coca cola in south africa.pdf

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The Economic Impact of The Coca-Cola Systemon South Africa

Prepared by

Division of Research

March 2005

SOUT

HAFR

ICA

SOUT

HAFR

ICA


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Executive Summary

This executive summary presents the major findings of an in-depth study of theCoca-Cola systems economic impact on South Africa. Conducted during 2003-04, thestudy represents a wide-ranging assessment of economic linkages, enterprisedevelopment, and employment.

In the decade following the introduction of multiparty democracy, South Africahas seen tremendous economic progress. Yet serious challenges remain.

The Coca-Cola system serves as an example of long-term commitment to thecountry. It has invested significantly in almost every year since 1994 and spread itsbusiness network into all segments of the South African market. The extent of theCoca-Cola systems participation in South African markets is evident throughout thecountry. The Coca-Cola Company and affiliated brands are prevalent in the shoppingcenters of major cities, the informal retail outlets of townships, and the small shopsfound in rural villages.

As one of the worlds most efficient business systems, the Coca-Cola system offers

potentially expanding economic opportunity as South Africas renewal moves forward inthe decade ahead. In particular, entrepreneurial development and employment creationare key objectives of economic policy in South Africa.

This study emphasizes that enterprise expansion and job creation result fromthriving local business networks, or clusters. Accordingly, the Coca-Cola system in SouthAfrica is seen as the core of a competitive cluster. This core encompasses the countryoffice of The Coca-Cola Company and local bottlers and canners who make productsunder the Coca-Cola trademark. Moreover, a larger network of businesses is tied to thiscore system, including suppliers, distributors, wholesalers, and retailers spanning everyregion of South Africa. The Coca-Cola system employment network thus extends fromplant managers to street hawkers.

The study explores the nature of the Coca-Cola system beverage cluster, providingemployment estimates and other economic impacts generated by its activities. Inaddition, the research team surveyed 760 informal retail outlets that sell Coca-Colaproducts throughout South Africa. This survey was designed to probe a business systemthat unites South Africas formal and informal sectors. The small retail operationscovered in the survey are considered important to South Africas future since they formthe commercial hub of their local economies and, indeed, the local communities. Whilethe South African informal retail sector has developed largely without demanding scarcegovernment resources, informal retail is often considered to be unstable or survivalist.


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Economic Impact of The Coca-Cola System on South Africa, ii

The survey results suggest, however, that participation in an advanced cluster may helpthese retailers to become stable businesses.

Principal Findings

The study presents a wealth of information on the economic linkages between the

Coca-Cola system and the South African economy. In particular, the study shows theextent to which the Coca-Cola system provides employment and income for SouthAfrican citizens as well as tax revenue for local and central governments. It can be seenthat The Coca-Cola Companys bottling activities engender substantial direct andindirect effects, creating significant business and employment opportunities throughoutthe economy. Overall, this impact is measured by an economic multiplier that capturesthe ripple effects of the Coca-Cola system investment and ongoing operations.

The main findings of this study are the following:

The total economic impact of the Coca-Cola systems activities on gross domesticproduct (GDP) is valued at 17.5 billion rand (all rand figures in the study are expressed

in 2003 prices). This represents about 1.4 percent of South Africas total GDP for theyear.

The Coca-Cola bottling system directly employed 9,740 workers in 2003.

Overall, it was estimated that 166,360 jobs were supported, directly and indirectly, bythe Coca-Cola system in South Africa. This calculation is based on the complexinteractions of the Coca-Cola system with the local economy through production anddistribution. The calculation relies on the most reliable and detailed impact modelavailable for South Africa.

The Coca-Cola systems employment impact represented about 1.4 percent of totalSouth African employment (formal and informal) in 2003.

Thus, the direct employment multiplier (the ratio of total to direct employment inbottling) is approximately 17.1; that is, for every direct job created in the bottlingsystem, an additional 16.1 jobs were supported through upstream and downstreamlinkages. Clearly, then, there is a considerable amount of employment activityassociated with the system as a whole.

In particular, the employment supported by the informal trade sectors activitycontributes significantly to the total impact. Informal trade accounts for 70,000 jobs inSouth Africa. This is most likely a conservative estimate.

A diverse range of sectors benefit from the production and distribution of Coca-Colaproducts, including plastic products, metal products, chemicals, iron & steel, motor

vehicles, electricity, business services, trade, food, and agriculture. In particular, thesugar industry along with its important linkages to agriculture benefit from the largelocal purchases documented in this study.

Total government income associated with the Coca-Cola systems impact is estimated tobe approximately 5 billion rand for 2003.


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Economic Impact of The Coca-Cola System on South Africa, iii

Details for the summary points given above can be found in the full study.Moreover, the effects of the Coca-Cola system on micro enterprise development arepresented in the study. The informal trading sector provides an alternative source ofincome and employment when the formal sector cannot absorb all those individualsseeking work. At the same time, many small retail operations stay in business andremain profitable for years. They develop into a stable segment and prominent featuresof many communities. Some expand from small home-based operations into largerdistribution centers and even into soft drink production.

The survey results presented in the study reveal that entrepreneurs who workclosely with the Coca-Cola system can attain high turnover and high margins with Coca-Cola products. The interaction of the Coca-Cola system with the informal sector canprovide help as entrepreneurial activities blossom into bona fide, sustainable businesses.

Methods and Terms

The primary research presented in this study entails an economy-wide analysisdesigned to measure the economic multiplier effect of the Coca-Cola systems capital

investment and ongoing operations. Based on information taken from a survey of theCoca-Cola systems bottlers in South Africa, the researchers evaluated the cluster ofbusiness activities that developed indirectly around the bottling system.

To introduce the informal retail sector into the framework, the research teamsurveyed 800 informal retail outlets (obtaining more than 760 completed surveys). Theoutlets were selected to reflect both South Africas mix of retail channels and itsgeographical diversitythe cities, townships, and rural areas. Owners and managers ofinformal retail trade outlets were asked to respond to a pre-tested, structuredquestionnaire, administered by trained interviewers. The survey instrument includedrequests for detailed business information, such as employment, turnover, and net

income, as well as demographic characteristics of the small business owners and theiremployees. A high response rate ensures that this would be one of the most completeinformal sector surveys ever undertaken in South Africa, or indeed anywhere.

Primary data collection from the Coca-Cola systems bottlers, the informalretailers, and other sources of information provided the inputs needed to model theCoca-Cola systems total impact on South Africas employment, GDP, and othereconomic variables. The research team used a Social Accounting Matrix (SAM) tocalculate the extent of the linkages between the Coca-Cola system in South Africa andother local business. This model allowed for a detailed assessment of employment (andother impacts) related to both the informal and formal sectors.

The scope of the study is to assess the economic impact of the Coca-Cola system

in South Africa, its suppliers, and its distribution network. Throughout the study, thefollowing points concerning terms and definitions should be kept in mind.

The Coca-Cola system specifically refers to The Coca-Cola Company and its bottlingpartners in South Africa.

The Coca-Cola Company in South Africa is represented by Coca-Cola Southern and EastAfrica (CCSEAD).


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Economic Impact of The Coca-Cola System on South Africa, iv

The distribution network refers the transportation of finished product from the plants(to the retailers, warehouses and distributors), distribution centers, and outlets/retailers both formal and informal.

Conclusion

The Coca-Cola systemencompassing the bottlers, suppliers, and the manyvendors that sell Coca-Cola brandshas a wide-ranging impact on the South Africaneconomy. This study goes beyond conventional economic and employment impactanalysis to consider both upstream and downstream (including informal) linkages. Over166,000 jobs are associated, directly or indirectly, with producing and distributing Coca-Cola products. This employment network comprises about 1.4 percent of South Africantotal employment.

