Did Coca-Cola lose its bottle over P&G deal?

Despite underlying difficulties, the joint venture between Coke and P&G did have potential. So why has it collapsed so soon? asks Åse Hedberg

Two of the world’s biggest companies were left with egg on their faces last week when it was announced that the much-touted joint venture between Coca-Cola and packaged goods giant Procter & Gamble had collapsed.

News that the companies had pulled the plug on their planned venture did not come as a surprise to those who have been following the deal over the past few months. What is unusual is the way the whole thing has been handled. Surely executives at two of the most highly marketing skilled companies in the world should have thought through the deal properly before announcing it with such fanfare in February this year?

Warning bells began sounding less than five months after the two multinationals announced they were setting up a new company to sell brands such as Pringles potato chips and Minute Maid juice.

In July reports emerged that Coca-Cola was getting cold feet about the deal, which some analysts said favoured P&G over the soft drinks giant. At the time both companies reiterated their commitment to the tie-up, but in August they announced the planned $4.2bn (£2.8bn) joint venture was being scaled back.

Instead of creating a new worldwide company to market and distribute P&G’s Sunny Delight and Pringles snacks alongside Coke’s Minute Maid, Hi-C, Fruitopia and Five Alive juice drinks, the companies now talked of a “partnership” which would focus on developing “good for you” healthy beverages and distributing salty snacks.

Last Wednesday they issued a statement saying that the joint venture was being scrapped and the two parties would instead “independently pursue opportunities to grow their respective businesses”.

Most analysts agree that abandoning the venture makes sense for Coke which, under the original terms of the deal, would have had to “trade” half the profits of its high-growth juice business for two declining brands – Sunny Delight and Pringles.

But it leaves P&G with the problem of what to do with its two underperformers. It had hoped to be able to distribute its Pringles potato chips through Coke’s vast distribution system.

“The news is worse for P&G,” says one analyst. “It may well consider selling Sunny Delight and Pringles or find a new partner, but it will not be able to find any other company with the distribution capabilities of Coke.”

George Thompson, a soft drinks analyst at Prudential Securities in the US, argues that from Coke’s point of view the deal was always well worth considering. The real value for Coca-Cola, he says, was not the Sunny Delight or Pringles brands, it was the new product patents that P&G was going to contribute.

“The deal might have accelerated the rate at which Coca-Cola got involved in other areas of non-alcoholic beverages on a worldwide basis. But, in the end, it seems Coke felt it could develop products as effectively and more economically by going it alone,” he says.

Many industry observers believe the joint venture was a masterstroke by P&G because it would have given the packaged goods giant access to Coke’s unrivalled distribution channels. But one industry insider questions how beneficial the deal would really have been for P&G.

He says: “The actual benefit for P&G of capitalising on Coca-Cola’s distribution power was actually much smaller than anyone realised.” While Coca-Cola undoubtedly has a massive distribution network, the system is managed by individual bottl

ing companies which are answerable to their own shareholders. In other words, Coca-Cola simply sells the syrup to the bottlers, who take on the costs of the liquid and the distribution, leaving the soft drinks company with little say over what additional products these companies should distribute.

The insider says: “If you are an individual bottler, would you choose to distribute more Coca-Cola through the system or a new untested ‘good for you’ beverage?”

He argues that while combining Coca-Cola and Pringles would have created a portfolio to rival Frito Lay, which owns Pepsi and Walkers Crisps in the UK, the idea of distributing salty snacks along with healthy beverages was flawed from the beginning.

“Where is the ‘good for you’ bit in Pringles? Why isn’t Pringles being marketed with Coca-Cola? That would make more sense than marketing it with some calcium-added orange juice that no one has heard of.”

Coke and P&G are both keeping tight-lipped about the real reason behind the change of plan. But the calling off of the joint venture raises questions over where the two companies are going and whether they will look for other partnerships in the future. Coca-Cola already has a deal with Nestlé to create a joint venture specialising in iced tea and coffee products.

Whatever happens in the future, there is no doubt that the public unravelling of the deal will leave executives at both companies with some explaining to do. As one insider says: “It is a complete humiliation for both companies. These are the two best marketing companies in the world, and if they can’t get it right, who can?”

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