January 11, 2006
By Chad Terhune
The middle shelf in the soft-drink aisle at Las Tarascas, a Latino supermarket in Lawrenceville, Ga., was bare last week. But store manager Erik Carvallo couldn't call the local Coca-Cola bottler to replenish his stock of Coke.
The Coke Carvallo's customers had snapped up comes in scuffed glass bottles stamped "Hecho en Mexico" - made in Mexico. It found its way to this Atlanta suburb through an underground supply chain that flouts Coca-Cola Co.'s long-established distribution system.
Mexican-made Coke is such a popular taste of home for many immigrants that Las Tarascas sells about 20 cases a week, or nearly 500 12-ounce bottles at $1.25 apiece. "It's what they grew up with," says Carvallo. Meanwhile, he sells fewer than five cases a week of the cheaper U.S. version, in cans and plastic bottles on a nearby shelf after his Mexican supply is gone. (A plastic 20-ounce bottle of U.S. Coke sells in some parts of the country for about $1.)
Coke from south of the border is a big business, fueled by the Hispanic population, the fastest growing minority group in the U.S., and soda connoisseurs drawn to its taste and the old-time look of the iconic bottle. Fans insist the Mexican cola, made with cane sugar, has a better "mouth feel" than the U.S. formula. U.S. bottlers switched from cane sugar to high-fructose corn syrup in the 1980s to cut costs.
Hamilton Rousseau, the former owner of a gourmet soda shop in Dallas, thinks Mexican Coke's thick bottles help the soda keep its fizz longer. "Cane sugar gives it a cleaner taste," he says. Atlanta-based Coke says that the difference is imperceptible to most consumers in taste tests.
In addition to Latino restaurants and markets, Mexican Coke is sold at a few supermarket chains, such as Kroger Co., where some store managers say they stock the soda to lure Latinos.
Mexican Coke is produced by 13 company-authorized bottlers, but Coke condemns its importation as the work of bootleggers. That's because the company has a network of individual bottlers throughout the world with their own exclusive territories. U.S. Customs and Border Protection agency officials don't seize or turn back the Mexican shipments because they aren't counterfeit.
The underground business is especially galling to Coke and its bottlers because Coca-Cola Classic sales in the U.S. are down 10 percent since 2000, and Coke's market share of the $66 billion-a-year industry is at an eight-year low.
Don Knauss, president of Coke's North American operations, calls the bootleg cola "an irritation." He recently assigned a team of executives to fix the problem. "There are a lot of distributors bringing Coke into the U.S. We don't know how big it is," he says. Last year the company quietly started a limited test program to allow the authorized distribution of a small amount of Mexican Coke through one of its U.S. bottlers.
When U.S. bottlers complain about unauthorized Mexican Coke being sold in their territory, Coke investigates. Mart Martin, a Coke spokesman, says the company has successfully filed lawsuits over Mexican Coke in the past, but he declined to elaborate. "We have found, however, that sending draft complaints and cease-and-desist letters to be relatively effective since they serve as a mechanism to inform the unauthorized distributor of the legal issues," he says. Martin says that the importation of Mexican Coke infringes on Coke's trademark and on local bottlers' authorized territories, but "it's not an illegal product." The company also has fined some of its Mexican bottlers for failing to keep their sodas out of the U.S.
"Coke is sending lawyers to harass people instead of catering to customer demand," said Danny Ginsburg, founder of Real Soda in Real Bottles, a Los Angeles company that sells hard-to-find drinks. He says he has stopped selling Mexican Coke. Mr. Martin said the company doesn't consider its legal maneuvers to be harassment.
The underground trade is costing Coke's 75 U.S. bottlers millions of dollars a year in sales to a motley crew of wholesalers, distributors and mom-and-pop retailers who are beating the bottlers to a lucrative market with their own brand.