This employment network spreads advanced marketing know-how andproduction expertise to many regions of the country. This is one of the most extensivemulti-local business systems in the country. Consequently, the studys findings onemployment and enterprise development should be of interest to policy analysts,

economists, the media, government, and business leaders in South Africa.


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Economic Impact of The Coca-Cola System on South Africa, v

Preface

This study explores the relationship between multinational enterprise andentrepreneurial development in African economies. There are few effective studies ofinternational business committing to the future of South Africa.

Given its business presence throughout South Africas diverse communities, theCoca-Cola system has a potentially significant influence on the economy. Research onthe impact of the Coca-Cola system in South Africa began in 2003. The final study wascompleted in November 2004.

The study was funded through a grant to the University South Carolina, based ona proposal submitted to The Coca-Cola Company. We thank numerous executives,managers and staff of The Coca-Cola Company for their cooperation.

The results are wholly based on field research by independent academicinstitutions and widely accepted economic modeling techniques. Three research/academic institutions collaborated to produce the study, setting the research agenda,defining the methodology, collecting the data, analyzing the results, and preparing thefinal report.

The Division of Research at the Moore School of Business, the University of SouthCarolina (USC) conceptualized the project, coordinated the research, and produced thefinal report. The responsibility for the study, including the initial design and the finalnarration given in the pages that follow this preface, falls on the Division of Research inthe Moore School of Business. The study is part of an ongoing effort led by faculty to

explore the interaction between international business and local entrepreneurs. TheSchools international business programs have consistently been ranked highly byU.SNews & World Report.

The impact analysis draws on the proficient economic modeling work performedby Ernest (Dirk) van Seventer. In addition, we thank the Bureau of Market Research,University of South Africa, especially Professors A.A. Ligthelm and J.H. Martins, forsuperb survey work.

As for the contributors from University of South Carolina, the lead researcherswere Dr. Douglas Woodward and Dr. Robert Rolfe. It is also important to recognize Dr.Sandra Teel, associate director of the Division of Research, who prepared the study inexcellent fashion for final publication. Jan Collins, senior editor for the Division of

Research, deserves credit for expert copy editing. Patrick Warren, research associatewith the Division, merits special thanks for playing an invaluable role in the research.Also on the Division staff, Cissy George helped in the wide variety of important tasksinvolved in preparing manuscript. Finally, it should be recognized that this study, andthe research that underlies it, represents the effort and cooperation of many more peoplethan recognized here.


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Economic Impact of The Coca-Cola System on South Africa, vi


Table of Contents

EXECUTIVESUMMARY ..........................................................................................i

Main Findings ..................................................................................................................... ii

Methods ......................................................................................................................... iii

Conclusion ......................................................................................................................... iv

PREFACE ........................................................................................................................... v

TABLEOFCONTENTS ..........................................................................................vi

CHAPTER1: INTRODUCTION: GOALSANDOBJECTIVESOFTHESTUDY ................. 1

CHAPTER2: COCA-COLASOUTHAFRICA: COMPETITIVENESSANDCLUSTERING ................................................................................................................ 4

Macroeconomic Conditions......................................................................................... 4

Table 1. Macroeconomic Summary................................................................................... 5

Table 2. Employment by Sector ........................................................................................ 6

The Coca-Cola Systems Upstream and Downstream Network....................6

The Upstream Network ......................................................................................................6Figure 1. Coca-Cola Production and Distribution ............................................................. 7

The Downstream Network ................................................................................................. 7

The Beverage Cluster ....................................................................................................... 7

Meeting Demand ................................................................................................................ 9

Resource Development ..................................................................................................... 10

Competitive Dynamics ......................................................................................................11


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Economic Impact of The Coca-Cola System on South Africa, vii

Related and Supporting Industries.................................................................................. 12

Supporting Institutions .................................................................................................... 13

Summary ......................................................................................................................... 14

CHAPTER3: THEECONOMICIMPACTOFTHECOCA-COLASYSTEM .................... 16

Introduction ...................................................................................................................... 16

Impact Analysis Methodology................................................................................... 16

Direct Economic Effects ............................................................................................... 17

Direct Bottler Impact ....................................................................................................... 17

Export and Division Office Direct Impact ....................................................................... 18

Table 1. Current and Capital Expenditures by Coca-Cola Bottlers in South

Africa (2003 current R 000) ............................................................................... 19

Table 2. Labour at and Employment Skill Distribution by Coca-Cola Bottlers

South Africa ......................................................................................................... 20

Direct Formal and Informal Trade Impacts .................................................................... 18

Direct Formal Trade Impact ......................................................................................20

Table 3. Current and Capital Expenditures by Coca-Cola Related

Activities in South Africa (2003 current R 000) ......................................... 21

Direct Informal Trade Impact....................................................................................20

Total Direct Impacts ...................................................................................................22

Overall Economic Impact ............................................................................................ 24

Table 4. Sizing the Annual Market for Coca-Cola Products Trade in the

Informal Sector (winter sales, 365 days per annum) ...................................23

Table 5. Sizing the Informal Market for Coca-Cola Products............................. 24

Table 6. Employment in Informal Sector Trading of Coca-Cola Products ........ 24

Table 7. Consolidated Expenditures Associated with the Coca-Cola

Systems Activities in South Africa (2003 R 000) ....................................... 25

Current Expenditure ........................................................................................................26

Table 8. Consolidated Impact of the Coca-Cola Systemin South Africa (2003 current R 000) ................................................................ 27

Capital Expenditure ..........................................................................................................28

Impacts from Exports ................................................................................................28

Coca-Cola Southern Africa Division Office .....................................................................28

Formal Trade Impacts ......................................................................................................29

Informal Trade Impacts ...................................................................................................29


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Economic Impact of The Coca-Cola System on South Africa, ix

Table 9(A). Distribution of Business by Time in Operation and

Type of Business ...................................................................................................39

Table 9(B). Distribution of Business by Time in Operation and Urbanisation .......40

Type of Products Sold .......................................................................................................40

Table 10(A). Categories of Products Sold by Type of Business ................................40

Table 10(B). Categories of Products Sold by Urbanisation ...................................... 41

Table 11. Ranking of Product Sales in Order of Contribution to the

Turnover of Spazas/Tuckshops ........................................................................... 41


Turnover of Shebeens .......................................................................................... 42


Turnover of Hawkers ...........................................................................................42


Turnover of Other Businesses.............................................................................. 43

Business Hours .................................................................................................................43

Table 15. Distribution of Businesses by Weekday and Number of Hours Open .....44

Table 16. Highest Percentage for Trading Hours by Weekday and

Type of Business ...................................................................................................44

Table 17. Highest Percentage for Trading Hours by Weekday and Urbanisation ... 45

Role of The Coca-Cola Company...............................................................................44

Affordability ...................................................................................................................... 44

Table 17(A). Coca-Cola Products Are Affordable by Type of Business ....................45

Table 17(B). Coca-Cola Products Are Affordable by Urbanisation .......................... 46

Coca-Cola Products Attract Customers ...........................................................................46Table 18(A). Coca-Cola Products Attract People to Store by Type of Business ....... 46

Table 18(B). Coca-Cola Products Attract People to Store by Urbanisation............. 47

Table 19(A). When Buyers Purchase Coca-Cola Products, They Also Buy

Other Goods by Type of Business ........................................................................ 47

Table 19(B). When Buyers Purchase Coca-Cola Products, They Also Buy

Other Goods by Urbanisation .............................................................................. 47

Frequency of Purchases ....................................................................................................46

