Food and drink for titans at bay

It would be fascinating to know what was going through the mind of each chief executive when Coke’s Doug Daft and P&G’s Alan Lafley gathered, shortly before Christmas, to conclude an extraordinary alliance between the two companies.

Was the deal, which last week saw the light of day, an imaginative solution to the problem of brand innovation in the global era – or, less gloriously, a cynical piece of expediency designed to prop up two beleaguered corporations which have run out of ideas? Did it, for that matter, mean the same to each ceo?

There is plenty of room for speculation, since the facts remain strangely elusive. The companies themselves would have us believe that the as-yet-unnamed snacks and soft drinks venture is an inspired fusion of Coke’s global distribution and merchandising capabilities with P&G’s record in product innovation. Not wholly untrue, but not the whole truth either.

The important missing ingredient is that both companies are in trouble with shareholders, and looking for a fix to get them out of it. From this perspective, the deal has a number of obvious attractions for P&G. It enables what is essentially a detergents, cosmetics and toiletries company to park some difficult food and beverages brands off the balance sheet. “Difficult” needs some qualification: Pringles and Sunny Delight, to name the two best known, have enjoyed great success, but are now experiencing declining sales. Half their troubles (all the pooled brands are to be jointly owned) will now pass to Coke (subject to regulatory approval). Not only that: whereas P&G struggled to fill more than supermarket shelves, Coke will now provide the P&G products with a passport into the impulse-driven corner shop. An immediate boost in sales revenue cannot be far away.

By contrast, commentators have been at a loss to understand how the deal profits Coke. All right, Coke knows an increasing share of its profits must come from the non-carbonated juices sector, where its own efforts have not met with conspicuous success: P&G seems an obvious partner here, judged on past performance. Likewise, Coke has long cast an envious eye over PepsiCo’s Frito Lay operation: surely P&G also offers a golden key to the complementary snacks market?

The only flaw with this argument is that it rests on a debatable premise: is P&G in reality as innovative as it is cracked up to be? What we have so far is a joint portfolio with only one established snack, Pringles – which may be past its best – a potential success with the soon-to-be launched snack brand, Jeckles, and a lot of interesting patents. Moreover, P&G has experienced problems with its food technology: witness the chequered history of the fat-free oil product, Olean.

This is not to suggest the joint venture is uninspired or doomed: simply that it has a lot of hurdles to surmount. For P&G the advantages seem weighted to the near future and involve corporate re-engineering – possibly with a view to spinning off the food business in its entirety at some time. For Coke, this is a longer game with more intangible benefits.

In the final analysis, much will depend upon the calibre – and independence – of the new organisation’s management. Both parent companies will need to restrain their natural tendency to control and subordinate if the venture is to succeed.

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