Pepsi Buys North American Bottlers for $7.8 Billion

Purchase Gives Soft-Drink Giant Greater Flexibility With Niche Products

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NEW YORK ( -- Pepsi today took another step toward diversifying its North American beverage business and being faster to market with products and packaging by purchasing its two largest bottlers.


The $7.8 billion purchase, which is expected to close late this year or early next year, will also allow the company to incubate smaller brands and provide bundled offers across its food and beverage portfolio. "It allows them to be more nimble and move their products into the system and ultimately into consumers' hands quicker," said Gary Hemphill, managing director-chief operating officer at Beverage Marketing Corp. "It allows them to rethink how they go to market."

Noncarbonated beverages hot
Mr. Hemphill pointed out that with consumers increasingly embracing niche products, the purchase of the bottlers will give PepsiCo a distinct advantage. Handling smaller, niche brands can be tricky for bottlers, as many have built their businesses around handling big volume brands such as Pepsi or Mountain Dew.

And the action in beverages is around noncarbonated drinks, which now account for 55% of the company's portfolio of "liquid-refreshment beverages." In the second quarter, PepsiCo Americas Beverages saw revenue decline 7% and volume fall 6%, due to "the challenging underlying liquid-refreshment-beverage-category dynamics, consumer shifts to lower-priced options, an intensely competitive environment as well as deliberate strategic choices on our part," the company said in its earnings statement.

Indra Nooyi, chairman-CEO of PepsiCo, has been publicly touting the advantages of the deal for the past few months, and the completion of pact will surely cement her legacy at PepsiCo. In a conference call today, she told analysts the purchase will allow the company to drive growth and innovation while reshaping the North American beverage business.

"We believe that we're likely to see even more product diversification as health and wellness offerings become a larger part of the beverage portfolio," Ms. Nooyi said. "The only way we can successfully launch these products and make them compelling for consumers to buy is if we can get them on the retail shelves cost effectively and incubate them."

Furthering 'Power of One'
The deal will also allow the company to further develop its "Power of One" strategy, which entails making the company's myriad businesses more cohesive. By purchasing its two largest bottlers, PepsiCo will be able to better bundle promotions for its food and beverage brands, merchandise its products together and coordinate things such as joint deliveries.

Analysts had also been rooting for the completion of a deal, noting that it is an important step forward for the beverage giant. Following PepsiCo's second quarter earnings report, Carlos Laboy, an analyst with Credit Suisse, argued that it is, "important for PepsiCo to buy the bottlers if it really wants to fix the portfolio issues and return North America to growth."

What's not yet apparent is how the integration, which PepsiCo says will result in $300 million in synergies by 2012, will influence executives in the company's beverage division. Massimo d'Amore runs PepsiCo's Americas beverage business, but it's not clear whether he'll oversee the bottling operation as well.

Many changes
"Acquiring [its two largest bottlers] will likely precipitate changes in the management personnel and structure of PepsiCo's North America beverage business," wrote John Sicher, editor and publisher of Beverage Digest. "That business is now mainly a brand marketing, sales and innovation business. In acquiring these bottlers, it will become, in addition, a very large operating business."

Certainly, the company has already undergone a number of changes to its beverage division in the last 19 months. Most recently, Dave Burwick, CMO of North American Beverages, left the company. Jill Beraud is now head marketer for the beverage division, while Gatorade, which had reported to Mr. Burwick now reports directly to Mr. d'Amore.

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