Bottlers Sue Coca-Cola

At issue: Wal-Mart Powerade delivery plans

Published in CSP Daily News

SPRINGFIELD, Mo. -- A group of about 50 Coca-Cola bottlers filed a suit in U.S. District Court here to prevent The Coca-Cola Co. and Coca-Cola Enterprises Inc. (CCE) from shipping PowerAde to customer warehouses instead of delivering the product directly to individual stores, a system that has been in place for more than 100 years.

Coca- Cola bottlers will also seek a preliminary injunction to stop CCE's PowerAde warehouse delivery plans until the legal action is resolved.

A similar suit is also expected to be filed in Circuit [image-nocss] Court of Jefferson County in Birmingham, Ala., by an additional group of bottlers bringing the total number of bottlers involved to nearly 60.

The suits contend that an agreement negotiated in 1994 between the bottlers and the company specifically prohibits warehouse delivery of PowerAde to retailers like Wal-Mart.

The plans for a large scale rollout of warehouse delivery of PowerAde fundamentally alters the system that has made Coca-Cola the most recognized global icon and one of the world's most valuable brands, said Claude B. Nielsen chairman, president and CEO of Coca-Cola United Bottling Co., Birmingham, Ala., the third largest Coca-Cola bottler in the United States and a member of the executive committee for the Coca-Cola Bottlers Association.

Nielsen said the bottlers and Coca-Cola have worked for months to come to an acceptable resolution of the issue of PowerAde warehouse delivery. Unfortunately, despite our best efforts, we have not been able to reach a solution with either the company or CCE and we are left with no alternative but to initiate legal action, said Nielsen.

The bottlers are also concerned that the warehouse delivery of PowerAde violates the principles that underlie the bottlers' perpetual contracts with Coca-Cola. Throughout their 100-year history, bottlers have served all of their customers directly, large and small, by using their own employees and trucks to deliver product to store shelves within their exclusive territories.

In the 1970s, that system was challenged by the Federal Trade Commission (FTC) in part because of objections that the exclusive territory system made it impossible for large customers to use their warehouse delivery systems. Congress intervened and passed the Soft Drink Interbrand Competition Act in 1980, concluding that the bottler system should be preserved because of its benefits to competition, consumers and local communities including smaller retailers.

All Coca-Cola bottlers, first and foremost, seek to provide the best and most reliable service we can for our customers, said Edwin C. Rice, chairman and CEO of Ozarks Coca-Cola Bottling, Springfield, Mo., which saw its PowerAde volume grow by 121% in Wal-Mart stores in its territory in 2005. Regrettably, this action involves one of our most valued and largest customers. It is our commitment to provide Wal-Mart with excellent service and local promotional activity that will continue to build the PowerAde brand.

We believe that DSD continues to provide retailers, both large and small, with the most efficient and effective distribution of Coca-Cola products, said Rice. Combined with superior merchandising, local brand development and strong local relationships, DSD has had a tremendous impact on the overall success of the PowerAde brand.

Research shows the bottling system played a key role in the doubling of PowerAde sales volume between 2000 and 2004. While PowerAde trails the market leader in isotonic drinks nationally by a wide margin, several of the plaintiff bottlers, which have more than 10,000 employees collectively, have built PowerAde into either a leadership or strong contender position in their local markets.

The value that the bottling system brings to the Coca-Cola Co. and our customers is without question, said Rice. We believe the ultimate success measure for retailers is increasing PowerAde sales, which is more a matter of operational performance on the part of the bottler than warehouse delivery. Getting the product to the warehouse is not the goal. The goal is getting the product into the hands of more consumers more often.

Atlanta-based Coca-Cola said it is extremely disappointed with the suits by bottlers representing about 10% of the company's U.S. volume, attempting to block the test by CCE of a new delivery system for Powerade.

These suits are actions against our consumers and our customersthey would prevent the Coca-Cola system from strengthening its competitive position in this category and meeting consumer demand for lower cost, more efficient access to our popular Powerade sports drinks, said Don Knauss, president of Coca-Cola North America. The actions by bottlerswould greatly hamper the Coca-Cola system from competing with other sports drink brands, and that does a great disservice to the system, its people and its consumers.

He added, We want to work with all our bottlers to create growth in all channels and with all customers. Litigation is completely inappropriate and unfounded in light of the ongoing discussions between the company and all our bottlers to respond to a major customer's request for the benefit of everyone. We are extremely disappointed that a few individuals are attempting to hijack those discussions.

Powerade U.S. volume growth was in double digits in 2005, reaching an 18.6 share in the sports drink category (FY 2005 Nielsen Measured Channels). Wal-Mart approached the company and its bottlers last summer, saying it wanted to increase availability of Powerade in its stores and grow the brand even faster, if the system would allow it to deliver the product to its stores through its own warehouses. In response, CCE decided to conduct a test of that proposal in some of its exclusive territories, which it is allowed to do under its contract with the company.

When a customer comes to our system with an idea, we want to consider it as a system for the benefit of our consumers and our entire system, which is how we have handled this request, said Knauss. We are currently reviewing a complex and unrealistic proposal from the Coca-Cola Bottlers Association and have committed to responding to it by February 22. These lawsuits will only shut down for everyone what we believe had been a productive business dialogue.

Meanwhile, Coca-Cola said that Warren E. Buffett and J. Pedro Reinhard have informed the company that they do not intend to stand for re-election to the board at the upcoming annual meeting of shareowners.

Buffett said that his decision was a consequence of the increased demands on his time resulting from Berkshire Hathaway's acquisitions of new companies. He also noted that Berkshire Hathaway intends to retain its holdings of Coca-Cola stock.

Both Buffett's and Reinhard's terms expire on April 19, 2006, at the Company's Annual Meeting of Shareowners. The company has no immediate plans to fill the vacated board seats.