Kotabe/Helsen, Global Marketing Management, 5eCase 8Case 8The Coca-Cola Company in Japan∗A financial crisis gripped most of Asia in July 1997. Originating in Thailand, the Asian Financial Crisisspread to countries throughout the region sending them into deep recessions. The crisis had originatedfrom financial institutions lending with little or no credit analysis to financially unworthy companies thatdid not have the capacity to repay their debts.As the crisis spread through Asia, companies across the business spectrum were threatened.Companies and executives feared the worst. However, Douglas Daft, head of Coca-Colaâs Asianoperations, saw this time as an opportunity for growth. The beverage industry in Japan, which featuredunprecedented speed in product development and product turnover, operated with razor-thin margins;thinner than were found in other parts of the world. But Coca-Cola already knew that local attitudestoward foreign multinationals were changing and that acquisition opportunities would become moreabundant because of the Asian crisis. Daft saw it as a chance for the company to be stronger than ever inthe region, particularly Japan, because the company was such a nimble competitor and innovator.Daft planned a series of workshops with top executives to explore opportunities. As Daft workedto gain market share in Japan, he did so with the necessary decentralization from headquarters. The CocaCola Japan subsidiary was given the freedom to create new products and bring them to market without themarket research that its US subsidiary was used to. In Japan, product after product is launched, and manyof them fail. Corporate acceptance of the fact that there will be many failures among some successes is anecessity that Coca-Cola Japan enjoyed.∗This case was prepared by J. Patterson Calhoun, Tim Fitzpatrick, Gwen Joe, and Greg Silvesti of theFox School of Business and Management at Temple University under the supervision of ProfessorMasaaki Kotabe for class discussion rather than to illustrate either effective or ineffective management ofa situation described (2009).Kotabe/Helsen, Global Marketing Management, 5eCase 8As it explored new opportunities, Coca-Cola purchased a bottling business in South Korea, givingit better regional access. In addition, it abandoned its country-specific market strategy in favor of a moreregional strategic view. It also bought several locally branded coffee and tea drinks to exploit regionaleconomies of scale and to keep up with changing consumer preferences. During much of its tenure inJapan, Coca-Cola dominated the soft drink market. However, the 21st century showed signs thatcompetition was catching up. Coca-Cola saw diminishing share in key sectors, specifically, RTD (readyto-drink) tea and coffee as well as Asian specialty drinks. Due to its broadened regional focus, CocaColaâs success in other parts of Asia offset declining Japanese sales, which contribute 20% of thecompanyâs annual profit. But Coca-Cola executives started asking themselves how to maintain its numberone position in Japan as competition crept in.History of the Coca-Cola CompanySince its advent in 1886, Coca-Cola Company has arguably been a marketing genius, dominating theglobal soft drink market. Dr. John Slyth Pemberton, a pharmacist in Atlanta, invented the Coca-Colabeverage in 1886 as a drug to help people feel better, and sold it out of the pharmacy where he worked.The pharmacy was owned by Frank M. Robinson, the man who coined the name we know today, CocaCola. After Pemberton died in 1888, Frank M. Robinson and two brothers, Asa and John Candler createdthe Coca-Cola Company. Asa Candler was a marketing master who promoted the beverage by paintingwalls, clocks, posters, and serving trays and handing out coupons for free Coke. Sales increased, and soonpeople were calling the product by the now-iconic âCoke.â In 1894 the company opened its first syrupmanufacturing plant outside Atlanta in Dallas, Texas. The following year plants opened in Chicago andLos Angeles. Three years after the Coca-Cola Companyâs incorporation Asa Candler announced in theannual report: âCoca-Cola is now drunk in every state and territory in the United States.