P&G-COKE JUICE GIANT FACES GLOBAL CHALLENGES

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By Stephanie Thompson and Jack Neff

To challenge PepsiCo's juice and snack stronghold, the new joint venture between Coca-Cola Co. and Procter & Gamble Co. will need Coca-Cola bottlers to expand their horizons. And that won't be easy to pull off.

Meanwhile, P&G's spinoff of nearly half its food business into the joint venture brings back another question: Will P&G exit food?

Although the package-goods giant brings to the table its research and development capabilities to help Minute Maid innovate its way ahead of PepsiCo's leading Tropicana, Coke's vast network of bottlers is most important. That network is expected to help the still-unnamed entity battle PepsiCo's powerful in-store merchandising effort that combines snacks and beverages.

The first priority appears to be expanding distribution of Pringles through Coca-Cola's global distribution system, followed by better distribution of Sunny Delight, a P&G beverage that will be part of the snack and juice venture. P&G executives think those two moves alone could generate up to $1 billion in revenue on top of the $4 billion in annual revenue the new venture has at the start. The play also could give P&G a distribution chain for products in development, such as Spire energy drink.

Yet the beverage behemoth's army of bottlers has failed in the past to drive even brands in Coke's existing roster beyond the flagship Coca-Cola and maybe Diet Coke and Caffeine-Free Coke, said Burt Flickinger, managing director at Reach Marketing, Westport, Conn.

"The bottlers are not going to think about red [Coke] at night and wake up thinking of the man with the mustache [Pringles]," he said. Mr. Flickinger compared the strategy to Anheuser-Busch Cos.' failed effort to put Eagle Snacks and other A-B brands on beer trucks. (P&G now owns the Eagle brand, though it has no products under that name; the brand moves to the new joint venture.)

That sort of thinking could help explain the stock market's lukewarm reaction to news of the deal. Coke's stock fell 6.1% the day it was announced; P&G rose 1.4%.

Said one top food industry executive: "Just because someone has a direct store delivery system doesn't mean you can link up disparate products. It might happen [that Coke drivers carry Pringles], but it Coke drivers carry Pringles] but itwon't happen successfully."

While PepsiCo successfully builds in-store displays for Pepsi and Frito-Lay, it delivers soda and bags of chips through separate distribution systems and trucks.

Even so, if P&G is able to harness Coca-Cola's distribution, it may improve its relationship with food retailers, which has suffered under multiple sales force changes over the years.

Pringles is handled by Grey Global Group's Grey Worldwide, New York. Sunny Delight is at Publicis Groupe's Saatchi & Saatchi, New York, and Minute Maid's agency is Bcom3 Group's Leo Burnett USA, Chicago.

P&G has been in food since 1912, when it introduced Crisco. But P&G has floundered in expanding its food franchise in recent decades, striking out on products such as Citrus Hill orange juice and Fisher Nut snacks.

After the spinoff, P&G's remaining foods will make up just 7% of revenue; the business wouldn't rank among the nation's top 10 food companies in a rapidly consolidating industry.

Analysts who cover P&G and have long urged the divestiture of "noncore" food and beverage brands generally applauded the Pringles spinoff, and some are looking for more. "We would not be surprised to see further divestitures," wrote Merrill Lynch analyst Heather Hay Murren.

Its three remaining big food brands - Folgers, Jif and Crisco - lead their categories. But the coffee category is growing slowly, peanut butter is flat and cooking oils are declining.

Bcom3's D'Arcy Masius Benton & Bowles, New York, handles Folgers and Millstone coffees, while Saatchi & Saatchi, New York, handles Crisco and Grey Worldwide handles Jif. "We're thinking through our options for coffee," said P&G President-CEO A.G. Lafley in a conference call with analysts, adding: "Right now, coffee is a leading business and a growing business, and the issue is how we can get it to grow faster."

Folgers is one of P&G's 10 largest brands, yet it's the only one whose sales are limited to North America.

In a separate press briefing, Chairman John Pepper said P&G is considering global expansion of Folgers, which could entail an alliance with another company. Nestle and Sara Lee Corp. could be two logical candidates.

"There's nothing that we're doing here [in the Coke deal] that in any way mandates a move on our other [food and beverage] brands," said Mr. Pepper, adding that the company has no current plans to divest them.

Crisco and Jif are, like Folgers, profitable, but with both, "the issue is growth," Mr. Lafley said. M

Copyright February 2001, Crain Communications Inc.

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