It’s starting to look like the only companies that will not be harmed by the crisis currently affecting Russia, Ukraine and other Eastern European markets are those that stayed away from the area to begin with. By a long shot, Coca-Cola does not fit that description.
Coke’s rise to dominance on independent Ukraine’s beverage market has been almost frighteningly swift. Virtually non-existent during Soviet times, Coke quickly carved out roughly 50 percent of the Ukrainian beverage market.
Now, the implosion of the hryvna is threatening to do more than simply put a dent in Coke’s short-term Ukrainian profits – it may be affecting the share price of the company Fortune magazine rates as the third largest in the world.
On Sept. 29, shares of Coca Cola Ukraine’s European parent company, Coca-Cola Beverages, fell 13 percent in one day. According to Reuters, the drop in share prices was brought about by Coca Cola Beverages’ warnings of ‘testing conditions’ in Ukraine and Belaurs.
Meanwhile, U.S.-based Coca Cola, which owns 51 percent of Coca-Cola Beverages, had announced that it too would suffer profit losses due to the international financial crisis and resultant sales drops in Europe and the Far East.
Coca-Cola Beverages, which markets in 13 European countries including Ukraine, announced half-year losses of around $3.2 million last week. Ten of its countries of operation lie within the former Soviet bloc. Italy, Austria and Switzerland are the exceptions.
Neville Isdell, the president of Coca-Cola Beverages, downplayed the possibility of losses in Ukraine and Belarus having a significant effect on the company’s profits.
‘[Belarus and Ukraine] represent only eight percent of total group unit case volume,’ Isdell told Reuters. ‘The other 92 percent is detached. Poland, the Czech and Slovakia republics and Hungary have very little foreign trade with Russia so their currencies have remained stable.’
Coca Cola Beverages sold 561 million cases of soft drinks last year. Of that total, Ukraine and Belarus consumed only 44.8 million cases.
Isdell blamed the first-half losses on one-time legal fees and said the country would recover in the second half.
Whether investors believe Isdell’s arguments or not, these are not the best of times for Coca Cola Ukraine. Company officials in Kyiv said fallout from the financial crisis is manifesting itself in the form of dropping demand for Coca-Cola products.
‘It certainly has affected the business,’ Sonya Soutus, Coca-Cola Ukraine External Affairs Manager told the Post. ‘Now we have to manage costs.’ For now, the company is taking a wait and see approach.
‘Like most every one else we’re going to…see how things shake out with the financial markets and the hryvna in the next couple of weeks,’ she said. The financial crisis hit Ukraine just as Coke’s most successful summer to date was concluding.
‘We had a record-breaking summer,’ Soutus said. ‘ But we don’t yet have any statistics reflecting the effects of the crisis…Catch me in a couple of weeks.’
The numbers will likely deteriorate somewhat, she predicted, but no matter how bad they are the chances are extremely unlikely Coke would ever consider a pullout. The owner of perhaps the best-known trademark on Earth can afford to take some lumps in the short term in a country of 50 million people.
‘We are a long-term company,’ Soutus said. ‘We’re here for the long haul.’
Coca Cola’s campaign to dominate the Ukrainian market took eight years using a systematic development approach employed successfully in dozens of countries before Ukraine: first import the product, then the syrup, then bottle in-country.
Coke’s Ukrainian program began immediately when Ukraine became independent in 1991. Within two years, Coke had already developed a distribution network using products trucked in from neighboring countries.
Coke began manufacturing in Ukraine in 1995, when Australian bottler Coca-Cola Amatil joined up with a Lviv bottler. This was followed in May of 1998 by the delayed opening of the much larger Kyiv bottling plant, which Coca-Cola Amatil also financed.
Now, Coca Cola owns about half of Ukraine’s estimated 300 million liter ($148.5 million) beverage industry, industry analysts estimate.
Compared to most countries its size in Europe, those figures are extremely low. Ukrainian sales represented only 5 percent of the total of 4.48 billion liters of carbonated and non-carbonated beverages sold by Coca Cola Beverages in the 12 countries it does business.
But Ukraine, with a population of 50 million, constitutes 25 percent of Coca Cola Beverage’s 200 million potential customer pool. Marketing in Ukraine has therefore focussed on raising product awareness while advertising is cheap, rather than stimulating demand among the country’s predominantly poor residents. That is Coke’s textbook corporate strategy, and its result can be clearly observed in cities throughout Ukrainian, where red Coke logos adorn a disproportionate amount of kiosks, taverns and billboards.
The multinational does not advertise so much in smaller towns, largely because much of the rural populace can only pay in what they get paid in: commodities like grain and tractor parts. But Coke still manages to get its message out to Ukraine’s rural areas.
When elite Ukrainian and American National Guard troopers flew into the town of Chuhuiv for joint training under the auspices of the Partnership for Peace program this past August, they were armed with more than just firearms. As one of the sponsors for the program, Coke equipped each soldier with several cans of Sprite and Coca-Cola Classic, receiving not a few good photo opportunities in return.
In addition, Coke has sponsored rock concerts in several Ukrainian cities, and donated $1 million to the Ukrainian National Olympic Committee earlier this year.
