Squeeze play
Coca Cola has long been organized in the US as a three-tiered business. At the top is the Coca Cola Company itself, which guards the formula for the drinks itself, comes up with new products, and does the (enormous) national marketing campaigns. It also manufacturers the concentrated syrups used both by bottlers and soda fountains; they also run local marketing campaigns. At the next level are the local and regional Coca Cola bottlers, who actually bottle (and can) the drinks and deliver them to resellers in their regions. The stores and other resellers, the third level, range from Wal-Mart to corner stores to from vending machines to supermarkets.
The reason for the division between the national corporation has a long history, starting with the company's origin in 1899. As a Wall Street Journal article ("A Suit by Coke Bottlers Exposes Cracks in a Century-Old System", 3/13/06) points out, Coke's founder decided that while he was interested in selling syrup to soda fountains, he did not want to get into the risky and capital-intensive business of bottling. So he signed over the bottling rights to a number of investors in perpetuity, arranging to sell the syrup for a dollar a gallon.
Bottling turned out be the growth industry, more so than soda-fountain business and the bottlers got rich. In the 1920's Coke tried to raise the price of concentrate and many of the bottler sued. The main company was allowed to raise prices somewhat, despite the original contract. Then, as the article notes, "in the 1980s and '90s Coke managed to shrink the number of bottlers by buying some of them, merging them and selling off majority stakes in the combined entities -- a strategy known as the '49% solution.'" Most important of these was the national Coca-Cola Enterprises, 35% owned by Coca Cola. From 1,000 bottlers, the number has been reduced to 76. Coke holds a large share of some of the biggest bottlers now.
But as the article points out, there is a new lawsuit from 55 Coca Cola bottlers against the mother company. The cause is Wal-Mart. Wal-Mart, as ever, is a key client for Coca Coal products (selling 10% of them nationwide), and up until now the sale and service have been taken care of by the regional dealers, who take care of individual Wal-Mart stores in their territory. But, reports the article, "the giant retailer last summer sought to break with that tradition, asking to have Powerade sent to its warehouses, instead of stores." And the likely supplier is Coca Cola Enterprises, which operates in a number of regions.
One motivating factor for this the competition from Pepsi, which delivers it far more popular sports drink, Gatorade, to Wal-Mart warehouses, not to the stores. Wal-Mart wants from Coca Cola Company what it enforces with most other dealers, that is, complete national consistency in terms of pricing, inventory, promotional campaigns, and service across the country. They also want to get the drinks inside their highly efficient inventory system, and they want a single national cost, not a different one in every district.
It's another case of the big dealing with the big - they don't want to mess around with lots of smaller entities. They only want to deal with the mother company, and Coca-Cola says it wants to go along, at least with Powerade.
The dealers see this as the first step in a process of cutting out the middleman, namely them, reducing them from marketing locally to simply dumping their products in a few warehouses. As the article says,
Their concern is that straight-to-warehouse delivery will prove pleasing to Wal-Mart, that other chains will demand it, and that it would inexorably spread to other drinks and bottlers. The small bottlers then would see their close relationships with grocers diminished, and local marketing would suffer. Those relationships are the main way the bottlers feel they can drive sales in their territories -- and thus their own business success.
Coke's counterargument is that the fragmented bottler system makes no sense in an age when national logistical and service standardization is what's happening in every other industry. For example, if the bottler in Baltimore is inferior to the one in Philadelphia, there's little Coke can do about it. And Coke sales are slipping in the US over the past few years. While this may have more to do with a saturated market and a renewed interest in drinking water, the cola company believes that fragmentation is at least part of the problem. After all, each of the independent business generates profits that go its own, separate stakeholders and execs, not to the national corporation.
The Powerade is clearly a wedge deal, and one which, Coke hopes, will end up with a very few distributors standing, ones with close ties to the national corporation. It's yet another marker in small companies cannot stand if they are being pushed on both sides by large oligopolies/oligopsonies.
