The Pepsi Bottling Group, Inc.

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The Pepsi Bottling Group, Inc.

One Pepsi Way
Somers, New York 10589
U.S.A.
Telephone: (914) 767-6000
Fax: (914) 767-7761
Web site: http://www.pbg.com

Public Company
Incorporated: 1999
Employees: 38,700
Sales: $7.98 billion (2000)
Stock Exchanges: New York
Ticker Symbol: PBG
NAIC: 312111 Soft Drink Manufacturing; 312112 Bottled Water Manufacturing

The Pepsi Bottling Group, Inc. (PBG) is the world’s largest manufacturer, seller, and distributor of Pepsi-Cola beverages. Separated from parent PepsiCo, Inc. in 1999, it accounted that year for 55 percent of Pepsi-Cola beverages sold in the United States and 32 percent worldwide. Pepsi Bottling Group’s strongest presence is in the United States and Canada, but it also holds exclusive Pepsi franchises in Greece, Russia, and Spain as well as in most U.S. states and Canadian provinces. The company delivers its products directly to stores without using wholesalers or other middlemen. In addition to its extensive production and distribution facilities, PBG leases and operates about 20,000 vehicles and owns more than 1.1 million soft drink dispensing and vending machines. PepsiCo holds a controlling interest in the firm.

Pepsi-Cola Bottling and Distribution to 1975

Caleb D. Bradham founded the original Pepsi-Cola Co. in 1902, shortly after devising, and before patenting, the syrup in his New Bern, North Carolina drugstore. He established a syrup and bottling factory in New Bern in 1904. Bradham began franchising the product to other bottling companies almost immediately; by the end of 1909 there were 250 in at least 24 states.

Pepsi-Cola suffered losses in 1919 because of the high sugar prices that followed the end of World War I price controls. Bradham bought the sugar he needed at high prices as a hedge against even higher prices. When the sugar bubble burst in 1920, prices fell from 26 cents a pound to below two cents a pound within months, and he was ruined, declaring bankruptcy in 1923. A few bottlers remained, and Roy Megurgel purchased the company’s trademark, business, and goodwill for $35,000, moving the enterprise to Richmond, Virginia. However, in 1931 his National Pepsi-Cola Corp. also went bankrupt.

Charles G. Guth’s Loft, Inc. was operating candy stores with soda fountains when a grievance against the Coca-Cola Co. drove him to found a new Pepsi-Cola Co. Megurgel purchased the prior company’s trademark, business, and goodwill for $10,500 before coming to terms with Guth. By 1934 the company was profitable, due to Guth’s fortuitous decision the previous year to offer the soft drink in 12-ounce bottles instead of the usual six, but for the same five cents. Guth established bottling plants in Baltimore, New Orleans, Philadelphia, and Pittsburgh to supplement the original one in Long Island City, an industrial area in New York City’s borough of Queens. He also acquired a Montreal plant in 1934 and formed a Canadian subsidiary. Coca-Cola challenged the Canadian Pepsi trademark, taking its case all the way to the British empire’s highest court, which in 1942 ruled in favor of Pepsi-Cola.

Like Bradham, Guth generally relied on franchisees to grow the Pepsi-Cola business, establishing four U.S. regional territories to sign up bottlers. They brought in 167 licensees during 1935-36, and by the end of 1939 the number had nearly doubled. Loft, Inc. shareholders won a proxy fight against Guth in 1936, and three years later he withdrew from Pepsi-Cola by terms of a settlement. Loft was merged into Pepsi-Cola in 1941. During World War II sugar supplies were rationed, so the company bought the sweetener in Mexico and processed it into a syrup there before shipping it to bottlers. The federal government halted this practice in 1944. Pepsi-Cola began packaging its product in cans as well as bottles in 1948.

