Why Coke isn’t buying up its Bottlers

In an article in Business Week:

A day after PepsiCo announced a structural revamping with plans to acquire its two largest bottlers, Coca-Cola’s (KO) chief executive dismissed talk of a similar move for his company. “There’s no one road that leads to Rome,” Muhtar Kent said in an Apr. 21 telephone interview after the beverage giant released weak earnings. “This business has been built on the power of the franchise model since 123 years ago. It is the best model when it works well. At times when it’s challenging, it’s not because of the model, but the people trying to make it work.”

Kent’s message of long-term value growth lacked the drama of PepsiCo’s (PEP) plan to purchase its two largest bottlers, Pepsi Bottling Group (PBG) and PepsiAmericas (PAS), and to overhaul its packaging this year. But Kent says he remains optimistic and that Coke is gaining market share despite the poor global economy and sticking to its long-term strategy. Although significantly slower than last year, volume was up 2%, while income was off 10% to $1.36 billion. Wall Street was unimpressed; Coke shares dipped 2.2%, to 43.35. So is Coke flat-footed or ahead of the curve? Kent wouldn’t give a definitive “no” when asked whether Coke might buy its major bottler, Coca-Cola Enterprises (CCE), but repeated that he feels the current arrangement of separate bottler and brand is “the best way to win in the marketplace.” Shares of the Atlanta-based bottler surged on Apr. 20 on speculation that Pepsi’s plan would spur Coke to make a similar bid, but then retreated by 3.5% on Tuesday.

Joint Pricing Decisions
Kent says the relationship between Coke and CCE hasn’t been stagnant. Since he became president in 2005, he’s been working to improve that system, making pricing more transparent to bottlers and thus reducing friction. Almost 90% of bottlers are now participating in a program in which Coke and the bottler agree to adjust pricing jointly in response to market conditions or specific occasions, like holidays, for a limited period of time in order to maintain profits. Other initiatives, including some coordination of sales calls, have reduced costs, one of the rationales Pepsi gave for its move. “We haven’t ended up here with a magic stick,” Kent says. “We’ve been working at this very hard every day.” Earlier he told analysts: “All our bottlers are executing with much more precision and much more passion.” Not having billions in capital tied up in a bottler certainly leaves money to spend on growth. Coke had a major setback in that arena a month ago when the Chinese government rejected its $2.4 billion bid to acquire the country’s leading pure juice brand, China Huiyuan Juice Group. Coke is pushing forward, however, and says noncarbonated beverage sales in the market were up 25% last quarter, led by products like Minute Maid Pulpy. The Atlanta company will invest a further $2 billion in its Chinese operations over the next three years. The one major acquisition Coke has made in recent years, the $4.1 billion purchase of Vitaminwater maker Glaceau in 2007, is paying off, Kent says. Coke has already rolled Vitaminwater, now a $2 billion brand, out to Australia, Britain, and Mexico. By the end of this year, it will be in 14 or 15 markets. “Glaceau was an absolutely critical strategic acquisition,” Kent says. “We’re seeing great momentum.”

Coca Cola has prided itself on being a franchise model. IT has been operating on the same model for 123 years. Coca-Cola was founded in 1885 so this model was adopted soon after the company was started. Pepsi was formed 13 years after Coca-Cola. I believe the model that Coca Cola has been following for 123 years has been working well. However I believe that this franchise model will not always work for everybody. PepsiCo is doing what they beleive will work best for their corporation while Coca-Cola is doing what is best for them. It is also very different for Coca-Cola to buy its bottlers then Pepsi because of the fact that Pepsi is already a more diversified company. Pepsi is involved in more than the beverage segment. I believe that the Coca-Cola’s CEO is working on the following principle: “if its not broke don’t fix it.”