What's fizzing between Cott and Walmart?

Cott, the world's largest private label (retail brand) soft drink provider, announced that Walmart USA had informed them of a 3 year phase-out of its exclusive carbonated soft drink (CSD) supply agreement (click here) . This means that Walmart can source one-third of its private label soft drinks from other vendors in 2010, two-thirds of its requirement in 2011 and its entire requirement from other vendors in 2012.

Cott gets more than 30% of its revenue from the Walmart relationship (CSD, water, other beverages). Clearly a lot is at stake for Cott, which reported a $88 MM loss in its third quarter, coupled with a 9.5% decline in sales compared to last year. With only $21 MM of cash (Nov'08) and a debt/ equity ratio of 2.3, Cott is in a tight liquidity position, given that it had cash outflow of $17 MM in the first three quarters from operations and capex. Any decrease in Walmart business is likely to affect Cott significantly.

I stopped to think: Why would the world's largest retailer cancel its exclusivity clause for its fizz supplier (which has been a supplier for 10 years now)? What should Cott expect in terms of sourcing impact?

• Exclusive relationships are not common in the food & beverage market. Cott had managed to get an exclusivity clause in its agreement with Walmart in 2000 because Cott needed to make significant capex to support US domestic CSD supply to Walmart.
• Walmart may be creating the flexibility to source from other vendors, if Cott has sustained losses during the recession and may get operationally affected.
• Cott's conference call referred to Cott's extensive US domestic production facilities and its proprietary CSD formulas. It will be difficult for another vendor to replicate the exact taste of the Cott's products and to match the production facilities. As such, it will be difficult for Walmart to rapidly introduce a new CSD vendor with the same brand and different taste than their current product. Walmart may have to spend significantly to introduce new sub-brands in case they want to source from multiple vendors.
• While private labels account for more than 25% of bottled water sales, they account for less than 15% of retail CSD sales ( I don't know the figures for Walmart). Although private label share of the CSD market is increasing, the national majors (Pepsi, Coke) are fighting back strongly using discounts and promotions. In this scenario, it is unlikely that Walmart will want to change its private label sourcing strategy and experiment with the taste of its products.

In short, my assessment is that Cott has little to worry about if it maintains the quality of its products and improves the quality of its balance sheet.

Let me know what you think...

The brand new face(s) of Pepsi ;-)

Pepsi announced that it is rejigging its brands at the Morgan Stanley Global consumer & retail conference last week. The key elements of the brand redesign and repositioning are:

• New logos for all the Pepsi beverage brands which supposedly leverage Pepsi's design heritage, humanity, and simplicity. The logo re-design efforts are being led by Arnell Group (the same agency that re-branded Reebok as Rbk, and Donna Karan as DKNY).
• Clear sub-segmentation of the hydration 'need state' into simple hydration (Aquafina), body wellness (Propel, SoBe), and performance hydration (G2, Gatorade). Pepsi seeks to expand ('democratize') the brand appeal of Gatorade from athletes to exercisers.
• Repositioning of Tropicana for the breakfast occasion and Trop50 for calorie-conscious consumers
• Targeting of Lipton and Tazo RTD teas at specific demographic and need sub-subsegments within the Nourish need state
• Launching hybrids of the energy drink AMP (with tea, lemon) to incorporate consumer feedback of unfamiliar taste and lack of thirst-quenching in the Transform need state

I think these are bold moves that will revitalize the CSD market and well as position Pepsi well in the non-carbonated beverages market.

Some of the products launched by Pepsi recently are very notable (Diet Pepsi Max, flavored AMP variants). As a traditional Diet Coke fan, I was surprisingly attracted to the taste of Diet Pepsi Max. I personally witnessed a free sample promotion for Diet Pepsi Max outside Grand Central station in NYC in mid-October and the reviews appeared good. Pepsi has opened up a new segment in the CSD market by adding ginseng to cola. This will attract consumers who want a rush of energy with few calories at a price point below energy drinks.

The ball is now in Coca Cola's court...