Cott Corporation

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Cott Corporation

207 Queen’s Quay West, Suite 340
Toronto, Ontario M5J 1A7
Canada
Telephone: (416) 203-3898
Fax: (416) 203-8171
Web site: http://www.cott.com

Public Company
Incorporated: 1955 as Cott Beverages Ltd.
Employees: 2,228
Sales: US$1.09 billion (2001)
Stock Exchanges: New York Toronto
Ticker Symbols: COT (NYSE); BCB (Toronto)
NAIC: 312111 Soft Drink Manufacturing

Toronto-based Cott Corporation is the world’s top supplier of private label (although the company prefers to call it “retailer brand”) carbonated soft drinks. Cott has 15 beverage production facilities located in Canada, the United States, and the United Kingdom, as well as a research facility in Columbus, Georgia. Major customers include Wal-Mart and Safeway in North America and the J. Sainsbury grocery chain in the United Kingdom. The Pencer family, Cott’s founders, have in recent years sold their interest in the business to Thomas H. Lee Co., a Boston investment firm, which now runs the company with a 34 percent ownership position.

Harry Pencer Founds Company in 1955

Cott’s founder, Harry Pencer, was a clothier in Montreal in the early 1950s and looking for a new business when he became involved in the soft drink industry by happenstance. Supposedly, his three sons—William, Samuel, and Gerald—were attending summer camp on Lake Winnipesaukee in New Hampshire and developed a taste for the regional New England Cott soda brand and its “17 heavenly delicious flavors.” Cott Beverage Corporation was established in 1923 by Polish immigrant Solomon Cott and his son Harry Cott, in Port Chester, New York. In 1952 Harry Pencer began to import Cott soda to the province of Quebec, where the fruit flavors such as orange, grape, black cherry, and raspberry proved popular. In 1955 he acquired Stewart Bottling Company, then licensed the Canadian rights to the Cott label and formed Cott Beverages Ltd. to bottle the Cott line of sodas using the Stewart facility. The Cott family eventually sold the company, and the U.S. rights to the Cott label, to Cadbury Schweppes.

The Canadian business was moderately successful during its first 20 years, establishing a following for its fruit flavors and brand loyalty in the Quebec province. The one area where Cott clearly failed was in producing a good cola, which was essential in achieving a higher level of success in the marketplace. (According to the Pencer sons, their father occasionally attempted taste tests between Cott cola and Coca-Cola or Pepsi—or simply poured Cott cola in the bottles of the major brands without telling them—but they claimed that they were always able to tell the difference.) Cott experienced a setback in 1970 with the recall of cyclamates used as an artificial sweetener in beverages, but by 1976 the company began to extend its reach across Canada. Although it remained a strong brand in Quebec, Cott was struggling when Harry Pencer died in 1983. That year the company lost $367,000.

Harry’s sons inherited Cott, and were advised by Coopers & Lybrand to simply liquidate the business. Nevertheless, the eldest son, Bill, along with President Maurice Chouinard, attempted to turn around Cott. The most important step they took was to cut costs by eliminating delivery and the company’s 60-truck operation—instead customers picked up the product themselves. As a result Cott was able to dramatically reduce the price of its soda, six bottles now retailing at 99 cents rather than $2.49. To better exploit this low-price niche in the Ontario market, Sam Pencer gave up his job as an insurance broker to work for the company on a full-time basis. The family then took the company public in 1986 under the Quebec Stock Savings Plan. Although shares went out at $7 they soon lost half their value, but other independent bottlers were also struggling at the time. In 1989 Cott bought out its chief competitor in Ontario, Tricopack Beverages. To this point the family business always found a way to survive, but just barely. It had a market capitalization of less than $10 million in 1989 when it began a period of remarkable growth under the guidance of Gerry Cott, the youngest of Harry’s three sons.

Gerry had been the least involved in the family business yet was named chairman of the board at a time when his name was flying high in the financial world. A natural entrepreneur, brash and visionary, he built a financial empire in the 1980s that ultimately crashed and burned. After college in the mid-1960s he ran a gumball machine concession in Montreal for the Steinberg supermarket chain, due in large part to his brother having married Ida Steinberg. He then managed to convince the CEO of the Rolls-Royce Canadian operation to meet with him and asked to run the auto plant’s cafeteria. Pencer claimed to run the cafeteria at the Steinberg’s headquarters and even escorted Rolls-Royce’s head of office services to the cafeteria where he pretended to be in charge, much to the befuddlement of the personnel. The trick worked, he won Rolls-Royce’s business and within several years he was running Montreal’s largest institutional catering operation. In the 1970s Pencer moved to Calgary to manage a Honda dealership and once again found a way to parlay a small venture into a much larger enterprise—Financial Trustco Capital. In the early years of the 1980s he pursued the dream of creating the first Canadian financial services supermarket. Fueled by junk bonds sold by Michael Milken and Drexel Burnham Lambert, Pencer grew Financial Trustco into a $2 billion insurance, trust, brokerage, and real estate conglomerate. The company was criticized for dubious, although legal, accounting, as well as its reliance on junk bonds. When the stock market crashed in October 1987, the business was overextended and in danger of collapsing. In 1988 Pencer stepped aside and out of the public spotlight, as the main subsidiary, Financial Trust Co., was sold off in a government bailout.

