The following commentary can also be viewed and commented upon on the Supply Chain Expert Community web site.

In March of 2010, Supply Chain Matters provided commentary on how the aftereffects of major economic downturns can often lead to new and different business models.  We specifically cited an evolving trend for disintermediation and structural change within certain industry supply chains, motivated by certain business performance needs.  The ongoing developments currently occurring in the beverages industry provide learning for certain other industries.

Within the beverages industry, the separate acquisition announcements by both Coca Cola and PepsiCo for buyout of each of their major North American distribution groups made significant news for that industry.  Both previously held major equity interests in their named franchise bottling groups, but major shifts in consumer buying preferences toward flavored waters, juices and other drinks caused both industry giants to embark on a strategy of acquiring the assets of major bottlers.  PepsiCo was first by acquiring both Pepsi Bottling Group Inc. and PepsiAmericas Inc. for $7.8 billion. Coca Cola followed later with its acquisition of the North American operations of Coca Cola Enterprises for $15 billion.  Both companies at the time indicated the need for more flexibility in production, distribution and new product innovation cycles.

In our prior commentary we speculated that both companies were about to gain a new appreciation for geographical supply chain operational flexibility, inventory management and smarter asset management.  We also wanted to keep an eye toward the evolution of both efforts, since there are often mixed results to major M&A efforts.  Both companies have now posted fourth quarter and 2010 earnings and the first signposts are emerging.

Coca Cola’s fourth quarter earnings soared, and the Wall Street Journal report attributed some of the results to the acquisition of North America bottling operations.  Sales volumes in North America rose 3%, excluding the impact of acquisitions, and unit shipment volumes are increasing. Quarterly profit nearly quadrupled and total worldwide revenues were up 40 percent. Current opinion in the Wall Street analyst community is that growth has come at market share expense of competitors.  Coca Cola was not immune to higher inbound commodity costs and anticipates overall costs to be up $400 million in 2011. More importantly, increases in juice, aluminum, plastic and energy will be more impactful since Coke now controls major portions of bottling and distribution, and the company has already embarked on incremental price increases among products, which may extend through the remainder of 2011.

PepsiCo reported fourth quarter revenues up 37 percent but earnings came in at 10 percent. Full year earnings increased 34 percent, with profits up a mere 6 percent. North America operations grew operating profit by 8 percent, the strongest growth in the decade.  However, volume levels were relatively flat.  Total inventories were also up 28 percent from a year ago. The company indicated in its earnings briefing that synergies from its previous acquisitions are exceeding original estimates.  Hmm…

PepsiCo further indicated that commodity costs could increase to as much as $1.6 billion, considerably more than was reported by Coke.  We should however point out that PepsiCo has a more diverse snacks and food portfolio, including its Frito Lay division, which increases its exposure to increased commodity costs.  Some on Wall Street are skeptical on Pepsi’s outlook, expressing concern on the bottling acquisition as well as investments in a major Russian distributor and other emerging markets were Coke is stronger.

Wall Street may be on the right track in terms of its observations, and I’m sure that our community readers will have more pointed observations as to these initial signposts on efforts to own more of the bottling and distribution value-chain.  From this author’s perspective, the initial evidence points to how more efficient inventory, operational and commodity management can impact the overall success of these initiatives, as well as the bottom line. In the end, supply and value-chain capabilities always matter.

Students and practitioners of supply chain management should continue keep a keen eye on the beverages industry because what is unfolding is yet another case study on how supply chain transformation, change management and process capabilities do matter for companies and industries. We previously commented on the notion of an integrative improvement framework where operational improvement efforts scale with the clock speed of business.  The beverages industry continues to undergo a living test of these concepts.

Bob Ferrari