Alfred N. Steele, a former Coca-Cola manager, was chief executive of Pepsi-Cola during the 1950s. Steele revived the flagging company through a variety of measures, including a shakeup of management, a new advertising campaign, and a change in the formula of the drink to make it less sweet. On taking charge he also concentrated on reviving the morale of Pepsi-Cola’s often-fractious 500-odd independent bottlers. Usually local businessmen, the bottlers had been prone to selling out because of dissatisfaction with stagnating sales in the late 1940s. As business improved in the 1950s, Steele still regarded the bottlers as a problem, because, in his opinion, they were inclined to become complacent and lazy in good times. Accordingly, Steele bought the franchises of several bottlers who were not getting good results in major markets and assumed operation of these territories directly. By 1959 Pepsi-Cola was its own bottler in 22 major U.S. markets, including metropolitan New York City, Houston, Philadelphia, Pittsburgh, and St. Louis.

Pepsi-Cola began expanding overseas in the 1950s. One territory that remained unserved, however, was the Soviet Union, although a trademark was registered in Moscow in 1938. The company scored a public relations coup in 1959, when, as the representative of the U.S. soft drink industry at the Moscow Trade Fair, its kiosk was visited on a hot summer day by Soviet Premier Nikita Khrushchev and U.S. Vice-President Richard Nixon. While the cameras whirled, the Soviet leader quaffed a cup of Pepsi and proclaimed it“very refreshing.” In 42 days, visitors there drank Pepsi at the rate of 10,000 cups an hour. The nation remained out of bounds commercially until 1973, however, when Moscow made Pepsi-Cola the sole soft drink company allowed to bottle in the Soviet Union. Parent PepsiCo, Inc. (the company had changed its name following its 1965 merger with Frito-Lay) sold the concentrate to the Soviet government, which provided the bottling and distributing facilities. Some two billion bottles were being sold annually in 1978.

A Growing Company-Owned Network: 1975-99

Although there were still hundreds of Pepsi-Cola licensees in the United States alone—some of them grouped into sizable chains—the company, in 1975, was reserving for itself bottling and distribution facilities in ten choice metropolitan territories. This network was administered by a Metro unit that was renamed Pepsi-Cola Bottling Group in 1977. In 1978 subsidiaries of PepsiCo operated 19 plants, in Dallas, Houston, Los Angeles, Milwaukee, the New York City metropolitan area, Orlando, Philadelphia, Phoenix, and Pittsburgh, the entire state of Rhode Island, and all of Michigan except the Upper Peninsula. Pepsi-Cola Bottling Group was manufacturing, selling, and distributing carbonated soft drinks and syrups bearing trademarks owned by PepsiCo, including Pepsi-Cola, Diet Pepsi-Cola, Pepsi-Cola Light, Mountain Dew, Teem, Patio, and Aspen. The 34 company-owned units abroad run by Pepsi-Cola International went under the name United Beverages International.

A vexing issue for PepsiCo at this time was perennial overdog Coca-Cola’s huge lead in fountain sales and vending machine locations. Pepsi’s franchise agreements—unlike Coke’s—gave its licensees and not the company the right to sell to soda fountains in their territories. Pepsi-Cola Bottling Group executives complained that the bottlers were hurting the company by neglecting this area. Craig Weatherup, the PBG executive who later became first CEO of independent Pepsi Bottling Group, later recalled to Beverage World that “the continual loss of fountain accounts hit this organization like a series of bombs.” PBG attempted to solve the problem by establishing a unit that called directly on fast-food operations and other large users of soft drinks without regard to franchise territorial lines. If the salesman won an account, PBG contracted with the local bottler to co-pack the beverages and to service the fountain machinery.

