Coca-Cola Lures Japan With Cellphone Come-Ons

On a hot and humid morning in Tokyo recently, a Coca-Cola Co. manager beamed an e-mail message to the cellphones of several thousand customers across Japan.

By CHAD TERHUNE and GABRIEL KAHN
Staff Reporters of THE WALL STREET JOURNAL

The message urged them to buy a drink from one of hundreds of high-tech vending machines around the country. The lure? Those who bought a can from one of Coke’s machines that day or the next would get a free download of a company ad jingle for their cellphone ring tone. Sales jumped 50% among those who received the message.

The promotion was part of Coca-Cola’s Cmode wireless vending-machine service, which is tapping into Japan’s obsession with cellphones. It is one of several ways Coke is trying to overcome slower growth in its second most profitable market after North America. Japan represents only about 5% of global sales volume for the world’s biggest beverage company, but it accounts for roughly 20% of its profit.

The Atlanta company is battling a sluggish economy, changes in consumer habits and falling prices. After a 3% decline in Japanese sales in the second quarter, Coke’s sales plunged 11% in July, though that was partly blamed on rainy weather.

And longer-term trends don’t bode well. As the Japanese population ages, Coke risks losing many of its best customers — the under 30s who spend freely on its colas, coffees and teas. Half of Japan’s population will be over 50 by 2025, according to the U.S. Census Bureau’s International Database on Aging, and the population is projected to decline by nearly 10 million people in that period.

"The days of double-digit growth are over," says Etsuko Katsube, director of strategic marketing at Coca-Cola Japan. "The big-picture pie is never going to grow again."

Coke isn’t alone: Many big U.S. consumer-product companies are facing a similar challenge in the important Japanese market as the young, core market shrinks. Sales at McDonald’s Corp.’s Japan unit dropped 12% last year from a year earlier. As one solution to the problem, the company now is targeting affluent young Japanese women with gourmet items such as French-style hamburgers with ratatouille sauce. Starbucks Corp., whose profits have tumbled in Japan, is experimenting with selling beer and wine in one Japanese outlet and, later this year, plans to serve hot food such as pastrami sandwiches and tuna-and-basil pizzas.

For beverage makers, one of the most troubling trends in Japan has been the rise of sales in supermarkets, which have led a downward consumer price spiral with aggressive discounting. For years, the Japanese love affair with vending machines allowed Coke to command higher prices and earn better margins from its one million machines. But vending machines’ share of beverage sales dropped to an estimated 32% this year, from 36% in 1995, according to the All Japan Soft Drink Association. Supermarkets’ share grew to an estimated 28% from 24% during the same period.

Mary Minnick, president and chief operating officer of Coca-Cola Asia, says vending-machine sales, where prices can run 30% higher than in supermarkets, should remain profitable for Coke, but the company must find new ways to trigger an impulse purchase. Coke is considering offering certain drinks exclusively in vending machines or changing the drinks in a machine more frequently to reflect different consumer needs throughout the day.

Another response has been Coke’s Cmode service, a partnership with Japan’s leading cellphone operator, NTT DoCoMo Inc. It enables customers to buy drinks using their phone by calling up a bar code on their cellphone screen and holding it up to a vending machine equipped with an optical reader. The vending machine then debits their prepaid Cmode account.

Cmode’s real power may be its capacity to deliver promotional messages to account-holding customers. Although that is still being tested, Coke wants it to become a major thrust of its Cmode campaign in the future. "That one-to-one involvement is going to be very important for us," says Coca-Cola Japan’s Ms. Katsube. Perhaps even more importantly, it will allow Coke to track the tastes and habits of users. Nearly 200,000 customers have signed up for Cmode and several thousand more Cmode machines should hit the streets next year. The 900 Cmode machines already in place in Japan are beating the average sales of regular machines by 21%.

Coke leads the fragmented Japanese market with a 33.7% share of the country’s $26.8 billion soft-drink business, which includes sodas, coffees and teas. But brand loyalty is notoriously low in Japan.

Riho Yamanaka, a 29-year-old Tokyo hotel manager, consumes up to four drinks a day and says she switches brands all the time. "When the new drinks come out, I probably try them at least once or so," says Ms. Yamanaka. "But I don’t go for one particular brand."

Beverage makers try to keep pace with Japan’s fad-driven culture by launching more than a thousand new drinks each year. Ms. Minnick says Coke intends to invest even more in new products and packaging and devote more attention to "functional" drinks that appeal to aging consumers by claiming to boost energy or impart other health benefits. Last month, the company launched Tarumi, a low-calorie beverage blended of six minerals. Tarumi is Japanese for "sag unhealthily," a condition the drink is intended to reverse.

Coke also hopes to be in a better position to profit from falling prices by cutting costs in the manufacturing and distribution of its drinks. Coke plans to establish a joint venture with its 14 bottlers later this year. This new supply-chain management company is expected to help Coke’s bottlers reverse several years of declining profit on their side of the business.

Write to Chad Terhune at [email protected] and Gabriel Kahn at [email protected]