Czech National drink king Kofola to serve up bubbly stock exchange debut

Following a post-revolution period of decline, the soft drink was re-established as a national favorite, especially among consumers who take pride in all things Czech. Now, following an agreement for a merger with a Polish peer, Kofola Holding hopes to make an effervescent stock market bow. The formula for Kofola was hit upon by Czechoslovak pharmaceutical company Galena.

Conducting experiments aimed at finding a use for surplus caffeine obtained from roasting coffee beans, researchers produced the dark, sweet and sour „Kofo” syrup that was seen as a suitable basis for a carbonated drink. Following the near disappearance of Kofola from the market during the influx of rivals that entered the newly capitalist Czech and Slovak republics, Kofola Holding, based in Krnov, North Moravia, nowadays likes to think of the flagship brand as leading a renaissance of Czech products.

The stock market initial public offering (IPO), however, will not take place on the Prague bourse. Instead the shares, amounting to 22% of the company, will be offered on the Warsaw Stock Exchange (WSE) following Kofola Holding’s merger with Polish firm Hoop, which is expected to be completed by May next year. Hoop is the number three soft drink maker in Poland.

The merged company, boasting annual sales revenue of Kč 8.9 billion (€332.3 million) and named Kofola-Hoop, will operate in the Visegrád countries — the Czech Republic, Poland, Hungary and Slovakia — as well as Russia. Kofola Holding will be the major shareholder, with 57% of the share capital, while the current co-owner of Hoop, Marek Jutkiewitz, will hold 15% and Polish investment fund ING TFI 6%.

Kofola know-how
So, given the fact that Kofola Holding is the majority shareholder, which of the two partners is the bigger player? „It depends how you look at it,” said Martin Klofanda, spokesman for Kofola. „If you take the sales revenue view, Hoop is stronger. But then the Polish market is much bigger, so it’s easier to generate great volumes there. If you take the profitability view, then Kofola is stronger. And we believe we have the know-how how to make Hoop more profitable too,” Klofanda added.

Explaining why Kofola’s putting its stock through Warsaw rather than Prague and why it has not opted to go for a double listing by simultaneously offering equity through both bourses, Klofanda pointed out that Hoop is already listed on the WSE. „The reason is simple. We are not doing a new listing. We are just working with the fact that Hoop is already on the Warsaw bourse,” said Jannis Samaras, CEO of the company and a member of the Greek family that owns Kofola Holding.

Nevertheless, equity analyst Jan Pavlík, a specialist on the Polish and Hungarian stock markets at Prague-based brokerage Wood & Company Financial Services, said he’s of the opinion that a double listing would be the best way forward. „If you look at [specialty textile maker] Pegas Nonwovens, which is double listed in Prague and Warsaw, you see that the liquidity of it is higher in Czech. There may be a good level of subscription to its stock in Poland, but I’m afraid that the liquidity is not going to be any good,” he said.

Milan Vaníček, an analyst at brokerage Atlantik finanční trhy, also doubted that a sole listing on the WSE is the best step forward for Kofola. „If they placed stock on the Prague Stock Exchange (PSE), they would do more for their image … Here, it would be one of a dozen [titles], while in Warsaw it will be one of 250 and so more likely to drift [into obscurity],” he said. But, he added, the WSE admittedly enjoys more interest than the PSE from investors and from companies in terms of placing stocks.

Targeting the Polish subconscious
Kofola, which won’t currently discuss whether it has plans for a future debut on the PSE, hopes to make sales mileage in Poland through the Kofola-Hoop listing in Warsaw. „One reason they are entering the WSE is to try and make it on to the [Polish] market with their products. If they want to get into the subconsciousness of Polish consumers, they can do it by being listed on their stock exchange. From the moment this happens, they won’t be unknown [in Poland],” Pavlík said.

Given the relative patriotism of Polish consumers, the listing might be a very good strategic marketing move, he added. And given the fact that Poland annually witnesses many more IPOs each year than does the Czech Republic, the appetite of investment and pension funds for stocks is higher in Warsaw than it is in Prague, Pavlík noted. Kofola Holding has been active on the Polish market for about three years. Originally, the company simply had commercial representation there, but in 2005 it placed a factory in Kutno, central Poland.

Kofola, which also has three plants in the Czech Republic and one in Slovakia, plus a business representation subsidiary in Hungary, Kofola Zrt, views the Kofola-Hoop market move into Russia, where Hoop already distributes goods, as a longer term objective. „Priority number one for now is the Polish market. This is where we would like to strengthen our position until 2010,” Klofanda said.

In the Czech Republic, the company is the number three soft drinks producer, behind the Coca-Cola Česká Republika based in Prague and Karlovarské minerální vody based in Karlovy Vary, West Bohemia. Its 2006 sales stood at more than Kč 3.5 billion, while its market share was 12.8%. This year it is targeting sales of Kč 4 billion.

Ads for the young and hip
Kofola is seen as something like a domestic business champion in the Czech Republic. Successful advertising campaigns aimed at the young, hip market segment have included slogans such as „When you love it/her nothing else matters.” Although Kofola now has two other product lines — fruit juice and mineral water — it’s the „black stuff” that continues to keep it in good health. The cola currently makes up about 40% of the company’s sales.

The re-emergence of the Kofola brand can be traced back to 1993 when the Samaras family, led by Jannis’ father Kostas, took possession of the privatized soda factory in Krnov that had been run by state company Nealko Olomouc. After it was turned into Santa Nápoje, a maker of drink syrups, the firm continued as one of various soft drink producers entitled to use the Kofola trademark under license from Galena, now named IVAX Pharmaceuticals.

„Then, in 2002, we bought the trademark and started to invest into it. And the brand went up steeply,” Klofanda said. At the time of the trademark purchase, spontaneous general knowledge of the brand Kofola stood at 5% but by now it has risen to 74%, surveys by market research company GfK Praha show. „It’s definitely not a question of money, our competitors invest much more,” Klofanda said. This line is actually borne out by figures recently published in trade weekly Marketing & Media.

These show that last year Karlovarské minerální vody spent Kč 415 million on advertising, Coca-Cola Kč 395 million and Kofola a mere Kč 246 million. Advertising agency Kaspen, which Kofola has used for seven years, remains involved in making Kofola some kind of „ideological alternative” to Coca-Cola and Pepsi-Cola.

This is particularly applicable to Moravia, he added, because in Prague and Central Bohemia people still prefer international brands. „There are definitely people who feel some national pride and drink Kofola just because of this. And they feel sympathy not only toward the Kofola brand but also to the company as they sense it can compete with the global giants,” Klofanda added.

One in the eye for globalization
Czech advertising expert and former head of the Brussels-based Association of Communication Agencies (AKA) Jiří Mikeš admires Kofola’s marketing triumph. „It seemed that globalization was definitely going to win. But now it’s been shown that in the new times people want something local, national. It’s been shown that the value of the national brand is much higher than we thought,” he said.

Praising the move that has seen Kofola made available on tap in restaurants and bars, he added that the company’s advertising strategy has eventually gotten through to the older generations. „They’ve done really well. First they went after the young generation, then, they went after us, the older ones, who drank Kofola when there was no Coca-Cola. They just recalled it all in our minds. And their ad campaign is imaginative, different. It’s Czech.” (Czech Business Weekly)