Coke Wants To Own Bottlers Again – Is Past Strategy A Sign of Times To Come?

Friday, February 26, 2010

Photo: Coca-Cola bottlesOn Thursday, Coca-Cola (KO) announced the acquisition of all North American bottling operations from Coca-Cola Enterprises (CCE). (Click here for Coca-Cola press release)

This is an example of “vertical integration,” a growing activity among leading companies. As I wrote in December (“Message from Companies: Growth with Inflation Is Coming”), I believe vertical integration is more than an individual corporate tactic. It looks to be a widespread growth strategy for an inflationary environment.

In 1986, with inflation having peaked and now steadily declining, Coca-Cola spun out Coca-Cola Enterprises. Strategically, it said it wanted to continue the consolidation of independent bottlers in a company specifically created to do so. Not said was that they didn’t want this typically less-profitable/capital-intensive/slower-growing part of the business watering down the main company’s results. (Coca-Cola did retain a position in the Coca-Cola Enterprises to protect its interests.) In other words, in 1986, management felt that vertical integration would hinder Coca-Cola’s growth and profitability plans. The graph shows that their decision was wise.

Graph of KO and CCE stock price history, adjusted for dividends

So, the question is, why does Coca-Cola now want to take back all of the North American bottlers? The official explanation has vague terms such as “efficiencies” and “operational synergy.” (Want more of those phrases? Read Chairman and CEO Muhtar Kent’s two paragraphs of comments in the press release. Whew!) But management didn’t need to wait 24 years to achieve those efficiencies, etc. For that matter, they simply could have skipped creating Coca-Cola Enterprises in the first place.

The answer comes when they say the action is in line with their “2020 Vision,” meaning their 10-year outlook and business plan. I believe their expectations are for growth with inflation, so they want to regain full operating and pricing control over North American bottling operations. This is where they are most exposed to US inflation. Exchange rates and currency hedging can protect foreign profitability, which is likely why Coca-Cola Enterprises will have the European bottlers. (Other countries/regions have their own bottlers.)

So, what do we take away from all of this?

  1. Knowing that companies are gearing up for growth with inflation, we should do the same
  2. Understanding vertical integration’s benefits, we can better judge company moves to find winning investments – like Coca-Cola

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John Tobey on Seeking Alpha

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February 2010