Coca-Cola Co turns bottler strategy upside down

Coca-Cola Co turns bottler strategy upside down

The news this morning (25 February) that The Coca-Cola Co is to buy the North American operations of its largest bottler Coca-Cola Enterprises (CCE) is a major u-turn for a firm that has staunchly maintained its operations are better left independent.

Just five months ago, following the announcement that PepsiCo had signed a deal to buy out its major bottlers, Coca-Cola Co moved to distance itself from the approach of consolidation with its own bottlers.

The soft drinks giant told just-drinks that it believed strongly that Coca-Cola Co is a business at a local level that is best left in the hands of a local distributor.

"We don't want to be in the business where we're owning and managing the bottlers outright,” he said.

Yet today, both firms announced a deal that they say will “strategically advance and strengthen” their partnership and “drive long-term growth” for all shareholders.

In what the pair say is a “substantially cashless transaction”, Coca-Cola Co. will acquire CCE's entire North American business, which consists of around 75% of US bottler-delivered volume and almost 100% of Canadian bottler-delivered volume. In addition, CCE will buy Coca-Cola Co’s bottling operations in Norway and Sweden for $822m.

So much for independence.

For many years The Coca-Cola Co, has operated separately from its principal bottling companies, the idea being that the separation maximised efficiencies and left them free to concentrate on brand-building.

That thinking has now clearly changed and it may have something to do with the seismic shift in the North American soft drinks market.

The performance dichotomy between mature and growing markets is certainly becoming apparent as soft drinks firms churn out their results.

Coca-Cola saw its case volumes in North America drop 2% in 2009.

And the story is a similar one for rival PepsiCo. Despite revenue growth in North America, the firm’s volumes fell in each of the region’s segments, with the exception of Frito-Lay, including a 5% volume decline in beverages.

For Cott Corporation, North America filled beverage case volume for the year declined 1.2% to 574.2m cases. Revenue decreased 0.3% for the region.

The firm has insisted it has “a long long way to go” to replicate Canada’s sales in the US.

For CCE, changes in consumer habits have put pressure on the bottling system in the US, which was traditionally geared toward manufacturing and selling carbonated soft drinks.

And as the industry moves from a heavy reliance on carbonated soft drinks into water, juice, teas and more "enhanced water," or bottled water with vitamins and flavours, many soft drink bottlers don't have the equipment to manufacture the noncarbonated drinks and so many are sold in small volumes.

When Nooyi launched that company's similar move last year, she said owning the two bottlers would allow it to accelerate revenue growth and be more “agile and flexible”.

Coca-Cola Co CEO Muhtar Kent said this morning that its new North American structure will create an “unparalleled combination” of businesses, which will serve as its “passport to winning in the world's largest non-alcoholic ready-to-drink profit pool”.

There’s no doubt that, coupled with PepsiCo’s deal, this move is certain to change the face of the North American beverage market for good.

For an update on the deal, following Coca-Cola Co's conference call, click here.

To view the main facts from today's deal, click here.