âIn 1919, Asa Candler sold the Coca-Cola Company for $25 million to an Atlanta banker namedErnest Woodruff. At that time, the company was reincorporated and 500,000 shares were sold for $40 pershare. In 1923 Woodruffâs 33-year-old son, Robert Woodruff, was named president of Coca-Cola2Kotabe/Helsen, Global Marketing Management, 5eCase 8Company. During his tenure Robert Woodruff promoted Coke by insisting on nothing but the highestproduct quality standards. In 1930, quality control standards were implemented to ensure consistency inthe syrup across all locations where Coke was sold. 1944 marked the year when the one-billionth gallonof Coca-Cola syrup was sold. Throughout the mid-1950s, the company sold one product, Coca-Cola, inone or two bottle styles. In 1953 the two billionth gallon of Coca-Cola syrup was sold. Woodruffâs tenurealso marked Coca-Colaâs international expansion. In 1943, plants opened in Northern Africa and Europenear fighting fronts because Dwight Eisenhower wanted to boost morale of American soldiers abroad.Expansion continued, and Coca-Cola entered the Japanese market in 1957.In 1960 the Minute Maid Corporation merged with the Coca-Cola Company. As a result, Fanta,Sprite, Fresca, and Tab, the first diet soda, were introduced to the American market. Four years laterDuncan foods merged with Coca-Cola, and in 1967 the Coca-Cola Food Division was born by mergingMinute Maid with Duncan.In 1981 Roberto Goizueta, a Cuban-born chemical engineer, took over the company andaccelerated its growth through acquisitions and expansion into new markets. In 1982, Coca-ColaCompany launched Diet Coke, the first-ever extension of the Coca-Cola trademark. In 1985, the companyintroduced âNew Coke,â which was based on a different recipe than the original. Due to a consumerbacklash, the original recipe returned to the market within three months, as Coca-Cola Classic. Saleshardly missed a beat. In 1992 Coca-Cola Company introduced PowerAde. The company entered the Arabmarket and ended Pepsiâs dominance there. It also established operations in Moscow and re-entered Indiaafter resolving issues in that country. Over the next few years Coca-Cola signed exclusive deals to sellCoke at the summer Olympics in Atlanta, at Yankee Stadium, and at Blockbuster stores. Before his deathin 1997, Robert Goizueta saw the companyâs value rise from $4 billion to $145 billion.In the late 1990âs M. Douglas Ivester ran Coca-Cola Company. He struggled to leave the samelegacy that Goizueta did. The company faced a decline as it dealt with the Asian market crisis, collapsingeconomies in Russia and Brazil, and strong competition with PepsiCo. Coke’s earnings fell two straightyears under Ivesterâs tenure. Coca-Cola was also plagued with other problems. In the spring of 1999,3Kotabe/Helsen, Global Marketing Management, 5eCase 82,200 African American employees charged Coca-Cola with racial discrimination, resulting in aUS$192.5 million settlement in November 2000. In 1999, Belgian schoolchildren became sick afterdrinking Coke with contaminated carbon dioxide. Then a fungicide was found in cans of Coke shippedfrom France. The contamination problems turned out to be relatively minor, although Ivester was faultedfor not acting quickly to calm jittery European consumers. He was forced out in 1999.In 2000 Douglas Daft took over and announced that the company needed to become moredecentralized to quickly respond to market demands. Through internal restructuring, acquisitions, andstrengthened partnerships, Daft hoped to turn Coca-Cola around. Coca-Cola Company then startedexpanding into the health drink sector by concentrating on bottled water, tea, and juice. Coca-Colacompleted two key acquisitions in 2001. It purchased Mad River Traders, which produced specialty icedteas, lemonades, and juice cocktails, and Odwalla Inc, known for fruit and vegetable drinks, spring water,nutritional bars, and organic milk sold in health stores. During this time Coca-Cola continued signingexclusive deals with such companies as AOL, Proctor & Gamble, and Subway.In 2004 E. Neville Isdell became the CEO of Coca-Cola, and in 2005 Coca-Cola began targetinga younger, more health-conscious market by introducing a zero calorie cola. In that same year, sales inJapan and China helped to push third quarter profits up 37% to $1.28 billion. The company continued tosign deals, namely with Bally Total Fitness, the PGA Tour, and Papa Johns. Continuing its concentrationon the health-conscious market, in 2005 Coca-Cola began its plans to introduce a new green-tea baseddiet soda named Enviga. Developed with Nestle, the product reportedly boosts metabolism and burnscalories. Coca-Cola also began to develop products with less sugar, like Diet Coke with Splenda. 2005also marked Coca-Colaâs return to Iraq after a 37 year absence. During this time, Coca-Cola restructuredits overseas operations into three operating units: European Union Group; North Asia, Eurasia, andMiddle East Group; and Southeast Asia and Pacific Rim Group. At this time, international salesaccounted for almost 80 percent of the company’s operating income and more than 70 percent of beveragevolume.4Kotabe/Helsen, Global Marketing Management, 5eCase 8In 2006 Coca-Cola trademarked âCoca-Cola Greenâ and âGreen by Coca-Colaâ as it continuedits concentration on green tea based beverages. Then in 2007 the company expanded its line-up of tea,juice, and energy drinks via the acquisition of Fuze Beverage. It also acquired Vitamin Water in 2007.Proving its commitment to international expansion and customer satisfaction, Coca-Cola established aresearch center in China to develop beverages based on traditional Chinese herbs. By 2007, Coca-Colagrew to include more than 400 brands manufactured and sold in 200 countries–or virtually every nationon earth– with sales reported at US$29 billion.Case Exhibit 8-1Financial InformationCase Exhibit 8-2Coca-Cola Japan Ltd.