Coke's Crisis of Opportunity

Now that we’ve absorbed the shock of Coca- Cola’s noncarbonated beverage binge – acquiring Fuze and Vitaminwater, reaching a distribution deal for Campbell Soup’s V8 – it’s time to start focusing on how the company will implement these deals. After all, the recent history of beverages is littered with stories of upand- coming brands commanding rich premiums from major players, only to go inert on the shelf once they were integrated into the core operation. Snapple’s near-ruination at the hands of Quaker Oats has already entered business school case histories as a classic example of that, though Snapple’s fate within the Cadbury Schweppes portfolio is also a cautionary tale. And watching once-renegade SoBe enter the Pepsi portfolio was like watching an ingénue get stuck in a dreary character role.

Fuze counts as a relatively modest “tuck-in” acquisition and it seems to be on the way to a fairly quick and decisive cutover to the Coca- Cola bottling network. Not much downside there. The acquisition of Glaceau is another story. Vitaminwater is a much bigger, more developed brand than Fuze, and the premium paid – the deal was announced at $4.1 billion, not counting distributor buyouts – dwarfs the $250 million or so paid for Fuze (including buyouts).

This creates a real dilemma for Coke. On one hand, the company finally has an explosively growing, high-margin noncarb it can offer to its bottlers, providing another leg of growth while squelching “jailbreaks” in which some bottlers looked beyond Coke for new brands. And the bottlers do want this brand, which is important. Many beverage observers note that as the biggest difference between Pepsi’s purchase of SoBe and Coke’s pickups, and it could make all the difference in that critical area of post-acquisition execution.

On the other hand, at this price, Muhtar Kent, Sandy Douglas and the rest of the KO brass know they really can’t afford to bungle the acquisition, and one way of assuring that the brand will continue to thrive is to retain at least some of its current distribution matrix. Indeed, in announcing the deal, Coke execs lavished praise on the merchandising savvy displayed by Glaceau and expressed their need to learn from it. That credit, of course, really is shared by the independent distributors who have worked with Glaceau’s field staff to execute those well-crafted programs.

So far, the Coca-Cola people have been careful. Word is that in New York and Los Angeles, incumbent distributors have received some assurances that they’ll hold onto the brand for some time. Clearly there’s a case to be made that, in Vitaminwater’s core Northeast market, Coke should move with deliberation. Coke execs say they see the brand as most underdeveloped in the Southwest, middle states and Southeast, so they may move more quickly to dislodge it from that part of the independent network in those regions.

Could it be that we’re about to see some unexpected, out-of-the-box thinking from Coke, which has increasingly been willing to acknowledge that distribution is moving in unanticipated, hybrid approaches? Coke already tested the waters with warehouse delivery on PowerAde with Wal-Mart (they settled a suit on the matter brought by independent Coke bottlers) only to see McLane drastically raise its fees on beverages. That tilted the economics back to DSD for most brands, even bulky, low-velocity segments like bottled water and sports drinks.

For now, Coke seems at least to be deliberating intriguing schemes like keeping some indies in place for Vitaminwater while shifting some lower-velocity KO brands from the bottlers, who can’t give them the attention they deserve, to those indie distributors. I’ve heard that could go so far as to include Coke-branded items like Coke Blak. In essence, the bottlers would be allowed to stay within their comfort zone of larger-scale, high-velocity brands, while delegating to indies some of the lower-velocity, high-touch brands.

Coke is not the only company thinking along those lines. PepsiCo is showing a similar willingness to rethink the distribution model for its recently acquired Izze sparkling juice brand, vowing to keep an open mind over pulling it from independent distributors. In one case where it did move the brand, in New York, it seems to have done so to measure the performance of a Pepsi bottler against that of the indies.

Whether Coke actually proceeds with such an experiment is, of course, another story. Doing so would bring its own set of complications: contracts, coverage areas and the like. Also, despite the rhetoric, Coke execs do not have a history of acting as though they have anything to learn from anybody else. Then there is this stern reality – Coke bottlers are clamoring for some real winners in the noncarb sector and wouldn’t be happy to have to wait for their crack at Vitaminwater.

How Coke walks this tightrope – rewarding its bottlers with Vitaminwater while not undermining the magic that makes the brand so appealing in the first place – will be fascinating to watch in the coming months.