Pepsi ended up meeting Quaker at the altar after all. For Pepsi, the addition of Gatorade helps it improve its shelf space clout. Coke's been shut out of the fast-growing non-carbonated beverage market twice now by Pepsi this year. Pepsi's increased command of shelf space will be great for it, but not so good for Coke. Coke needs to find a way to increase its non-carbonated beverages presence. So far, Pepsi has beaten Coke at every turn.
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Like old flames who break up, date around, and find themselves unfulfilled, Quaker Oats (NYSE: OAT) and Pepsi (NYSE: PEP) got back together today. Quaker went out with Coca-Cola (NYSE: KO) and Groupe Danone (NYSE: DA), but the match-ups were never quite right. The boards of both Pepsi and Quaker have approved the merger, which is valued at $13.4 billion and has Pepsi trading 2.3 shares of its stock for each Quaker stub. The real benefit for Pepsi with the acquisition, above and beyond the addition of Gatorade to its non-carbonated beverages lineup, is the increased clout Pepsi will have for claiming retail shelf space. What benefits Pepsi, not surprisingly, hurts Coke. Why Quaker tastes better with Pepsi Pepsi also won't likely face the same anti-trust concerns that Coke would have had it bought Quaker. Gatorade controls about 83% of the sport-drink market, with Coke's Powerade coming in next at around 12%. Pepsi's All-Sport only has 3% of the market, and the company says it'll get rid of it if it has to. Coke's feeling the hurt What will impact Coke more, though, will be Pepsi's increased shelf-space clout. Shelf space has been a driver of all the food industry consolidation moves that have taken place recently, and there have been plenty: General Mills (NYSE: GIS) bought Pillsbury from Diageo (NYSE: DEO), Unilever PLC (NYSE: UL) grabbed Bestfoods (NYSE: BFO), and Philip Morris (NYSE: MO) bought Nabisco Holdings (NYSE: NA) to compliment its Kraft line. Even now, there's a battle brewing over IBP (NYSE: IBP), the country's largest producer of beef and second-largest producer of pork, as Smithfield Foods (NYSE: SFD) and Tyson Foods (NYSE: TSN) have traded salvos. By owning more brands, a company controls more retail shelf space. The company can use its increased presence in a powerful way to negotiate better terms and placement with grocery and convenience stores. Increasing shelf space and presence for a company's old products is one benefit that comes from an acquisition. (If you're interested in learning more about the retail food and beverage industry, it's covered in depth in the Motley Fool Research Industry Focus 2001 report.) Pepsi's increased presence In convenience stores, Pepsi's ability to negotiate very favorable terms and placement for its products will be improved. Pepsi will have all of its usual carbonated products, plus the Tropicana products, Aquafina water, Lipton teas, SoBe drinks, and now Gatorade. Pepsi will command much of the "door space" offered in convenience stores. With Coke and Pepsi and their various products, it's all about shelf space -- just as it is for non-beverage companies. Having your products positioned at eye level, and having as many of them as possible populating the shelves, is a constant battle. Pepsi has scored big wins in this battle so far this year. Coke, meanwhile, needs to find a way to increase its presence in non-carbonated beverages if it wants to get in on that growth.
It makes more sense for Pepsi to have Quaker than it did for Coke. Pepsi can integrate Quaker's snack foods into its Frito-Lay division, and Quaker's chewy granola bars and other snack foods should benefit from Frito-Lay's distribution network. Pepsi says it'll hang on to Quaker's slow-growing cold cereal business and will look for ways to develop snack versions of some of those products. Coke got out of the food business in the late 1980s and has retrained its focus on beverages, so it would have been saddled with a substantial business outside of its core strategy.
All this undoubtedly hurts Coke. The non-carbonated drink market is growing about three times as fast as the market for carbonated beverages, and Pepsi will control an estimated 25% of that market -- about one and a half times bigger than Coke's share. It's especially bitter for Coke given that Pepsi recently snatched SoBe -- a maker of herbal-enhanced happy teas -- from its grips before it went on to secure the Quaker purchase.
Pepsi owns Tropicana, and its derivitives -- like Tropicana Twister products -- share a grocery store aisle with Gatorade. Pepsi, given that it will own so much of that aisle, will have more clout with the stores for increased and improved shelf space. Pepsi believes that the addition of Gatorade to its line-up will help its sales of Tropicana products.
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