Coca-Cola's smaller bottlers brace for change

After years of often stressful relations with CCE, a majority of Coca-Cola's other U.S. bottlers -- ranging from the fairly large to the very small -- apparently supported the deal. Bottlers who met with Coca-Cola in August generally gave "very positive" reviews of the management team Coca-Cola had assembled to run North America and CCE's old bottling operations, according to trade journal Beverage Digest.

But Coca-Cola has not specifically mapped out its end game. Uncertainty remains among the independents about what Coke has in mind. Will the company push hard for smaller bottlers to sell out? Will it seek to change contracts?

"I think most of them are really waiting to see what Coke plans to do," said Marion Glover, a longtime consultant to Coke bottlers.

In the near future, Coke will look to its independent bottlers for a new kind of collaborative relationship, said John Sicher, editor of Beverage Digest. He predicted Coke will seek some changes in production, in how the system deals with national customers and in how some products are distributed.

Some bottlers will agree to Coke's recommended changes and stay in the system for many years to come, while others may choose to sell, Sicher said. He added that it will probably take about five years to see how it all evolves.

In the past few weeks, Coca-Cola executives have said soothing things about the future of independent U.S. bottlers. Chief executive Muhtar Kent said the deal with CCE will benefit them, and that they will have a continued role in the U.S.

"The tide is going to rise, and it's going to help everyone," he told employees at a town hall meeting.

But Tom Pirko, president of California consulting firm Bevmark, said smaller bottlers are in a precarious situation. Coca-Cola owns the brands, and its status as the only supplier of the concentrate that makes soft drinks gives it a lot of leverage. Successful bottlers need to have critical mass, and also need to invest a great deal of cash in new technology to keep up in an increasingly sophisticated business, he said.

"The economics no longer allow you to be small. It just doesn't work," he said. "You need to be rich to play this game. You need to be able to invest significant sums of money to play it well. The smaller you are, the less power you have."

With PepsiCo trying to remake its own North American bottling system, Coca-Cola executives want to use the freshly-inked deal with CCE to make Coke the best beverage supplier to big retailers such as Wal-Mart.

"They wish us the best," said Steve Cahillane, the new leader of Coke's bottling and sales group. But big chains are waiting to see results, he said.

About half of Coca-Cola's 70 independent U.S. bottlers have been in business at least 100 years. A quarter have lasted that long under the ownership of the same family. Their patchwork of territories covers the United States, entrenched in perpetual agreements under franchise law.

The network started in 1899, when Coca-Cola executive Asa Candler signed over exclusive rights to bottle Coca-Cola across most of the U.S. (except Vicksburg) for one dollar. The three Chattanooga attorneys who got the rights sold territories to other entrepreneurs. The bottlers bought concentrate from Coca-Cola and turned the stuff into soft drinks.

The system spread quickly  throughout the country. Nearly 400 Coca-Cola bottling plants were operating in 20 years. At the start of the 1920s, the U.S. held more than 1,000 Coke bottlers.

That number shrank dramatically in subsequent decades, as larger bottlers snapped up smaller ones. But the pace of consolidation and buyouts in the Coke bottling system has slowed to a crawl, averaging one deal per year for the past decade. Coca-Cola itself has bought only one U.S. bottler since the mid-1980s: a company in Philadelphia.

In the early days of Coke's U.S. bottling system, it nicely suited an era when just about every store was mom and pop. But slowly, economies of scale became more important and production became more complex. While the bottling system was based on territories, growing big-box retailers wanted a single point of contact.

At times, trying to orchestrate national beverage promotions caused headaches for national retailers, who might have to work with dozens of bottlers who controlled the territories containing its stores. The multitude of sales calls and meetings with Coca-Cola, CCE and various smaller bottlers frustrated the big chains.

Coca-Cola says coordination has improved recently. Its U.S. bottlers agreed this year to provide a consistent portfolio to customers.

For years, smaller bottlers have had to rub shoulders with CCE, buying beverages or working on national promotions. The arrangement often bred frustration between the mega-bottler and its smaller cousins.

"It became very hard to get some new products through the system; it became hard to customize products for each customer," said Michael Bellas, CEO of Beverage Marketing Corp. "It became a different marketplace."

With smaller bottlers now required to deal directly with Coca-Cola in the place of CCE, one longstanding issue will remain difficult to fix: the proliferation of brands and packages. Handling the hundreds of items Coca-Cola churns out can be a big challenge for small bottlers.

Coca-Cola's sales distribution is heavily concentrated in its largest bottlers. Including the CCE operations that Coke just took over, about 94 percent of its U.S. sales of bottled and canned soft drinks come from its top ten bottlers, including Coca-Cola Bottling Co. United in Birmingham and Coca-Cola Bottling Co. Consolidated in Charlotte, the only publicly-traded U.S. company in the bunch.

After the top 10, sales drop off precipitously.

Only about 20 Coke "bottlers" in the U.S. actually make bottles and cans of Coca-Cola and other soft drinks. The rest buy drinks from others and sell them in their own territories.

Even the smallest companies can be highly profitable, said Glover. Their profits per case may actually be higher than those of the big bottlers, because the small operations don't make their own drinks and don't have as much capital tied up in production.

Since they pull in good cash flow, small bottlers are not quick to sell out, said Glover. "They ask, if I sell my business, where am I going to get that rate of return?"

But small bottlers can't afford to be comfortable, Pirko said. Consumers and Coca-Cola will demand more from them.

"They're going to have to respond, but I don't think they can," said Pirko, who argued that many bottlers have been conditioned to sell carbonated soft drinks at a time that consumers are asking for more non-carbonated and healthier drinks. "They have a tremendous challenge, and I don't think they can meet it."

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How we got the story

As Coca-Cola completed its takeover of North American bottling operations, AJC reporter Jeremiah McWilliams looked into the possible ramifications of the deal for Coke's squadron of smaller, independent bottlers, which typically got even less media attention than Coca-Cola Enterprises. McWilliams read equity research notes and Coke history books, and talked to Coca-Cola executives, trade journalists, former employees and industry experts to get a sense of what those companies might expect.