Â¥ million199719981999200020012002Net Sales115,408117,991164,731207,827220,203223,866Operating10,73712,53315,16017,449NANA5Kotabe/Helsen, Global Marketing Management, 5eCase 8ProfitNet Profit5,4285,8726,8235,700NANAProfit Margin4.7%5.0%4.1%2.7%NANANote: net sales estimated 2001-2002Financial year end: MarDynamics of the Japanese MarketplaceJapan is a high context culture, where the interpretation of messages rests heavily with cultural cues, interms of age, gender, and balance of power. Japanese culture also tends to be group oriented with groupshaving similar expectations and experiences. Results from the NMIâs LOHAS Consumer trends Databaseshow Japanese consumers are more likely than US and EU consumers to choose products from firmswhose values are like their own.Case Exhibit 8-3Japanâs increasingly improving economy is causing consumers to emphasize quality overaffordability. This can be seen in the beverage market where premium ready-to-drink coffees and teas aswell as juices with real fruit or premium grapes are growing. The population is also aging, triggering a6Kotabe/Helsen, Global Marketing Management, 5eCase 8shift away from sugary, sweet sodas to beverages with perceived health and functional benefits, like lowcalorie beverages, bottled water, and ready to drink tea and vitamin beverages.Historically, Japanâs economy has been tied to innovation, creating a frenzied pace to discoverthe next popular iteration of a product. Most Japanese TV ads for food and drinks incorporate the mantrashin hatsubai, meaning "new product for sale.â According to the September/October issue of MarketingScience, out of a 31 nation study, Japan was the world’s speediest economy in bringing new products tomarket. Much of this is due to the Japanese consumer liking choices and being notoriously fickle. Forexample, when a Japanese beer drinker goes to buy a can of Asahi at an average convenience store, he hasthe choice of Super Dry, Premium, Prime Time, Black, Stout, Orion Draft, Northern Style, Clear,Flavorful, Gubi Draft, New Draft 3 and Ginger Draft, among others.The Japanese Beverage IndustryIn 2007 the Japanese soft drink market generated revenues of $48 billion, second only to the U.S. marketThe soft drink market in Japan is organized into the following categories: Carbonates, Fruit/vegetablejuice, Bottled water, Functional drinks, Concentrates, RTD tea, RTD coffee, Asian specialty drinks, andSoft drinks. While the overall industry is relatively stable, segments within the industry are changingmore rapidly in response to changing market conditions.Case Exhibit 8-4Consumption of Soft Drinks by Sector 2000/2005%growth200020052000-litres per capita / as on-on-statedtradetrade20002005%2005 on- off-off-2000-2005tradetradeoff-tradetrade7growthKotabe/Helsen, Global Marketing Management, 5eCase 8Carbonates3.93.3-15.0116.917.42.7Fruit/vegetable juice1.31.3-3.1919.418.7-3.4Bottled water0.40.779.4312.719.654.413.014.17.9Functional drinksConcentrates0.00.06.50.30.2-19.80RTD Tea0.50.845.8835.046.633.13RTD coffee0.40.43.7720.221.77.57Asian specialty drinks0.40.754.3322.534.754.18Soft drinks6.76.6-1.00119.1139.917.48Source: Euromonitor International from trade sourcesThe beverage industry in Japan is mature and highly competitive. The Japanese food andbeverage market is relentless and built upon innovation, with older products being cast aside for newerfads as the country is obsessed with novelty. Approximately 1,000 to 1,500 new drink products areintroduced each year.Unlike in the United States, where single elaborate product launches are backed by huge budgets,endless product line and brand extensions are the norm in the Japanese marketplace. A desire for newproducts leads marketers to quickly bring new product offerings to market, sometimes creating outlandishideas in hopes that market share can be gained for a short period of time.For example, in July 2008 Japan Tobacco Inc launched the fishy drink Unagi Nobori, whichtranslated to "Surging Eel." This new beverage, believed to be the first mass-produced drink of its kindmade in Japan, contains eel extract and vitamins found in the fish that many locals believe act as anenergy booster during the summer’s hot and humid conditions. The beverage has a similar taste to broiledeels, a popular form of the summer delicacy, and was launched to coincide with the start of Japan’s annualeel-eating season.8Kotabe/Helsen, Global Marketing Management, 5eCase 8Coca-Cola