Making a Comeback with Cott: 1989

Chastened and his spirit all but broken, Gerry Pencer returned to the business world in 1989 at the behest of his brother Sam, who convinced him to help run the family soda business. As a result, Chouinard resigned as Cott’s president. By now, Sam had already taken the first step in pursuing the private label business, contracted by President’s Choice, the Loblaw supermarket chain’s well regarded private label business, to supply flavored sodas along with another bottler, HPI Beverages of Edmonton. The Cott plant, capable of producing 15 million cases of soda a year, only had business that totaled three million cases. In order to take advantage of that excess capacity, Gerry approached Coca-Cola and won a five-year contract to bottle Coke, which added credibility to Cott. At the same time, Royal Crown (RC) contacted Sam about taking over the RC franchise in Quebec, due to the recent sale of Canada Dry to Cadbury Schweppes, which was unable to bottle in Canada because of a deal with Coke. Cott assumed the RC license for Quebec in 1989, then added the Ontario franchise the following year.

Pencer saw the Royal Crown connection as a way to realize a longstanding dream of his father’s: producing a good tasting cola. In blind taste tests Royal Crown held its own with Coke and Pepsi but never had the proper marketing to challenge the top two brands. Pencer tried to convince Royal Crown executives to let Cott use their cola concentrate in a modified form for the private label business. While seeking potential supermarket partners, Pencer learned in 1990 that President’s Choice was looking for a new cola supplier. He and Sam met with the head, David Nichol, who had also been frustrated in his attempts to produce a cola that could rival Coke and Pepsi in taste. In order to win his business, he told the brothers that Cott would have to meet three conditions: come up with a cola that tasted good, improve the company’s packaging, and come in with a price point 30 percent less than Coke and Pepsi. According to Nichol, he never expected to see the Pencers again.

Nichol had become a celebrity by masterminding President’s Choice, which transcended the private label category, becoming an upscale in-store brand of some 1,700 products, accounting for close to C$1.5 billion in annual sales. Not only were his taste buds the deciding factor for the addition of new products, his was the face that personally recommended on television that Canadian consumers should try such President’s Choice fare as Ancient Damascus Tangy Pomegranate Sauce. In college Nichol had roomed with Galen Weston, whose family owned Loblaw Companies Ltd., Canada’s major supermarket and food merchandising group. After Weston took charge of the business he turned to Nichol in early 1972 to help him find an executive to turn around the struggling Loblaw’s supermarket chain. Nichol recommended Richard Currie, a colleague at McKinsey & Co., an international management consulting firm where the two men worked. Currie was then instrumental in Weston hiring Nichol to assist him at Loblaw. For several years Nichol was involved in store operations, but product development was clearly his passion. In 1983 he began work on the first products for President’s Choice, the brand inspired by the success of the St. Michael’s house brand in the United Kingdom. A year later Nichol was made president of Loblaw International Merchants to devote all of his time to building President’s Choice, which proved so successful that he was able to extend the brand to a number of major supermarket chains in the United States. Like Pencer, Nichol dreamed big, as well as shared a love of food. He increasingly viewed President’s Choice as a revolution, a way to shift the balance of power in the food business from national brand manufacturers to the supermarkets.

After their initial meeting early in 1990, Pencer returned to see Nichol, bringing with him samples of Royal Crown cola. Nichol wanted some changes to the taste of the cola but was very much interested. Pencer then went to Royal Crown offering to add 50 million cases to the company’s 150 million cases of annual volume. Moreover, by selling RC cola as a house brand the supermarkets would have an incentive to make shelf space for the product. To seal the deal, however, Pencer had to fly to Florida to meet with Royal Crown’s current owner, the elderly, notorious corporate raider Victor Posner. After a week of negotiations with Posner, Pencer emerged with a 25-year private-label rights agreement for North America and a manufacturing agreement throughout the world.

Company Perspectives:

Our success lies in the production of innovative, high quality retail brand beverages combined with world-class packaging.

Contract for President’s Choice Cola: 1990

Cott took over the President’s Choice cola contract and began shipping in March 1990. The soda was an immediate success and Pencer and Nichol became close friends, taking vacations as well as attending trade shows together. Following the house brand strategy Cott grew at a dramatic rate in the early 1990s. From $43 million in sales for fiscal 1989, the company reached the $500 million mark in 1993. Most of the growth took place in the United States where Cott had no bottling facilities. In order to supply the market, the company contracted independent bottlers with excess production capacity, just as Cott had done with Coke. In effect, Cott developed a third soft drink system in North America. The company also expanded through acquisitions, picking up assets of Vess Beverages and Vess Specialty Packaging in the states, and moving into the United Kingdom market with the purchase of Hero Drinks Groups. In addition, Cott signed up the United Kingdom’s largest supermarket chain, J. Sainsbury PLC, as well as a number of major chains in other countries, including Spain and Japan. A recession, which made house brands a more attractive option for consumers, also helped to spur Cott’s growth. Although Coca-Cola and Pepsi were in no danger of losing significant amounts of market share to the Canadian upstart, both were forced to respond by cutting prices and spending money on promotions to shore up their positions.

