Originally created 08/30/98

Coke remains afloat in midst of Asia crisis

When the economic crisis began spreading across Asia in the summer of 1997, U.S. companies had to scramble to protect investments and market share patiently built up during Asia's boom years.

Some companies had a lot to lose. One of them was Coca-Cola Co., which earns almost 80 percent of its operating income outside the United States and sells a product utterly dependent on the whims of consumer tastes.

But Coca-Cola managers in the region had a playbook in hand.

Using lessons learned from the Latin American economic crisis triggered by the collapse of the Mexican peso in 1994, Coke's top people in Asia moved to shore up sales despite massive currency devaluation, hyper-inflation, unemployment and impoverished consumers. They moved quickly -- deploying lower-cost returnable packaging, launching smart promotions, giving attention to distribution and continuing investment.

This is the story of how one American company has persevered through the Asia crisis. Coke expects to take an 8 percent to 9 percent hit this year against its earnings because of currency fluctuations. But it has kept volume growing in its largest Asian markets, with sales up 12 percent in the first six months for the Coke region that includes Asia.

"The name of the game in this kind of environment is to keep the business growing and make sure costs are under control so you can maintain a decent level of profitability," said Emanuel Goldman, an industry analyst for PaineWebber Inc. "Coke had already practiced for the Asia crisis back in 1994."

As a result, at a time when other U.S. companies that do business in Asia are sustaining damage, Coca-Cola has kept moving forward.

What Coke learned from the Mexican peso crisis boils down to a handful of basic lessons: Keep the product affordable, and promote it. Stay close to the consumer, and be flexible enough to revise plans -- daily, if necessary. And don't let short-term difficulties deter investment for the future.

In Asia, applying those lessons was complicated by the ways the crisis rippled through nations with widely different economies and populations, each representing a different set of challenges.

"We don't have any magic formula, but there are some things that happened within our company in those two years that allowed us to weather the storm pretty well," said Jose Octavio Reyes, division president for Mexico, reflecting on the experiences of 1995-96 that he has shared with colleagues in Asia.

One of the main initiatives used in Mexico and repeated in Asia was the shift away from nonreturnable packaging to reusable cans and bottles to keep the price of Coke and other products within reach for consumers.

In South Korea, where Coke had planned to acquire the nation's bottling companies before the crisis began, that strategy paid off by allowing the company to make a faster switch to returnable packaging, effectively halving Coke's price, said Jim Harting, president of Coca-Cola Korea and region manager.

Unit sales in Korea will probably be about the same this year as last, said Mr. Harting. But that's not bad, he said, considering that sales of other consumer goods have fallen 30 percent to 60 percent.

The company also has reaped benefits from continuing to invest in Korea, he said. For instance, by agreeing at the beginning of the year to a full year of media buys on television stations when other advertisers were holding back, Coke was able to negotiate about a 30 percent discount, he said.

In Indonesia, where inflation in the past nine months has been about 55 to 60 percent, Coke has been able to avoid raising prices by shifting more production to returnable cans and bottles. Nine months ago these containers represented about 65 percent of the business. Today they are about 85 percent, said John Murphy, vice president of the South Pacific division and managing director of Coca-Cola Indonesia. Even so, sales are likely to be off 17 percent to 18 percent, he said.

When the crisis began last summer, Coke's managers in the Philippines predicted that the pain would be postponed because it was an election year and because of the spending that occurs when overseas workers return home for the holidays. Coca-Cola had grown used to a seasonal slump after Christmas, said Pat Garner, president of Coca-Cola's Philippines division, but last year Coke resolved to counter that.

Part of the effort was a promotion called "Coca-Cola -- Always Time for Millions" that paired Coca-Cola with the nation's biggest bank. Consumers could win instant prizes revealed under the bottle cap crown or find themselves entered in a drawing for grand prizes. The grand prizes were ATM cards loaded with cash provided by the Bank of the Philippine Islands, which used the promotion to stimulate use of ATM cards.

"We thought harder about the consumer and said, `What is it that the consumer really needs in the first quarter?"' Mr. Garner said. "What he really needs is more cash. What if we give away cash prizes?"

Everyone aspired to win a cash card with the Coca-Cola logo, Mr. Garner said, adding: "It's not the most original idea on earth," but sales were up more than 30 percent over the first quarter of 1997 in the Philippines, which is Coke's sixth-largest market globally.

Japan is Coca-Cola's fourth-largest market and one of its most profitable. Japan accounts for about 7 percent of unit sales but about 20 percent of earnings, according to Mr. Goldman. Coca-Cola's continued strong showing in Japan has helped insulate it against declines in smaller markets.

In Japan, despite the yen's long downward slide in value against the dollar, inflation has been almost nonexistent. Coca-Cola increased its price in Japan for the first time since 1991, by about 9 percent, in part to offset an earlier tax increase that the company had not passed on, according to the company.

Although volume dropped about 3 percent in the second quarter, Mr. Goldman estimates unit sales will be up about 2 percent for the full year. Coca-Cola is the leading brand of soft drink in Japan, and its canned coffee and teas, sold in vending machines, are the leading brands in those segments.

Volume has also continued to grow in China, Coke's third-largest market in the region. Unit case sales were up 28 percent in the second quarter in China.

Nonetheless, the devaluation of the yen and other currencies in Asia has taken a toll on Coke. Like most other major global corporations, Coca-Cola uses an array of tools to minimize the adverse impact of currency fluctuations. The company's goal is to ensure that currency movements trim no more than 3 percent a year from earnings, said chief financial officer James Chestnut. This year, however, currency fluctuations are expected to reduce profit 8 percent to 9 percent, he said. But that assessment could be subject to change.

Part of the difficulty in hedging against currency changes has been the prolonged slide of two major currencies, the yen and the German mark, over the past three years or so, Mr. Chestnut said. Because the trend has been in only one direction, it has made it harder to offset the dollar's strength, he said.

Coke has also faced major devaluations in the currencies of Thailand, Malaysia, South Korea and the Philippines, where there are fewer opportunities to hedge against those changes. Coke derived some benefit from a weaker currency in its purchase of South Korea's largest bottling company. The devalued won meant that the transaction was twice as cheap in dollars as it originally would have been. But those small victories are more than offset by the bigger problems of doing business in a troubled economy, Mr. Chestnut said.

Because Coke handles currency hedging from Mr. Chestnut's offices, that leaves regional managers free to focus on marketing, distribution, customers and increasing sales volume, he said.

"The important thing from my standpoint ... is that -- despite the fact that the exchange is affecting the number of dollars that come out of these marketplaces in 1998 from a translation standpoint -- it has not affected the way operating management focuses on the marketplace," Mr. Chestnut said.

That means not allowing currency problems, for instance, to get in the way of investment.

In Mexico, in the year after the peso crashed, Coke launched a new product and opened three bottling plants and 10 warehouses, Reyes said. And in South Korea, the pattern is being repeated, said Harting, who added that between 1997 and 2000, the company will invest about $750 million in the market.

"In a crisis like this, you absolutely cannot afford to back off in the marketplace. You've got to put the assets out there in the marketplace that you're going to need later on," he said. "Those were lessons we learned directly from the people we talked to in Mexico."


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