PepsiCo Inc assured investors this week that its recent bottler acquisitions would give it the muscle to retool its North American distribution system, but it still faces small hurdles. Some analysts wonder how the food and beverage giant can make sweeping changes, given that one-fifth of its drinks volume remains in the hands of about 100 small, independent bottlers.
"You have to bring those bottlers around to service national retailers like Wal-Mart and 7-Eleven," said ConsumerEdge Research analyst Bill Pecoriello. "You need those bottlers to cooperate." Last month, the world's No 2 soft-drink maker purchased Pepsi Bottling Group and PepsiAmericas, which controlled 75 percent of its North American distribution, for $7.8 billion.
Along with drinks PepsiCo already delivered itself, it now has responsibility for bottling and distributing about 80 percent of all its beverages sold in North America, from Pepsi-Cola and Mountain Dew to Gatorade and Tropicana juice. Coca-Cola Co is working on a similar deal that should give it control of 90 percent of its North American volume.
Aside from cutting costs and speeding innovation, Pepsi and Coke expect the consolidation to give them more control and flexibility when it comes to servicing retailers. A big selling point for Pepsi's deal is that the company can now present one face to customers. Until now, stores have often dealt with one associate from the bottler, which delivers sodas and other drinks directly to stores, and one from PepsiCo, which already delivers Gatorade and Tropicana through warehouses.
But getting the independent bottlers to agree to changes in how they operate will be a challenge. "PepsiCo will have to continue to carefully manage relationships with independent bottlers if it wants to make significant changes in its route to market for national retailers," said John Sicher, editor of industry publication Beverage Digest.
PepsiCo shares were flat in Friday afternoon trade at $66.55. The shares have gained 6.5 percent since the end of February when its acquisition closed. HSBC Securities analyst Lauren Torres said Pepsi's challenge with its small bottlers is limited in scope, though worth noting.
"It could involve either Pepsi and/or Coke paying up for other bottling assets," Torres said. "Or if they can't ... it requires them working with that 10 to 20 percent to accomplish what they want." In addition, she said, it could affect how both beverage giants think about working with retailers if other bottlers are acting more independently.
W.P. Stewart & Co portfolio manager Jim Tierney, a PepsiCo shareholder, said he expected the company to succeed in making the changes since they are likely to benefit all the bottlers. "When they're setting policies ... they're not going to do something that will disadvantage the 80 (percent) and likewise disadvantage the 20 (percent)," he said. "They're going to operate them in sync." PepsiCo has not said exactly what changes will come, but Sicher thinks a shift toward warehouse delivery of multipack bottled water to some retailers could be on the agenda.
"Bottlers don't make much profit selling pack water to supermarkets, club stores and mass merchandisers," Sicher said. "It's hard for the Coke and Pepsi bottlers to compete against private-label and Nestle brands, which are warehouse-delivered." The largest independent bottler is Pepsi Bottling Ventures, based in North Carolina. The privately held company has 28 facilities that mostly serve the Carolinas, Idaho and New York's Long Island. Coke and Pepsi typically sell flavoured syrup, or "concentrate" to bottlers, which add liquid and sweetener, and bottle and distribute the drinks.
Disagreements can arise. In 2008, bottler Coca-Cola Enterprises Inc raised beverage prices more than agreed on, in an effort to make up for soaring commodity costs, even though it knew the increase would hurt sales. Coca-Cola cut funding to the bottler, its largest, and raised concentrate prices more than expected, leading Coke Enterprises to cut its full-year forecast.
Eric Foss, who runs PepsiCo's new bottling unit, said he was "highly, highly confident" the company would be able to "speak with one voice" for much more than the 80 percent of North American distribution under its charge. "Most customers will tell you, 'If you can get me over the 90 percent hurdle, then I can deal on the margin,'" he told reporters at the company's two-day analyst and investor meeting at Yankee Stadium this week.
He mentioned increased collaboration between PepsiCo and the bottlers, as well as the potential for more bottler acquisitions in what has been an ongoing consolidation. "If there are interested sellers, I think we're interested buyers," he said. Foss noted, however, that he didn't think buying more bottlers was a priority for PepsiCo.
Hugh Johnston, a PepsiCo veteran who will soon take over as chief financial officer, said relations with the independent bottlers were "very, very smooth." An executive from one independent bottler, who requested anonymity because he was not authorised to speak on the matter, said he expected that any big changes would be preceded by negotiations, but that so far, it has been "business as usual."