In 1991 the company changed its name to Cott Corporation. As time passed Pencer began to view Cott as something more than just a beverage company, his earlier dream of building a financial services giant returning in a new form. If excess production capacity could be harnessed to inexpensively manufacture private label soda, he reasoned, why not copack other products? To help retailers launch their own private-label programs, in 1994 Pencer created a subsidiary, Retail Brands International. To help pursue his vision of building a new age General Mills, he then lured Nichol away from President’s Choice, making him chairman and chief executive of another subsidiary, Destination International Inc. (DPI), to develop new private-label products. The initial plan was to target product categories that were similar to the soft drink business at the time Cott entered the private label business. They had to be high-volume, popular brand products that nevertheless did not provide much profit to retailers, such as beer, pet food, and snack foods including ice cream and cookies.

In the end, however, the dream was ill-conceived and shortlived. Although Pencer managed to grow Cott’s annual revenues to more than $1 billion by 1997 he was unable to produce suitable profits. Much of Cott’s rapid success was the result not of visionary genius but of taking advantage of Royal Crown’s years of development and the soft drink industry’s unique excess production capacity. Nichol and his large staff certainly tried their best to produce quality products at DPI’s test kitchens, but life without the backing of a college roommate and his giant supermarket chain made business a little more problematic. Nichol may have had a discerning palate, but his taste now seemed to diverge too much from the mainstream. When he headed President’s Choice he could simply push a product through the Loblaw system and onto the store’s shelves. Now he had a far more difficult time gaining entry, as a result spending an excessive amount of money to secure shelf space.

Early in 1997 Pencer was diagnosed with cancer and underwent brain surgery and chemotherapy. While he struggled to regain his health, the prospects for DPI grew grimmer by the week and before the year was out Cott wrote off the subsidiary and Nichol was out of a job. Several months later, in February 1998, Pencer succumbed to cancer. He left Cott a much larger company but in a perilous condition. Not only debt laden, it had a disparate collection of businesses, from design houses to a mismatched collection of private label products, including pet food and frozen foods. Moreover, its main soft drink business was plagued by inconsistent quality. Near the end Pencer recognized the limitations of copacking and as part of a restructuring effort began to acquire bottling operations to gain better control.

Cott had grown too large too quickly in the 1990s and with the death of Gerry Pencer it was in dire shape. The price of its stock, which reached $35 a share in late 1993, now plummeted to $3. In June 1998 the Thomas H. Lee firm, best known for the money it made in Snapple, paid $70 million for the Pencer family stake in the business and installed a new CEO from the States, Frank Weise. He had many years of experience in the consumer products business, including 24 years with Procter & Gamble and five years at Campbell’s Soup. Just prior to taking over Cott he also oversaw the turnaround of a private-label company that specialized in hygiene products, making him an ideal candidate to tackle the problems at Cott. Weise quickly set about cleaning up the books, which were legal but overly aggressive, thereby regaining credibility with investors. He also returned Cott’s focus to its core beverage business, selling off the design, frozen-food, and pet food divisions, as well as nonessential soft drink operations in Australia and Norway. Efficiencies at the company’s 15 North America and U.K. manufacturing facilities were improved by sharing best practices and a consolidation of seven divisions into just two units. Moreover, he was uninterested in challenging Coke and Pepsi, or pursuing any grand plans beyond exploiting a very lucrative niche in the soft drink industry.

Key Dates:

1923:: Cott Beverage Corporation is founded in Port Chester, New York, by Solomon and Harry Cott.
1952:: Montreal clothier Harry Pencer begins importing Cott sodas into Canada.
1955:: Pencer forms Cott Beverages Ltd., a Canadian company, to bottle Cott sodas in the province of Quebec.
1983:: Harry Pencer dies.
1986:: Cott Beverages goes public.
1991:: Company name is changed to Cott Corporation.
1998:: Gerald Cott dies, Pencer family sells interest to Thomas H. Lee.

Because Cott still retained the Royal Crown formula, and Coke and Pepsi were once again raising prices, Weise was presented with a chance to quickly restore Cott’s beverage business. With revenues improving and the company starting to turn a profit once again, he was soon able to shift from turnaround mode to growth. In late 2000 Cott was in a strong enough position to pay $71.5 million in cash to acquire Concord Beverage and its well-known Vintage brand. A deal of even more importance came in June 2001 when Cott bought out its Royal Crown cola concentrate contract from Cadbury Schweppes and acquired RC’s international division as well as a Columbus, Georgia, plant. It also acquired the U.S. rights to the Cott label, sold decades earlier by the heirs of Harry Cott. Not only did the company fully control its own name, it now owned the RC cola formula and essentially controlled its own destiny.