Bottlers may forge new relationships with Coca-Cola and PepsiCo

Bottlers may forge new relationships with Coca-Cola and PepsiCo

The Coca-Cola Co's largest independent bottler has been flexing its considerable might of late.

Coca-Cola FEMSA's takeover of Coca-Cola's Philippines bottler franchise was FEMSA's fifth transaction in the Coca-Cola bottling space in the past 18 months – an overall investment of US$3.5bn, according to the Mexican company. It was also its first acquisition outside Latin American and an initial step in a stated ambition to spread beyond its traditional boundaries.

It is a logical move for such a large company. But a report out yesterday (30 January) suggests it is also a harbinger of larger changes in Coca-Cola and PepsiCo's relationships with their bottlers.

In yesterday's study, analyst Rabobank claims that “significant M&A activity within the global soft drinks industry” signals a new wave of refranchising for 2013. Deals such as PepsiCo's partnership with Tingyi in China, which saw the US company sell all its Chinese assets for a share in a JV with Tingyi, and Coca-Cola's link up with Saudi Arabia's Aujan Industries, give the soft drinks giants exposure in new markets while allowing them to focus on core brand building and marketing, the report said.

FEMSA's acquitions are part of the same trend - a sign of Coca-Cola looking to "shift bottling assets to strong franchise partners", according to the report.

Will this year see the two soda companies offload their bottlers?

If so, it would be a sharp turnaround in strategy for PepsiCo, who just two years ago took back two of its large North American bottlers, Pepsi Bottling Group and PepsiAmericas. In the same week, Coca-Cola announced it would acquire the North America operations of Coca-Cola Enterprises (CCE).

The reality, however, is less about a trend towards refranchising than Coca-Cola and PepsiCo managing risk in different markets. 

Melissa O'Connor, an analyst with Sanford Bernstein, calls the Tingyi co-operation an “offensive play” that saw PepsiCo link-up with a local partner that better understands the market. The buying of franchises in the struggling North American market, however, allows parent companies to fix them up before selling them back on.

A key test of Coca-Cola's bottler ambitions will come in May, when CCE's option to buy Coca-Cola's German operations runs out. According to O'Connor, Coca-Cola is keen to sell, though whether CCE will want to buy a unit in such a tepid market is debatable.

What will likely happen, says O'Connor, is that the two companies form a joint-venture, giving CCE the assets and allowing Coca-Cola to take the unit off its books. This could form the template for the fate of Coca-Cola's North American bottlers, though O'Connor said this is unlikely to happen this year.

But why would Big Soda want to lessen control of its extensive distribution network that has served it so well in the past? As O'Connor says: “They can spend all this money (on marketing and brand building), but if they don't control (the distribution) part of it, then it could be a problem.”

One answer can be found in the Rabobank report. “As CSDs face slower growth, the focus on non-carbonates has intensified,” it says. The traditional distribution networks were great for pushing brand Coca-Cola and Pepsi, but as those core labels start to fade, soft drinks companies realise future growth lies in new innovations, such as RTD teas and sports beverages.

Big Soda's retreat from its bottlers is really a return to the drawing board.