Coke reaps a smaller profit on sales of its syrupy cola concentrate to bottlers in Mexico than those in the U.S. Mexican firms capture about 65 percent of the profit from soda sales while U.S. bottlers split profits with Coke more evenly, Morgan Stanley estimates. The company declined to discuss its pricing arrangements with bottlers.
Coke has no plans to start making a version of Mexican Coke in the U.S., claiming consumers wouldn't consider it authentic. Introducing another Coke formulation also would undermine the myth that the famous soda is identical everywhere, even though the recipe varies slightly around the world. In Europe, Coke is made using sugar from beets.
Wholesale imports of soda from Mexico reached $114 million in 2004, up 55 percent from 2000, according to the U.S. Census Bureau which compiles U.S. customs data. The government doesn't disclose imports by company or brand.
Distributors and storeowners who cater to Mexican Coke cravings usually are reluctant to discuss how they get their supply. Jeff Guarino, who sells Mexican Coke and other glass-bottle sodas through Pop the Soda Shop, a Scottsdale, Ariz., company, said he has a "don't ask, don't tell" policy with his suppliers. His Web site promotes Mexican Coke as "The Real Thing Bottled in Mexico. Great Stuff!"
When Coke entered Mexico in the 1920s, it was one of the company's first international outposts. Since then Coke has captured 70 percent of the soda market in Mexico, which has the world's highest per-capita consumption of Coca-Cola, according to the company and Beverage Digest, an industry newsletter. Mexican Coke is still sold in the contour glass bottles Coke commissioned in 1916 to ensure that consumers weren't buying copycat drinks. The company's slogans at the time were "demand the genuine" and "accept no substitute." Company executives figure that millions of Mexicans moving north will keep drinking their favorite brand, even if it looks and tastes slightly different. "We see Hispanics as a tremendous opportunity," says Mr. Knauss.
But many Latinos remain stubbornly loyal to Mexican Coke. At Las Tarascas, Alicia Fonseca, 30 years old, reached for a bottle of imported Coke to go with a plate of grilled steak on tortillas from the store's lunch counter. "It tastes better," she said.
The red cap on her weathered soda bottle was stamped with the address of the Bebidas Mundiales bottling plant in a section of Monterrey more than 1,200 miles from Atlanta. The plant is owned by Embotelladoras Arca SA, Coke's second-largest Mexican bottler.
At the sprawling plant, used Coke bottles in red crates are taken off trucks with forklifts and stacked on a conveyor belt. Then they go through a washer with turbocharged jets of soap and water. Empty bottles are refilled with Coke at a rate of 1,000 per minute, then repacked into crates and loaded onto trucks for delivery.
Plant manager Juan Carlos Barrera smiled when told that some of his Coke bottles wind up in the U.S. selling for far more than the Mexican price of about three pesos, or about 30 cents. "I have no idea," he said. "We don't export from here."
Arca ships Coke by tractor-trailer from Monterrey and other bottling plants in Mexico to its distribution center in Nuevo Laredo, a city just across the Rio Grande River from Laredo, Texas.
The short hop across the border into the U.S. makes it relatively easy for so-called transfer drivers, usually independent truckers, to haul Coke into Laredo, the busiest crossing point for trade between Mexico and the U.S.
Another source for Mexican Coke are "depositos," or warehouse stores in Mexico, where consumers can buy drinks and other items in bulk, according to Arca. Some depositos order large quantities of Mexican Coke and then ship it to the U.S. instead of selling it to Mexicans. Arca spokesman Carlos Beltran says the company stopped supplying some warehouse stores after it received complaints from U.S. bottlers.
It is hard to trace shipments of Mexican Coke to their final destinations, but the first U.S. stop for some truckloads is La Bodega Wholesale. Its yellow warehouse in Laredo is adjacent to Interstate 35 and a railroad line. A large Coke bottle is painted on the building. Inside, salesman Erasmo Villarreal jumped up from his desk to point out several pallets of Mexican Coke packaged in brown boxes with the word "cola" scribbled in pen on the outside.
