After months of preparing for a smooth integration of its North American bottler acquisition, Coca-Cola Co can begin talks with independent bottlers about how they can all benefit from the deal that will help change how most soft drinks in North America are sold.
The world's largest soft-drink maker closed on the purchase on Sunday of the North American operations of Coca-Cola Enterprises.
The deal gives Coke direct control over about 90% of its North American sales volume. Like PepsiCo Inc, which did a similar deal earlier this year, Coke sees the consolidation of its bottlers resulting in lower costs, more flexibility and faster innovation.
The deal brings the North American bottling business into the Coca-Cola Refreshments unit, which also includes a company-owned bottler in Philadelphia and Coke's fountain and juice businesses. This allows, for example, one sales associate to service retail customers, instead of one from the bottler and one from the company.
For the past several months, Coke was focused on completing the deal and preparing for a smooth integration, Chief Executive Muhtar Kent said in an interview on Sunday. Now that the deal has closed, Coke can begin talking to the 70 or so smaller bottlers that remain independent about improving the overall business.
"Going forward we'll certainly be engaged in more discussions with our bottlers," Kent said. "I think every one of those bottlers is going to benefit."
Even though Coke and Pepsi now have direct control over the lion's share of their drinks sold in North America, they need the agreement by the smaller, independent bottlers if they want to make sweeping changes for national accounts.
Kent declined to say if Coca-Cola would be open to acquiring more small bottlers, or to discuss what particular changes might be made in the company's distribution network.
"This is not about one move or two moves," he said, but acknowledged that changes in existing distribution networks would be one tactic Coke plans to use to boost performance in North America, where sales have slowed as consumers cut back on bottled beverages due to a weak economy and changing tastes.
Coke expects the deal to result in savings of at least USD 350 million over the next four years. It also said it remains committed to repurchasing at least USD 1.5 billion in stock in 2010. So far it has not bought back any.
Last month, Pepsi said it would start distributing its Gatorade sports drinks straight to stores, the first large move following the purchase of its bottlers.
North America vs Western Europe
Once Coca-Cola Enterprises' North American business becomes part of Coca-Cola, the bottler which buys drink concentrate from Coke and bottles and distributes the drinks will operate solely in Europe, where some markets are still behind the United States on the road to economic recovery.
"There is no question that the United States is still not out of this tunnel," Kent said. "It is closer to the exit of the tunnel than some Western European markets, but the US consumer is still somewhat confused."
Therefore packaged goods makers have to be very careful when pricing their wares so consumers will see enough value in them to make purchases, Kent said. The problem recently though, is that costs for raw materials such as sugar and dairy have gone up, meaning that manufacturers must raise prices to maintain their margins: A move that many are afraid to make for fear of losing sales.
"You can't indiscriminately increase pricing in this environment, now or in 2011," Kent said, adding that the deal should help Coke better align its prices and package sizes to consumers' needs, while protecting its market share and profits.
"This deal will allow us to do that, not necessarily by raising price but by adding more value," Kent said.
The smaller Coke Enterprises, which will keep its Atlanta headquarters and its listing on the New York Stock Exchange, affirmed its long-term financial goals, which call for 4 to 6% revenue growth, 6% to 8% growth in operating income and a high single-digit increase in earnings per share.
In 2011, earnings per share will likely exceed those targets due to anticipated share buybacks, the company said, adding that it will give a more detailed 2011 outlook in December.
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