What the cola giant and its bottlers are really squabbling over is neither concentrate price nor soft drink price. Its the buy-out price
At first sight, Coca-Cola and its bottlers are fighting over the price of soft drinks and concentrates. But scratch the surface and a different picture emerges. The real battle is over the price Coke should pay for taking over the bottlers.
Says one activist bottler who has been rounding up the rest for presenting a common front to the multinational: If Coke had any sense, it would settle the issue by giving us a golden handshake. If the bottlers are holding out for the golden handshake, it is because they know Coke badly wants to align its Indian operations with its global model.
Internationally, Coca-Cola controls its bottling operations through subsidiaries or associate companies in which it has stakes varying from 13 per cent to 49 per cent. In India, Cokes 54 bottlers are all independent. Rahul Dhawan, director (external affairs and corporate communications) at Coca-Cola India, explains why the multinational isnt happy with this: The advantages of company-owned plants are that these can gain economies of large-scale production, purchase and distribution.
This is how Coca-Cola handles its bottling operations worldwide: set up a holding company, known as the anchor bottler, that buys out all bottlers in the region. Then, spin off the anchor bottler to the public but retain 13-49 per cent of the stake. Roberto C Goizueta, chairman and CEO of the Coca-Cola Company, puts the strategy
clearly: When the opportunity presents itself, we invest in bottling operations to further strengthen the system, then sell our stake at a later date. This is... an essential element in how we run the business to meet our long-term goals.
All that is fine, but the bottlers complain that the price Coca-Cola is willing to pay to buy them out is peanuts: $3 per crate of bottling capacity. The price they want: somewhere between $6 and $8. Coke now sells 110 million crates a year in India, so assuming that capacity is equal to actual sales, the difference in the valuation between Coca-Cola and its bottlers comes to Rs 1,500 crore. If you assume that capacity is double the present sales, as is likely, the difference in valuation would work out to Rs 3,000 crore. In clear monetary terms, that is the extent of difference between Coca-Cola and its bottlers. The on-going battles over concentrate prices are merely attempts to strengthen their own hand and weaken that of the opponents in the negotiations.
Take the battle over soft drink and concentrate prices. Bottlers say that by hiking concentrate prices and holding down the price at which they can sell the soft drink, Coke is squeezing their margins. In three years, the multinational has doubled the concentrate price. Coca-Cola counters that Rs 21 per crate is not an unreasonable price. The margins in the soft drink business are around 20 per cent higher than those in any other consumer product, says Dhawan. The bottlers dispute that figure, but what neither side disputes is that over a period of time, Coca-Cola has indeed reduced bottlers margins.
By sending a message to the bottlers that their operating margins are at its mercy, Coke strengthens its negotiating position on the acquisition price. The lower the margins, the lower the justification for the bottlers to demand a higher price. The multinational is planning for the day when the bottlers will see things the way it wants them to. It is already armed with FIPB approval for investing $176 million in four bottling plants under two holding companies Bharat Coca-Cola Bottling Company and Hindustan Coca-Cola Company Ltd.
The 54 bottlers will then have just two options: enter the joint venture or sell out. Coca-Cola is counting on the bottlers coming around, one by one. It says, for example, that the bottler in Hyderabad has agreed in principle to participate in the joint venture. It has also been circulating a statement by Prakash Chauhan, managing director, Parle Beverages Limited: Both Coca-Cola and us understand each others business objectives and together, we are implementing strategic initiatives for our long-term success.
Many bottlers, however, calculate that if they hang together, they could get a better deal from Coke. If squeezing margins is Cokes main weapon, the bottlers intend to use the political weapon. Many of them have been making representations to the government and lobbying with members of Parliament to put pressure on Coke. More recently, they have been talking about launching a new soft drink to take on both Coke and Pepsi. But the trouble is, time is against the bottlers. In another two years, the bottlers franchise will run out and then Coke will be free to do whatever it wants. As the deadline nears, the bottlers bargaining strength is bound to weaken. In fact, there is a sense of desperation among even the most determined bottlers. The bottling fraternity is less united now than it was a year ago, says one, adding: It could be only a matter of time before we give in.
If they give in, it wouldnt surprise Coke at all. Look at how the cola giant has organised its bottling operations worldwide and what it has been up to in recent times. The Coca-Cola Company has nine anchor bottlers across the world (see map). CCE, Cokes first anchor bottler, was floated in 1986 to buy out a bunch of non-performing bottlers in the US. Today, it is the worlds largest non-alcoholic beverage bottler and continues on its breakneck expansion course. Since 1981, Coca-Cola has completed 300 bottler transactions and in the first six months of 1997, it announced transactions with bottlers worth more than $7 billion.
The question now is: what price will Coke pay to remodel its Indian operations on the global pattern? Before we get to the answer, expect more posturing from both Coke and its bottlers.
