Special Issue: Coke and P&G Join Forces.

Coke Forms Joint Venture With Procter & Gamble.
Pringles Salty Snacks 'Critical Part.'

Talk with Daft and Short.  New Company Includes Minute Maid, Fruitopia and Sunny Delight.

Coke's new joint venture with Procter & Gamble will incorporate Coke's Minute Maid and Fruitopia plus P&G's Sunny Delight juice drink and Pringles salty snacks.  Coke and P&G say focus will be "developing and marketing innovative juices, juice-based beverages and snacks on a global basis."  New venture -- 50%-owned by each company -- will also include P&G's food/beverage research and development unit.  Company will be run by Don Short, now president Coke's Africa/Middle East group.  JV's board will consist of two Coke and two P&G executives.  JV will initially have about $4 bil in revenues (75% beverages, 25% snacks), 6000 employees, 15 production plants.

Interview:  Daft and Short. BD talks with Coke chairman/CEO Doug Daft and Short.  What does P&G bring to the table for Coke? SHORT:  "When a partnership works, it's because each of the partners brings unique capabilities ... The innovation side of P&G is a leverage that we didn't have in the Coke system today ... The distribution system and merchandising and the ability to price by channel is a unique capability we have that Procter doesn't have ... We're grounded in common values, but the fundamental differences are so unique that we'll be able to get (revenue and cost) leverage."

Joint venture more about today's brands or future? DAFT: "Both.  Both (parts of JV) are substantial businesses today.  Both parties bring, however, the ability to take what are good businesses (and) turn them into something exponentially greater.  It's like (something) made in heaven.  It gives the R&D folks the way to the marketplace instantly ... The idea of (joint) venturing is important.  If this were a straight acquisition, you wouldn't get the same complementary process."

Role of Pringles?  SHORT:"The day this company starts, you have such distribution opportunities in that Pringles is in about one-tenth of the outlets that Coke is in."  DAFT:  Salty snacks and beverages "are such a natural fit.  Put a can of Coke next to a can of Pringles -- both have the same shelf life, they even look the same.  Pringles is coming out with a small can, so we can vend it.  Again, it's the complementary principle."

Might Coke bottlers handle Pringles snacks? DAFT:  "Absolutely.  This is a critical part of what we'll do.  I've spoken to several big Coke anchor bottlers, and they're ecstatic about what they can do with this.  They can take this into channels that Pringles is not able to penetrate.  For them, it's another revenue stream."  SHORT:  "This is a critical part of this strategy."

Will cold-fill Sunny Delight go into Coke system? DAFT:  "(JV) will honor existing agreements.  The brand is an excellent brand.  It fits in well.  It's a teen brand."  Synergies with refrigerated Minute Maid and Sunny Delight? DAFT:  "Yes, both in the U.S. and Europe and elsewhere as well.  (Sunny Delight) will fit into Japan well, where we have a big juice business."

PepsiCo view. PepsiCo executive:  "We respect each of them as competitors and have learned to never underestimate them.  We've also learned throughout our history that competition makes us better by raising the bar on our performance."

Deal rationale. JV combines Coke's distribution strength with P&G's R&D capability, says executives/analysts.  Senior beverage executives:  1) P&G is "excellent at product development, but they have a problem with beverage distribution."  2) "P&G has amazing R&D capability, but they're not as good as Coke at commercializing it."

Snacks. Coke is now -- via JV -- player in salty snack business dominated by PepsiCo's Frito-Lay.  Pringles global sales $1.5 bil; sold in about 70 countries.  Product is line of potato snacks, stack-packed in tubes.  Market shares.  PepsiCo says Frito's US market share at 56; Pringles at 6. Worldwide, Frito share at 40. Plus.  P&G CEO A.G. Lafley says in investor call Pringles "placement in grocery stores should significantly increase" via Coke system.  'On route trucks.'  Short:  "Our distribution system will enable us to get Pringles into more points of distribution where the consumers are willing to pay for the convenience of a smaller immediate consumption size."  Says in U.S. new JV can "triple the number of vendors and double the C-stores that carry Pringles."  Adds:  "Pringles packages will fit on route trucks and inside vendors."  Notes Pringles plans new flavors, brand extensions and products.  Daft says he's had talks with CCE and Coke Femsa and they've "expressed excitement."  Coke bottlers.  CCE says, "we're excited about this new enterprise ... We see the opportunity for profitable growth."  Other bottlers reached on day deal announced:  1) "We're excited about the marriage."  But bottler expresses questions about Pringles "actually going on our trucks."  Sees joint sales/promotional potential but says "actual distribution may come from different directions."  2) "It's still early.  We'd like to have Pringles on the trucks.  We could see profitable growth by putting Pringles on the trucks, but we must work out the details."

Beverage brands. Coke's Minute Maid consists of: refrigerated juices and juice drinks; shelf-stable juices/juice drinks; and flavored CSDs.  P&G's Sunny Delight includes:  refrigerated juice drinks and cold-fill non-carbs produced on soft drink bottling lines.  Sunny Delight cold-fill handled in US by Pepsi and 3rd-tier bottlers.

Refrigerated. Table A shows data for refrigerated juice and juice beverage category in grocery channel in U.S. for 2000.  Category totaled $4.4 bil and about 727 mil 192-ounce cases in that channel. Industry executive estimates grocery channel represents about 50% of refrigerated category's total volume. Minute Maid and Sunny Delight combined would have dollar share just slightly less than Tropicana.

Shelf-stable. Table B shows U.S. volume/market share data for shelf-stable juice drinks full-year 2000. Data covers five major take-home channels: $4+ mil supermarkets, food stores under $4 mil, mass merchandisers, fuel stores and drug chains.  BD estimates total, all-channel volume for cold-fill Sunny Delight in 2000 was about 27 mil cases; Fruitopia at 40 mil cases.  System issues.  Several bottlers with Sunny Delight say franchise contracts for Sunny Delight not perpetual; many said to be expiring soon.  Accordingly, Coke may be able to switch most Sunny Delight into Coke system. Pepsi bottler with Sunny Delight says, "I'd hate to loose it.  We're happy with it."  But other Pepsi bottler says, "it hasn't been what we hoped.  The concentrate price is so high that we couldn't promote it on display with our CSD brands."

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