Total Value Could Top $12 Billion; Strategic Shift Driven by New Consumer Tastes
February 25, 2010
By DANA CIMILLUCA, BETSY MCKAY and JEFFREY MCCRACKEN
In an earlier posting this year (http://marketdrivengrowth.blogspot.com/2010/01/why-vertical-integration-is-making.html), Rita McGrath highlighted that vertical integration is making a comeback as companies compete on offering consumers unique experiences or meeting their specific needs. In a dramatic departure from a VERY successful strategy, Coca Cola is forward integrating into bottling (actually making and distributing the final drink product) in the U.S. vs. selling the syrup and marketing the global brand and product.
"In a strategic about-face driven by big changes in consumer tastes, Coca-Cola Co. was nearing a deal late Wednesday to buy the bulk of its largest bottler, according to people familiar with the matter.
As part of the deal, Coke would buy Coca-Cola Enterprises Inc.'s North American operations, the people said. The rest of the bottler, which consists of operations in several European countries, would remain independent and acquire Coke bottling operations in Scandinavia and Germany……
……A Coke deal would mark a major change in the strategy the company has pursued for decades—setting up large, independent bottlers run separately from Atlanta-based Coke itself. It would also come as PepsiCo is about to close acquisitions of its two largest independent bottlers, putting pressure on Coke to make a similar move to gain the same competitive advantages PepsiCo stands to reap.
The anchor bottler strategy worked well for Coke in the 1980s and 1990s when consumers were drinking increasingly more soda that was shipped in high volumes. But since then, the interests of Coke and its bottlers have diverged, as the drinks giant seeks to adapt to consumers moving away from soft drinks to more niche, noncarbonated offerings.
Owning a bottler would give Coke flexibility. It could decide to distribute via its bottling system, through which products are delivered directly to stores. Or it could deliver drinks through warehouses—cheaper and preferable for products too small or not profitable enough to distribute cost effectively through the more expensive "direct store delivery" system……
…..Any deal could prove risky. A marketing and branding company, Coke could be distracted by taking on bottling drinks in a huge market. The net effect on its balance sheet is unclear: It would not only absorb bottling assets, but also potentially spin off others that it currently owns in Scandinavia and Germany as part of the deal. Coke owns several of its bottlers around the world, also including bottlers in Brazil, India and China.
For Coke, the deal would represent a partial reversal of a strategy it pioneered in the mid-1980s. Worried about losing control over its disparate bottlers,…...
…..That bottling system allowed Coke to build a network of anchor bottlers around the globe, maintain a powerful influence with large stakes, and generate an additional profit stream by buying up small bottlers and then selling them to the new anchor bottlers. But by the late 1990s, some of the big bottlers also became a problem for Coke, saddled with debt from acquiring small bottlers and new equipment.
Broader changes in consumer habits have also put pressure on the bottling system in the U.S., which was traditionally geared toward manufacturing and selling carbonated soft drinks rather than the types of drinks that are growing faster these days, like "enhanced water," or bottled water with vitamins and flavors.
When PepsiCo Chairman and CEO Indra Nooyi launched that company's similar move in April, she said owning the two bottlers would give it the flexibility to decide how its beverages should be distributed.
As the industry moves from a heavy reliance on carbonated soft drinks into water, juice, teas and other noncarbonated drinks, some soft-drink bottlers don't have the equipment to manufacture the noncarbonated drinks. "