Acquisitions in the late 1970s and early 1980s increased Pepsi-Cola Bottling Group’s share of Pepsi-Cola USA’s overall soft drink system to 21 percent by 1985. The unit’s revenues increased from $1 billion in 1984 to more than $2.5 billion in 1986—in part because of further acquisitions, such as Allegheny Beverage Corp. and MEI Corp.—raising its share to 32 percent. Weatherup, who became president of Pepsi-Cola Bottling Group in 1986 and graced the cover of Beverage World in August 1987, later described this era to the magazine as“a stretch of six to eight years in which it seemed we could do little wrong.” The system now consisted of 45 plants grouped in 25 business units reporting to four business regions—eastern, central, southern, and western. Headquarters were in Somers, New York, just down the road from PepsiCo headquarters in Purchase.

Interviewed by Tim Davis of Beverage Group at this time, Weatherup denied that Pepsi-Cola Bottling Group had a plan for further physical growth. “We are prepared to be larger”we don’t see ourselves getting smaller,” he conceded, but added, “Every acquisition we’ve made has been triggered by some circumstance, the most common being change in family ownership. That has keyed the vast majority of acquisitions over the last 10 years. We have not solicited anyone’s franchise, ever, that I know of, or forced anyone to sell …We absolutely are not looking to take a floundering bottler under our wing. That has not been a criterion for 10 years.” The following year— 1988, however, PepsiCo agreed to buy its third largest independent U.S. bottling operation from grand Metropolitan plc for $705 million. In outbidding two groups led by existing Pepsi franchisees, PepsiCo indicated that the territories were desirable because they were adjacent to existing PBG bottlers.

By this time Pepsi-Cola Bottling Group had been dissolved, a company reorganization having folded PBG, Pepsi-Cola USA, and the USA Fountain Beverage Division into four U.S. regional divisions of Pepsi. Under whatever name, however, the operation continued to grow. In 1990 PepsiCo was operating on a company-owned basis about 55 of the 190-odd soft drink plants in the United States, accounting for about 47 percent of the Pepsi-Cola beverages sold in the United States. The company also had a minority interest in about 25 more plants. In 1995 the number of company-owned plants in the United States and Canada was about 70 (of about 200 total), accounting for 56 percent of Pepsi beverages sold in North America.

Company Perspectives:

We have absolute clarity around what we do: We Sell Soda.

In Spain, PepsiCo held only a 14 percent market share of the cola market in 1988 and trailed Coca-Cola by five to one. Pepsi-Cola International’s poor performance was attributed mainly to a distribution problem, which was addressed by refranchising several key markets, including Madrid. By 1991, however, joint ventures in which Pepsi-Cola International took a part were operating Spanish plants, and in 1993 these became completely company-owned. With the fall of the Soviet Union, PepsiCo lost its soft drink monopoly there. Pepsi-Cola International restructured its Russian operations, sharing bottling and distribution with local partners, but during the next five years Coca-Cola outspent PepsiCo by six to one and drew even in market share. The company, in 1996, said it would work with Whitman Corp.’s General Bottlers unit—Pepsi’s second largest bottler— and insurer Leucadia National Corp. to add 11 plants over the next five years. In 1999 Pepsi Bottling Group purchased operations in St. Petersburg from Whitman.

Independent Company: 1999-2000

In March 1999, PepsiCo spun off its soft drink bottling and distribution operations—what was known within the organization as Pepsi COBO (company-owned bottling operations)—as The Pepsi Bottling Group Inc. In the fifth largest initial public offering in U.S. stock market history, PepsiCo sold 100 million shares at $23 a share. Retaining a 40 percent interest in the newly public company, PepsiCo placed two senior officials on its board of directors. In addition, PBG was required to submit its annual operating plan to PepsiCo for its approval and was using only PepsiCo-approved vendors. In return, PBG was expecting a high level of funded marketing support from PepsiCo.

