Dirty Soda Business
It has been found that Coca-Cola Korea Company (CCKC), a local branch of the Coca-Cola Company of the U.S., has signed a business agreement with Coca-Cola Beverage Company, which is a subsidiary of LG Household and Health of Korea. The agreement is very advantageous to CCKC, the foreign-owned subsidiary, and very disadvantageous to locally-owned Coca-Cola Beverage Company, but they cannot offer a protest because they must maintain the supply of concentrate syrup from the CCKC. Concentrated syrups are the basis for all the soft drinks that both companies sell.
LG Household and Health is enjoying a market share of about 30 percent in Korea, and Coca-Cola Beverage Company and Haitai Beverage are subsidiaries and big profit makers of the company. LG Household and Health took over the Coca-Cola Beverage Company in 2007.
The acquisition was good news, as it expanded the size of LG Household and Health’s business. But its exclusive contract with the foreign-owned CCKC forced LG Household and Health to give a big chunk of profits to the foreign company.
The Coca-Cola Beverage Company paid 90.183 billion won (US$79.7 million) to the CCKC to buy concentrated syrups from the CCKC, and that is only the amount for the first half of this year. Additionally, this figure is up about three percent from a year before.
In 2014, the Coca-Cola Beverage Company paid a total of 170.2 billion won (US$150.5 million) to buy the concentrated syrups. This amount is a year-on-year increase of 1.2 billion won (US$1.0 million). However, the CCKC has been scaling down performance incentives based on sales for the Coca-Cola Beverage Company despite the increase.
The CCKC previously paid 10 billion won (US$8.8 million) a year. But in 2013, the incentive was pared down to 7.5 billion won (US$6.6 million). Finally, last year, no incentive was paid.
Soft drink industry experts comment on this by saying that since CCKC and Coca-Cola Beverage Company have a master-slave relationship where CCKC is the mater, Coca-Cola Beverage Company has no alternative but to accept the unfavorable conditions.
According to the contract, the Coca-Cola Beverage Company has to engage in the soft drink business, which requires concentrated syrup, exclusively through the CCKC.