US soft drinks giant Coca-Cola and Pampers-to-Pringles conglomerate Procter & Gamble are to establish a 50-50 joint venture company that will develop and market juices and snacks worldwide.
Best known for its cola activities, Coke has been trying for some years to expand its portfolio. It makes non-cola beverages including Fruitopia, Minute Maid, POWERaDE and Sprite. The group was recently pipped to the post by archrival Pepsi in the race to buy Quaker Oats, the owner of the Gatorade energy drink brand, and is known to be seeking growth beyond its core cola sector through partnership or acquisition. Coke does not market any snack brands, unlike Pepsi, which is behind the huge Frito-Lay range of snack foods.
Procter & Gamble makes the Sunny Delight drinks range, which has been on the US market since 1964 but really took the world by storm with its mid-90s relaunch. P&G also produces the Punica line of nectar-based beverages in Germany. However, the group is primarily known for its personal care and household products, which include the Olay facial care range and Tide detergent. While the group has moved in recent years to improve its standing in the food sector, these activities have never rested easily alongside the core business despite marketing some powerful brands, such as Pringles snacks and Crisco vegetable oil. P&G also launched the Olestra fat substitute used in snacks and has devoted a vast budget to research and development in the nutrient and vitamin field. For example, it developed the CCM technology, a form of calcium fortification that is licensed by PepsiCo’s Tropicana.
The new business unit will form a limited liability company with a four-man board drawn equally from Coke and P&G executives. It will be headed up by Coke veteran Don Short, who has been named CEO. In a joint statement, the two groups stressed they would focus on research into wellness beverages and juice, two dynamic segments of the soft drinks industry. Feeding divisions of existing operations into the new entity, the as yet unnamed company will have about 40 brands, 6000 employees and 15 production plants.
From the outset, it will generate annual turnover in excess of US$4bn, and the groups expect this to grow to US$5bn within two years as synergies filter through, notably in revenue growth and cost savings. Coke’s superior distribution chain is expected to double revenue growth of the Pringles snack range, while Sunny Delight will also benefit from improved distribution and merchandising.
Since Pringles and Coke cans are a similar size and have a similar shelf life, the companies are planning to distribute them on the same trucks. Since Pringles are currently only sold in around a tenth of the outlets selling Coke, the scope is enormous.
Back at their respective headquarters, the two companies will be able to remove the assets they are spinning off from their balance sheets and generate profit from their equity stake in the enterprise. P&G CEO A.G. Lafley and Doug Daft, his counterpart at Coke, said they are not planning to take the new company public or spin it off to shareholders. Indeed, the first hurdle they must overcome is regulatory approval. Given the size of the deal, it will inevitably be subject to intense scrutiny worldwide.
To read the press release Coke and P&G published, click here.
To read an article from 19 February about Coke’s juice strategy in Australia, click here.