PepsiCo (PEP)
For folks in their thirties and forties, the Cola Wars were a big part of growing up in America. The battle between Pepsi (PEP: Charts, News, Offers) and Coke (KO: Charts, News, Offers) was a good-natured, but a serious struggle to see who could dominate the $60 billion soft drink market. Huge ad campaigns, logo merchandise and supermarket taste tests all conspired to compel the consumer to declare where he stood on the “Coke or Pepsi” question and determine which of the two companies would hold the major percentage of the carbonated beverage industry. It is nice to see that even in a new millennium, that particular rivalry is as strong as ever.
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Stock Analysis
For years, Pepsi-Cola and Coca-Cola produced beverage concentrate and syrup in bulk and then sold the product to licensed, independent bottlers to deliver that product. The result was several large bottling companies who worked with the soda manufacturers. PepsiCo contracted with Pepsi Bottling Group, Inc. (PBG: Charts, News, Offers) and PepsiAmericas, Inc. while Coca-Cola’s largest North American independent bottler is Coca-Cola Enterprises Inc. (CCE: Charts, News, Offers). In April of 2009, PepsiCo announced that it was finalizing plans to acquire its two bottlers by the end of February 2010. According to PepsiCo Chairman and CEO Indra Nooyi, owning the bottlers gave the company more flexibility in how, when and where beverages are delivered to the market. Nooyi said, “We can accelerate revenue growth and be more agile and flexible.”
Slowing sales, especially in North America have forced both companies to seek new ways to generate profits. Consumers are moving away from sugary, carbonated beverages to a diverse array of healthier alternatives such as bottled water, teas, juice and other non-carbonated drinks. Both Coke and Pepsi own major stakes in non-cola beverages, however, the diversity of products made it difficult to work with independent bottlers who were primarily set up to produce carbonated cola. Purchase of bottling companies makes it far easier for the brands to tailor man power, equipment and delivery to the exact specifications of the market.
At the announcement of the PepsiCo merger, Coca-Cola CEO, Muhtar Kent repeatedly stated that the system of independent bottlers is “still the best way to win in the marketplace”. Except, several months later, Coca-Cola has announced plans to make virtually the same move as PepsiCo. On Thursday, Coca-Cola indicated plans to acquire the North American portion of its largest bottler, Coca-Cola Enterprises Inc. Details of the almost cashless deal are that Coca-Cola will take control of Coca-Cola Enterprise’ bottling operations in North America – approximately 90 percent of Coke bottling in North America. Coke will also take on $8.88 billion of CCE debt and all of the North American assets and liabilities. As a part of the agreement, CCE will purchase Coca-Cola’s bottling interests in Norway and Sweden for $822 million and the rights to acquire Coca-Cola’s German bottling operations at some point over the next three years.
As a part of the deal, investors in Coca-Cola Enterprises will get $10 plus one share in the new bottling company for each share that they hold. Coca-Cola projects that the merger might save close to $400 million over four years in North America. It is obvious that the competitive advantages provided to PepsiCo by the merger forced Coca-Cola to make virtually same move. Despite CEO insistence that the independent manufacturer and independent bottler company setup did not need to be tweaked, Coke did ultimately made the right choice in regards to the bottom line. When companies cut costs and streamline operations, consumers and shareholders win.
Other News about Coca-Cola
- Coca-Cola to buy North America bottler – Coca-Cola (KO: Charts, News, Offers) consolidates in North America to better deal with the changing marketplace.
- Coca-Cola, Big Lots, Heinz in focus – Coca-Cola Enterprise (CCE: Charts, News, Offers) shareholders will receive close to $4 billion in cash.
- Coca-Cola unveils new market – Coca-Cola will commence sales and distribution in Bangladesh.
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Joshua Caucutt is long-time market follower and finance writer. Debt management, entrepreneurship and government economic policy are areas of emphasis. He regularly contributes to the Stock of the Day analysis.
both company’s have good market share, winner will depends upon the ability to infulrance the new markets, and there advertisement to make consumer loyal towards them
In some ways, both companies are winners . . .
yes this is a smart move for coke, but I honestly believe PEPSI has the competitive edge since they have the ability to CO-BRAND their products more effectively therefore enticing the consumer with an actual deal in the market!