Ronald Stanley:
Coca-Cola Hellenic Bottling Co. (CCHBC), one of the largest private investors in Poland, continues to carry out its nonstop battle with arch-rival Pepsi and a bevy of homegrown drinks on Polish soil. Coca-Cola Beverages Polska (CCBP), a CCHBC subsidiary, employs 2,100 full-time and 400 part-time and outsourced workers and has about 30 distribution centers across the country. Ronald Stanley, 59, took the helm as CCBP's managing director in early 2001 after a five-year stint as head of the cola giant's Hungarian operations, where he helped make the loss-making outfit profitable. He recently talked to the WBJ's Roseanne Gerin about CCBP's restructuring, product sales, and efforts to make a U.S. trademark relevant for Poles. The following is an edited version of their conversation.
Q: How important is Poland to Coca-Cola's European operations? A: It's very important. We are the fifth-largest bottler within Coca-Cola Hellenic Bottling Co., and CCHBC is now the second-largest anchor bottler for the Coca-Cola system globally next to Coca-Cola Enterprises, which has close to 70% of the domestic market within the United States and interests in Europe in the U.K., the Netherlands, France and Belgium. At CCHBC we now have 26 countries within our franchise network, having recently purchased (operations in) the three Baltic states of Estonia, Lithuania and Latvia, and Moscow and St. Petersburg as part of the Russian franchise. Poland, with a population base of some 40 million with a very low per-capita consumption relative to other developed markets, has a high level of priority within CCHBC because of its upside opportunities. Today the consumption of Coca-Cola products in Poland is around 60 per capita. And the Coca-Cola system looks at opportunity in per capita consumption. That's the true measure of growth potential. In Hungary (from) 1992 through 2001, per capita consumption went from 40 to 160 units. When you compare Poland we have a significant upside in the short-term to get to 160 and be profitable at 100. Per capita consumption in the United States is at almost 400 (units). So the glass (in Poland) is not half empty, it's half full.
Q: Why is the consumption here lower and how is your company addressing it? A: The income level is a primary reason, but over the years there have been local brands that are indigenous to Poland and now make up more than 50% of the total consumption of carbonated soft drinks. These are locally owned and locally produced brands that have regional preferences, such as (the Polish carbonated beverage and mineral water producers) Hoop or Hellena. We have a lot of respect for what these independent bottlers have achieved in developing their businesses. They've been very innovative and competitive but they've driven their brands on being locally relevant and with perceived value by the consumer - lower prices. As the consumer has struggled with disposable income they have quite often exercised the option of these lower price brands rather than the premium brands of Coca-Cola or Pepsi.
Q: Last October the Polish operations started restructuring with 300 layoffs and the planned division of the company's operations into eight sales regions. To what extent has this project been completed? A: It was completed within a matter of two weeks in October. This was done after very careful evaluation and consideration of the opportunities and comparing - benchmarking - ourselves to various other countries within our region, (including) Hungary, the Czech Republic and Slovakia. We saw a lot of opportunities internally to make the necessary adjustments to increase our productivity and we (took) those steps to get ourselves more aligned to the productivity measures of the other countries.
Q: Are any more layoffs planned for 2002? A: No. The focus this year is not to lay off additional people. We are looking at the reallocation of resources as we identify additional opportunities in the marketplace to better provide superior customer service to our customer base. Our target is to essentially control our costs. I'm not going to go into any specifics but the target for us this year is to maintain our cost basis equal to the prior year, which means that with volume growth our cost per case will be reduced.
Q: What do you hope to accomplish by establishing the different sales region in Poland? A: There are six sales regions. Originally we intended eight but we saw an opportunity to consolidate four of those regions into two to make it six total because of the demographics and the regional make-up, which were more alike in those consolidated areas. The market in all of Poland is very different. Each region is unique and different in its make-up and stage of development. We look at Poland as not just one country but almost as six individual countries because of the demographics of each of the regions, their levels of development for our product and (their) total carbonated soft-drink consumption. We are treating the six individual regions as individual businesses with separate (profit-and-loss statements) and with separate marketing plans. In Łódź, for example, we might have a higher need for penetration of distribution of all our products, and that's the way to drive our business profitably. While in Kraków it may be a consumer preference issue that would require more investments (in) improving the product attributes to the consumer to build preference for our products. We can only be successful if we are locally relevant to the Polish consumers in each region, and those needs vary significantly across a wide range of attributes in the regions we serve - (attributes) such as unemployment, (the amount of) disposable income, culture, share of market for our products and the historical reasons for the (market share). Originally when Coca-Cola and our competitor Pepsi came to the marketplace, the government assigned these products to various businesses like distilleries and breweries in the various regions. And in one location, such as Kraków, Pepsi may have been there first and became the preferred product, (but) today it's not necessarily the preferred product because there's more of a parity market. In Warsaw we have a better than two-to-one market share vs. our competitor but that's because Warsaw was developed early on as a Coke market, not as a competitive market.
