COKE GAMBLES ON MARRIAGE Grocery behemoths Coca-Cola and P&G have turned to backscratching. Is this really a multinational dream team, ask Helen Gregory and Ed Bedington The joint venture between Coca-Cola and Procter & Gamble illustrates the groups' desire to put some fizz into their soft drinks portfolio. Indeed, the dimensions of Coke cans and the Pringle tubes are so similar ­ as is their shelf-life ­ that the firms reckon the brands will make a good fit because P&G can use Coke's existing distribution system. The food and drink giants hope to become the global leader in non-carbonated drinks and snacks by pooling their brands and resources. The new standalone enterprise brings together P&G's Sunny Delight, Punica and Pringles with Coca-Cola's Minute Maid, Hi-C, Five-Alive, Frutopia, Cappy, Kapo, Sonfil and Qoo with the aim of leveraging these brands and launching new ones. And it all seems very timely as recent consumer figures show carbonated drinks are losing share to non-carbonated beverages as consumers switch to healthier alternatives and drinks. According to analysts, the carbonated market is set to grow by up to 2% this year, while the non-carbonated market will leap by 10%. Other drinks companies have already cottoned on to this, with PepsiCo recently buying the world's leading sports drink Gatorade. Despite the fact that Coca-Cola markets more than 230 products in 200 countries, and P&G sells 300 brands in 140 countries, both have seen sales growth slow over recent years. In a nutshell, the new venture promises to give Coca-Cola an entry into the snacks market, while P&G is in line for extra distribution potential. Coca-Cola's prowess in worldwide distribution, merchandising and customer marketing, is looking for a happy marriage with P&G's research and development skills. Coke desperately wants new technologies to meet new consumer needs, especially in the healthy drinks area. And P&G looks likely to fit the bill as it is a global leader in research and development and applies for about 3,000 new patents each year. It has a wide range of new brands under development, including NutriStar which contains GrowthPlus, a proprietary iron, Vitamin A and iodine fortification technology which promises taller, stronger and smarter kids; Eclipse, a vitamin-fortified chilled fruit drink for teens and young adults; and Spire, a juice-based energy drink based on P&G's proprietary method of delivering "sustained alertness". Coca-Cola has access to 16 million outlets globally which means that in the United States alone, Pringles will increase its outlets from 150,000 to 1.5 million with the potential to distribute to 16 million stores. The move is Coca-Cola's fourth joint venture announcement this month. It has bought US iced coffee firm Planet Java, restructured its ready to drink tea and coffee venture with Nestlé, renaming it Beverage Partners Worldwide, then set up a new Asia Pacific link with San Miguel for fruit juice and water. It also appears to be making a defensive strike against Schweppes and its massive Motts juice and flavourings company in the US. Coca-Cola chairman/CEO Doug Daft called the venture the "perfect combination" and said it could create more health/wellness products faster and more efficiently than either group on its own. Meanwhile P&G president AG Lafley said it would allow Coca-Cola to focus on its carbonated drinks and P&G to focus on other sectors like fabric and home care and baby care. "P&G has evaluated all the options including selling off outright and we believe retaining an interest is the best route," he said. However, shares of Coca-Cola fell 6% on announcement of the news and US analysts questioned whether the company had the ability to reach its longstanding sales volume target of 7% to 8% growth per year. In the UK the City was receptive to the move. Consumer staples analyst at Goldman Sachs, Mark Lynch, said growth had been lacklustre in both companies' core brands and that the tie-up was a good alternative to selling brands off at a dilutive value. "It's a sensible strategic deal and we would expect to see greater visibility of the brands and enhanced distribution as a result. People like Golden Wonder and Walkers, along with the fruit juice firms, should see more competition." Another drinks analyst said Coke needed to get into non-carbonated soft drinks and that Sunny Delight had proved attractive to its executives. But he added that Procter & Gamble looked likely to get the most out of the deal. "It won't have much of an impact on the UK market initially, but we will gradually see more brands introduced here." Richard Hall at specialist drinks consultancy Zenith said PepsiCo had stolen the lead in the non-carbonated drinks market ­ especially in the US ­ by recently buying world leading sports drink Gatorade, lifestyle drink SoBe, Tropicana fruit juice and Aquafina water. "Coke needs more fire power," he said. "There are acquisition targets but most are not of sufficient scale so joint ventures have to form an important part of Coke's equation. However Coke's great strength has always been its focus on core brands ­ it will need to avoid too much clutter in its portfolio." Hall added: "The holy grail may be nutritional beverages which most people expect to achieve major long-term growth and where PepsiCo may have difficulty in matching P&G's research capabilities." Most of the venture's initial impact will be felt in the US, with reverberations not felt in this country for some time. Coca-Cola's West European communication manager Jonathon Chandler said that locally, the venture would have to be approved by regulators so it would be months before the deal was consummated. "Any local decisions as regards the UK will then be taken by the company as it emerges. "However we believe it is a great opportunity for the whole of Coca-Cola and the new company will offer new prospects to everyone." Sally Woodage, external relations manager for P&G in the UK, added: "We believe the new company demonstrates both companies innovative approach to business. "Both companies will benefit from this launch. We will be adding together the strengths of both organisations to bring innovation to the market. "We believe the line-up of products is the right portfolio for the new company. The brands are very important, they are all very big brands, although not all in the same country. We want to develop them and the new company will be able to build on both companies' existing global knowledge to help them grow. "We expect to see Pringles sales double and expect to see growth increase globally. The new company will be looking at all opportunities around the globe. "Initially it will be looking to build on existing strengths and then will look for gaps in the market." She said the issue of distribution in the UK was still to be decided. "We both have excellent distribution systems. We will look at the strengths and weaknesses of both and develop the best system, but in terms of what the structure will be like, at the moment, I don't know." The pressure could now be on Coca-Cola and P&G's rivals, although it is doutbtful that the venture will drive down the price of drinks generally. Tropicana managing director Gordon Bromley said the fact that big companies like Coke and P&G were focusing on juice and juice drink opportunities only demonstrated how much growth potential there was. "All competition is good ­ it's very exciting," he added. THE GENERATION OF SYNERGIES The new firm will be a limited liability company with its own board of directors, made up of two executives from The Coca-Cola Company and two from P&G. It will have 15 manufacturing facilities and employ 6,000 employees, manufacturing, distributing and marketing brands. Coca-Cola veteran Don Short will be the new CEO, while the CFO and other key managers will come from P&G. Each company will own a 50% share in the new firm, which is yet to be named. It is expected to make a profit in the second year, with sales forecast to grow from $4bn to $5bn within that time using mainly existing brands. It is expected to generate synergies ­ both revenue and cost savings ­ of about $200m pretax earnings annually by 2005. As part of this, Pringles revenue through expanded distribution will grow to $120m, improved distribution and merchandising of Sunny Delight will save $30m and lower manufacturing and distribution expenses along with combined purchasing operations will save $50m. The executives said the focus would initially be 60% in the US, and 40% international. And as part of this, there will be a 70% focus on drink and 30% on snacks. {{NEWS }}

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