The Pepsi Re-Alignment And Small Brand Innovation

What's on the truck?

There has been lots of coverage of Pepsico's (PEP) move to purchase its two largest bottlers - Pepsi Bottling Group (PBG) and Pepsi Americas (PAS). In short Pepsico, which owns a significant, but not controlling interest in these businesses, has decided that now is the time to fully align their system.

While this is not a revolutionary idea - Dr Pepper Snapple Group executed a similar plan in 2006 - it is likely have big ramifications for the beverage industry, and specifically for emerging beverage brands .

With the bottling systems separate to the parent companies, small emerging businesses still had a chance at gaining distribution through big beverage systems... and indeed Muscle Milk and Rockstar have recently taken advantage of the PBG/PAS system. It is likely that Pepsico will not be as tolerant to those incubation businesses - and block small competitor access to this resource.

Indeed, it is now possible to see an industry with four large centralized systems. Coke, Pepsi, Dr Pepper Snapple and InBev/AB could carve up the marketplace, and restricting small brand access to growth.

As a "glass half full" person, I would also believe that there will become an even greater opportunity for smaller, non-aligned distribution systems across the USA. But, importantly, these systems will need a new, high margin, breakout product to again disrupt the consolidation, much as Snapple did in the 90s and Vitamin Water did in the past decade.

The lessons of the past 30 years that every consolidation tends to create an equal fragmentation as long as there is high margin innovation to support the change. As ever beverages are a world of constant change.