Table 20(A). Frequency of Purchase of Coca-Cola Products by

Type of Business ...................................................................................................48Table 20(B). Frequency of Purchase of Coca-Cola Products by Urbanisation ........48

Frequency of Coca-Cola Truck Deliveries........................................................................48

Table 21(A). Frequency of The Coca-Cola Companys Truck Deliveries by

Type of Business ...................................................................................................49

Table 21(B). Frequency of The Coca-Cola Companys Truck Deliveries by

Urbanisation .........................................................................................................49

Frequency of Deliveries by Wholesalers ..........................................................................49


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Economic Impact of The Coca-Cola System on South Africa, x

Table 22(A). Frequency of Deliveries by Wholesaler and Type of Business ............50

Table 22(B). Frequency of Deliveries by Wholesaler and Urbanisation .................. 50

Frequency of Fetching from Wholesaler .........................................................................50

Table 23(A). Frequency of Fetching From a Wholesaler by Type of Business ........ 51

Table 23(B). Frequency of Fetching From a Wholesaler by Urbanisation .............. 51

Frequency of Fetching from Retailer ............................................................................... 51

Table 24(A). Frequency of Fetching from a Retailer by Type of Business............... 52

Table 24(B). Frequency of Fetching from a Retailer by Urbanisation ..................... 52

Restocking of Coca-Cola products ................................................................................... 52

Table 25(A). Wait for Next Delivery When Running Out of Stock by

Type of Business ................................................................................................... 53

Table 25(B). Wait for Next Delivery When Running Out of Stock by

Urbanisation ......................................................................................................... 53

Table 26(A). Fetch Stocks from the Wholesaler/Retailer When Running

Out of Stock by Type of Business......................................................................... 53

Table 26(B). Fetch Stocks from the Wholesaler/Retailer When Running

Out of Stock by Urbanisation .............................................................................. 53

Table 27(A). Average Number of Cases Fetched When Run Out of Stock

by Type of Business .............................................................................................. 54

Table 27(B). Average Number of Cases Fetched When Run Out of Stock

by Urbanisation .................................................................................................... 54

Table 28(A). Method of Transport for Fetching of Coca-Cola Products by

Type of Business ................................................................................................... 54

Table 28(B). Method of Transport for Fetching of Coca-Cola Products

by Urbanisation .................................................................................................... 54Temporary Closure of Business Due to The Coca-Cola Company Stock Shortages ...... 55

Table 29(A). Temporary Closure of Business Because Coca-Cola Products

Were Not Available by Type of Business ............................................................. 55

Table 29(B). Temporary Closure of Business Because Coca-Cola Products

Were Not Available by Urbanisation ................................................................... 55

Consumption of Coca-Cola Products: Location of Consumption .................................. 55

Table 30(A). Location of Consumption of Coca-Cola Products by

Type of Business ................................................................................................... 56

Table 30(B). Location of Consumption of Coca-Cola Products byUrbanisation .........................................................................................................56

Physical Characteristics of Business ...................................................................... 56

Location of Business .........................................................................................................56

Equipment Installed in Business ..................................................................................... 56

Table 31(A). Location of Business by Type of Business ............................................ 57

Table 31(B). Location of Business by Urbanisation .................................................. 57


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Economic Impact of The Coca-Cola System on South Africa, xi

Table 32(A). Percentage of Respondents With Equipment Installed by

Type of Equipment and Business ........................................................................58

Table 32(B). Percentage of Respondents With Equipment Installed by

Type of Equipment and Urbanisation .................................................................58

Table 33(A). Percentage of Equipment Owned by The Coca-Cola Company by

Type of Equipment and Business ........................................................................58

Table 33(B). Percentage of Equipment Owned by The Coca-Cola Company by

Type of Equipment and Urbanisation ................................................................58

Impact of Refrigerated Drinks on Turnover ................................................................... 59

Table 34(A). Having a Fridge Help Selling More Coca-Cola Products

by Type of Business .............................................................................................. 59

Table 34(B). Having a Fridge Help Selling More Coca-Cola Products

by Urbanisation ....................................................................................................59

Type of Business Accommodation of Business ............................................................... 59

Table 35(A). Type of Business Accommodation by Type of Business......................60

Table 35(B). Type of Business Accommodation by Urbanisation............................60

Direct Access to Electricity and Tap Water ..................................................................... 61

Table 36(A). Direct Access to Electricity by Type of Business ............................... 61

Table 36(B). Direct Access to Electricity by Urbanisation ....................................... 61

Employment ...................................................................................................................... 61

Total Employment ............................................................................................................ 61

Table 37(A). Direct Access to Tap Water by Type of Business ................................. 62

Table 37(B). Direct Access to Tap Water by Urbanisation .......................................62

Table 38. Employment of Spazas by Race, Gender and Full- and Part-time........... 63Table 39. Employment of Shebeens by Race, Gender and Full- and Part-time ......63

Table 40. Employment of Hawkers by Race, Gender and Full- and Part-time ....... 64

Table 41. Employment of Other Businesses by Race, Gender and

Full- and Part-time ...............................................................................................64

Table 42. Employment in Metropolitan Areas by Race, Gender and

Full- and Part-time ............................................................................................... 65

Table 43. Employment in Urban Areas by Race, Gender and Full- and

Part-time ............................................................................................................... 65

Table 44. Employment in Rural Areas by Race, Gender and Full- andPart-time ............................................................................................................... 66

Table 45. Employment by All Respondents Included in the Study by Gender

and Full- and Part-time ........................................................................................ 66

Features of Ownership and Management ............................................................ 67

Status of Owner ................................................................................................................ 67

Gender of Owner ............................................................................................................... 67


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Table 46(A). Full- or Part-time Engagement of Owner in the Business by

Type of Business ................................................................................................... 67

Table 46(B). Full- or Part-time Engagement of Owner in the Business by

Urbanisation ......................................................................................................... 67

Table 47(A). Gender of Owner by Type of Business .................................................68

Table 47(B). Gender of Owner by Urbanisation .......................................................68

Race of Owner ...................................................................................................................68

Nationality of Owner ........................................................................................................68

Table 48(A). Race of Owner by Type of Business ..................................................... 69

Table 48(B). Race of Owner by Urbanisation ...........................................................69

Table 49(A). Nationality of Owner by Type of Business ...........................................69

Table 49(B). Nationality of Owner by Urbanisation.................................................69

Work done by Owner ........................................................................................................69

Table 50(A). Type of Work Done by Owner by Type of Business ............................ 70

Table 50(B). Type of Work Done by Owner by Urbanisation ..................................70

Table 51(A). Running of Business by Type of Business ............................................70

Management .....................................................................................................................70

Table 51(B). Running of Business by Urbanisation .................................................. 71

Table 52(A). Owners With Business Training by Type of Business ......................... 71

Table 52(B). Owners With Business Training by Urbanisation ............................... 71

Business Training ............................................................................................................. 71

Table 53(A). Owners Who Said They Need Business Training by

Type of Business ................................................................................................... 72

Table 53(B). Owners Who Said They Need Business Training by Urbanisation..... 72

Financing of Business ................................................................................................... 72

Start-up Capital ............................................................................................................... 72

Table 54(A). Training Needs of Owners in Order of Importance by

Type of Business ......................................................................................................... 73

Table 54(B). Training Needs of Owners in Order of Importance by

Degree of Urbanisation .............................................................................................. 73

Time Required to Mobilise Sufficient Start-up Capital .................................................. 73

Sources of Finances .......................................................................................................... 74

Table 55. Start-up Capital by Type of Business And Urbanisation .......................... 74Table 56(A). Time Required to Mobilise Start-up Capital by Type of Business ...... 74

