The Hindu Business Line : Coke cuts dealer margins, outsources distribution

COCA-COLA India said it has initiated a massive cost rationalisation exercise, mainly by slashing dealer margins per crate and outsourcing distribution.

The company, which claims to be reaping benefits of its affordability strategy by "strong double digit" volume growth in its carbonated soft drinks business this summer, said it was targeting over a million dollars in savings in 2004 by adopting several cost-reduction measures across the board.

"We have rationalised retailer margins because net earnings for each retailer have gone up after the introduction of 200 ml pack size led to strong volume growth. Several other steps have been taken to cut costs across the board and we expect to save more than a million dollars through these measures in 2004," Coke India Vice-President, Mr Sunil Gupta, told Business Line.

While he declined to quantify the reduction in dealer margins, market sources said margins per crate have been slashed by more than half, from Rs 48 a crate (comprising 24 bottles of 300 ml each) to Rs 20. On the 200 ml pack size, margins are down to Rs 16 per crate from Rs 18 earlier.

Mr Gupta said reduced margins do not hurt the earnings of retailers because the reduction is compensated by increased sales volume. The other measures the company has taken to rationalise costs include reducing the weight of returnable glass bottles (RGBs) by a whopping 20 per cent so that their transportation costs proportionately less. And it has outsourced distribution so that trucks and other equipment needed for the purpose are no longer owned by the company.

Besides, the company is buying refrigeration and cooling equipment needed to stock products in bulk, thereby reducing the costs in this aspect of the business too. He said retailers have been given more asset services - the company provides them bulk discounts on equipment and other purchases - besides financing several needs such as purchase of storage equipment and refrigerators.

By simultaneously implementing the two-pronged strategy of driving volumes through affordability and across-the-board cost reduction, Coca-Cola India is sure to shore up its bottom line this year. However, the fact that the company will have to invest in process upgradation for manufacturing of packaged water and soft drinks when the new integrated food law is enforced may dent the projected revenue saving.

The company says sales of the more affordable 200 ml pack size already account for about 60 per cent of its total carbonated soft drink (CSD) sales. Along with the affordability strategy for CSD segment, the company is also aggressively pushing its non-CSD segment products including Maaza fruit drink, Kinley packaged and bulk water, Sunfill soft drink concentrate and the tea and coffee business.

Mr Gupta said the non-CSD business accounts for 15 per cent of Coke India's sales and was registering a strong, double digit growth this year.

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