Euromonitors report looks at M&A opportunities in the soft drinks industry

Euromonitor's report looks at M&A opportunities in the soft drinks industry

As soft drinks manufacturers emerge from the global recession, many face continued sales declines in developed markets due to saturation of key categories. As credit markets ease, new global competitors will continue to emerge as companies look beyond their domestic markets for growth. While large-scale transformative mergers are less likely, several smaller companies offer advantages of access to new geographies, brands, sales channels, or strategic partnerships. A report from Euromonitor this month looks to identify these opportunities for major soft drinks categories and explains the rationale and implications of potential future M&A activity.

Though large manufacturers devote considerable resources to brand and new product development, it can be difficult to anticipate what will resonate in the minds of consumers. Sometimes the white spaces of unmet consumer needs only become apparent after a company has gained experience in a local market.

Tastes also differ vastly in different regions of the world, and it is often a local company that can best take advantage of the knowledge about traditions, flavours, sources, along with routes to market that would be needed to succeed in a particular country.

Brands that have already become successful through the efforts of a smaller independent manufacturer in turn often hit a barrier of scale when they want to expand beyond local cities and carry their product to new markets. Expansion at this point often takes a great deal more expenditure. If a brand is not profitable quickly, which is often the case, it can put a smaller company at risk of insolvency.

A marriage with a larger player can thus benefit both parties, allowing the brand the time and resources to slowly grow beyond its local means of production, and providing a larger manufacturer with the innovation and exposure in a new category with a proven track record, without the costly research they would have to undertake on their own to achieve the same result.

Countries such as Thailand, South Africa, Chile, and Indonesia may not be the largest markets but can provide valuable experience in testing manufacturing capabilities, working with local distribution partners, and reaching new consumer groups more common to certain regions of the world. The lessons learned can then be applied to larger regional markets such as China and Brazil.

In mature markets, large acquisition targets are often non-existent, and even smaller, targeted brands can have limited potential. As a result, company activity is more squarely-focused on building existing brands beyond their existing channels and routes to market. Acquisitions can therefore be predicated on greater control of the supply and production chain, and especially on investigating new and innovative sales channels that have not yet been explored.

Often, local independent distributors or manufacturers have built success in a very specific channel, such as vending or home delivery. Economies of scale can be achieved through a partnership with a larger manufacturer with a large, ready-made portfolio of brands. Smaller distributors are often regional in nature and find it challenging to move to a national presence if their brands are produced in only one area. A large soft drinks manufacturer typically has production and warehouse capabilities across entire countries and regions, and can offer the means for further expansion that could not be achieved otherwise.

Sometimes an outright acquisition is prohibitively expensive or too risky for the launch of a product in an emerging category. In such cases, a strategic partnership with a large, established player can be advantageous. The soft drinks manufacturer gets access to existing retailer relationships and production capacity, while the partner gets to expand to a new category behind what is often a proven brand or company, without spending on research and development. This is a common strategy preferred by many of the world's leading brands and companies.

Other key findings in the report include:

Many of the largest soft drinks markets around the world are highly competitive, with many companies and brands trying to capture shares of categories dwindling in total sales. Expansion to new, high growth markets is needed to offset these declines.

Following the recession of 2008-2009, companies are finding it easier to secure financing and take on debt in 2010 in order to complete M&A activity. Potential deals are more likely to happen in this climate than 12 months previously.

When Cadbury Schweppes divested its drinks division in 2007-2008, it marked one of the few times a global soft drinks portfolio was put in to play. Gaining scale through large acquisitions is not always an available option.

Local players are often able to develop successful brands in key categories based on a more directly applicable knowledge of country-specific tastes, supply chains, and distribution channels. These should become the focus of incremental M&A moves.

There are limits to the reach of multinationals even in markets where their products have been successfully launched. Often, local players have established positions in second-tier cities or at lower price points that could be utilised through partnerships.

Some manufacturers have built success in limited product areas and regions. To better compete with global players, a strategic partnership in a new, smaller country can provide a test market for a longer-term goal of regional expansion.

An influx of new competitors from Asia as well as parallel industries such as alcoholic drinks and packaged food means that soft drinks manufacturers need to be ready to make deals when the opportunity arises, without distracting from immediate sales.

In order to take a smaller, more targeted approach to M&A activity, an understanding is needed of which markets and companies offer strategic advantages within specific soft drinks categories.