Supply Chain Structural Change Within the Beverages IndustryInitial Signposts Emerge

0 comments Posted by Bob Ferrari on Feb 22, 2011 in Controlling Supply Chain Costs, Industry Specific Supply Chain Issues, Supply Chain Business Process, Supply Chain Strategy | 0 comments
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 Colas 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 Pepsis 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 Im 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 authors 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

Supply Change Structural Change Begins to Emerge Within the Beverages Industry
0 comments Posted by Bob Ferrari on Mar 3, 2010 in Supply Chain Business Process, Supply Chain Strategy | 0 comments
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 WalMart

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 assetintensive 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. Its important to understand the logic made by each companys 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 noncarbonated 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 Warrens 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. CocaCola 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.

Bob Ferrari

http://www.theferrarigroup.com/supply-chain-matters/tag/pepsico-supply-chain/ http://www.scribd.com/doc/35492024/Supply-Chain-Management-pepsi

1 India Packaging Show 2006 Modern Packaging Trends in Retail & Supply Chain Management Pradeep Sardana PepsiCo India2 India Packaging Show 2006 What is Packaging? Techno-economic function aimed at minimizing cost of delivery while driving sales & profits Art, science & technology of preparing goods for Market and sale Means of - Product handling - Product integrity - Brand presentation3 India Packaging Show 2006 Trends impacting Packaging Consumer choice Environmental pressures Recycling Statutory Declarations Technology improvements Materials Security features Processes Retail needs Unique SKUs,Bundling Bar coding RFID Consumer Retail Packaging Supply Chain Supply Chain4 India Packaging Show 2006 ` Consumer Retail

Packaging Supply Chain Consumer Retail Packaging Supply Chain5 India Packaging Show 2006 Consumer Changing demographics Younger earning population Brand conscious 54% below 25 years 81% population below 45 years More acceptance of new concepts Changing aspirations More nuclear families with dual income 75 million households, called consuming classes with annual income between 50000 to 3 lacs 1 Million Households in creamy layer with income at par with International Higher disposable income and easier financing options Convenience overriding price consideration Lifestyle values Global lifestyle: media exposure and overseas travel Look at me (LAM) the most important criteria6 India Packaging Show 2006 ` Consumer Retail Packaging Supply Chain Consumer Retail Packaging Supply Chain7 India Packaging Show 2006 Macro environment Globalisation Entry of leading Indian & global retail brands Retail format consolidation/customization in India Financial institutions upbeat on the sector Several Indian & international FIs setting up specialized division for retail funding Easy availability of credit Investments in retail infrastructure Government support Infrastructure development

 Policies favouring growth Tax and duty structure rationalization (VAT) FDI policy8 India Packaging Show 2006 Use of environment friendly materials Build industry standards Maharashtra govt bans poly bags < 50 microns Global retailers demanding Non PVC shrink sleeves Promote recycling strategies Forced standards by customers/govt agencies and organized retailers Ensure Product security Social Responsibility 9 India Packaging Show 2006 ` Consumer Retail Packaging Supply Chain Consumer Retail Packaging10 India Packaging Show 2006 India moving at a fast pace towards consumer driven economy Demand for competitive goods & services by Indian consumers like global counterparts Organized retail can be a major driver of economy Can attract large FDI and FII investments Industry driven Distributor controls Consumer driven Retailer controls Consumer dictates US UK Germany Japan HK Singapore

Taiwan Indonesia Philippines China India Retail Power Indian Retail Landscape11 India Packaging Show 2006 Indian Retail Landscape Total retail market: Rs 1,000,000 crore ($235 billion) 12 million + outlets, only 4% > 500 sq.ft Modern Trade: Rs 30,000 crore ($7 billion) with a Share of : 3% Modern trade by 2010 : 10% of retail market 100,000 Cr12 India Packaging Show 2006 ` Consumer Retail Packaging Supply Chain Consumer Retail Packaging13 India Packaging Show 2006 High growth rate of modern trade 30% plus Share of organized retail 15%+ for top 10 markets Share of modern trade as high as 60-70% for packaged food categories for top 10 mkts Supply chain clusters close to top 10 mkts Retail format consolidation in India VAT & supply chain implications Local availability of cheap technology resources Supply Chain14 India Packaging Show 2006 ` Consumer Retail Packaging Supply Chain Consumer Retail Packaging15 India Packaging Show 2006 Convenience

 Buying decisions within fraction of a second Modern trade ambience offers Touch & Feel Multipacks - Value creator to all stake holders Addresses the usage cycle demands: Easy to handle Easy to store Easy to consume Easy to dispose Packaging A Key differentiator Packaging & Consumers16 India Packaging Show 2006 Packaging & Retail Developing multi pick-up & drive POP with bundled packs Retail shelf friendly17 India Packaging Show 2006 Built-in POP though packaging Create billboards using pack orientation Run promotions on packaging Electronic advertising budgets: POP offers alternate media Packaging as a Marketing Tool18 India Packaging Show 2006 Packaging as a Supply Chain tool Laminate, Rigids,Cartons . Retail pack Dist. Pack Pallet Load 15 - 24 kg 2 4 kg 1000 kg Organized retail route Integrated Pack Model Primary & In plant storage only secondary routes Operation Retailer pack Tactical Consumer pack Secondary route Primary route Strategic Promotions X Secondary route Primary & In plant storage only secondary routes Operation Retailer pack Tactical Consumer pack Secondary route Primary route Strategic Promotions X Secondary route - GS 1 standards (bar codes) - RFID tags for real-time stock replenishments

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Tubes Flexibles Rigids Taping Banding Sleeves Strapping Hi Cone Stretch sleeves Stretch banders Shrink Carton Blister Packs21 India Packaging Show 2006 Thank You!