Alan Mitchell: Packaged goods giants head for the high-jump

The logic behind the Coca-Cola/Procter & Gamble $4bn (£2.74bn)) joint venture in snacks and beverages announced last week, seems perfect. Who can argue with powerful synergies in distribution and the opportunities to capitalise on P&G’s formidable research and development prowess? In which case, why didn’t Coke and P&G tie the knot a long time ago?

Recently, scientist Stephen Jay Gould attempted to explain the apparently lamentable decline in the number and frequency of outstanding baseball performances. Gould wanted to know why repeats of glorious performances such as Ted Williams’ 1941 seasonal batting averag

e of 0.406 rarely happen nowadays. His answer is sobering. Baseball is getting ever more professional. The overall standard of play is much higher than it was then, which means that (statistically speaking) the bell-curve of performance scores – the variations – has been squeezed around an ever-improving mean. There are far fewer appalling performances, but fewer outstanding ones too.

Athletics provides another example. Nowadays, we expect athletes to run a four-minute mile, but we have few new records, and the best-time figures are only broken by a smidgen. We’re getting closer to a natural limit: can we really expect a normal human being, no matter how fit, to run a one-minute mile?

Wherever you have a system comprising individual units competing according to stable rules, Gould concluded in his book “Life’s Grandeur”, their natural struggle to find “means for improvementí means that over time, their discoveries accumulate within the system, leading to general gains toward an optimum”. The closer they get to “this narrow pinnacle”í the harder it gets to improve on past performance or to maintain a significant lead.

That’s precisely the dilemma facing the big-hitters in packaged goods. The basic rules of product, brand and distribution have changed little over the years. Only the best are still in the race and their performance differences are narrowing. This is extremely frustrating for anyone wanting to set new records – such as shareholders.

That’s one reason for a deal right now: look at the drubbing these two companies have had from their shareholders recently. Another reason, is that the closer you get to that pinnacle, the more intense the pressure to find some way of transcending it. Athletes turn to steroids and big companies do likewise. They search for brand steroids such as globalisation.

Globalisation, however, brings its own dilemmas. There is clearly a great opportunity to achieve new levels of efficiency in areas such as buying, production, distribution and marketing spend. But as all the big players adopt similar strategies, so the margin of advantage is eroded and competition becomes a war of grinding attrition. Global branding may excite companies, but it rarely excites consumers – for that, you need innovation.

Yet innovation doesn’t come easily to a company that’s focusing every sinew on a small handful of global mega-brands. Of course, global brands want to innovate. But by definition, big new ideas with instant global potential are as rare as Ted Williams’ batting average.

The global mega-brand mindset just isn’t the best nursery for growing brands. It’s definitely not the best nursery if the opportunity can only be met by many, different brands with different formulations aimed at different markets, rather than by one single, global brand. And that’s the problem that both Coca-Cola and P&G have been grappling with in the burgeoning “better-for-you” drinks market.

P&G has Sunny Delight, with added calcium (and many other suspect additives too). It has its proprietary GrowthPlus formula – added iron, vitamin A, and iodine (see Cover Story, page 28). It has a vitamin-fortified fruit beverage called Eclipse and the juice-based drink Spire, for “sustained alertness”. And don’t forget its gloriously named “smoothie protein particle stabilisationí proprietary technology” which combines calcium-carrying milk with vitamin-carrying fruit juices in a way which gives them extra-long shelf life. But they’ve hardly set the world on fire.

Ditto Coca-Cola. Last month it upgraded its joint venture with Nestlé – Beverage Partners Worldwide – to market ready to drink teas and beverages with “a healthful positioning”. But it failed to bag Gatorade in the US and Orangina in Europe and, arguably, it has also failed, long term, to capitalise on the full global potential of Minute Maid or Fruitopia. It, too, has languishing “better-for-you” offers such as the vitamin-enriched Hi-C and Kapo brands. Clearly, what all these products needs is a bit of TLC, far removed from their big brothers’ brand shadows.

There’s one more side-effect of globalisation that’s worth a mention. When P&G reorganised itself into a series of global business units (GBUs) that focused on categories such as fabric or baby care, it unwittingly raised an awkward question: why does P&G exist? Each one of these GBUs is a huge multi-billion business in its own right. Does being a part of P&G actually bring anything extra to the party?

Of course P&G has a myriad of affirmative answers: cross-fertilisation of technologies, synergies in retailer “customer business development” company-wide global IT systems such as the one spun out into consultancy EMM a few weeks ago, media buying muscle, and so on. But what happens if, for some brands or categories, the best synergies lie outside these corporate boundaries? The need for Pringles to expand its distribution beyond P&G’s strengths with mega-retailers like Wal-Mart, Ahold and Carrefour is one obvious example. This need for an alternative strategy falls out of P&G’s reorganisation.

What’s intriguing is that none of these factors have the innate inability to deliver sustained “outstanding performance” and the subsequent search for breakthrough “steroid” strategies, and the dilemmas created by these self-same strategies are unique to Coke and P&G, or the categories involved in this joint venture. As Nestlé has shown, first with Cereal Partners Worldwide and now with Beverage Partners Worldwide, one-plus-one-equals-three strategies can be an extremely effective way of reshuffling the pack in your favour. Alongside continuing mergers and acquisitions activity, we can expect a lot more from where this came.

Alan Mitchell’s book Right Side Up: Building Brands in the Age of the Organized Consumer will shortly be published by HarperCollins. Alan will be giving the IDM Annual Lecture, Is Your Marketing Worth Buying?í in Manchester on March 5, and London on March 6. Details: 0208 614 0275.