Japan vs. Coca-Cola USAThe Coca-Cola Company has taken a very different approach to connecting with consumers in Japan thanit has in the United States, and that is due to the contextual makeup of the markets. The companyâspresence in Japan is characterized by greater innovation in products, technology, distribution methods,and speed to market. However, the company has in recent years taken advantage of some decidedly U.S.practices, including increasing scale for the sake of operational efficiency.According to Coca-Colaâs president and CEO Muhtar Kent, "Across all geographies around theworld, we are inspired and fortified by the leadership and innovations that we’ve come to expect over thelast half-century from Coca-Cola Japan.â Japan is absolutely critical to our system’s future growth. Notonly because of the sheer size of this market, but also because of the constant stream of leadership andinnovation that springs from this great nation."Coca-Cola in Japan, like the beverage industry in the country as a whole, is more diverse in itsproduct offerings than in the U.S. The company âoffers the Japanese market over 25 brands in 60 flavorsand over 200 packaging formats, as well as significant volume in coffees, teas, and functional andwellness drinksâ and introduces new products each year to keep up with new aggressive competitors anddynamic, highly volatile consumer tastes. For example, Coca-Cola Japan has introduced a vitaminfortified Coke drink named Coca-Cola plus vitamin, a Diet Coke variant that is marketed as providing81% of the daily requirement of vitamin C, with no calories. Water Salad, a beverage that taste as thename implies like salad flavored water. These product offerings are just a couple of the many that wouldbe seen as odd to the American Coca-Cola consumer marketed by Coca-Cola in Japan.The companyâs innovativeness in Japan extends beyond products and encompasses marketingand distribution, primarily in the form of a network of technologically advanced vending machines.According to remarks by Mary E. Minnick, former president and COO of Coca-Cola Asia, "There is nosuch thing as a global consumer," adding that Cokeâs marketing and distribution are Japan-specific, withvending machines being a key channel to consumers.9Kotabe/Helsen, Global Marketing Management, 5eCase 8Coca-Cola is continually advancing vending machine technology to stay ahead of consumertrends and to preserve its status as an innovator since the vending machine is such an importantdistribution channel in Japan. Coca-Cola has the largest network of vending machines in Japan,controlling approximately 980,000 machines nationwide, or 30% of all soft drink vending machines inJapan. Coca-Cola Japan operates both hot and cold vending machines as well as machines with innovativefeatures, including ones that allow customers to purchase a Coca-Cola product with their cell phone andeven a machine with an emergency phone that provides instant access to local police using 110 (the policeemergency number in Japan) and activates an overhead security camera when the handset is lifted. CocaCola Japanâs newest vending innovation is a âgreenâ vending machine, the e-40, a machine that is 100%hydrofluorocarbon (HFC) free providing more efficient heating and cooling as well as well assophisticated insulation and LED lighting. These features make the e-40 40% more energy efficient thanthe conventional model.Case Exhibit 8-5Innovative marketing is also a trademark of The Coca-Cola Company in Japan. From June toDecember 2007 a viral campaign of 22 short films in the style of a 1960âs Japanese Tokusatsu live-actiontelevision shows, embracing the comedic stereotype of Japanâs film culture, were uploaded to YouTube topromote the launch of calorie-free Coke Zero. The shorts followed the exploits of a fictional hero, a CocaCola vending machine known as âVending Machine Redâ who traveled around Japan battling evilvillains. An account for VM Red on Japanâs most popular social networking site, Mixi was created andVM Redâs profile was updated daily with movies, pictures, and blog entries to help further humanize VMRed to the youth in Japan, particularly young males. Coca-Cola Japan has also released limited edition10Kotabe/Helsen, Global Marketing Management, 5eCase 8scaled-down replicas of the robots from the campaign that have been one of the hottest collectables of2007.In contrast, The Coca-Cola Company in the United States has a reputation of a storied companywith products embodying Americana, tradition, and history. Innovation can be seen as a betrayal of thattradition, as illustrated with the backlash after the introduction of New Coke. Flavors like Water Salad areseen as âweirdâ in the United States. Marketing campaigns are nation-wide and they are introduced afteryears of market research. Economies of scale are seen as a path