Is outsourcing a good strategy for Coca Cola? (2024)

by Alessio Matrone, Eduard Mayor & Patrícia Poch

Coca-Cola is the leading manufacturer of soft drink syrups. It owns more than 500 soft drinks brands. Being headquartered in Atlanta, Coca Cola has presence in more than 200 countries with most of its profit coming also from outside of the United States. According to Business Insider, the Coca-Cola brand has the highest brand awareness across the globe, with approximately 94% of the population being able to identify its red and white logo. Coca-Cola’s profitable expansion across the globe has required excellent supply chain management and adequate parent-subsidiary coordination.

The history of Coca-Cola’s supply chain goes back to the last decades of the 19th century when Coca-Cola, initially a pharmaceutical product sold in drugstore soda fountains, started gaining popularity. Although the initial recipe was ideated by John Pemberton, Asa Candler had become the chairman of the company. In 1899, Coca-Cola’s chairman Candler received a proposal: he could maintain the rights on the syrup (which today is the world’s most popular secret recipe) and hand over bottling rights or take charge of the full process. Coca-Cola at the time was sold as a syrup that retailers could mix with water but Candler knew bottling could help the product become more commercial, thus boost sales. He agreed on the deal to manufacture Coca-Cola in bottles and maintaining the rights on the syrup.

This marked the beginning of what we know today as the Coca-Cola System: a conglomerate of different partnerships with 900 bottling companies that allowed the company to establish a worldwide distribution network and presence with local expertise. Because of its partnership with more than 275 independent international bottling companies of different sizes, The Coca-Cola Company, which is the parent company, has become an empire. Some of these bottling companies are so large that they have gone public and participate in different exchange markets, including Coca-Cola European Partners, FEMSA, or Coca-Cola Bottling Company United or Swire Group. The parent Company owns some stock of the main bottling companies and has acquired some international bottling companies such as International Beverages Pvt. Ltd. based in Bangladesh and Coca-Cola Bottlers Philippines Inc. In 2013 The Coca-Cola Company decided to take over most of the production assets of North American bottling companies, regaining control of its business and at the same time remaining local.

The franchise model allows The Coca-Cola Company to cut off certain costs including manufacturing, bottling, storing, and establishing local distribution networks. While the past has indicated a large trend towards outsourcing, its last attempts to regain control of these fragment of its supply chain suggests the following question: is outsourcing a more convenient option for Coca-Cola’s operations management or do acquisitions make more sense considering their business model?

In order for a Coca-Cola to be sold, four different agents in the supply chain must become involved: the syrup producer, the bottler, the distributor and the merchandiser. Firstly, syrup producers process raw materials together and add sweeteners depending on whether they want to produce a diet or non-diet beverage. Afterwards, bottlers receive the syrup concentrate, add more ingredients respectively (more water, more sugar, carbonate), package and ship. This is key in order to understand why Coca-Cola in the United States tastes differently than Coca-Cola in Spain, which is bottled by Cobega or Coca-Cola Iberian Partners, currently integrated into Coca-Cola European Partners. Finally, these bottling companies decide whether to ship to a distributor or directly to a merchandiser. The distributor is also in charge of repackaging and distributing product to retailers. Generally, bottling companies are also in charge of the distribution process for the final sales to take place. The chart below provides detailed information on Coca-Cola’s supply chain described earlier:

Many bottling companies have merged or have been acquired in the last years. This is because this sector requires a lot of investments in fixed assets and it has high competition. Merging also improves functionality by splitting costs, enlarging the network and enabling knowledge sharing. The acquisition of smaller bottling companies has also improved the efficiency of the so-called Coca-Cola system.

Outsourcing or developing bottling expertise within the supply chain both have various advantages and disadvantages. On the one hand, developing a big network of franchises and distributors also provides the opportunity to perform excellently and focusing in one key strength of the company, which is the production of syrup. Moreover, outsourcing such a process creates more competition between bottling companies, pushing bottling costs down as a result and promoting more efficiency for them to maintain and improve operating margins. By relying on a worldwide network of Coca-Cola bottlers and distributors, The Coca-Cola Company is able to also adapt locally and rely on those that have developed over time a local expertise. This also provides greater flexibility and adaptability to changing environments as well as market demands. Local expertise allows the parent company not to develop a local distribution network and the outsourced company can perform larger economies of learning.

On the other hand, outsourcing for the parent company would entail less control and more efforts to keep track of suppliers’ operations so that the “Coca-Cola” brand name continuously builds reputation. Stemming from the aspect of control, other major concerns regarding the outsourcing of the bottling process include potential issues of communication and delegation between Coca-Cola and its partners. Generally, through this system, Coca-Cola has less control on the processes within its supply chain and how the product arrives to the market. Since the fixed costs of starting up a bottling company are so high, it would promote a point where the parent company would not be able to reach the demand if it had to take charge of all these operations.

Finally, some of its affiliate companies such as Coca-Cola European Partners have a lot of bargaining power. This means that Coca-Cola partners, over time, have acquired economies of learning as well as increased negotiating power with points of sales and the parent company.

To conclude, it is important to recognize those activities that are strategically viable and can be performed exceptionally, worth to keep under the control of the company, thus without needing to outsource these operations. Inversely, any non-strategic, costly activity, that proves difficult to execute and operate should be outsourced to partners. Coca Cola has excelled on this, keeping the production of the syrup and at the same time outsourcing the bottling and distributing activities.

References:

https://smallbusiness.chron.com/pros-amp-cons-outsourcing-manufacturing-jobs-40320.html
https://www.forbes.com/sites/deeppatel/2017/07/17the-pros-and-cons-of-outsourcing-and-the-effect-on-company-culture/#2bde51f6562d
https://www.bdc.ca/en/articles-tools/operations/operational-efficiency/pages/outsourcing-pros-cons.aspx
https://www.marketing91.com/marketing-strategy-of-coca-cola/