“A move this big changes the entire landscape of the industry,” said John Sicher, editor of the trade publication Beverage Digest. “Today the beverage business consists of a greater diversity of products, and PepsiCo needs more control and flexibility over the route to market for its brands.”
10 years ago, Pepsi Bottling Group separated from PepsiCo to become an independent company. This allowed both companies to concentrate on what they do best – PBG to distribute and execute the carbonated soft-drinks, and PepsiCo to focus on marketing. However, PepsiCo currently operates three different distribution systems: soft-drinks distributed by bottlers, sports drink (Gatorade) delivered through warehouse distribution, and juice business (Tropicana) distributed through the warehouse. At the same time, carbonated soft-drinks sales have slowed down while non-carbonated soft drinks have increased. PepsiCo’s Gatorade and Tropicana beverage business is delivered directly from a warehouse to a retailer, whereas PepsiCo’s carbonated soft-drinks are bottled and distributed separately. Therefore, it makes sense to consolidate the three distribution systems into one system. Analysts estimate that cost savings when fully realized may be up to $400 million per year.
Also, by consolidating the bottling business and the marketing business, PepsiCo will have a competitive advantage in decision-making and prices to retailers. With decision-making, PepsiCo will eliminate middle management layers and eliminate liaisons between the two companies, allowing information to travel a shorter distance and speed up key decisions. With prices to retailers, it has been noted that bottlers have been increasing prices to retailers. Bottlers increase prices in order to maintain profit margins due to the weak economy. By eliminating the bottlers, PepsiCo will be able to determine pricing and may even have cost savings to pass onto the consumers (relating from transport costs and sales costs).
Pepsi Bottling Group and PepsiAmericas are evaluating PepsiCo’s offer right now, so we will wait to hear back from them. It will also be interesting to see how The Coca-Cola Company responds, as they own a 35% stake in Coca-Cola Enterprises, The Coca-Cola Company’s largest bottler.