Coca-Cola: Managing Resource Constraints in China. In this case study we will:

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1 Coca-Cola: Managing Resource Constraints in China In this case study we will: Show how businesses can respond to a major natural resource constraint issue Demonstrate how they can share their expertise with the local community in order to improve their resource efficiency Demonstrate how business can learn from its past experience Why is this strategic for Coca-Cola? Water is the main ingredient in all of Coca-Cola s products. It is used extensively in their manufacturing processes and in their supply chain to grow ingredients like sugar and citrus i Sales in China are a major engine of Coca-Cola s growth However water in China is a scarce resource and must be shared with the local communities and ecosystems that make the company s long term sustainability possible Background China is a major and expanding market for Coca-Cola. Surging sales in emerging markets like China and India have been credited for Coke s best sales growth for almost nine years with sales rising 19% from 2007 (The Times, 2007). According to President of Coca-Cola China, Doug Jackson, the company currently counts China as it s fourth-largest market in terms of revenue, although it is expected to overtake Brazil to become its third-largest in two years and the second-largest within five years (China Daily, 2007). Having invested $1.25bn since entering the country in 1979 (BBC News, 2007), Coca-Cola now have 36 bottling plants and plan significant investment in infrastructure over the next year according to Jackson (China Daily, 2007). However, Coca-Cola faces a significant obstacle in its quest for growth in this emerging market. The country suffers from uneven distribution of water reserves and exceptionally low water resources per capita, just one quarter of the world average. Four hundred of the six hundred largest cities face water shortages (OECD, 2007). Water is a global challenge for Coca-Cola. The company have reported water quantity and quality as a material risk to its business since 2003 (Business for Social Responsibility, 2008) and have faced this issue before. Notably, their bottling plant in Kerala, India, lost its license to operate in 2004 when the company was accused of using an unfair proportion of the local community s natural water reserves (The Guardian, 2003). Coca-Cola subsequently went to the High Court to have the decision overruled, but as David Cox of Coca-Cola Asia said; the issues undoubtedly had a short-term significant impact on sales (Ethical Corporation, 2003) This clearly demonstrated the potential pitfalls associated with taking a short-term view during business planning, rather than examining the issues that contribute to

2 long-term business success. In this case, the company overlooked the needs of local communities when drawing on a constrained resource such as water. The Challenge The trial for Coca-Cola was to acknowledge the importance of water for their business at a global level and put in place measures to combat this restraint and deal with the competition for this life-giving resource with local communities. In China, a key market for international business growth, but a region which faced water scarcity, they faced the challenge of maintaining their social and legal licence to operate by engaging with local communities, and ensuring long term availability of water. The Response As a result Coca-Cola set itself a challenge: to become best-in-class in both water efficiency and wastewater treatment and changed their strategy to encourage longterm sustainability. One of their first initiatives included conducting wide-reaching international research in the form of a water risk survey. The detailed questionnaire was issued to managers at around 840 facilities in 200 different countries (cokecce.com, 2005) aimed at highlighting areas of potential water stress within the Coca-Cola plant network. Stress included ecological concerns, competition for resources and community water issues. Regional training sessions were undertaken, using the data to offer plant managers locally relevant information on water stress in their immediate area. Over this, data on regional and global water issues was presented, offering managers insight into the significance of the problem for Coca-Cola as a global brand. An interactive tool kit was also developed, allowing managers to see what other similar plants were doing to improve their water efficiency, to encourage sharing of best practice. In China, water efficiency improved by 8 percent between 2005 and 2006 alone, with over two-thirds of plants having implemented water reuse and recovery projects to reduce their consumption. Further, all of Coca-Cola s bottling plants in the country were fitted with on-site wastewater treatment facilities and employed operators trained in their management. They ensured wastewater was treated to a level capable of supporting fish life, before it is discharged. In addition, Coca-Cola China launched a new initiative with the United Nations Development Programme, the Ministry of Water Resources, and the China International Centre for Economic and Technical Exchange, to improve water access and sanitation in rural communities in China. The four-year, US $6.792M project is designed to focus on key issues including improving water resource management, advancement of water rights management and water resources allocation, and drinking water safety technologies.

3 Most recently the Coca-Cola Company began working with World Wildlife Fund (Australia) to protect the Yangtze River, a river that provides more than 36 percent of China s freshwater resources, benefiting both the company and local communities. The project aims to inspire better governance and sustainable river management practices in the region and has a two-fold benefit; firstly to make a tangible improvement to water conditions for children and the poor in these areas, but also to demonstrate innovative and effective water resource management practices to the Chinese government, provincial leaders and local communities, teaching them how to manage key water issues themselves (Bloomberg News, 2007). Initiatives have included rebuilding drainage pipelines, installing sanitary toilets in schools and demonstrated ecologically sustainable agricultural technologies for water conservation to key local stakeholders (Bloomberg News, 2007). What Can We Learn? Coca-Cola s experience in these emerging markets shows the strategic importance of sustainability. In this case how to manage a constrained resource so that both business and the community could benefit. Although this is not yet a global solution (issues of land contamination and over use of water still present problems for coke e.g. in El Salvador and Chiapas in Mexico), by being proactive and tackling the challenge of limited water resources head on and engaging local communities in the process, they have built in long-term sustainability to their business model, paving the way for the company to flourish in these key new markets. Reporting and performance measurement Coca Cola report on their corporate responsibility performance on their website and in their annual Corporate Responsibility Review, using guidelines issued by the Global Reporting Initiative (which we will look at in more detail in Module 4). In terms of water management, Coca-Cola report on: - water use ratio, i.e. water use per litre of product produced - annual percentage improvement in water use ratio - total water usage per annum - annual percentage decrease in water use Link to website: Link to report: Other examples Access to water and water management are key issues for a wide range of business sectors. Companies such as Unilever, DuPont, ConocoPhillips and Shell have responded to this issue by being involved in a World Business Council for Sustainable Development working group to develop a tool to help companies map their water usage. For more information:

4 UxNQ&doOpen=1&ClickMenu=LeftMenu References BBC News (18 th November, 2007), China may let multinationals list Bloomberg News, (June 6 th, 2007), Coca-Cola to spend $20 million on water conservation. Business for Social Responsibility, (March, 2008), Drinking it in: The Evolution of a Global Water Stewardship Program at the Coca-Cola Company China Daily (17 th July, 2007), Coca-Cola Pours More into China. cokecce.com, (2005), Corporate Responsibility and Sustainability Review Ethical Corporation, (2003), Lessons for other companies from Coke's Indian pesticide crisis, Inter Press Service (August 5 th, 2003), Indian Coke, Pepsi Laced with Pesticides, Says NGO just-drinks.com, (20 th March 2008), CHINA: Coca-Cola signs up to water partnership OECD (The Organisation for economic Co-Operation and Development) (2007) OECD Environmental performance Reviews: China, 2007 The Guardian, (25 th July, 2003), Coca-Cola in India accused of leaving farms parched and land poisoned. The Times, (July 18 th 2007), Coca-Cola Toasts China as it Drives Soaring Sales.

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