Review of the Year 2013 - Part III: Soft Drinks
By Andy Morton | 17 December 2013
Diet sodas were under pressure in the US
It's that time of year when just-drinks takes a look back at the past 12 months. Here, in part three of our final management briefing of the year, Andy Morton, takes a look at the major soft drinks stories of 2013.
It was a year in which the soft drinks industry, instead of looking outwards to mergers and acquisitions, turned its gaze inwards. Structural changes were firmly in vogue, from simple cost-cutting plans to root-and-branch upheavals of entire operational systems. And, while there were still a few purchases here and there, most companies kept their powder dry, perhaps in wait for less rainy days.
Nowhere was the move away from M&A more in evidence than with Britvic. Twelve months ago, as 2012 drew to a close, the UK firm was busy expunging the memories of recalls and profit falls with plans to merge with AG Barr. Today, that merger lies in tatters. Nevertheless, company executives will toast the new year with sales and profits firmly back on the up.
How did that happen?
Well, if those profits continue to climb, Britvic may want to thank the UK's Office of Fair Trading, which gave the company pause for thought when it referred the merger to the Competition Commission in February.
It was from that moment that Britvic - previously firmly in favour of the merger - seemed to shy away from a partnership with its Scottish rival. By July, when competition watchdogs gave the green light to the deal, Britvic had announced a radical cost-cutting programme and chairman Gerald Corbett was bullishly stating that “Britvic's prospects as a stand-alone company are bright”.
In the end, even a sweetened offer from AG Barr to finalise the deal was not enough for Britvic and the merger was abandoned on 11 July.
The biggest example of a structural reorganisation in soft drinks this year came from the sector's largest player. In April, the Coca-Cola Co announced the launch of a new bottler model in the US that granted expanded territories to five of its bottlers. Coca-Cola CEO Muhtar Kent said at the time that the move would create a “coast-to-coast” operation managed from one point, while one analyst called it “a major step in the transformation of (Coca-Cola's) US production and distribution”.
Further details of the plan have yet to fully emerge. However, in September, one of the five bottlers, Coca-Cola United, said it had created the position of chief commercial officer to prepare for the territory expansion.
Then, this month, Coca-Cola said it is returning its North American operations to separate business and bottler arms just 17 months after they were integrated into a wider Americas unit. According to Kent, the move will “accelerate the refranchising of our bottling system” in the US.
All of which dovetails nicely in with a Radobank report in July that forecast a wave of refranchising in soft drinks that would allow companies like Coca-Cola to "shift bottling assets to strong franchise partners".
Across the Big Soda divide, PepsiCo was wrestling with a few structural issues itself. But, unlike with Coca-Cola, the pressure for change was coming from outside the company rather than inside. It started in July, when so-called “activist investor” Nelson Peltz called on PepsiCo to merge its snacks business with rival Mondelez. This was a renewal of Peltz's call for PepsiCo to split its snacks from beverages and form separate entities. It was also the start of concerted pressure by Peltz on his fellow PepsiCo investors to bring management around to his way of thinking - that the fast-growing snacks business could better realise its potential if shorn of the more sluggish beverage unit.
PepsiCo's CEO Indra Nooyi, however, stood firm, saying in July that every part of PepsiCo “is functioning well” and there was no need for M&A.
Peltz has since gone quiet, but his actions shone a light on PepsiCo's beverage business in the US, which has been hit hard by a continued slowdown in the CSD category. Volumes continue to drop, and in May Nooyi said the industry has just three years to win back US consumers before they abandon CSDs altogether.
PepsiCo has placed its faith in a new wave of CSD sweeteners and flavourings that Nooyi said in February could “alter the trajectory of the cola business”.
The only problem is that, since then, little more information has come out about these mysterious innovations. Also, this year has seen the CSD slowdown spread to diet beverages, suggesting that, if the new sweeteners are aimed at demand for lower calories, sugar might not be the only health concern on consumers' minds.
Aspartame returned to the spotlight this year, with Coca-Cola launching a US ad campaign to tackle health concerns around the artificial sweetener. The move may have been prompted by the forementioned diet soda slowdown, although one analyst suggested the ad could backfire as it “may be giving pause to consumers who hadn't been concerned before”.
That would mean more good news for stevia producers, who were already enjoying a banner year for the naturally-occurring sweetener, with a number of new product launches. In March, Coca-Cola said it was relaunching its Sprite brand in the UK as a new low-calorie product using stevia, while in June, the company unveiled the stevia-and-sugar sweetened Coca-Cola Life. By September, stevia producer PureCircle was forecasting a sales boom.
There wasn't a complete lack of M&A activity in 2013, and a few big-money swoops kept investors happy.
In September, Suntory Beverage & Food agreed to buy the Lucozade and Ribena brands from GlaxoSmithKline (GSK) for GBP1.35bn (US$2.11bn) after GSK put them up for sale in April. Analysts said the price seemed to be on the high side, but Suntory could afford it after a successful IPO in Japan raised close to US$4bn. Despite the heaving warchest, Suntory later announced it is taking an M&A break.
Coca-Cola FEMSA was busy snapping up smaller beverage companies, such as the agreement in July to buy Brazilian beverage maker Companhia Fluminense de Refrigerantes for US$448m.
In May, it completed its takeover of Mexican bottler Grupo Yoli in a deal valued at $700m, while in September, the company prepared the takeover of independent bottler Spaipa Industria Brasileira de Bebidas.
Meanwhile, Coca-Cola was in line to take full ownership of UK smoothie maker Innocent Drinks.
One of the strangest stories of the year came in August, when PepsiCo said it had agreed to pay up to US$75 to US consumers who had bought its Naked Juice brand in the past six years up. The deal, which required proof of purchase, came after a lawsuit that claimed Naked Juice's ingredients were “synthetic”, and not “natural” as advertised in its marketing. PepsiCo said at the time that it could end up facing a $9m pay-out over the lawsuit.
Jones Soda, a company that just a few years ago was making multi-million-dollar losses, provides the happy-ever-after ending for soft drinks in 2013. This year, the firm rediscovered its groove, thanks mainly to some stringent cost-cutting measures installed by CEO Jennifer Cue, who in an interview with just-drinks in August blamed a rash of badly misjudged marketing initiatives and spiralling salaries for the profits meltdown. In the past two quarters, the company has finally neared break-even, and Cue is confident next year will see a return to the red.
Here's proof, then, that, with sensible management and clear goals, it is possible for even the most underperforming companies to turn a profit in the soft drinks industry - and a lesson for all in the year ahead.
For reviews of the other drinks categories, click here.
Global Carbonated Soft Drinks industry guide provides top-line qualitative and quantitative summary information including: market share, market size (value and volume 2008-12, and forecast to 2017). The guide also contains descriptions of the leading companies including key financial metrics and analysis of competitive pressures within the market.
Sectors: Soft drinks
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