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Coke unveils plan to buy most of its largest bottler

By Guy Montague-Jones , 25-Feb-2010

Coca-Cola has revealed plans to buy the bulk of its largest bottler following a similar move from rival PepsiCo last year.

In an acquisition worth over $10bn including equity and assumed debt, Coke has announced its plan to buy the North American operations of its bottler Coca-Cola Enterprises (CCE).

At the same time Coke intends to sell its Swedish and Norwegian bottling operations to CCE and has obtained the right to sell its German bottling business to CCE as well. The European side of CEE will therefore be entirely separate from Coke. For full financial details, click here to read the Coca-Cola announcement.

The deal is a major about-turn in strategy for Coke.

When PepsiCo announced plans to buy its bottlers (Pepsi Bottling Group and PepsiAmericas) in a $7.8bn deal last October, Coke CEO Muhtar Kent said separating bottling from brand management is “still the best way to win in the marketplace.”

Irrespective of the apparent u-turn, there is widespread support for a fusion of Coke and CCE among analysts.

Analyst reaction

John Michalik, director of research at beverage market intelligence firm Canadean, told BeverageDaily.com that a deal is a positive move for the business.

Michalik said Coke had spun off its bottling in 1986 to improve its balance sheet and become a “lean, mean, and more focused business”. Hope Lee, a senior soft drinks analyst at Euromonitor, said the original split had also fitted into a strategy of international expansion that meant focusing on building the Coke brand across the globe.

So what has changed? Michalik and Lee agreed that branding has become less important. Now Coke needs to get better at responding to changing consumer preferences and quicker at getting products to market. In sluggish developed markets, Coke is also eager to cut costs.

By acquiring CEE, Coke will be able to cut away excess layers of management in sales and marketing.

Eliminating role duplication will bring substantial operational savings. By acquiring its bottler in North America, Coke expects to generate operational synergies of $350m over 4 years.

A leaner management structure should also enable to Coke to be more responsive to market changes and quicker at getting products to market.

As things stand, Michalik said when Coke wants to develop a new product it has to persuade CEE to make the product and then persuade retailers to stock it. Bringing bottling and branding together cuts out the first pitching step in this process.

Michalik also said the interests of Coke and CEE were not always aligned. Coke wanted to maximise volume of syrup sold while CEE was more concerned by profitably. Such a situation had the potential to cause conflict and slow down decision making. Now Coke will have more control over what its finished products are and look like.

Lee said a more unified organisation with fewer management levels should also be able to get closer to consumers, and become more responsive to the trends that may be seen from the manufacturing point of view.