Table 56(B). Time Required to Mobilise Start-up Capital by Urbanisation ............ 74

Table 57(A). Sources of Finance by Type of Business ............................................... 75

Table 57(B). Sources of Finance by Urbanisation ..................................................... 75

Government Incentives .................................................................................................... 76

Expansion and Growth Plans ..................................................................................... 76

Business Expansion in Terms of Turnover ...................................................................... 76


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Table 58(A). Government Business Development Incentive by

Type of Business ................................................................................................... 76

Table 58(B). Government Business Development Incentive by

Urbanisation ......................................................................................................... 76

Table 59(A). Business Performance in Terms of Overall Turnover by

Type of Business ................................................................................................... 77

Table 59(B). Business Performance in Terms of Overall Turnover by

Urbanisation ......................................................................................................... 77

Funding of Expansion ...................................................................................................... 77

Table 60(A). Business Performance in Terms of Coca-Cola Products by

Type of Business ................................................................................................... 78

Table 60(B). Business Performance in Terms of Coca-Cola Products by

Urbanisation ......................................................................................................... 78

Table 61. Average Additional Amount for Expansion by Type of Business

and Urbanisation .................................................................................................. 78

Table 62(A). Source of Funding of Expansion by Type of Business ........................ 79

Table 62(B). Source of Funding of Expansion by Urbanisation .............................. 79

Plans or Intentions for Future Development .................................................................. 79

Table 63(A). Most Important Plan or Intention for the Development by

Type of Business .................................................................................................. 80

Table 63(B). Most Important Plan or Intention for the Development by

Urbanisation ........................................................................................................ 80

Financial Performance ................................................................................................. 81

Monthly Turnover ............................................................................................................ 81Table 64. Average Monthly Turnover of Sales by Type of Business


Operating cost ................................................................................................................... 81

Table 65(A). Average Monthly Operating Cost by Type of Cost and Business ........82

Table 65(B). Average Monthly Operating Cost by Type of Cost and Urbanisation.82

Coca-Cola Products ........................................................................................................83

Support by The Coca-Cola Company ...............................................................................83

Table 66(A). Support by The Coca-Cola Company by Type of Business .................83Table 66(B). Support by The Coca-Cola Company by Urbanisation .......................84

Average sales per day of Coca-Cola products ..................................................................84

Mark-up on Coca-Cola products ......................................................................................84

Table 67(A). Average Number of Products Sold During Winter by

Type of Product and Business.............................................................................. 85

Table 67(B). Average Number of Products Sold During Winter by

Type of Product and Urbanisation ......................................................................85


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Economic Impact of The Coca-Cola System on South Africa, xiv

Table 68(A). Average Number of Products Sold During Summer by Type of

Product and Business ...........................................................................................86

Table 68(B). Average Number of Products Sold During Summer by Type of

Product and Urbanisation....................................................................................86

Table 69(A). Cost Price, Selling Price And Mark-up of Coca-Cola Products by

Type of Business ................................................................................................... 87

Table 69(B). Cost Price, Selling Price And Mark-up of Coca-Cola Products

by Urbanisation ....................................................................................................89

Marketing and Advertising ......................................................................................... 91

Table 70(A). Marketing/Advertising Methods of Promotion by Type of Business . 91

Table 70(B). Marketing/Advertising Methods of Promotion by Urbanisation ....... 91

Table 71(A). Assistance by The Coca-Cola Company in Marketing/Advertising by

Type of Business ...................................................................................................92

Table 71(B). Assistance by The Coca-Cola Company in Marketing/Advertising

by Urbanisation ....................................................................................................92

Business Problems .........................................................................................................92

Table 72(A). Problems Experienced by Type of Business .........................................93

Table 72(B). Problems Experienced by Urbanisation............................................... 93

Crime .........................................................................................................................93

Table 73(A). Victim of Crime During the Past Twelve Months by

Type of Business .........................................................................................................94

Table 73(B). Victim of Crime During the Past Twelve Months by Urbanisation ..........94

Environmental Issues ...................................................................................................94

Customers .........................................................................................................................94

Number of Customers ......................................................................................................94

Table 74(A). Type of Crime Experienced by Type of Business ....................................... 95

Table 74(B). Type of Crime Experienced by Urbanisation ............................................. 95

Table 75(A). Usage of Coca-Cola Products After Consumption by

Type of Business .........................................................................................................95Table 75(B). Usage of Coca-Cola Products After Consumption by Urbanisation ......... 95

Table 76(A). Recycling Depot or Centre in Vicinity by Type of Business ................ 95

Table 76(B). Recycling Depot or Centre in Vicinity by Urbanisation ...................... 95

Table 77(A). Distribution of Businesses by Number of Customers and

Type of Business ................................................................................................... 95

Table 77(B). Distribution of Businesses by Number of Customers



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Economic Impact of The Coca-Cola System on South Africa, xv

Table 78(A). Distribution of Businesses by Customer Spending and

Type of Business ................................................................................................... 97

Table 78(B). Distribution of Businesses by Number of Customers


Customer Spending .......................................................................................................... 97

Customer Profile ...............................................................................................................98

Table 79(A). Customer Profile by Type of Business..................................................98

Table 79(B). Customer Profile by Urbanisation........................................................ 99

Table 80(A). Frequency of Settlement of Accounts by Type of Business ................ 99

Table 80(B). Frequency of Settlement of Accounts by Type of Urbanisation ....... 100

Table 81(A). National Lotterys Effect On Sales by Type of Business ..........................100

Table 81(B). National Lotterys Effect On Sales by Urbanisation ................................ 100

National Lottery Influence on Business .............................................................. 100

Table 82(A). Sale of Lottery Tickets by Type of Business ............................................. 101

Table 82(B). Sale of Lottery Tickets by Urbanisation................................................... 101

Influence of AIDS on Businesses ............................................................................ 101

Table 83(A). Reduction in Turnover As A Result of AIDS by Type of Business .......... 101

Table 83(B). Reduction in Turnover As A Result of AIDS by Urbanisation ................ 102

Appendix A: Disaggregation of a 2000 SAM for South Africa

Appendix B: Bottler Survey

Appendix C: Informal Sector Survey


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Chapter 1Introduction: Goals and Objectives of the Study

No doubt the most significant economic challenge facing South Africa is toalleviate poverty. Increasing incomes will necessitate meeting the empowerment goalsset by the countrys leaders. It will also require creating thousands of jobs annually and

channelling entrepreneurial dynamism into viable local businesses.The expertise and knowledge embodied in investments by the worlds leading

companies will be crucial in moving the South African economy forward. To employSouth African labour productively, new capital needs to spring from many sources, bothinternal and external. In turn, the African employment base will expand only to theextent that private investors will make substantial, long-term commitments.

The Coca-Cola enterprise system represents Africas largest employer, withproducts sold in all segments of the continents diverse markets. It is a major employerin South Africa as well. For over a decade, The Coca-Cola Company has been dedicatedto a large-scale private investment expansion program in the country. Investments in

production and the distribution infrastructure have extended The Coca-Cola Companyslinkages deep into the countrys market structure.Understanding The Coca-Cola Companys competitive character, its employment

network, and its business linkages may offer some clues to solving some of South Africascurrent poverty, employment, and other economic problems. Potentially, the Coca-Colasystem brings competence and globally competitive standards of production, marketing,and management to local economies. Yet how does this significant actor in the SouthAfrican economy spread benefits throughout the country? What are the realcontributions of the Coca-Cola system to the economic and business climate?

Building on previous work conducted by the research team in the late 1990s, thisstudy looks at the economic impact of the Coca-Cola system in South Africa in 2003-04.

