Cott, Danone Store-brand Sodas May Take on Coca-Cola in China

By Michael Forsythe Beijing, Jan. 31,2002 (Bloomberg) -- Coca-Cola Co.'s 23 years of brand-building in China haven't swayed Wang Zhongxia. For Wang, a cola by any other name may be just as sweet.

“If it tastes good and the price is low, I'll buy it,”the 26 year-old computer-shop manager said as he browsed a Carrefour SA supermarket in Beijing.

That's good news for Canada's Cott Corp., the biggest maker of store-labeled colas, which licensed a beverage company near Beijing to use its syrup recipe in China, the fourth-largest cola market. Cott aims to repeat its success in the U.S., where its RC Cola, sold as Sam's Choice by Wal-Mart Stores Inc., took market share from brand leaders Coca-Cola and Pepsico Inc.

The Toronto-based company hopes for a boost should Wal-Mart or Carrefour agree to market its cola through the hypermarkets each is building in the country. Its Chinese licensee, Sanhe Meile Soft Drinks Co., is in ``very serious discussions'' with both store chains, said company President Ji Jun.

“If the taste is right, and if they have the support of the hypermarkets, they can do it,”said Geoffrey Cheng, a beverage analyst at HSBC Securities in Hong Kong.

“That is the fastest growth segment.”Hypermarkets Sanhe Meile plans to take advantage of the growing popularity in China of “hypermarkets,”which sell everything from groceries to fur-lined steering wheel covers.

Wal-Mart has 15 such stores in China and plans to build five more in the Beijing area. Carrefour has 28 stores in China.

In Shanghai, China's commercial capital, up to 20 percent of all soft drinks are now bought at such stores, which typically sell soda from about 10 to 15 percent less than smaller outlets, according to Chang.

Coke and Pepsi have both seen market share erode in the U.S. to private label sodas, to Cott's gain. Yesterday, Cott said fourth-quarter profit rose 39 percent on a 13 percent rise in sales, primarily in the U.S.In contrast, Coca-Cola's sales rose 4 percent in the same period. Cott's shares have risen 101 percent in the past year.

“Wal-Mart or any supermarket is going to use a low-priced soda to keep Coke and Pepsi in line,”said Perry Caicco, an analyst at CIBC World Markets in Toronto who rates Cott“strong buy.”“The way to do that is to build a store brand.”

Danone Cott isn't alone. Groupe Danone SA, the biggest maker of cookies and dairy products, has a 50 percent stake in the Shanghai plant that bottles“American Cola”under license from Monarch Beverages of Atlanta International, Inc. American Cola sells for 1.50 yuan (18 US cents) a can at Carrefour in Beijing, where a can of Coke sells for 1.69 yuan.

Danone is also the owner of Wahaha, the Chinese bottler which makes Feichang Cola, billed as“China's Own Cola.”Famous for its flashy ads, the latest features the Chinese God of Money, enticing people to buy the soft drink during the upcoming Chinese New Year.

Danone Asia Vice President Simon Israel wouldn't comment on his company's China strategy. For Cott and Danone, success means taking on the most- recognized international brand name in China: Coke.

Coke, which re-entered the China market in 1979 after exiting shortly after the 1949 Communist victory, has close ties to the government and a nationwide network of bottling plants. It claims 48 percent of the soft drink market, employs 15,000 people and made $1.2 billion in China sales in 2000.

Competition from Coke helped to force Guangdong Jianlibao Beverage Co., the former market leader, to put itself up for sale. It was bought last week by the investment arm of a Chinese province.

“This is a highly competitive market,”said Brenda Lee, a spokeswoman for Coca-Cola in Shanghai. Coke will continue to employ“effective and innovative marketing to maintain our leadership in the soft drink market.”Coke also has its own promotion specials with hypermarkets in China, Lee said, holding a nationwide promotion with Carrefour last month offering “instant win”prizes that included stereos, jackets and -- unsurprisingly -- free drinks.

Concentrate Still, Sanhe Meile's concentrate plant, located in the outskirts of Beijing, has the capacity to make syrup for nearly 1 billion liters of soda a year, and Ji Jun and his U.S. partner, Ohio-based Calcol Inc., which owns 80 percent of the venture, say they can undercut the market leader's price by up to 30 percent. A bottling facility, under construction next door, is set to be completed by September, Ji said. In the meantime, the company will employ local bottlers to package RC Cola. At least 10 percent of the market is waiting for me,'' Ji said in an interview.

“With private labels (Wal-Mart and Carrefour) can earn more money -- they understand that.”Wang, the Carrefour shopper, seems to agree. He bought his first can of Danone's “American Cola,”which sold for 12 percent less than a can of Coke. “Everybody knows about Coke,”Wang said.“Once people see that this one costs less, its sales will take off.”