to success.Achieving economies of scale is a practice that Coca-Cola Japan has borrowed from its U.S.parent. While Coke management in Japan has established a reputation for innovation, they have alsoincorporated production strategies driven by cost leadership characteristics pioneered in the United States.Coca-Cola is integrating bottlersâ procurement, production and distribution systems. Coca-Cola reducedthe number of factories from 34 to 30 by 2007 with further plans to shrink the number to 27, centralizedthe joint procurement of raw materials/ingredients, manufacturing on a national level and supply anddemand planning and cooperation.In 2004 the company established a development department to develop health-related goods andto consolidate group-wide efforts in new product development previously undertaken by individualbottlers. One of Coca-Cola Japanâs targets was the unsweetened healthy drinks market with the launch ofSokenbicha Gokoku, a five-grain unsweetened tea. According to Japan Marketing News, Coca-Colaâs teaoffering âachieved the highest sales rank amongst recently released beverages in Japan.âSo while it took Coca-Cola over 70 years of operations to enter Japan, the companyâs Japaneseoperations serve as an engine of innovation that benefits the companyâs operations around the globe.Indeed, âthe Coca-Cola system in Japan has pioneered many beverage industry innovations – from newproducts to cutting-edge vending machine technology – serving as a model for Coca-Cola operationsaround the world.âCompetition11Kotabe/Helsen, Global Marketing Management, 5eCase 8The top five beverage providers in Japan are Coca-Cola, Suntory, Kirin, Ito En, and Asahi, respectively.The top three combined hold nearly 50% market share.SuntorySuntory is certainly not new to the beverage industry in Japan. The company was founded in 1899 withthe opening of a store that sold grape wine. The company opened the first malt whiskey distillery in Japanin 1923 and began exporting its products as early as 1931. Throughout the 1960âs and 70âs Suntoryproduced many different varieties of whiskey.Suntory Oolong Tea was introduced in 1981. Throughout the 1980âs and 1990âs Suntorycontinued working on new alcoholic drinks, including the release of a 100% malt beer in 1986. Itestablished a strategic alliance with PepsiCo in 1998, making it responsible for all marketing, productionand distribution for PepsiCo in Japan. Today Suntory has operations in Asia, the U.S., and Europe.The company prides itself on its âPrinciple of Dividing Profits Three Ways,â whereby one-thirdgoes back to the customer, one-third goes back into the company, and one-third is contributed to society.With regard to its beverage and food company, Suntoryâs websites states, âDetermined to graspconsumer trends and to provide better-tasting products with greater consumer appeal, we are launchingattractive new products that respond to the tastes of the times one after another.â The company wants towork hard to innovate in ways that will keep customers satisfied in an ever-changing market.As described on the website, Suntoryâs product line-up in the soft drink market includesâIYEMON, an authentic Japanese green tea that has grown since its launch in 2004 into a brand containingthe nucleus of the green tea market; Suntory Oolong Tea, a brand known for its long-term popularity;BOSS, a canned coffee positioned as "My buddy coffee for working people"; Suntory Natural Water, asafe, natural drinking water from a carefully preserved water source; PEPSI, which cultivated a newcurrent in the cola market; and DAKARA, which has earned high repute as a "daily health beverage".âSuntory relies on its research and development department for innovation and development ofnew desirable products as it strives for growth. Management is said to ask itself, âWhat would they like to12Kotabe/Helsen, Global Marketing Management, 5eCase 8drink?â and âWhat would please their palates today?â In addition, the company also developed a QualityAssurance Committee to ensure the production of safe, delicious products.KirinJohan Martinius Thoresen was a Norwegian who immigrated to Yokohama Japan in 1834. (He laterbecame known as William Copeland when he became an American citizen.) Responding to a largedemand for domestically brewed beer, he opened the Spring Valley Brewery in 1869. By 1884 he wasrunning out of money and sailed to the United States. A year later British entrepreneurs took over thebrewery and by 1888 all beverages were being produced under the Kirin name. By the mid-1930s Kirinwas achieving record sales. Throughout the 1950s sales increased at an average of 17% a year and in1954 it was the number one brewer in Japan. Kirin did not establish a presence in the soft drink marketuntil the 1970s. During the 1980s and 1990s Kirin faced some challenges.The emergence of convenie…