The widely reported negotiations between Quaker Oats and a number of suitors, including PepsiCo and The Coca-Cola Co., have cast a strong light on the ever-growing strength of noncarbonated cold beverages. The interest expressed by Coke, Pepsi, and France's Danone (producer of "Evian" spring water) in Quaker Oats has been interest in adding "Gatorade" to those companies' product lines. PepsiCo's recent acquisition of South Beach Beverage, whose novel lizard-logo "SoBe" formulations have been on the cutting edge of alternative-beverage development, is another case in point.
Reporting on the takeover bids for Quaker Oats, The New York Times noted that sales of noncarbonated drinks in the United States have been enjoying annual double-digit sales increases, while carbonated-beverage volume growth has continued to slow (it now approximates one percent per year). This is not at all surprising, given the tremendous popularity of soft drinks and their long dominance of the cold-beverage market. It is a tribute to the marketing expertise of Coke and Pepsi, both of which have been extraordinarily effective in making sure that just about everyone who wants a branded soft drink can get it easily.
However, that very success has raised concerns about the ability of the giants, especially industry leader Coca-Cola, to maintain growth. Cadbury Schweppes, the parent company of Dr Pepper/Seven Up, Inc. recently acquired Snapple Beverage Group from Triarc Cos. (see V/T, September), the latest in a series of moves designed to improve the company's competitive posture. PepsiCo's "SoBe" acquisition also advances a strategic plan under which Pepsi has built its portfolio of noncarbonated beverages to include "Aquafina," the leading bottled-water brand; "Lipton" ready-to-drink tea, also a category leader; and "Frappuccino," the number one packaged chilled coffee beverage.
Coca-Cola, meanwhile, has been engaged in an extensive restructuring initiated by its new chief executive officer, Douglas N. Daft, who took over in February of this year. The Times reported that this reorganization has involved laying off about 18 percent of the company's workforce, and replacing 23 of its 26 division heads. He has asked the new management team to draft blueprints for increasing soft drink sales in key markets, particularly domestic ones. And his decision to settle a federal discrimination lawsuit, according to the Times, largely was based on his desire to "rid the company of lingering distractions" in order to allow it to focus on sales.
The difficulty about acquiring Quaker Oats is that its value in the eyes of its board of directors includes the value of its successful snack and cereal brands, which the major soft drink companies do not want or need. The Times noted that taking on that food business would have represesnted a "potentially unwelcome diversion" for Coke. To date, no one has been willing to meet Quaker's price.
Coca-Cola's steady endeavor to refocus its attention on sales and marketing has won it praise from Advertising Age. Reporting on Coke's decisions to open a "think tank" in New York City, and to make equity investments in e-commerce and other Internet ventures, Ad Age wrote, "the cola giant should be applauded for uncharacteristically thinking out of the box. Whether it's reality or perception, creative approaches in the soft drink business have largely been seen as the domain of rival Pepsi-Cola Co.
"Taking chances may be just the fizz that Coca-Cola needs at a time when its core business, soft drinks, is relatively flat vs. alternative beverages," Ad Age suggested.
Meanwhile, the successive attempts to acquire Quaker Oats do not seem to have done anyone much good. Coke shares declined on fears that the company would overpay for Quaker Oats, then declined again on fears that the deal would fall through. Quaker shares also dipped on that fear. Focusing on consumers, and on sales, seems to be a better approach.