In an article last Thursday, The Wall Street Journal announced that the Coca-Cola Company was nearing a deal to buy the bulk of its largest bottler, Coca-Cola Enterprises.  This was interesting news to me because the acquisition, like PepsiCo’s deals to buy its two biggest bottlers, The Pepsi Bottling Group and PepsiAmericas, was driven in large part by the need for distribution flexibility.

A little refresher course on this industry might help to explain what is going on. Coca-Cola Company and PepsiCo were originally vertically integrated. The companies developed the products, manufactured and distributed them, and took care of marketing. Then, several decades ago, these companies divested the manufacturing and logistics responsibilities to bottlers while retaining control of product development and marketing. The bottlers manufactured the products – mostly carbonated beverages – and distributed a large portion of them using direct store delivery (DSD) to retail establishments rather than delivering to retail distribution centers. 

As for the supply chain drivers of these mergers, the authors of the WSJ wrote:

The anchor bottler strategy worked well for Coke in the 1980s and 1990s when consumers were drinking increasingly more soda that was shipped in high volumes. But since then, the interests of Coke and its bottlers have diverged, as the drinks giant seeks to adapt to consumers moving away from soft drinks to more niche, noncarbonated offerings [such as bottled water with vitamins and flavors, juices, and teas].

Owning a bottler would give Coke flexibility. It could decide to distribute via its bottling system, through which products are delivered directly to stores. Or it could deliver drinks through warehouses—cheaper and preferable for products too small or not profitable enough to distribute cost effectively through the more expensive “direct store delivery” system.

When PepsiCo Chairman and CEO Indra Nooyi launched that company’s similar move in April, she said owning the two bottlers would give it the flexibility to decide how its beverages should be distributed. [The move would also allow PepsiCo] to have greater control over development, distribution and marketing of new products. Owning its bottlers allows PepsiCo to negotiate alone with retailers, rather than sharing that task with representatives of separately publicly traded bottlers.

In the press release at the time of PepsiCo’s announcement, Ms. Nooyi said that “The fully integrated beverage business will enable us to bring innovative products and packages to market faster, streamline our manufacturing and distribution systems and react more quickly to changes in the marketplace, much like we do with our food business. It will also make it easier to leverage ‘Power of One’ opportunities that involve both our beverage and food offerings, and for PepsiCo to present one face to retail customers. Ultimately it will put us in a much better position to compete and to grow both now and in the years ahead.”

The PepsiCo transaction is expected to create annual pre-tax synergies of $300 million by 2012 largely due to greater cost efficiency and also improved revenue opportunities. And this was another factor in Coca-Cola’s decision to follow suit. Once PepsiCo had direct control of distribution, and had cut out the middleman, it would potentially have a price advantage over Coke.

In summary, changes in customer tastes, SKU proliferation, and having products with different distribution velocities, has led to deals that are cumulatively worth about $20 billion.