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As PepsiCo buys its bottlers, the question is, will Coke follow suit?
PepsiCo announced on Monday 20 April that it is to buy its two largest bottlers for $6bn, a move that surprised much of the industry and could make The Coca-Cola Company review its own bottling strategy.
Pepsi and Coca-Cola both sell concentrate and syrups to bottlers, which make, package and distribute the final product.
Industry analysts have speculated for several years that Atlanta based The Coca-Cola Company might buy its largest bottler, Coca-Cola Enterprises (CCE). But it was rival Pepsi, based in Purchase, NY, making the move.
Pepsi wants to buy Pepsi Bottling Group and PepsiAmericas to lower costs, improve flexibility and increase the speed of decision making, said Indra Nooyi, PepsiCo chairwoman and chief executive officer.
In the past decade, retailers have consolidated, new competitors have emerged and non-carbonated beverages have become a bigger part of the market.
“We believe that by reshaping our business model we can significantly improve our competitiveness and our growth prospects,” Nooyi said.
Pepsi’s offer, a combination of cash and stock, must be reviewed and accepted by both Pepsi Bottling Group and PepsiAmericas for a deal to be completed.
Coca-Cola declined to comment on Monday 20 April as it was due to release financial results on Tuesday 21 April. Public companies typically do not usually comment on issues building up to an earnings release.
Coca-Cola executives said late last year the company had no plans to buy CCE, also based in Atlanta.
“In the past, Coke has considered buying US bottlers and at the time decided not to,” said John Sicher, editor and publisher of Beverage Digest. “PepsiCo’s transaction will, at the very least, make Coke want to take a look at the new competitive landscape. What they’ll end up doing, I certainly can’t predict.”
Pepsi’s bid marks a major shift in North American bottler relations. In 1986, Coca-Cola created and spun off Coca-Cola Enterprises, which handles about 80% of Coke’s North American bottle and can volume.
In 1999, Pepsi followed suit by spinning off Pepsi Bottling Group, which accounts for about half of Pepsi beverages sold in North America. PepsiAmericas, its second largest North American bottler, has expanded in the United States, Caribbean and Europe through consolidation with other bottlers.
Pepsi owns 33% of Pepsi Bottling Group and 43% of PepsiAmericas. Coca-Cola owns 35% of Coca-Cola Enterprises stock. But the bottlers are independent companies.
Bottlers have been affected in recent years by a change in the US market. The market traditionally was dominated by a few high volume carbonated soft-drinks, which the bottlers made at their own plants. In recent years, non-carbonated soft drinks, such as teas, sports drinks and juice drinks, have gained popularity. Most of these beverages are made at plants owned by Pepsi or Coca-Cola.
JP Morgan analyst John Faucher wrote in a note to investors that Pepsi’s move represents the “changing realities of the North American beverage business,” and that “PepsiCo is looking at the continued growth of non-carbs, the broader manufacturing footprint of the beverage business, and the changing retail landscape and deciding that one entity is better suited to deal with this.”
Source: The Atlanta Journal-Constitution
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