As before, the research undertaken for this project is far-reaching. University and otherresearchers from South Africa and the United States looked at many ramifications of TheCoca-Cola Company as an enterprise system and its effects on the economy. Specifically,the researchers intent has been to assess how manufacturing soft drinks spreadsemployment across different, seemingly unrelated industries. Trading activities aregiven special attention, in large part because the economic implications of trade arepoorly understood. Thus, a central purpose of this research is to investigate how microenterprise in the trade sector fits within a larger framework of business linkages in SouthAfrica. Informal trading may serve as a safety net for the unemployed? Does it provide a


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Economic Impact of The Coca-Cola System on South Africa, 2

catalyst to legitimate enterprise when linked to an advanced business cluster? The studywas designed to answer these and many other questions.

While covering many issues, the study has the following central objectives:

To explain the cluster of business activities directly and indirectly tied to The

Coca-Cola Companys system of production and distribution.

To assess the economic multiplier effect of the Coca-Cola system, with a special

focus on employment impacts.

To explore the relationship between the Coca-Cola system and the informal

micro enterprise sector of South Africa.

Above all, an exhaustive effort was undertaken to calculate the economicmultiplier effect of the Coca-Cola system. The research team examined the entire valuechain of goods and services involved in the production and distribution of soft drinkproducts by the Coca-Cola system across the country. Primary data used for the analysis(and reported in the study) are based on surveys sent to all affiliated bottling andcanning manufacturers.

Economic impacts of production and investment were analysed through the mostreliable economic model available, known as the South African social accounting matrix(SAM). The South African SAM estimates the impacts on production activities fromagriculture to manufacturing industries and services, labour, household incomedistribution, and government revenue.

Most economic impact analyses focus exclusively on upstream linkages capturedby a similar SAM (or input-output) model; that is, impact analysis typically meanstracing the supplier relations and other indirect effects stemming from productionactivities. A unique aspect of this analysis is a novel extension of existing economic

methods to capture the specific nature of the downstream linkages, including informaltrade, in South Africa.

A few caveats should be given at the outset of the report. First, the methodology isoriented toward examining the current structure of the Coca-Cola system, based on theavailable data for its operations and capital expenditure. Yet, it should be stressed thatevery model requires complete data and rests on many assumptions. The appropriateassumptions are explained in subsequent chapters. No model can ever completelyaccount for all the complex economic effects of international business and localeconomic activity. It should also be noted that the results represent a snapshot in timeas modeled during 2003. As the South African economy continues to develop andrestructure, the relationships underlying this analysis will change as well.

To obtain credible results, the most complete data and best modeling techniqueswere employed. In addition to calculating multiplier effects through the South Africansocial accounting matrix, this study examined other important aspects of the Coca-Colasystems complex connections with the local economy. Notably, we present the results ofa large survey, probing the special role the Coca-Cola system plays in the informal tradesector of the South African economy. Economic and political opportunities denied thepopulation during apartheid gave birth to many informal retail businessestheubiquitous spaza shops, shebeens, and tuck shops. Many survive today, and others have


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started.To gain more insight into the informal sector and its interaction with the Coca-

Cola system in South Africa, the research team obtained 760 detailed surveys. The microbusinesses canvassed were selected to reflect both the South Africas mix of retailchannels and geographical diversitythe countys cities, townships, and rural areas.Owners and managers of informal retail trade outlets were asked to respond to a pre-tested, structured questionnaire, administered by trained interviewers. The surveyinstrument included requests for precise business information, such as employment,turnover, and net income, as well as demographic characteristics of the small businessowners and their employees. A high response rate ensured that this would be one of themost complete informal sector surveys ever undertaken in South Africa, or indeedanywhere. This primary data collection provided essential information on the extent ofthe linkages between the multinational enterprise and local business. A primaryobjective is to discern whether these micro enterprises offer sustainable livelihoods andthus help to alleviate poverty and spread economic benefits.

In sum, this study examines the structure and impact of The Coca-Cola Companyas an important business systemthe hub of a beverage cluster. Accordingly, this cluster

may serve to exemplify South Africas potential for expanding job and businessopportunitys, even in otherwise impoverished settings. Expanding employment andenhancing small-business development will be crucial as the South African economycontinues its transformation in the 21stcentury.

The rest of this study is divided into the following three chapters.

Chapter 2 explains the Coca-Cola enterprise system, or beverage cluster, in detail.

Chapter 3 presents the methods, findings of the multiplier, and social accounting matrix

analysis.

Chapter 4 presents the findings of the informal trade sector survey.


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Chapter 2Coca-Cola South Africa: Competitiveness and Clustering

This chapter sets the stage for the studys findings by providing background onthe current macro and microeconomic challenges shaping the business climate in South

Africa. At the macroeconomic level, the country must elevate growth, control inflation,stabilize the currency, and instill investor confidence. If this were not enough, the mostsignificant challenge is to stimulate employment. However, in many respects, creatingand sustaining employment is a microeconomic issueit will require boosting thecountrys competitive advantages from the bottom-upraisingfirmcompetitiveness andproductivity. Indeed, according to the widely embraced theory of economic developmentput forth by Harvard University Professor Michael Porter, a country like South Africashould focus its strategy on firm competitiveness and build business linkages throughclustering.

These serious economic challenges and the position of the Coca-Cola system in

the competitive structure of the economy are key themes explored in this chapter. Thenext section begins with a brief overview of the major macroeconomic issues confrontingSouth Africa. This is followed by a look at South African employment, both in the formaland the informal sectors.

We then turn to understanding the Coca-Cola systems role in building a competi-tive cluster in the beverage industry of South Africa. The Coca-Cola system interactsextensively with the formal and informal sectors of the economy, with particularly deeplinkages in the trade sector. The nature of these linkages is covered in the last section ofthe chapter.

Macroeconomic ConditionsA principal goal for South Africa is to spur aggregate economic growth. In many

respects, South Africa has the necessary conditions for macroeconomic expansion. Thecountrys resources, market size, and superior infrastructure make it a prime candidatefor domestic and international investment. It is well known that South Africas manufac-turers, financial institutions, business services, and commercial enterprises comprisesub-Saharan Africas most advanced and diversified economic base. Many financial


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institutions, mining multinationals, and manufacturersincluding those in beveragesand its supplier industriesare competitive with businesses in developed economies.

South Africa has charted an ambitious course for the economy, embraced in thegovernments Growth, Employment and Redistribution (GEAR) program. There havebeen successes in stabilizing the macroeconomic environment. Government spendinghas been generally conservative under President Mbeki, bringing the budget deficit to asustainable level. This may set the stage for a loosening of fiscal policy that would spureconomic growth. South Africa also has a good reputation for sound monetary policy,setting inflation targets and a commitment to getting the fundamentals right. Risks tomeeting macroeconomic targets are always present, however. Potential macroeconomicshocks include sharply rising oil prices and the threat of currency instability.

Nevertheless, as seen in Table 1, the overall macroeconomic trends since therecession of the early 2000s have been largely favorable. South Africa has had notablesuccess in maintaining moderate growth in real (inflation-adjusted) gross domesticproduct (GDP). Manufacturing has increased production every year since 2001, andagriculture has shown improvement as well. Table 1 shows positive effects in controllinginflation (the rate of change in consumer prices), along with moderation in interest

rates. As the economy has grown, the government fiscal balance has turned negative, butas a percentage of GDP it has remained relatively low. Fueling economic growth, exportshave risen and outstripped imports.

