It was an announcement made so quietly that it did not even make the headlines: having already invested $172 million in Pakistan this past year, The Coca Cola Company – one of the world’s largest beverage companies – is planning on investing another $248 million in the country over the next two years.
It may have something to do with the fact that Pakistanis are estimated to have spent approximately Rs110 billion ($1.3 billion) on carbonated beverages in 2011, according to an analysis by The Express Tribune based on figures compiled from industry sources. Coca Cola currently enjoys a 30% market share, second only to arch-rival PepsiCo.
“We see great potential in Pakistan’s future, which is why the company is investing significantly in upgrading infrastructure and adding value to allied industries,” said Rizwan Khan, general manager for The Coca Cola Company in Pakistan and Afghanistan.
The money will be spent on two new bottling plants, one each in Karachi and Multan, as well as investing in more coolers, which will be distributed amongst retailers to help with the company’s retail sales efforts. Company officials were quick to point out that the investment is not simply the recycling of profits and cash flows from existing operations in Pakistan, but green-field foreign direct investment that will flow into the country over the next two years.
The expansion plans come as rising demand makes it difficult for Coca Cola to keep pace with its existing production capacity in Karachi and Punjab. The new plants will follow the establishment of a Coca Cola facility, already completed in 2011, which manufactures Coke cans. Previously, Coca Cola used to import cans from its factories in other countries.
Coca Cola’s business model in Pakistan is somewhat unique. The global US-based parent owns a subsidiary called The Coca Cola Export Company, which has a Pakistan branch. That Pakistan branch conducts all marketing and brand building activities and manufactures the concentrate for the company’s signature beverages from a plant it owns and operates in Raiwind.
The concentrate is then sold to Coca Cola Beverages Pakistan, a joint venture between the US-based parent and Coca Cola Içiçek, a Turkey-based partner of the group. Coca Cola Beverages Pakistan operates six bottling factories in Pakistan, located in Karachi, Gujranwala, Multan, Lahore, Rahimyar Khan, and Faisalabad.
Coca Cola used to have eight franchisees for its bottling facilities in Pakistan, but in the mid-1980s the company felt that the business model was not working. It then spent the next decade buying out every single franchisee in Pakistan, consolidating them under one umbrella to form Coca Cola Beverages Pakistan. This entity was a wholly-owned subsidiary of the US-based parent until 2008, when Coca Cola Içiçek took a 49% share.
The company declined to provide a precise revenue figure or growth numbers, but said that it buys close to Rs13 billion in raw materials from its 300 local suppliers. According to Coca Cola Içiçek’s annual report, the company’s revenue growth rate in Pakistan is in the high teens. Coca Cola has over 4,000 employees in Pakistan, and employs another 6,000 indirectly. Company officials say that it paid Rs11 billion in taxes last year.
Taxation is something of a sore point for Coca Cola, since it is forced to pay excise duty on both the concentrate and the finished product, in addition to paying sales taxes on the final product. It also pays the full corporate income tax on its net income. In 2010, the federal government removed the requirement to pay excise duty on the concentrate, but Coca Cola still feels that the burden of what it calls double taxation needs to be lightened.
“Our aim is to inspire economic activity, create employment and increase tax revenue for the government. However, it is the government’s responsibility to ensure that a productive investment and business operating environment is provided to local and international companies,” said Khan.
In the meantime, Coca Cola has tried to cut back on other costs, notably its logistics and distribution costs. One innovation it has introduced is called “pre-sell”, where instead of simply going up to every retailer with a truck, the company asks for orders to be placed via text messages. This method has saved the company approximately 30% in man-hours of delivery time.
Published in The Express Tribune, November 10th, 2012.