Even casual readers of the nation’s major newspapers and business trade press have probably seen articles on Coca-Cola’s recent—and newly accelerated—moves to divest itself of all of its bottling operations nationwide. By the end of 2017, Coca-Cola corporate plans to completely shed all corporate-owned bottling operations and focus exclusively on marketing, product development and its concentrate business. Concentrate is used to make bottle & can drinks and also to make the syrup used to make fountain drinks.
Generally speaking, this may be good news for Enliven hospital, restaurant and aviation clients who will be seeking new exclusive pouring rights agreements over the next few years. To understand why, we need to cover a bit of recent history first.
A Quick Look Back
Since its inception over 123 years ago, Coca-Cola corporate, just like PepsiCo, has almost always relied on a large network of franchisees nationwide that have the rights to manufacture and distribute bottles and cans of branded beverage products to customers. These franchisees own the manufacturing plants, trucks and employees that make and deliver all the company’s products to the stores, restaurants and other properties where consumers find them. These same franchisees, along with many other distributors, deliver Coke and Pepsi syrup for fountain drinks to these same customers, at very little mark-up.
Coke’s current bottling restructuring program represents a massive unwinding of the company’s $12.3 billion acquisition in 2010 of its largest franchisee bottler at the time, Coca-Cola Enterprises. At the time, Coke said that this deal gave it greater control over its business, but hurt its domestic operating margin, which fell to 11.4% in 2014 from 20.7% in 2009.
Simply put, it’s more profitable to be in the brand building and concentrate business than it is to be in the beverage manufacturing and distribution business. Coke corporate’s shareholders want to quickly return to the days of 20% operating margins.
Will Pepsi do the same?
We need to note here that PepsiCo also acquired its two largest franchisee bottlers, PepsiAmericas and Pepsi Bottling Group, back in 2009. PepsiCo recently asserted that it will not follow Coke’s recent move and divest its bottling operations.
While very similar operating margin discrepancies are at play between PepsiCo’s corporate business and its bottling business, PepsiCo is not under similar pressure today to divest its bottling operations because about half its overall operating profits come from its high-margin Lays snack food unit. However, we would not be surprised to see PepsiCo divest its bottling business at any point in the future if the company does begin to feel strong pressure to increase operating margins, for whatever reasons.
How this impacts you:
In the past, getting the entire bottler community to honor national agreements with large customers was one of the toughest issues facing Coke corporate. With the restructuring, Coke’s franchised bottlers are now likely to be compelled to honor nationally or regionally negotiated exclusive agreements with high-volume properties in their territories. This was a key reason for Coca-Cola’s restructuring. The new franchisee bottling agreements are, among other things, likely to have strong compliance language in them.
Additionally, if the restructuring does its job, Coke’s operating margins will increase and cash will be freed up for investment in further market share growth.
The combination of possible higher margins for Coke corporate and strong compliance language in the new franchisee bottler agreements should bode well for our clients. It means that increased investment in North American restaurant, hospital, and aviation customers is likely.
This increased investment by Coke means that Pepsi will have to step up their investment as well if they hope to retain your business. It also means that Coke has increased leverage within their system to do share-grabbing deals that they were once possibly reluctant or unable to do because of recalcitrant independent bottlers.
The bottom line is that, going forward, Coke corporate and its new franchisee bottlers will have greater economic incentives and capabilities to invest more into exclusive pouring rights agreements. PepsiCo, which is already committed to competing aggressively for exclusive business with all of Enliven’s clients, will have to raise the level of its investments in order to win its fair share of new business.
These are interesting times to be in our business, and we look forward to helping our clients gain the maximum possible benefits from all these beverage sector dynamics.
If you are interested in learning more about how an exclusive beverage agreement can benefit your organization, contact us now.