In the Spotlight – Anheuser Busch/PepsiCo
A joint procurement deal between PepsiCo and Anheuser-Busch this week has seen the two drinks giants form a global alliance to purchase indirect goods and services in the US, from technology hardware to travel.
The alliance between the soft drinks giant and the US unit of the world's largest brewer has however, raised questions as to how much further the fruitful partnership may take them.
While the deal allows both companies to purchase goods and services more efficiently and at competitive prices, the partners have emphasised that the agreement contemplates no additional forms of cooperation between PepsiCo and Anheuser-Busch InBev.
Stifel analyst Mark Swartzberg believes the move validates speculation that the companies have reason to cooperate beyond their existing relationship in Brazil (ABI is Pepsi's largest independent soft drink bottler, assuming PepsiCo completes its planned acquisition of Pepsi Bottling Group).
"We think it is also reasonable to imagine additional cooperation between the companies, ultimately. Areas that come to mind are joint purchasing of key commodities (eg, aluminium) and sharing of distribution," Swartzberg said.
However, PepsiCo spokesman Dick Detwiler has stressed that the two companies are focused purely on jointly purchasing indirect goods and services and that the deal won't involve commodities.
A-B InBev added that the agreement is nothing more than joint purchasing in the US for goods and services for use primarily in US operations. "No further joint activities are being contemplated at this time", the brewer said.
The companies have given no details as to the expected cost savings from the arrangement, mirroring similar global cost-cutting deals completed by Anheuser-Busch InBev in the past year.
The company yesterday blew its US$7bn disposals target out of the water, completing its mission to help pay off the A-B acquisition by refocusing the company on core businesses and markets.
Matthew Webb of Cazenove Securities told the Financial Times that any savings through the deal were likely to be "helpful" rather than "material".
The deal "may lead to further suggestions that the two companies may ultimately merge, or at least develop closer links", he said.
And so the pact with PepsiCo continues to raise questions about how the companies could collaborate even further, possibly taking advantage of their distribution capabilities.
Before the InBev take-over, PepsiCo had separate relationships with both InBev and A-B.
A successful partnership however, could prod rival Coca-Cola Co. - whose view is to focus solely on soft drinks - to seek its own acquisition in a countermove, experts have suggested.
Credit Suisse analysts have highlighted the strategic challenge posed to Coca-Cola in Mexico, where its main Latin American distribution partner, FEMSA, has reportedly discussed a sale of its beer business with both SABMiller and Heineken.
This could create a potential opportunity for Coca-Cola to establish a counterbalancing alliance with SABMiller, the second-largest global brewer, some have suggested.
Credit Suisse analyst Carlos Laboy says the PepsiCo-A-B procurement deal "should give Coca-Cola another reason to pause and ponder the wisdom of distancing the red [Coke] system further from beer".
"Coke's legacy of objection to beer and soft drink integration is obsolete. It defies the reality of the marketplace, logic and the fact that PepsiCo and ABI keep getting closer together," he told the FT.
Swartzberg believes Tuesday's news is not an occasion for "material near-term earnings upside", but he does consider it a medium-term positive in itself and that the partnership unveils increased optionality for PepsiCo in its US snacks and soft drinks business.
As for catalysts, Swartzberg said he sees "several", including improving margin and absolute EPS trends, along with potential for sequentially improving volumes as consumer headwinds moderate and business reinvestment increases.
This was echoed on Tuesday as ABI's US-listed shares rose 4.2% on news of the collaboration, fuelled in part by what Edward Jones analyst Jack Russo called market speculation that the deal could set the stage for an eventual takeover by Pepsi.
However, Russo cautioned against reading too much into the deal.
"I wouldn't look for anything right away and I just don't know at the end of the day if it makes a heck of a lot of sense, just because there seems to be some untapped growth potential in (emerging) markets," Russo told Reuters, noting a growing middle class is increasingly able to buy beer and soft drinks.
"On the other hand, Wall Street is talking about these sorts of things," he said.
Reuters columnist Alexander Smiths believes the plan is not without its risks.
"Firstly, the move will undoubtedly antagonise suppliers. Secondly, the longer and more entrenched such a relationship, the more inter-dependent the two parties become. Disentangling themselves could be costly.
He added: "Even if the savings on each contract are modest, the risks seem worth taking for A-B and Pepsi. The overall effect could be significant at a time when companies are all vying to squeeze costs out of their businesses. Rivals should pay close attention."
The UK soft drinks market grew by 2% in value in 2009, enough for sales in the on-trade to climb ahead of spirits to take the number two spot behind beer....
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