Along with creating the macroeconomic conditions for stability, South Africa, likeall countries, must expand business opportunities and foster job creation across the

country. Sluggish formal sector employment growth and widespread informal employ-ment pose particular burdens on South Africa. Stepped-up economic growth is obviouslyneeded to reduce the persistently high unemployment, reaching nearly one-third of theworkforce. At the same time, the growth sectors of the economy, including informalsector businesses, must become more competitive if employment gains are to last.

Table 2 shows the breakdown of formal and informal sector employment. It canbe seen that the trade sector, where the Coca-Cola system has extensive interactions, isan especially large part of the employment structure. The formal trade sector accountsfor more than 17 percent of employment. For informal trade, the trade sector dominates

Table 1. Macroeconomic Summary

(%, unless otherwise indicated) 2001 2002 2003 2004Real GDP Growth 2.8 3.0 2.5 3.0Manufacturing Production Growth 2.8 5.3 5.7 5.0Gross Agricultural Production Growth -1.7 4.0 3.6 3.5Consumer Price Inflation (average) 5.7 9.2 6.3 0.8Short-term interbank rate 13.8 15.8 15.4 12.6

Government Balance (% of GDP) -1.0 -0.8 -2.6 -2.4Export of goods fob (US$ billion) 30.7 31.1 32.3 33.6Import of good (US$ billion) 25.9 26.7 28.7 29.3

Sources: World Bank, Economist Intelligence Unit (EIU) Estimates, South African ReserveBank (SARB).aThere is a discrepancy between SARB and World Bank figures. EIU estimates are used forsome years.


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with 36 percent of total employment.The nature of these informal tradebusinessesthe spazas, shebeens, andother points of salesalong with theirbusiness relationship with TheCoca-Cola Company is documented inthe survey results presented inChapter 4.

Achieving macroeconomic stabil-ity can be an arduous, never-endingtask for South Africas policy makers, asis true elsewhere. At the same time, themacroeconomic fundamentals (includ-ing low inflation, a stable currency, andthe government budget balance) repre-sent only certain necessary, but notsufficient, conditions for South Africa to

achieve its economic goals. In addition, microeconomic (firm-level) conditions must bepresent in the economy, creating a competitive climate that supports productive firms,and, more importantly, deeply rooted clusters of businesses in the local economy.

The Coca-Cola Systems Upstream and Downstream Network

In this section, we explore the beverage cluster. To understand how the Coca-Colasystem can contribute to the competitiveness and growth of South Africa, it is necessaryto understand its linkages with the economy. Hence this section begins with an explana-tion of the business linkagesupstream and downstreambetween the Coca-Cola sys-

tem and the South African economy. This serves as a prelude to a more detailed exami-nation of the Coca-Cola system and the beverage cluster in South Africa.Figure 1 shows the Coca-Cola bottling system (including support of the country

and regional headquarters) in the middle of the value stream, with a surroundingnetwork of upstream and downstream businesses. Overall, the Coca-Cola businessnetwork spans agriculture to retail, from sugar production facilities to vendors withstreet pushcarts. Almost all of the value-creating activitiesfrom manufacturingthrough distributionare locally based.

The Upstream Network

The actual soft drink production process is capital intensive, with highly auto-

mated production lines. The upstream supplier network directly supplies inputs andservices to the bottling production system. Further upstream suppliers then feed the firsttier suppliers (increasing the economic multiplier effect explained in the next chapter).

Thus, to make the final product, the lines draw on numerous inputs suppliedupstream by companies, from agriculture to manufacturing to services. Some of themain local inputs include: sugar, CO2,beverage ingredients, and packaging (paper, PET,glass, closures, and crowns). Moreover, equipment input suppliers contribute to thevalue chains, such manufacturers of bottling line machinery, trucks, and liftingmachinery.

Table 2. Employment by Sector (% ofTotal)

Formal Informal TotalAgriculture 10.3 23.4 12.2Mining 6.3 0.2 4.5Manufacturing 18.3 8.2 14.8

Electricity 1.0 0.0 0.7Construction 4.2 10.2 5.2Trade 17.3 36.0 19.7Transport 5.7 4.6 5.0Business Services 12.2 2.6 9.3Community Services 23.8 7.7 18.6Private Households 0.2 6.7 9.4Unspecified 0.7 0.4 0.6Total 100.0 100.0 100.0

Source: Statistics South Africa: Department of Trade andIndustry. Data for September 2002.


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Local business services include financial institutions, advertising agencies, signmakers, design firms, business consultants, accounting firms, law offices, repair services,and hotel and travel companies. On the downstream side, transportation of the productto bottlers also represents a significant economic activity. Finally, construction firms aremajor partners during expansion programs.

The Downstream Network

On the upstream side, we have seen that most of the inputs shown Figure 1 repre-sent South African production activities. Local inputs account for the vast majority of thefinal product. That is certainly true of the downstream side (also shown in Figure 1). TheCoca-Cola system has extensive ties through its sophisticated local networkan infra-structure that reaches across all South African provinces. Arguably, it is the internationalbusiness system with the greatest commitment to the diverse population of South Africa.Although Coca-Cola is the most recognized brand in the country, reaching consumersrequires a complex network of distribution channels. The downstream network is re-sponsible for delivering the product of all bottlers to meet demand. The bottling systemdistributes some Coca-Cola products directly through retailers.

South African retail outlets run the gamut from large stores to small-scale, pri-vately-owned enterprises, convenience stores, restaurants and small individual points-of-sale. The distribution network includes informal outletsspaza shops, tuck shops,

shebeens, and hawkers. In addition, wholesalers distribute products to local retailersand other outlets. Besides bottling plants, the Coca-Cola system includes warehousesand sales depots. Chapter 4 will present a comprehensive survey of the informal distri-bution network.

The Beverage Cluster

How can Coca-Colas extensive business system contribute to South Africascompetitiveness? To answer this question, it useful to place beverage activities in the

Figure 1. Coca-Cola Production and Distribution

Downst ream NetworkUpst ream Network

Production

Coca-ColaBottlers

System

Beverage IngredientSuppliers

Transport & OtherEquipment Suppliers

Advertising & OtherBusiness Services

Packaging Suppliers

Construction

Further

Upstream

Linkages

F

inalConsumers

Wholesalers

Retailers

Other

Points of Sale


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context of cluster theory. Modern cluster analysis has its origins in Harvard BusinessSchool Professor Michael Porters work, first published in The Competitive Advantageof Nations.1In this book and subsequent articles, Porter introduced a model of competi-tive dynamics that now forms the basis for microeconomic strategy from Singapore toSpain.

In contrast with traditional economic models, Porter argues that it is not whatacountry produces, but how productively and efficiently. In theory, a country like SouthAfrica can develop competitive businesses in any sector by upgrading productivity.Porters approach suggests that upgrading firm competitiveness can best take placethrough clusters.

A clusteris a group of interconnected companies and associated institutions in aparticular economic field, linked by mutual interests and complementarities. Clusteringdiffers from the traditional industry approach to understanding economic development.With a cluster, there is synergy across industries, tying core firms, suppliers of special-ized inputs, components, machinery, services, financial institutions, and service compa-nies. A beverage cluster would certainly include the upstream and downstream activitiesalready discussed but also producers of complementary products; specialized infrastruc-

ture providers; government and other institutions providing training, education, infor-mation, research, and technical support; along with standards-setting agencies.

To identify a cluster, Porter recommends first starting with a key firm or group offirms. No doubt The Coca-Cola Company acts as a key firm in the South African beveragecluster. As a major producer of non-alcoholic beverages in South Africa, Coca-Colasname is synonymous with soft drinks. The core presence of The Coca-Cola Company inthe South African economy is Coca-Cola Southern and East Africa Division (CCSEAD), awholly owned subsidiary. Based in Johannesburg, CCSEAD acts as a liaison betweenbottlers throughout southern Africa, East Africa, and the African Islands and the U.S.multinational company, providing technical, marketing, and managerial support, whilepromoting quality assurance, distribution efficiency, and human resources development.

