Note: The following posting can also be viewed and commented upon on the Kinaxis Supply Chain Expert Community web site.
In January, Supply Chain Matters commented on evidence of large industry influencers embarking on the first steps toward what could ultimately become disintermediation within certain industry supply chains. At the time, we cited examples of Wal-Mart and Google embarking on significant programs to gain more control and influence over aspects within their respective supply and value-chains.
Another noteworthy evidence point of this trend is now occurring within the soft drink and beverages industry. For about thirty years, this industry has been operating on a business model developed around high margin carbonated beverages. The major brand owners, in this case Coke and Pepsi, control the marketing and sales of high concentration syrup These brand owners in-turn distribute to franchise or independent bottlers who control the production, sales and distribution to various beverage channel customers. The brand owners hold major equity interests in their named franchise bottling groups, and the model leveraged high margins for the individual brand owners, while the more asset-intensive and operationally focused bottlers managed the lower-margin aspects of production and distribution. In the end, the brand owners gained value and control across the entire value-chain.
A major change began last April, when PepsiCo announced the acquisition of its two largest independent bottlers, Pepsi Bottling Group Inc., and PepsiAmericas Inc. for $7.8 billion. At the time of the announcement, PepsiCo Chairwoman and CEO Indra Nooyl made a very powerful argument that the business model had changed. Whereas carbonated beverages previously drove the bulk of North American sales, alternative beverages such as flavored waters, juices and other drinks are now demonstrating higher sales growth. These newer products have different production, distribution and operating margin needs. Large retailers and grocers have also gained more bargaining power, and in previous commentary, we noted that Wal-Mart and others are consolidating major geographical procurement policies. This will mandate that bottlers and brand owners will be forced to also have a more timely and integrated response to selling and distribution needs of major customers.
Rival Coca-Cola Company had initially indicated that it did not intend to assume more control of bottling and distribution, but reflecting a change in strategy, Coke has now announced its intention to acquire the North America operations of Coca-Cola Enterprises Inc. for roughly $15 billion., At the close of the transaction it will have direct control of over 90 percent of the total North America volume. Coca-Cola Enterprises will be re-structured to eventually gain control of European production and distribution.
It’s important to understand the logic made by each company’s senior management in articulating not only on the implications of the significant changes that are occurring in their various global markets, but also on the need for a re-look at supply chain capabilities and asset management in North America. Whereas markets for carbonated beverages continue to grow at double-digit rates in China, India and Russia, new non-carbonated markets have emerged in North America. That has driven the need for more flexibility in production, distribution and new product innovation cycles. In my view, this is somewhat similar to when the computer industry, specifically Hewlett Packard, came to the realization that there was a need for significantly different supply chain delivery models to successfully support different margin products.
A fascinating and well-articulated discussion of these developments can be viewed in a recent CNBC television interview held with Indra Nooyl. PepsiCo Chairwoman, and the ‘Sage of Omaha’, Warren Buffett. (Pre-warning- the video is over 20 minutes but very insightful and at times humorous in Warren’s political skills.) It seems that Warren not only has an equity stake and love of Coke products, but also loves his Cheetos and Doritos.
Over time the evolution and results achieved by these two global giants will prove to be the very interesting to observe. As Ms. Nooyl astutely points out, PepsiCo being a diversified company with the likes of Frito-Lay fully understands the needs for both operational flexibility and efficiencies in production, distribution and logistics. Coca-Cola on the other hand remains a global marketing giant. Both companies are about to gain a new appreciation of the need for geographical supply chain operational flexibility and smarter asset management.
Major economic downturns do indeed lead to new and different business models, and the implications for industry supply chains are starting to emerge.
It would be interesting for the Supply Chain Matters community to share their observations of these emerging trends.