South Africa: Coca Cola tackles local "sugar barons" over prices
Coca Cola has chosen South Africa as the battle ground for its fight against the soaring cost of food, urging local “sugar barons” to reduce their prices by 24%, but the sugar industry has hit back, claiming it was a victim of an over-regulated international industry. Arnold Kirkby looks at this “bitter-sweet” battle at the foot of Africa.
In a ferocious attack, Coke’s international global procurement manager, Andrew Banks, said on a visit to South Africa that even though it was one of the world’s low cost sugar producers on a like-to-like basis, it was among the most expensive worldwide.
Banks promised Coke would fight for South Africa's 30 million sugar consumers by demanding a 'new deal' from the industry when price 'negotiations' started in November.
Coca Cola, the country’s largest industrial consumer of sugar and producer of carbonated drinks, had 3500 suppliers and purchased more than 20% of local production.
The company wanted the national price of sugar to be reduced from R3,280 (US$328.9) to R2,500 per ton and for future increases to be negotiated in good faith and below the rate of inflation.
Consumers in Africa’s non-sugar producing countries paid less for South African sugar than people living in Kwa-Zulu Natal and the Eastern Cape where it was grown, said Banks.
If it had not been for customs duties, industrial consumers would be able to import sugar from South America at a third less than local cost.
Banks slams ‘cartel-like set up’
"The industry’s attitude is inherently 'old world' and self serving" - Coke's Andrew Banks
Banks blamed the situation on the cartel-like set up, whereby the South African Sugar Association, which was created through legislation, controlled the entire process. It determined the type of crop to be planted, where and by whom and to which mills farmers could sell their cane, as well as the price for which it must be sold to industrial and private consumers, he said.
With two price increases so far this year – totalling 13% – the highest in recent years, Coke felt the rise was not justified: “Illovo Sugar, one of our largest raw material suppliers, posted a 53.1% increase in headline earnings in the previous financial year, while SASA’s revenue increased by 29% since 1989, despite a marked reduction in the volume of sugar produced in the country,” said Banks.
Notwithstanding its position in the market, SASA refused to enter into any consultation concerning the price issue.
“The industry’s attitude is inherently ’old world’ and self serving,” he added.
Sugar producers say Coke is ‘mischevious’
The sugar industry hit back, saying it was factually incorrect to state that the SASA controlled the entire sugar process.
SASA executive director, Trix Trikam, claimed it had absolutely no role to play in determining what type of crop was planted, where and by whom, to which mill farmers had to sell their cane and, importantly, at what price sugar was sold to industrial and household consumers.
“It was mischievous of Coca-Cola to suggest this was the case,” Trikam said.
SASA said that it could not talk on behalf of specific companies, but it understood that the price increase paid by Coca Cola Bottlers in 2002/2003 was down 9% compared with prices paid in 2001/2002.
"The sugar content of a 340 ml can of coke is roughly 3.3% of the retail selling price" - SASA's Trix Trikam
In as far as rebates were concerned SASA paid these to industrial users to assist in meeting the pricing aspirations of those users.
“To put the issue into context, the sugar content of a 340 ml can of coke was roughly 3.3% of the retail selling price or 11 cents in a can of coke that retails at R3.49 (US$0.35) a unit.
”The sugar content by value of coca-cola had been reducing over the years, suggesting that sugar was making its product affordable, said Trikam.
Rebates ‘granted and revoked at whim’
Banks said all industrial consumers received rebates from SASA. However, there are no criteria defining how it was calculated, nor were there contractual agreements regarding duration. Instead they were granted and revoked at whim, resulting in 'bad blood' between endusers and SASA.
Despite the commitment of South Africa's public and private sectors to achieving and maintaining the highest standards of corporate governance, especially in terms of transparency and accountability, it seemed ironic that a statutory body, such as SASA, was able to flout these commendable principles with relative impunity, he added.
The South African sugar industry claimed it did not consider itself to be a beneficiary of the regulated sugar environment, but rather a victim in that it continued to operate under duress in an “over-regulated” international market.
International prices were currently at unsustainably low levels as a consequence of this corrupt world market, to the point where the Australian industry had to seek financial assistance from its Federal Government in order to survive.
Removing tariffs would ‘destroy’ a competitive industry
In the light of this, for anyone to call for the removal of tariffs before addressing the highly protected EU and US sugar regimes, would be calling for the destruction, as in Australia, of an internationally competitive industry in South Africa, said Trikam.
"Coke's sugar content by value has been reducing over the years, suggesting that sugar was making its product affordable" - SASA's Trix Trikam
It had been demonstrated over the years and by recent studies undertaken by the government, as well as overwhelming wisdom of respective sugar commentators world wide that the international sugar price was not a benchmark price - instead it presents a dumped market with only a fraction of the sugar produced internationally trading on that market.
"At the recent World Summit on Sustainable Development in Johannesburg, the corrupt nature of the world market was repeatedly exposed for what it was by Oxfam.
" The SA domestic market price for sugar is not out of line with other benchmark countries as confirmed by studies, undertaken by the Board of Trade and Tariffs recently.
"The industry has far exceeded its Uruguay Round WTO obligations in terms of tariff reduction and market access. It has no domestic support subsidies at all, unlike many other industries throughout the world.
"The industry is playing an active role as a member of the Global Alliance for free sugar trade and liberalisation together with Australia/Brazil/Thailand/India amongst others.
"What we are calling for is liberalisation and that the EU and US take the lead in liberalising world sugar markets before any move to remove the tariff, which protects the SA industry from sugar being dumped into its market," said Trikam.
Coke believes its ‘wish list’ is achievable
Banks said Coca-Cola wanted SASA to support deregulation, greater competition and the scrapping of tariffs.
He believed Coke's 'wish list' was achievable and was adamant that SASA could no longer bury its head in the sand. "When the 1978 Sugar Act is finally reviewed and amended, greater competition will exist.
“We want to continue buying our raw material locally and urge SASA to consider establishing partnerships with key customers to ensure the industry's long-term survival," he concluded.
- Danone's Q1: four things to learn
- Nestle Q1 update: four things to learn
- Who will buy Danone's Stonyfield business?
- Column: Why snacking is the new meal
- Interview: KP Snacks on growth strategy
- Tyson shops Sara Lee bakery, Kettle and Van's
- Nestle to cut UK confectionery jobs
- PepsiCo affirms full-year target as Q1 hits mark
- Tyson to buy burger-to-entree firm AdvancePierre
- TreeHouse Foods sells soup, baby food units