because of power cuts. We worked through last year to ramp up the availability of ice-boxes. The tin boxes for new outlets cost Rs 1,000 and last for about two years. The thermocol boxes for seasonal outlets cost less at Rs 300.

Coke now has access to 27 per cent of rural India and we expect to double consumption in the next three years. With our affordability model, the per capita consumption of Coke has gone up from seven to 10 bottles; the rural contribution to our sales has increased to 29 per cent from 21 per cent in one year; and the drinker base has gone up from 155 million to 243 million. But clearly, we have just scratched the surface of the Indian market.

Is your distribution as good as that of Hindustan Lever?

In some areas, it is. I think we have broken into the ranks of top five distribution companies in the country.

Hasn't the affordability strategy put huge pressure on your profit margins?

On the contrary, the margins have gone up. Affordability has to be supported with a strong backend. The new bottles that we are using for the 200 ml drinks are 10 per cent lighter, which means we can pack in more cases for each delivery. Our costs have come down nearly 30 per cent per case.

Can you cut prices further?

No, we can't afford to. I think the current affordability model can go on for another five years, at least.

There hasn't been a new ad campaign featuring Aamir Khan for quite sometime now...

It needed a break. We are trying to space out all our celebrity campaigns. In the first quarter of the year, we ran the one featuring Aishwarya Rai. Campaigns featuring Virender Sehwag, and Vivek Oberoi for Vanilla Coke are on now, and you will see a new Aamir Khan ad in the third quarter.

What is your strategy for your other soft drink brands?

Every brand in our portfolio has a well-defined job description. The Rs 5 pack speaks about thanda and affordability; what Thums Up communicates is the big 300 ml size at Rs 6; Fanta stands for the new 600 ml family pack; Maaza speaks to mothers who want their kids to have a healthy drink; and Sprite is about youthful irreverence. In fact, India is the fastest growing market for Sprite and it is our third biggest brand.

Your predecessor Alex von Behr was very bullish about the ready-to-drink beverage market. What are your plans for Coca-Cola's tea and coffee business?

It is still a small business, but offers a huge potential. We are trying to leverage our distribution synergies to expand it. Beverages like tea and coffee still have a 74 per cent share of throat in the country, compared to the 3 to 4 per cent share of carbonated soft drinks. But we are moving ahead cautiously because it is a business that we don't know very well.