It strives to ensure that local bottlers realize continuous growth and profitability, whichspurs higher concentrate sales that benefit the multinational company.

In addition, The Coca-Cola Company has a significant interest in two canning/bottling companies in South Africa. It owns a share in Coca-Cola Fortune (approximately21 percent sales volume contribution), and a share in Coca-Cola Canners of SouthernAfrica (CCCSA), operator of the largest canning facility in the Southern Hemisphere.Along with CCSEAD, the core businesses in the South African cluster are franchisebottlers. In addition to Coca-Cola Fortune, licensed/franchise bottlers are AmalgamatedBeverage Industries (ABI) (approximately 60 percent of sales volume), Cook (approxi-mately six percent of sales volume), and Peninsula BeveragesForbes (approximately 13

percent of sales volume). Coca-Cola Canners of Southern Africa produces canned prod-ucts mainly and these are distributed via the bottlers network.As stipulated in the Bottlers agreement, for bottlers to participate in the cluster,

the critical competency is a mastery of the actual bottling process, for no bottler withouta advanced level of technical expertise could become a Coca-Cola licensee. In turn, theSouth African bottlers join (or are part of) a network of the most experienced bottlers inthe world. This network has established best practices for production quality and effi-ciency, practices which new affiliates are then able to adopt, adapted to their needs.Essentially, CCSEAD serves as a nexus in the alliance with the South African bottlers,


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responsible for activities like joint marketing, public relations, and information flow. Theproductive success of the beverage cluster, like others examined by Porter, is driven byfive factors.

demand conditions

resources, or factor development

firm strategy, structure and rivalry

supplier relations

supporting institutions

These are the competitive drivers of any business cluster, helping to create andexpand firm-level, cluster-level, and even country-level competitive advantage. Thefollowing elucidates these five aspects of the beverage cluster in the South African con-text.

MEETINGDEMANDThe viability of any private enterprise system like the Coca-Cola system is deter-

mined by demand conditions; that is, by meeting consumer preferences. Strong domes-tic demand can be fundamental in the development process. Consumers interact withproduction through marketswith retailers and other points of sale. Customers withsophisticated demand drive product differentiation and competition on non-pricegrounds. Local demand can also reveal market segments ripe for differentiation. Market-ing campaigns can cultivate sophisticated demand conditions, as can higher levels edu-cation and industrialization.

Discerning and sophisticated consumers help promote the beverage cluster andpush it to improve both its products and its efficiency. To meet that demand, an enter-prise system like the Coca-Cola system must obviously understand the peculiarities oflocal demand conditions in South Africa, from its rural to its urban regions.

To meet consumer demand, the licensed bottlers must build effective, highlylocalized marketing and distribution systems. CCSEAD works closely with its affiliatedbottlers on regional marketing strategy. International marketing experts work withexperienced local firms to promote awareness, launching marketing and advertisingprograms designed to preserve Coca-Colas brand recognition, increasing sales andprofits for both the bottlers and CCSEAD. But the only facet of business that rivals TheCoca-Cola Companys success in branding is its reputation for effective and flexibledistribution networks. This experience too is shared with affiliated bottlers. In SouthAfrica, the majority of production goes directly to retailers, but about 20 percent firstpasses through the hands of wholesalers and/or sub-wholesalers. Licensed bottlers have

close relationships with their major retailers and wholesalers, and CCSEAD providesproven methods to keep these relationships strong and mutually beneficial. These down-stream linkages will be more carefully examined as that aspect of the cluster is consid-ered in its own right.

In short, success in meeting demand depends on the distribution and retail partof the businesses. Twenty-eight percent of Coca-Cola products are distributed throughwholesalers, mostly to smaller retailers and retailers in rural areas. There are over 1,500primary wholesalers and hundreds of sub-distributors and runners. The primary whole-salers have a strong and direct connection to one of the licensed Coca-Cola bottlers, and


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act as an intermediary, using their greater knowledge of their local area to ensure thebroadest distribution of Coca-Cola products to interested retailers.

The sub-wholesalers, on the other hand, usually do not have a direct link to abottler. They work with wholesalers and are integral to distribution among small, infor-mal retailers who bring much of the product to the townships and countryside. Often,they also engage in retailing themselves. A larger bar in a village may make a trip intotown and overbuy from a formal wholesaler, selling off the extra product to small spazashops in the village.

When there is no such sub-wholesaler to provide for these very small retail out-lets, they are often provisioned by runners. Runners truck product to small retailers,mostly to those who cannot hold large inventories to meet any unusual demand or needfrequent re-supply. Runners are especially common in South Africas townships, wherethey are a crucial link in the downstream network.

This final link in the downstream network is retailers. To subsume all Coca-Colaretailers under one category is deceptive. Formal retailers encompass a gamut of busi-nesses: hyper markets, supermarkets, gas stations, restaurants, cafes, and bars. Informalretailers are equally diverse: spaza shops, shebeens, kiosks, hawkers, tuck shops, and

small informal restaurants. While some retailers purchase their product from wholesal-ers, about eighty percent is purchased directly from a bottler.

The relationship between retailers and wholesalers/bottlers is often very close.For many smaller retailers, Coca-Cola products represent a large part of their turnover(see Chapter 4). In most cases, retailers make use of advertising materials provided bythe core of the Coca-Cola system, and based on favorable need assessment by the bottler;traders are provided with branded coolers as a means to improve sales velocity. Suchcoolers are the property of The Coca-Cola Company. These can be used only forCoca-Cola products. The Coca-Cola system also requires a certain level of record keepingin line with any sound business practice, which some retailers find burdensome, but thissituation is similar to the strict requirements for suppliers (discussed later). The initial

investment in setting up these records can lead to greater efficiency in other aspects ofthe business, beyond the relationship with the Coca-Cola system.

In many areas, informal traders provide the necessary access to the diverse de-mand for beverages across market segments. Thus, even an advanced business musthave close connections with small-scale enterprise to reach the ultimate consumer. It ishard to overemphasize how important formal and informal retail outlets (as probed laterin this study) are critical to building a cluster. Potentially, entrepreneurs who workclosely with the Coca-Cola system can attain high turnover and margins with Coca-Colaproducts. The Coca-Cola Company helps entrepreneurial activities blossom into bonafide, sustainable businesses.

It should be recognized that the demand conditions in the beverage cluster arenot limited to the downstream consumer of the products. the Coca-Cola systems pro-duction places demand on suppliers, and stringent requirements for suppliers are a greatexample of sophisticated demand in Porters sense. This cluster driver will be explainedlater in a discussion of related and supporting industries.

RESOURCEDEVELOPMENTNext, Porter maintains that clusters must have the resources to succeed in meet-

ing demand. Resources, or factors, include tangible assets such as infrastructure (roads,


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electricity) and less-concrete factors such as the legal system, information, and educa-tional resources/research institutes.

Most important for competitive clusters, however, are two basic factors: labourand capital. Coca-Cola bottlers must be able to marshal human and capital resources toelevate productivity. The critical, often scarce resource in cluster development is mana-gerial talent. In the core, CCSEAD offers training sessions to update workers and, moreimportantly, managers abilities to work efficiently and productively. CCSEAD also offerstechnical training.

