Coca-Cola facing a healthful challenge among Chinese consumers

Tea, juice and herbal products remain strong in national culture and taste preferences

Drinks giant Coca-Cola, a major sponsor of the Beijing Olympics, is facing stiff competition in China from a humble, traditional herbal tea, as Chinese consumers develop a taste for health.

According to figures published last year by Asia Times Online, sales of Liang Cha tea hit 4 million tonnes in 2006, overtaking Coca-Cola as the No. 1 soft drink in China in volume terms.

And, according to experts, sales of the tea could continue to climb fast, with top-end forecasts coming in at 25 million tonnes a year by 2010.

Liang Cha, the herbal-based drink, is renowned in China for its reputed ability to remove the "spiritual heat and dampness" from the body, and promote a healthy balance of "basic elements and fluids."

In recent years, manufacturers of the tea have latched on to the changing needs of consumers and begun producing it in convenient formats for on-the-go drinking.

One manufacturer, Wanglaoji, saw sales of its eponymous Liang Cha brand, which is marketed in cans, more than double between 2004 and 2005, from 800 million yuan ($117 million) to 2 billion yuan ($293 million).

The success of Liang Cha is indicative of how China represents an increasingly rich market for producers of nutritional products. Earlier this summer, Shanghai-based probiotics supplier China-Biotics signed a one-year deal with pharma firm Jiangxi Lijia Pharmaceutical that will see the two companies develop a range of dietary supplements and powders for the Chinese market.

Meanwhile, China Yingxia, a nutrition and personal-care business based in Harbin in northern China, said in June it had seen a big increase in sales of products sold on a health platform.

"During this past quarter, we continued to shift our product mix toward nutritional food products and dietary supplements, and were pleased to see year-over-year growth in these product lines of 62 per cent and 232 per cent, respectively," said Yingxia Jiao, CEO of China Yingxia.

The acquisition of Jin Ao, a Shanghai soy-milk manufacturer, would "further help us expand our presence in the nutritional-foods market," she added.

In related news, Coca-Cola bid for a Chinese juice-making company in early September. The $2.5 billion offer to buy Huiyuan is said to be the country's largest foreign takeover. With US soft-drink sales dropping and, as mentioned earlier, with Chinese consumer preferences for healthier drinks, the move will allow Coca-Cola to benefit from the rising sales of fruit and vegetable juices in China, which grew by 187 per cent from 2002 to 2007, according to Euromonitor International. Analysts said the buy was a good fit because of growing interest in China for healthier beverages, increased personal income and Coca-Cola's brand awareness following the Olympics.

The bid of HK $12.20 (US $1.56) was nearly triple Huiyuan's closing price in early September on the Hong Kong stock exchange. This value — combined with outstanding shares, bonds and options — increased the deal to as much as HK $19.6 billion (US $2.5 billion), according the Guardian online news site.

Huiyuan's stocks sharply rose by 170 per cent after the two companies issued a joint statement saying that the company's three largest stakeholders agreed to accept the deal, including Group Danone SA with 23 per cent shares, and the company founder and president, Zhu Xinli, with 42 per cent shares.

In a joint statement, the companies said, "There are anticipated synergies that will drive operational and cost efficiencies, particularly in Huiyuan's production footprint and in the Coca-Cola Company's distribution and raw-material purchasing capabilities." Huiyuan has 30 factories in China, as many as 500 food and drink lines, and exports to 30 countries, including the US.

Reaction to the buy from Chinese citizens was mixed. The China Daily posted a poll on its website, and among more than 100,000 participants, 81 per cent opposed the deal, citing concerns about the dilution of Chinese homegrown brands.

Other industry watchers cited similar issues of whether the Huiyuan brand should be protected and whether government officials would give the buy offer final approval. In the past, similar bids were rejected. This billion-dollar bid will test last year's relatively fresh, and yet untested, antimonopoly laws.

Additional reporting by Kimberly Lord Stewart

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