|Coke bottlers fear the move would violate their territory exclusivity and make it easier for the company to move to warehouse distribution with other products.
Second suit on the way
The suit is the first major legal action against the beverage giant by its independent bottlers in 80 years. A second suit is expected to be filed by another group of bottlers to bring the total to 60.
“The plans for a large-scale rollout of warehouse delivery of Powerade fundamentally alters the system that has made Coca-Cola the most recognized global icon and one of the world’s most valuable brands,” Claude B. Nielsen, chairman and president-CEO of Coca-Cola United Bottling Co., said in a statement regarding the suit. The Birmingham, Ala.-based company is the third-largest domestic Coca-Cola bottler. Mr. Nielsen is an executive committee member for the Coca-Cola Bottlers Association.
For years, Coke and Pepsi have used a three-tier system called direct-to-store delivery in which bottlers package and ship product to stores, as well as set up displays and stock the shelves. Pepsi-Cola uses a two-tier system for rival Gatorade, shipping the product directly to retailers’ warehouses. For Wal-Mart, cutting out bottlers could cut costs and increase profit, according to analysts.
Two sides far apart
Coke bottlers fear the move would violate their territory exclusivity and make it easier for the company to move to warehouse distribution with other products. They also contend they’ve had a contract with Coke since 1994 that prohibits warehouse delivery of Powerade to retailers.
The two sides have been negotiating for months to find an agreement over warehouse delivery, but no resolution is in sight. “We are left with no alternative but to initiate legal action,” Mr. Nielsen said.
Coca-Cola argues that going through bottlers would make the company less competitive. “These suits are actions against our consumers and our customers–they would prevent the Coca-Cola system from strengthening its competitive position in this category and meeting consumer demand for lower cost, more efficient access to our popular Powerade sports drinks,” Don Knauss, president of Coca-Cola North America, said in a statement. “The actions by bottlers who represent approximately 10% of our company’s U.S. volume would greatly hamper the Coca-Cola system from competing with other sports drink brands.”
Idea initially pitched by Wal-Mart
Coke said Wal-Mart approached the company last summer in an attempt to increase the availability of Powerade and grow the brand faster. “When a customer comes to our system with an idea, we want to consider it as a system for the benefit of our consumers and our entire system, which is how we have handled this request,” according to Mr. Knauss’ statement, which added that the company plans to respond to the bottler association by Feb. 22.
“All Coca-Cola bottlers, first and foremost, seek to provide the best and most reliable service we can for our customers,” said Edwin C. Rice, chairman-CEO of Ozarks Coca-Cola Bottling, which is part of the suit. “Regrettably, this action involves one of our most valued and largest customers. Combined with superior merchandising, local brand development and strong local relationships, [direct-to-store delivery] has had a tremendous impact on the overall success of the Powerade brand.” The bottler said its Powerade volume grew 121% at Wal-Mart stores in its territory in 2005.
Powerade volume grew double digits in the U.S. in 2005 to capture an 18.6% share in the sports drink category, Coca-Cola said, citing Nielsen data.
Calling the move more of a “PR embarrassment” for Coke, Bill Pecoriello, beverage analyst with Morgan Stanley, said the company may have to provide additional compensation or other structural changes with bottlers to solve the issue.
“Wal-Mart wants a viable competitor to Gatorade,” he said. “A more viable competitor may force Pepsi to spend more money to defend Gatorade share. Given the higher costs of DSD, the Coke system can lower the invoice price to Wal-Mart and Wal-Mart’s gross margin can move from roughly 20% today on Powerade to the roughly 30% level it achieves on Gatorade.”
Buffet won’t seek re-election
The move comes as Coca-Cola director Warren Buffett said he wouldn’t seek re-election to the board in April. The 75-year-old billionaire investor said he was leaving the board after 17 years to tend to demands from newly acquired companies at his Berkshire Hathaway. Mr. Buffett is the beverage giant’s largest shareholder with 200 million shares, or 8.3% of the company’s outstanding shares.
A second board member, Pedro Reinhard, 60, former Dow Chemical Co. chief financial officer, also announced he would step down after just three years. Coca-Cola has no immediate plans to fill the vacated seats.