Q: According to the WBJ's Book of Lists, CCHBC was Poland's 18th-largest private investor in 2001. With the recent restructuring, will you lose some ground this year as one of the country's biggest investors? A: No. We have invested more than $300 million from the inception of Coca-Cola Amatil coming in and buying the franchise and that has been done through the acquisition of the franchise as well as the investments we have made in capital equipment - trucks, facilities and equipment to drive the volume of our business, such as investment in vending equipment and coolers, equipment for the fountains, opportunities in restaurants and quick-service restaurants, racks and other merchandising equipment. On an annual basis over the last four or five years the average investment has been $15 million-$30 million a year. This year it will probably be in the range of $15 million-$20 million in revenue-generating or volume-generating investments, such as upgrades of our equipment to introduce new packages for new products or full vending coolers and merchandising equipment.
Q: In 1999 the revenue for Poland was zł. 1.2 billion ($292 million) and it stayed the same in 2000, even though the goal was to increase it 8%. What was it last year and what is your forecast for 2002? A: I can't give you a specific number for last year. I would say that it was relatively flat to prior years but there were a number of reasons for that. Our anticipated growth for this year (is) in the range of 5-7%.
Q: Why was your revenue flat in 2001? A: I think our cost base compared to other countries was too high and as a result, to maintain margins, we increased prices at a frequency that made our products unaffordable in some cases to the average Polish consumer. We recognized that very quickly and we have taken two initiatives. One is to right-size our cost basis in the year 2001, and then we've taken a position this year to maintain suggested retail pricing at levels equal to 2001. The economy and the economic issues in Poland last year also contributed greatly because our product growth is dependent on pricing. Many of the decisions to purchase are made on price sensitivity. So as we were working against that with higher retail pricing, our consumers were telling us with lower frequencies of purchase that they could not afford the product. Therefore, we have reacted to that in the first quarter of 2002. We saw it in the increase of unemployment rates and in traffic and purchase patterns in the stores that we service and obviously it was reflected with softer volume than was anticipated in the full quarter. The fourth quarter was impacted the most in 2001.
Q: To what extent will your sales in Poland be affected by the weak economy this year? A: We believe that this year will be very challenging for us but at the same time we see tremendous potential for development our products in the total portfolio in Poland. Consumers will still consume liquid products and in large quantities and for us to get our fair share, we've taken the initiatives to make them affordable, acceptable and available in the right packages at the right price. With that initiative this year we will be able to grow our business rather than to see it decline.
Q: How much did you reduce retail prices? A: The way we have addressed this is by increasing our promotional discounts to target specific retail pricing that we have measured through consumer research will provide a greater value to the Polish consumer. For example, in the general grocery and over-the-counter (market), which is 40,000 outlets for us - a large portion of our consumer base - we reduced the price of a two-liter bottle of Coca-Cola from zł. 5.29 to zł. 4.59.
Q: Last year the company said it was going to tailor its ad campaigns so that they were more suited to local culture. How have you done this? A: We're working in concert with the Coca-Cola Co., which has a regional office here in Warsaw. There are 38 marketing professionals who work for the Coca-Cola Co. and most of them are Polish nationals and their job is to measure the consumer needs through research to identify the locally relevant opportunities that we have to better communicate the attributes of our product. To create the occasions for consumption and to find ways that will weave our products into the lifestyle of the average Polish consumer. The way we look at this as partners in this cooperation we have - the Coca-Cola Co. handles the marketing and they create the value in terms of the perception of the product by the consumer. We as the bottler make the investments in infrastructure, manage the customers and deliver the value. Now what has Coca-Cola Co. and CCHBC done to make the products more relevant to the Polish consumer? We've done a number of things. In terms of the advertising, we ran a couple of ads last year that were created and produced here. One was an ad with a young girl sitting in class taking her Matura (high-school leaving exam) in the spring and the other was her big brother and little brother playing checkers. These were done with Polish actors and this was in turn used in other markets with language adjustments to communicate the attributes of the product in trying to be locally relevant. In some ways nostalgic, referring to things that have happened in people's lives in Poland that they remember.
