Gerry’s Insights: Strategic Reversal

Some of us sitting high up in the peanut gallery have a tendency to give the benefit of the doubt to the strategics’ strategic strategizing even when the stratagems don’t entirely make sense to us. After all, those companies’ ranks are stacked with hundreds of MBAs. Thousands, maybe! They have access to reams of mysterious information, consumer and otherwise, that we get no glimpse of. They’re guided by directors who’re titans of their chosen business sectors. So who are we to quibble when new directions are unveiled that seem to be a bit beyond our comprehension? Surely they were exceedingly well thought out?

Once in a while, I start to question whether I’m being a bit naïve about that. After all, those business geniuses are driven by the same emotions, prejudices and FOMO as the rest of us. As consumer products specialists, they’re by definition obligated to chase the latest fads, whether those prove sustainable or not. Further, internal politics surely can trump cogent analysis when some of these decisions are being made. Some might be driven by the simple need to impress naïve investors with a sense that something dynamic is unfolding.

One of these “once in a whiles” has occurred just in recent weeks when strategies I’d presumed I was simply too obtuse to understand have been repudiated. One was Coca-Cola’s decision five years ago to bet $5 billion on making the foundation of its struggling US coffee business the addition of a humdrum UK chain called Costa that nobody here had ever heard of. So enthusiastic was it about this new direction that it unwound a nascent alliance it had forged with its innovation-adept partner on Java Monster, Monster Beverage, to play in coffee via such entries as Café Monster. A few years in, though, there’s no chain of Costa cafes on this side of the pond and Coke’s Costa-branded RTDs haven’t gotten anywhere. True, the Costa brand has been at the heart of an inventive series of foodservice offerings, but one can question how much value the Costa name itself lends to the effort compared with an invented name. Now the company has indicated it will look elsewhere for its coffee platform and there have been reports it’s shopping the chain, at the likely cost of a steep writedown.

Then there’s the move seven years ago by hot-coffee giant Keurig Green Mountain to acquire the cold-beverage giant Dr Pepper Snapple Group and merge the two entities via a deal that its architect, Bob Gamgort, said looked beyond outdated notions of “traditional manufacturer-defined segments” in favor of consumer need states, which the merged companies would dominate. At the time, some analysts and investors questioned whether there really were synergies to be harvested from the combination but Gamgort conjured the heady scenario of an ecomm-adept company that was perfectly positioned to shake up a stodgy liquid refreshment realm. Those who didn’t see the deal’s logic needed to question whether they were in step with the new times, he implied. That said, credit Gamgort with having proved an adept operator of the former DPS, willing to make investments in its bottling system that his predecessors weren’t and pursuing a partner-brand strategy that is the envy of the industry. Things haven’t gone as well on the Keurig coffee side but some of the reasons for that have been outside his control.

Those synergies, though? By now it’s clear to everybody that there really weren’t any, and the company now is moving to break up that purportedly breakthrough combination after fortifying the coffee side with the planned acquisition of JDE Peet’s. I’ve found it amusing how the company has conveniently forgotten about all the hype that preceded the merger and is now describing the move to undo it as visionary, too. Shareholders clearly haven’t been buying that, with shares slumping 20% since Gamgort’s successor as CEO, Tim Cofer, made the announcement. Now the glib Gamgort has called a special investor day at which he will put his personal spin on the transactions to get investors in line. It should be noted that his breakup plan is among a slew of such moves as CPG giants like Kraft Heinz realize that the scale that comes from putting together a legion of legacy brands only gets you so far, with most growth still being grabbed by the long tail of disruptor brands. In fairness, unlike many of those, Gamgort has actually kept the LRB side of the company briskly growing. So it’s not clear that doing the deal and then undoing it will cost the company much traction.

Then there’s the case of PepsiCo, a floundering giant where there’s lots that can be questioned. Take its decision to pay $4 billion to acquire its fading partner brand Rockstar Energy in order to clear the path for an alliance with Bang Energy purveyor Jack Owoc, who was famous throughout the beverage business for not playing nicely with others. That “alliance” duly proved to be the disaster that many had predicted though Pepsi recovered nicely by pivoting to Celsius as a new partner. Credit it further with the self-awareness to lately make Celsius the steward of its entire energy portfolio, including Alani and Rockstar, in the way Coca-Cola has successfully done with its partner Monster.

Still, Pepsi’s sluggish performance has lately drawn the activist investor Elliott Management, whose critique includes zeroing in on a possible strategic misstep of omission rather than commission: PepsiCo’s disinclination to refranchise its bottling system in the way its rival Coca-Cola did, a move that seemed to coincide with a marked divergence in the two companies’ fortunes. What does Pepsi say to justify maintaining a unitary distribution system? Unlike his predecessor Indra Nooyi, CEO Ramon Laguarta hasn’t even felt a need to publicly offer a rationale for maintaining the system beyond the general avowal that he likes it that way. The move by Elliott seems to ensure that there at least will be a discussion again of the pros and cons of the two approaches. Of course, Pepsi’s weak performance since it acquired its bottlers has devalued the franchise rights, a situation that some have suggested provocatively might be remedied by a pickup of KDP’s LRB arm once that’s spun off next year.

How much do any of these strategic reversals really matter? Maybe not much in the big scheme of things. Certainly, they don’t seem to put the managers who made the decisions under much pressure. In beverages it’s hard to find many examples of where a poor strategic decision actually cost a CEO the job. Maybe Campbell Soup’s CEO following her disastrous acquisition of Bolthouse Farms? More commonly, CEOs are eased out not for any particular decision but just for their company’s continued sluggish performance. In that context, the incentives seem to align with making bold moves, even if they ultimately don’t pan out.

Longtime beverage-watcher Gerry Khermouch is executive editor of Beverage Business Insights, a twice-weekly e-newsletter covering the nonalcoholic beverage sector.