Analyzing Coca-Cola Activity

Recent purchase of Odwalla has Wall Street talking.

By Adam Ismail

It has finally started to happen…Coca-Cola, Atlanta, GA, facing intense pressure from the street to become more active in the new age beverage category, acquired functional juice maker Odwalla, Half Moon Bay, CA, last month for $181 million. The move is a very unusual one for Coke, which has long been a very conservative company in the beverage industry, for a number of reasons.

Primarily, Coke has traditionally steered clear of controversial products for fear of the negative media backlash. When it launched its KMX beverage into the high growth energy drink category, Coke deliberately did not formulate the product with the taurine amino acid for which category leader Red Bull had become known. Apparently a lot of Red Bull’s consumers believe the ingredient comes from bull’s testicles, which was far too risqué for Coke to even go near.

So when you consider that Odwalla had received a warning letter from the Food and Drug Administration for putting unauthorized herbal ingredients in its beverages, a first pass look at the deal might make you wonder why Coke would be interested in the company. On top of that, an E.coli bacteria contamination a few years ago at Odwalla severely hurt the company after one person’s death caused a massive recall and overhaul of the business. However, the company seems to have turned things around, having acquired its largest competitor and grown to over $100 million in sales, which of course is why Coke even came to the bargaining table.

The deal also gave the street insight into how Coke plans to attack the health beverage market. Odwalla will now operate as a subsidiary of Coke’s Minute Maid division, which—it disclosed for the first time—will become the company’s health and wellness outlet. The two juice companies are now joined at the hip and have been given a mandate to create new high growth health products. The new structure comes on the heels of Minute Maid nearly becoming part of the proposed joint venture with Procter & Gamble that fell through earlier this year. What makes it so atypical for Coke is how the company has now declared its commitment to put Minute Maid at the center of its strategy so soon after a deal that nearly removed the brand from Coke’s core business.

What is even more unusual about the deal is the size of the target. For a $5.4 billion behemoth like Coke, single products often have revenue benchmarks exceeding the entire sales of all of Odwalla’s products combined. In June, Coke also acquired another small functional beverage player, Mad River Traders, that had less than $5 million in revenues. Has Coke decided to focus on small brands and small products? It isn’t likely. With Mad River, Coke immediately put the products into its distribution and has ramped up sales considerably. With Odwalla it is a little less clear on how it will grow the business to those traditional revenue benchmarks, but making it part of Minute Maid’s supermarket distribution cannot hurt.

So while the deal is certainly atypical for what industry analysts would have expected Coke to do, a fact which may be beneficial in itself, it marks a new paradigm for Coke and how it attacks the market. Coke management has been under a lot of pressure to push the envelope and really develop a unique and innovative offering. For the conservative beverage industry, acquiring a company with a somewhat sordid past, restructuring a major division to focus on a new mission and seeking out tiny companies that may cost more to integrate than to actually purchase, certainly is unique. The key thing to look for in Coke, however, is if it will help make the company more innovative with health.NW