Villarreal wouldn't reveal where he got his Mexican Coke, although the bottle caps show it was manufactured in Arca's Monterrey plant. He said he ships it along with tortilla presses, jalapeno peppers and other Hispanic staples by truck to Denver, Philadelphia and Atlanta and by train to Chicago, Memphis, Tenn., and other cities. He charges $15.10 for a case of 24 Coke bottles delivered to Atlanta. The shipments occasionally include much smaller amounts of Pepsi-Cola made in Mexico and other Latin soda favorites such as Inca Kola from Peru and Postobon from Colombia.
Some Mexican soda eventually reaches the loading dock of Georgia Wholesale, a small, air-conditioned warehouse near I-85 in Atlanta mostly serving convenience stores and ethnic groceries. Carvallo, the manager of Las Tarascas, drove there one recent weekday in his black Nissan truck with a shopping list jotted down on a notepad.
He was greeted by the warehouse's managers, who summoned a Hispanic employee to assemble his order. In Spanish, Carvallo ordered 10 cases of Mexican Coke for $18 a case, including free delivery the next day. At his store, Mr. Carvallo marked up the retail price 67 percent to $30 a case, or $1.25 a bottle.
Carvallo, a 30-year-old father of two who moved to the U.S. from Mexico nearly 20 years ago, used to order U.S.-made Coke from Atlanta-based Coca-Cola Enterprises Inc., the world's largest Coke bottler. He stopped after he discovered that he could get a better price from Sam's Club and other retailers. CCE also wouldn't guarantee a specific delivery day and didn't respond to requests for another Coke cooler. "For a big company like Coke, they don't care about a small business like me," he said. "If they treated us right, we could sell even more Coke" made in the U.S.
He says CCE sent a saleswoman to see him, but that he wasn't persuaded to return as a customer. Mark Schortman, CCE's chief customer officer, said "small or large, we value each customer relationship and continuously work to improve the level of service excellence we provide." A CCE spokeswoman, Laura Asman, added that the bottler is encouraging some of its salespeople to learn Spanish and to promote brands that are popular with Latinos, including Coke's Fanta.
In Mexico, Arca officials contend that Coke could recapture some of the lost sales if the Mexican bottler was allowed to export freely to U.S. retailers. "We don't like the bootleggers making money off of our product," said Arturo Gutierrez, Arca's director of strategic planning. But so far Coke has opposed that idea.
Arca already sells Topo Chico, a popular Mexican mineral water, in the U.S. through a Dallas subsidiary. But Coke levied several $500 fines against Arca in the past few years after U.S. bottlers reported seeing Arca-made Coke on store shelves north of the border. Arca says it investigates suspiciously big orders but can't police thousands of retail customers.
Tension between Coke and its Mexican bottlers has grown since October, when Coke announced that in 2007 it will raise the price of soda concentrate in Mexico for the first time in 13 years. Coca-Cola Femsa SA, Coke's largest bottler in Latin America, Arca and other Mexican bottlers are considering cutting their marketing budgets to offset the price increase for the syrup, which bottlers mix with water and other ingredients to make the finished drink, according to some of these bottlers.
Coke has begun allowing Arca to ship small quantities of Mexican Coke to the U.S. as part of a test in Texas, according to Coke, Arca and CCE, the Atlanta-based bottler. The bottles are handed over to CCE for delivery to stores. The trial started in September in San Antonio and was recently expanded to some other Texas markets. Coke has no current plans to expand the program.
"This allows more of our customers to carry this product which has such special appeal, while maintaining one point of contact for their Coca-Cola beverage needs," said Jeff Howe, general manager of CCE's Southwest unit.
There is one big difference between the Mexican Coke delivered by CCE and the version trucked in without Coke's permission. The authorized imports come in shiny new bottles, which could limit their appeal among Latinos. "People are used to seeing Mexican Coke in older bottles," said Gutierrez of Arca. "It doesn't look like the real thing."