Pepsi bottles it

The Grand Old Duke of York might recognise PepsiCo’s strategy. The group said on Monday it wanted to “strategically transform” its North American beverage business by buying its two largest bottlers – Pepsi Bottling Group and PepsiAmericas – for $6bn in cash and shares. Such a deal, however, would merely reverse the effect of Pepsi spinning out its bottling operations in a 1999 initial public offering of PBG.

Such see-sawing is a familiar sight in the soft drinks business. The industry has never quite made up its mind about the relationship between making and marketing drinks, and bottling and distributing them. Since listing Coca-Cola Enterprises in 1986, Coca-Cola has tended to keep its bottlers at arm’s length, via minority stakes, in the belief this encourages entrepreneurship from its bottlers. Pepsi, by contrast, spent much of the 1990s buying up its bottlers, then selling majority stakes into public markets; the Coca-Cola model.

The Dr Pepper Snapple group has, meanwhile, gone in the opposite direction, taking full ownership of its largest bottling partner in 2006.

In part, the latest move from Pepsi simply reflects changing management trends. Outsourcing is all very well in terms of keeping the balance sheet “light” but, in troubled times, companies still have a contingent responsibility to these same off-balance sheet operations. Folding in the two bottlers is a recognition of their interdependence on Pepsi, and should allow the group to find $200m of annual cost savings, with a net present value of some $1.5bn.

The strategic shift does little, though, to address a problem that has remained largely constant since the late 1990s – after decades of growth, US consumers are switching from the sweet fizzy stuff to other, healthier beverages. Decisiveness is always welcome from management. But Pepsi’s investors should ponder the strategic merits of marching up and down the same side of a hill.

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