Pepsi Bottling Group was focusing on enhancing the one-third of its business defined as “cold drink” or single serve. This profitable area had been growing rapidly as consumers increased their snacking. PBG doubled its spending on new coolers and vending machines between 1997 and 1999, adding about 175,000 new pieces of equipment. The company also was acquiring more bottlers in areas primarily contiguous to its existing operations, in order to realize cost savings in raw materials, manufacturing, warehousing, logistics, and general administration. Weatherup, who had been president and chief executive officer of Pepsi-Cola North America (1990-96) and chairman and CEO of its parent, Pepsi-Cola Co. (1996-99), and who then became the first chairman and CEO of Pepsi Bottling Group, said the company intended to grow 1 to 2 percent a year by acquisitions, averaging six to ten deals a year.

One pressing problem was to increase Pepsi Bottling Group’s operations outside North America, which were accounting for only 8 percent of total revenues. Russian operations suffered a heavy blow in 1998, when the value of the ruble collapsed, leading to a $212 million restructuring asset writedown. But in its first year as an independent company, PBG registered $7.51 billion in revenues—a 13 percent gain over the previous year. Net income was $118 million. These figures improved to $7.98 billion and $229 million, respectively, in 2000.

Pepsi-Cola Bottling Group had 67 production facilities (60 owned) and 320 distribution facilities (258 owned) at the end of 2000 in parts of 41 states, the District of Columbia, eight Canadian provinces, Spain, Greece, and Russia. PBG’s brands included Pepsi Cola, Diet Pepsi, Mountain Dew, Lipton Brisk, Lipton’s Iced Tea, Pepsi One, Slice, Mug, Aquafina (bottled water), Starbucks Frappaccino, Fruitworks, and, outside the United States, 7UP, Pepsi Max, Mirinda, and Kas. PBG also had the right to manufacture, sell, and distribute soft drink products of other companies in some territories. About 80 percent of PBG’s volume in 2000 was sold in the United States. In 1999 Pepsi-Cola brands held about 29 percent of the carbonated soft drink market in the United States, compared with 40 percent for Coca-Cola Co. brands. The long-term debt was $3.27 billion at the end of 1999. PepsiCo owned 37.9 percent of PBG’s outstanding common stock in February 2001. It also held all of the outstanding Class B stock.

By the terms of Pepsi Bottling Group’s master syrup agreement with PepsiCo, PBG had the exclusive right to manufacture, sell, and distribute fountain syrup to local customers in its territories and to act as a manufacturing and delivery agent for national accounts within its territories that specifically requested direct delivery without using a middleman. Also under this agreement, PBG had the exclusive right to service fountain equipment for all of the national account customers within its territories. PBG was purchasing the concentrates to manufacture PepsiCo’s soft drink products. Other raw materials were generally being purchased from multiple suppliers, but with PepsiCo acting as the agent.

Key Dates:

1902:: Caleb D. Bradham founds the original Pepsi-Cola Co.
1936:: Pepsi bottling plants have been established in five U.S. cities and Montreal.
1948:: Company begins packaging its product in cans as well as bottles.
1959:: Pepsi-Cola is its own bottler in 22 major U.S. markets.
1965:: Company is renamed PepsiCo, Inc. following its merger with Frito-Lay.
1978:: Pepsi Bottling Group is founded for companyowned bottling and distribution.
1988:: PepsiCo purchases its third largest independent bottling operation, from Grand Metropolitan plc, for $705 million.
1999:: Pepsi Bottling Group becomes an independent company.

By the terms of Pepsi Bottling Group’s master bottling agreement with PepsiCo authorizing PBG to manufacture, package, sell, and distribute the cola beverages bearing the Pepsi-Cola and Pepsi trademarks, PBG was required to pay the concentrate prices determined by PepsiCo and to deploy the types of containers authorized by PepsiCo. PepsiCo also had the right to approve PBG’s annually presented three-year financial plan but did not have the right to withhold approval unreasonably. Failure to carry out the approved plan in all material respects could result in a termination of the agreement. PBG had the right to determine the prices at which it sold its products. Although PBG had an extensive distribution system in the United States and Canada, in Russia, Spain, and Greece, it was using a combination of direct store distribution and distribution through wholesalers.