Capital is needed to continually upgrade beverage cluster development. To secureand develop a license, a local Coca-Cola bottler must have sufficient capital to invest inthe requisite land, building structures, machinery, equipment, trucks, bottles, andcrates. The actual production process is capital intensive and highly automated. More-over, as discussed earlier, bottlers must market their beverage to wholesalers and retail-ers, as well as to consumers, and therefore invest in an efficient distribution system toget it within an arms reach of desire.

As far as capital requirements are concerned, Cola-Colas role varies from bottlerto bottler. In some cases, The Coca-Cola Company will take an active role in financing

(equity) and control (management), whilst in other cases it only offers contacts andsuggestions to owners. The goodwill and prestige associated with the Coca- Cola nameshould not be overlooked. Being connected with one of the top consumer brands in theworld can open up opportunities for financiers, who are comforted by the knowledgethat licensed bottlers will have the full support of The Coca-Cola Company and a provenbusiness model.

COMPETITIVEDYNAMICSIn any cluster, the particular nature of firm strategy, market structure, and rivalry

can spur or deter productivity, efficiency, innovativeness, and new business formation.Every successful cluster depends on key, innovative firms, like The Coca-Cola Company

and local bottlers, to drive a strategy of enhancing local value-creating activities.In the Porter development model, both advanced and developing economies

benefit from highly efficient firms. In upgrading competitiveness at the microeconomiclevel, producers shift from simple imitation to focus on total competitive advantages,requiring constant technology and efficiency upgrades in production and distribution.Cluster competition begins to play itself out in terms of differentiation, not simple pricecompetition. This level of firm competition requires that the cluster innovate and com-mit to high levels of investment.

Also important to cluster competitiveness is the quality and strength of firms inthe upstream and downstream network. For example, an important supplier industry in

beverages is sugar. In this case, CCSEAD, through the South African Sugar Association,works directly with sugar suppliers to upgrade the quality standards of sugar to meet theworld standards that are a requirement for the Coca-Cola companys beverages, increas-ing quality outside the core firms.

The Coca-Cola network improves the competitiveness of the whole clusterthrough relations in the upstream and downstream network. Upstream, the Coca-Colasystems specifications are particularly demanding, but South African businesses haveproven to have the capability for advanced, competitive manufacturing and serviceoperations. Many supplies are delivered on a just-in-time basis. CCSEAD selects suppli-


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ers according to their ability to deliver quality products on demand. The application ofWorld standards for quality in the local market improves the global competitiveness ofsuppliers in the value chain.

In rounding out this discussion on competitive cluster development in beverages,it should also be recognized that CCSEAD has interactions with other core companies.Notably, SAB-Miller has a unique relationship with the Coca-Cola system. SAB-Miller isa major player in the beverage production business, while at the same time it owns thelargest Coca-Cola bottler in South Africa, ABI. Currently, SAB-Miller is the second larg-est brewery in the world, by volume, and ABI is one of the largest bottlers of Coca-Colaproducts outside the United States.

The advantages to productivity that come with this relationship are myriad. Bothcompanies have decades of experience in the beverage industry. Each ranks among thetop five in most recognized and esteemed brands in South Africa, a credit to their abilityto work together to mutual success. Working through CCSEAD, intentionally or not,SAB-Miller indirectly improves the efficiency and productivity of Coca-Cola bottlers bysharing information on best practices. But in the end, the global improvements help allbottlers, including SAB-Miller, by increasing brand awareness and customer goodwill. In

a network like this, success breeds success.In this relationship of leading beverage firms, one finds the mixture of competi-

tion and coordination that is the key feature of a mature cluster. With two firms on theforefront of the world wide beverage industry, South Africa can glean global benefits forits local economy. The relationship is an example of complex business systems drivinginnovation in any cluster. As they compete for consumers, these two major producersmust continually work together to improve quality and efficiency where they have mu-tual interests.

RELATEDANDSUPPORTINGINDUSTRIESAs indicated already in this study, a viable cluster also depends on a strong sup-

plier network. To make the final product, the beverage lines combine concentrate withother inputs: water, sugar, carbon dioxide, bottling, and packaging materials. Every unitoff the line must meet strict quality standards, as required by the Coca-Cola licenseagreement, yet costs must be low enough for production to be profitable. For this to bepossible, bottlers must possess a number of important competencies, each with a relatedlinkage to CCSEAD. Bottlers must be able to identify reliable suppliers of inputs andmaster a complex and exacting production process.

A full complement of local suppliers helps anchor a cluster in the local economyand engender strong multiplier effects. For many of the suppliers, the Coca-Cola systemis a major purchaser. Strong relations are built; they form a cluster rooted in the local

economy. Close supplier relations in the systemeconomies of scale, joint productionplanning, and inventory controlgenerate cost savings for the suppliers and the bottlers.A key competency is supply chain management: the ability to locate quality sup-

pliers that fit well in the production process. Every bottler has its own procurementpattern, but the inputs are standard. Bottlers prefer local suppliers: packaging suppliersto provide plastic, glass, paper, closures, and crowns; equipment suppliers for bottlingline machinery, trucks, and lifts; business services such as financing, advertising, design-ing, and accounting; and, most importantly, local sugar refiners capable of producinghigh quality sugar. But the demanding production process requires competitive manu-


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facturing and service business. Coca-Cola bottlers select suppliers according to theirability to deliver products on demand to the right quality specification, with many sup-pliers delivering on a just-in time basis. CCSEAD works with bottlers and potentialsuppliers to ensure the creation and stability of such a network. More will be said ofCCSEADs connection to input suppliers when we move more explicitly up the supplychannel.

It is difficult to overestimate the importance of high quality and dependablesources of supplies to the success of the Coca-Cola system in South Africa. A reliablesource of high quality sugar is of special importance. For example, since the Coca-Colasystem accounts for 20 percent of the South African sugar market, the relationship iscentral for the sugar industry as well.2This leads to benefits of scale, joint productionplanning, and inventory control. As recently as last year, however, the relationship hasproduced friction as the Coca-Cola system pushed back on sugar price increases. This isan example of the complex mix of coordination and competitiveness that one often findsin a cluster.

Another example of the importance of supply linkages is packaging. This includesglass, PET bottles, cans, paper, closures, and crowns, as well as crates and boxes for

shipping. South Africas level of development ensures that advanced, competitive manu-facturing businesses are able to supply these products on demand and to the high stan-dards the Coca-Cola system requires. Since the Coca-Cola system is often a major pur-chaser for these firms, strong supplier relations are the norm. This relationship runsboth ways, as the Coca-Cola system will often catalyze supplier upgrading by providingtechnical know-how and experience. But perhaps the strongest impact the coreCoca-Cola system has on its upstream suppliers is its high expectations. The moderniza-tion in production and delivery required of Coca-Cola suppliers has also allowed thesefirms to compete more broadly in their individual markets. Services such as just-in-timeprovision and cutting-edge quality control spillover into other aspects of the suppliersbusinesses, making them more efficient and profitable in their own right. These consid-

erations apply to other supplier firms which have a continuing relationship with theCoca-Cola system, such as equipment suppliers, business services, repair services, andhotel and travel companies.

In terms of social impact of the cluster, the Coca-Cola system has programs toremove all solid waste generated by its operations (cans, PET, glass, and so forth). Thisprocess creates jobs and improves the economic status of ordinary South Africans whowould otherwise not have a source of income.

SUPPORTINGINSTITUTIONSThe final driver in the beverage cluster is the local presence of supporting institu-

tions. This includes industry organizations which provide a venue for sharing best prac-tices, educational facilities which provide trained personnel, financial institutions whichprovide ready capital, and governmental institutions which provide regulatory supervi-sion and support.

A great example of an industry organization which plays a key role in the beveragecluster is the South African Sugar Association (SASA). This association, which had b

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