PepsiCo chairman/CEO Roger Enrico indicates major structural changes lie ahead for Pepsi's US bottling system. In recent comments to several Wall Street analysts, Enrico reportedly talks of 4-6 large bottling groups formed from combination of company-owned (Pepsi COBO) and franchise-owned (FOBO) bottling operations. Pepsi would own minority or majority equity interests in some or all. Pepsi now owns 100% of its largest US bottler, Pepsi COBO (table). In recent years, industry executives/analysts speculate Pepsi will divest COBO (BD 2/20/98). Many suggest separation of Pepsi's concentrate and bottling operations possibly provides certain financial benefits for PepsiCo and competitive benefits for Pepsi; structure would be similar to Coke's with CCE/other anchor bottlers. New Pepsi scenario would also capitalize on current management strengths at some Pepsi FOBOs.

Pepsi 'anchor' bottlers? Multiple Pepsi bottlers speculate FOBOs in line for new Pepsi US major bottler -- "anchor bottler" -- status include: Pepsi General, Pepsi Gross & Jarson, Pepsi Honickman NY, Pepsi Pohlad Delta, PepCom and Pepsi Lane. Turner? Several knowledgeable industry executives also predict big, well-regarded 3rd-tier bottler -- Dr Pepper Texas Turner -- possibly plays future role in Pepsi system. Turner now holds multiple Cadbury and RC franchises in major Texas markets plus southern California. Pepsi COBO is strong in southern California, but lags both Coke and Turner in Dallas/Ft. Worth and Houston.

New contracts? Bottlers say Pepsi would request new anchor bottlers enter into new "master" contracts requiring "participation in annual operating plan," "distribution of PepsiCo products," "performance standards," "input on management." Pepsi bottler: "There would be performance-based contractual provisions beyond what Pepsi bottlers have today." Pepsi system. In 1997, COBO handles 56.8% of Pepsi's US bottle/can volume; table lists top-10 Pepsi bottlers plus share of volume handled by each; percentage after 4 bottlers' names indicates stake in each owned by PepsiCo.

Details from analysts. After Enrico meeting, Goldman Sachs' Marc Cohen reports Pepsi may "parlay existing assets into positions in what could eventually become only a handful (maybe 4-6) of bottling groups traversing North America. (Pepsi) will probably maintain majority interests in a significant portion ... while moving to a minority interest in others and could get to the end product by buying and selling some territories." Cohen: "Pepsi hopes to eventually realign its North American bottling system into a more limited number of more competitively positioned bottlers without substantially changing its own overall investment in bottling assets." Sanford Bernstein. Bill Pecoriello -- after Enrico meeting -- notes: "Plan to create regional 'anchor' bottlers through a combination of current COBO operations and regional franchise bottlers is a major 'sea-change' for PepsiCo with important longer term benefits." PaineWebber. Manny Goldman meets with Enrico, reports "Pepsi is thinking in terms of five or six major bottlers, some or all of which Pepsi may have a part in." Notes: "The idea is to gear the bottling system to the customers. Pepsi wants a bottling system which is retailer-friendly." Morgan Stanley. Andrew Conway: "Pepsi has to be sure it knows what the end game is, given the dislocation this transition period could cause its (US) bottling system. If this is a step toward massive consolidation, it's a positive development." Adds: "I believe (Pepsi CEO) Craig Weatherup is spending more time on bottling."

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