Large beverage companies generally use their economies of scale to maintain market share and compete against encroaching micro-brands. When a small beverage company finds a niche market, as VitaminWater and Honest Tea did, the general trend is for one of the larger beverage companies to acquire them. Where there is competition in carbonated soft drinks, the major brands use their brand equity to keep most consumers loyal. When competition arrives in the form of small health drink companies, the story is different. Aside from packaging trends, demand trends are making healthier drink alternatives the increasingly popular choice for consumers. Accordingly, the major companies see it more cost effective to simply acquire the competition.[ "Mergers and Acquisitions Heat Up in Food and Beverage Industry." Logistics Consultants, Supply Chain Systems, Warehouse and Distribution Consulting. Web. 01 May 2011. http://www.tompkinsinc.com/industries/mergers-acquisitions/mergers-acquisitions-food-beverage.asp .] The majors also use M&A deals to enter emerging markets, as Coca-Cola did when it made an equity investment in Inca Kola in Peru.
With business model trend (1), above, the goal of acquiring brands is largely strategic. The odds of introducing a product in an emerging niche market and having it succeed are too slim and financially risky. Therefore, behemoth beverage companies like Coca-Cola and PepsiCo will routinely survey the market for other companies who have already accomplished the unlikely feat of succeeding in a niche market. Then, the larger company acquires the smaller one and all those great products belong to the major company. In this way, companies like Coke enhance their strategic goals of tapping all possible beverage markets while avoiding the massive financial risks. When the majors acquire smaller brands, there’s a chance that some followers of the brand will be alienated and cease to be customers. But when a Coke or PepsiCo-type company takes over a brand, that brand has access to the best distribution and marketing networks in the world. The exposure those brands gain automatically boosts their sales volume across target markets.
In pursuing the largely financial objectives of streamlining operations to improve efficiency, major beverage companies have begun integrating vertically. This takes place as bottling and distribution partners down the supply chain are acquired, as described in business model trend (2), above. Historically, the major beverage makers have left bottling and distribution responsibilities to partner companies. In Coca-Cola’s case, one such partner is Coca-Cola Enterprises (CCE). This type of bottling outsourcing simplifies operations and frees up vital funding for use on other projects, including international expansion, R&D, and brand diversification. Now that the global market for beverages has reached maturity, the places where major beverage companies can look for financial streamlining or simplification have narrowed significantly. With fewer untapped international markets, the major beverage companies are running into the issue of sustaining profit growth. Cash flows, therefore, are relatively healthy these days. Accordingly, the M&A activities of the major beverage companies tend to happen entirely in cash and stock. Coca-Cola rarely, if ever, uses financing sources directly to close on M&A deals. Naturally, the exact timing of cash flows may require these companies to tap revolving credit facilities. Generally though, the relatively small size of acquisitions lends to their closure in cash. The obvious benefit of this is that financing contingencies don’t hold back deals from finalizing.
As the adage goes, where revenue can’t be increased, costs must be decreased. The desire to enhance profitability has been a key driver of business model trend (2), above, in recent years. Last year, PepsiCo acquired its two largest bottling partners, Pepsi Bottling Group (PBG) and PepsiAmericas (PAS). Likewise, Coca-Cola has taken the initiative to acquire some of its bottling partners. In particular, Coca-Cola on February 25, 2010 reached an agreement with Coca-Cola Enterprises (CCE) to acquire the North American operations of that company. The extent of CCE’s operations in the North American market is substantial and is explained later on. CCE will continue to exist in much smaller form exclusively in Europe. This industry trend of bottom-line growth through vertical integration, specifically the Coca-Cola/CCE acquisition, will be the focus of ensuing discussion.
More posts from a paper on Coca-Cola M&A Activity (including merger with CCE):
Coca-Cola M&A Activity, CCE Acquisition: Executive Summary
Coca-Cola M&A Activity: Introduction
Coca-Cola M&A Activity: Product Trends
Coca-Cola M&A Activity: Demand and Economic Trends
Coca-Cola M&A Activity: Business Model Trends in the Beverage Industry
Coca-Cola M&A Activity: Beverage Industry Business Model Trends (2)
Coca-Cola M&A Activity: Company Strategic Objectives
Coca-Cola M&A Activity: Company Strategic Objectives (2)
Coca-Cola M&A Activity: Company Portfolio Analysis
Coca-Cola M&A Activity: Company Portfolio Analysis (2)
Coca-Cola M&A Activity: Company Portfolio Analysis (3)
Coca-Cola M&A Activity: PepsiCo M&A Portfolio Analysis (Largest Competitor)
Coca-Cola M&A Activity: PepsiCo M&A Portfolio Analysis (Largest Competitor) (2)
Coca-Cola M&A Activity: Other Beverage Industry M&A Activity
Coca-Cola Acquisition of CCE North America: Deal Structure
Coca-Cola Acquisition of CCE North America: Deal Structure (2)
Coca-Cola Acquisition of CCE North America: Major Legal and Financial Players
Coca-Cola Acquisition of CCE North America: Regulatory and Shareholder Approval of the Transaction
Coca-Cola Acquisition of CCE North America: Implementation Analysis: Likelihood of Acquisition Success
Coca-Cola Acquisition of CCE North America: Implementation Analysis: Likelihood of Acquisition Success (2)
Coca-Cola Acquisition of CCE North America: Conclusion to M&A Deal Analysis
Coca-Cola CCE Merger: Table of Contents and Works Cited List
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