Coca-Cola Co and some of its U.S. bottlers are in midst of sometimes thorny talks re possible warehouse delivery of Powerade. Sources in system say at this point, Powerade is only product under discussion, and it would only be for Wal-Mart and possibly some other mass merchandisers. Impetus for this is coming from Coke and several large bottlers after "a request from Wal-Mart," says source. Possible test eyed for later in 1st quarter in southwest and then second test possible in southeast. Some smaller bottlers say they are concerned that this could be precursor of interest by Coke and larger bottlers in warehouse delivery for other non-carbs and possibly water in other channels/retailers. One issue is this: warehouse delivery could involve shipments of product from a retailer's warehouse outside a bottler's territory to retail locations inside that bottler's territory, due to large geographic distribution patterns of some retailer warehouse systems. Other bottlers, however, are concerned about any replacement of DSD with warehouse, says source. Under bottler contracts, bottlers have nearly exclusive right to deliver Powerade and other Coca-Cola Co products in their territories; however, Coke has right to deliver Powerade and a few other products to national food-service accounts via national commissaries. Most other warehouse delivery by Coke would not be allowed, says source.
Test last year. Coke/CCE tested distribution of Powerade via warehouse last year in southern California and, says source, got a "significant volume lift." Chain involved in test was Stater Brothers, which describes itself as largest privately-owned supermarket chain in southern California with 162 stores. That test was entirely in CCE's territory.
Rationale. Multiple sources say company's rationale for Powerade warehouse delivery is based on several things. First, some large retailers are said to want to try using it. Additionally, say sources, it could allow Coke to more effectively compete with Gatorade, which generally moves via broker-warehouse system. One beverage industry executive says, because of lower cost of warehouse delivery vs DSD, retailer profit margins on Gatorade are higher than Powerade; this could not be confirmed. Beyond competitive dynamics in sports drink category, some executives say warehouse delivery of some non-carbs would help Coke respond to challenges some bottlers face in moving multiple low-volume SKUs via DSD. Several sources say core CSD products like Coke Classic, Diet Coke and Sprite are not — and would not likely be — part of any warehouse delivery discussion. One bottler who backs warehouse idea says: "We need to compete more effectively with Gatorade." But also acknowledges, "some small bottlers are worried." Other system executive: "It will be hard to get competitive on some products in some channels without looking for alternative routes of distribution."
Issues. Though some big bottlers agree with use of limited warehouse distribution, others — mainly smaller bottlers — do not, and some are quite concerned. They see potential incursion on their DSD systems and on their exclusive territory rights. One bottler notes, this could be the "start of a slippery slope" in diluting essence of the business, which is exclusively delivering Coca-Cola Co products in defined territory via DSD. Executive: "The bottlers are concerned about the implications of warehouse delivery of Powerade and/or other non-carbs on their exclusive territories." Other bottler: "The biggest problem I'm worried about is affecting existing contracts with the company." Adds, "I'm worried that it would be the first of a series of dominos." Third bottler: "The concern is not warehouse delivery of Powerade into a specific outlet. It's a bigger issue. If it's Powerade, what's next? Are they looking at CSDs?" Continues, "It's a huge issue." Other executive acknowledges, "the company has a legitimate interest (in pursuing warehouse idea), and the bottlers have a legitimate interest in protecting themselves." Another bottler: "The talks are ongoing, they're very sensitive."
Compensation. One Coke system executive says if smaller bottlers are in a warehouse test geography and product that they didn't sell is shipped into their territory, "they would receive some form of compensation"; but smaller bottler says, this is not the case.
Plus. Part of discussion between Coke and bottlers has been handled, on behalf of bottlers, by Coca-Cola Bottlers' Association. Tom Haynes — who used to be general counsel of Coke North America and is now head of bottler association — has been involved in these discussions, and several sources say relations between Haynes and certain people at Coke are strained. Other source says talks between Haynes and Coke are "productive." One small bottler says: "He's been good for the system, and (we) strongly back him."
Irony: Pepsi. As Coke pushes for test of some warehouse delivery of Powerade, Pepsi bottlers seek bigger share of sports drink business. Some want Pepsi to allow them greater rights to warehouse-delivered Gatorade. Others suggest Pepsi system should find and develop another sports drink.
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