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Competitor Analytics: What Next after the “Great Fall of China” for Soft Drinks Multinationals?

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By: Hope Lee

China’s stock market slump has sent shockwaves across the globe, with the days of heady double-digit growth seemingly over. A prolonged economic slowdown in China would have some serious consequences that could check the tentative recoveries in the Western economies. In terms of GDP, China accounted for 28% of the rise in global output between 2000 and 2014, and nearly half of world growth in the financial crisis years of 2007-2009. In soft drinks, China accounted for around 13% of global retail value sales in 2014 and it has been a key growth driver over the past decade. Before the stock bubble burst, Euromonitor International forecast that China’s soft drinks would see a CAGR of around 7% in 2014-2019, with the major multinationals likely to enjoy handsome net gains from this. As the situation changes, however, analysts will be pondering what the potential impact will be if China’s forecast growth were to be lowered from CAGR 7% to 3.5% in the next few years.

Euromonitor International used its Competitor Analytics Framework to explore China’s slowdown scenario in more detail and its effects on major soft drinks players in 2019.

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Without doubt, for The Coca-Cola Co (TCCC), China represents an increasingly important market. In August 2015, TCCC started to build its 45th production plant in China as part of a US$4 billion investment in the country. Its CEO, Muhtar Kent, said that “China is our third largest market by volume and is critically important to the future growth of our business.” TCCC ranked number one in China’s soft drinks market by retail value sales and China contributed 7% of the company’s global sales in 2014, compared to 6% in 2009. That said, although China increased its weighting in TCCC’s global sales, the Chinese influence is still far from overwhelming. In the past decade, while TCCC developed quickly in China on the back of being part of the “China boom” story, it also expanded rapidly elsewhere, which, in turn, lessened the importance of its gains from China proportionately.

Figure 1 shows that TCCC would hold a 27% market share globally excluding China, meaning TCCC has a very good geographical balance and its sources of growth are, in fact, from its prominent positions in a few strong-growth soft drinks markets. China is certainly important, but it is by no means the only source of growth. From a global perspective, it is precisely the multiple sources of growth and development in multiple major emerging markets that help TCCC effectively spread the risk. As a result, its global sales are not that susceptible to China’s slowdown, although it would likely see a potential loss of sales of over US$2 billion if the overall market were to grow at CAGR 3.5% in 2014-2019.

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Figure 2 shows that TCCC may well make marginal share gains of 30 basis points in 2019 if China does slow down. Likewise, in the same way that China is not overwhelmingly important to PepsiCo’s global soft drinks sales, PepsiCo might see a potential loss of retail sales from China, but its global market share might improve as the retail sales weight from China becomes less pronounced in its overall soft drinks portfolio.

The key factor behind this scenario is that local Chinese companies are the major collective market force and, as they mainly focus on domestic sales, they are most susceptible to China’s slowdown. This is because Chinese companies have no other geographies to fall back on when their single source of sales is at risk or enduring uncertain times. They totally relied on organic demand in the domestic market to raise their global profile in previous years, so that their global share could go down if domestic demand becomes volatile. This is a typical scenario for a diversified investment lesson: Chinese soft drinks companies should perhaps start looking elsewhere for possible market entry or acquire foreign assets to spread the risk in the long term. Holding assets in multiple currencies would help ease the pressure from operating predominantly only in a single currency.

Historically, Japanese companies operated in a similar way – that is, Suntory’s soft drinks business was confined to the domestic market and Suntory’s global share stood at 1.7% in 2008. However, its global share was lifted to 2.5% in 2014 through a string of international acquisitions. Today, Suntory is in a much healthier global position compared to 2009. There are plenty of lessons Chinese companies could learn from Suntory, although implementing them might require a change in the Chinese companies’ culture.

In brief, China’s slowdown is likely to have some kind of impact on all soft drinks players actively operating there in terms of sales in actual terms. However, while multinationals may see their global shares increase, Chinese companies are likely to see theirs fall. Perhaps it is a good time for Chinese CEOs to rethink their growth strategy – and it is certainly not too late to do so.

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