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.
Having worked for one of the largest independent Pepsi Bottlers from 1982 thru 1990, I experienced 1st hand some of the difficulties independent Bottlers & Pepsico faced trying to implement their respective marketing plans.
In the Seattle major market where we operated in, we had the Pepsi franchise for both Seattle and Tacoma but not Everett. Everytime we wanted to coordinate a marketing plan that included radio ads, we tried to enlist the involvement of the family owned Everett franchise. They may or may not agree to fund some of the marketing dollars targeted for the ads. The problem was the radio waves did not stop at the county line. If we elected to go forward with our own ads, consumers in Everett heard the ads but since the Bottler in Everett was not particpating consumers in the that county would not see the same discounts as advertised. We always had to put in a caveat on availability depending on the county you lived in.
Compounding the problem was many independent bottlers also had franchise agreements with other beverage companies. It was common to see a Pepsi franchise also have either 7UP or Dr. Pepper. That compounded Pepsi’s problem trying to work with us as a Bottler on Marketing programs as we were also trying to leverage the 7Up and Dr. Pepper relationships.
So I applaud Pepsico for taking more ownership of their bottler network. Eliminating obstacles like competing franchise interests can only help improve their ability to execute.
Rod Gifford
Sterling Commerce