Merger Mania, FDA Friskiness

As PepsiCo, Inc. finalized its merger with its anchor bottlers, The Coca-Cola Co., Inc. made its own surprise integration announcement.

After months of touting its dedication to the franchise model, the world’s largest beverage marketer said it will take over the North American operations of Coca-Cola Enterprises.

“The franchise structure needs to always evolve, as consumers evolve, customers evolve,” said Coca-Cola CEO Muhtar Kent on CNBC. “Our structure has not changed since 1986.”

He and John Brock, CEO of CCE, said they had discussed a North American merger for over a year. They also downplayed the role it might play in enabling nimbler distribution for non-core, niche beverages. Brock and Kent said they believe Coke’s core CSDs can grow in the U.S. despite conventional wisdom that consumers are shifting away from sodas. Instead, they emphasized operational efficiencies – estimated at $350 million over four years – created by the merger.

“Our business was structured differently in the U.S. anyway,” Kent said, adding that the Coca-Cola Co. already operates a fountain business, filling factories, and a large-scale juice business, all functions that are handled by franchisees overseas.

And CCE will handle more overseas operations if the deal goes through. Coke said in a press release that it agreed to sell European bottling operations to CCE as part of the agreement in a “substantially cashless” transaction.

PepsiCo announced the following day that it completed its merger with Pepsi Bottling Group and PepsiAmericas. Both firms have been rolled into PepsiCo’s newly-formed Pepsi Beverages Company unit, headed by former PBG chairman and CEO, Eric Foss.

CEO Indra Nooyi said that PepsiCo plans to ramp up cross-promotion between Pepsi products and Frito-Lay snacks, building on the statistic that consumers pair a beverage with salty snack about 90 percent of the time.

“We are well-positioned to leverage our total scale and breadth through joint promotions… product bundling, shopper insight, and programs that address consumers’ strong desire for greater value,” Nooyi told reporters during a conference call.

She and Foss also highlighted the partnership’s expected distribution agility – something that Nooyi said has already paid dividends. A major retailer called before the Super Bowl, she said, and requested a list of snack and beverage products that he wanted in 24 hours.

“Normally, that would have taken us four, six, eight weeks to work out,” Nooyi said. “In this case, in less than 24 hours, we had everything sorted out, and the product was on the truck.”

That agility will also apply to new beverage products, Foss said. With such broad distribution control, PBC will be able to test new products in select East or West Coast markets, then determine whether they fit PepsiCo’s national DSD or warehouse system – though Foss said some categories may not warrant PepsiCo’s attention. After all, as Nooyi pointed out, PepsiCo is now the second-largest food and beverage business in the world, and the third largest consumer products company in the world.

UBS analyst Kaumil Gajrawala noted that Dr Pepper Snapple Group, which acquired a string of its bottlers ahead of its 2008 spinoff from Cadbury, could be a surprise winner in the deal. Coke’s merger with CCE will likely trigger a provision giving DPSG the opportunity to bargain with Coke over distribution rights for DPSG brands, Gajrawala said. Similar provisions in DPSG’s contracts with PBG and PepsiAmericas netted the company a $900 million payout. Pepsi’s anchor bottlers Gajrawala noted, distribute 25.6 percent of DPSG’s volume while CCE distributes 27 percent of Dr Pepper.

FDA Ratchets up Enforcement

While interest in functional beverages has steadily increased over the past decade, there hasn’t been much interest in monitoring claims by food and beverage companies. Until now.

In a sign that the regulatory environment is changing, the U.S. Food and Drug Administration recently sent letters to 16 firms – including five RTD beverage companies – citing ingredient and health claim violations. Included in the group were POM Wonderful, Nestle’s Juicy Juice, First Juice, Drank, and Salada Tea maker Redco Foods, Inc.

Squarely in the sites of the FDA are health claims. POM, for example, has cited studies that its pomegranate juice products can help consumers improve their blood pressure, cut their risk of prostate cancer, and improve erectile function – all claims more akin to a drug than a food product. Meanwhile, the FDA also took aim at Drank owner Innovative Beverages Group, Inc., about the safety of the hormone melatonin in a beverage product.

“All statements made in connection with POM products are true and supported by unprecedented scientific research,” POM Wonderful said in a written statement. “We are currently reviewing the FDA’s concerns and, as strong advocates of honest labeling and fair advertising, we are looking forward to working with the agency to resolve this matter. Once the FDA reviews and better understands the substantial science, we are confident that the agency will agree with our position.”

But regulators have displayed a pattern of increasing scrutiny toward food and beverage products. In November, the FDA sent letters to firms marketing alcohol/energy drink hybrids demanding that they prove that the drinks are safe, and, in May, the agency announced that Cheerios’ claim to boost heart health broke federal rules.

With so many products making functional claims as a springboard to sales, increased FDA action is worth watching.