Beverage war brewing (BusinessWorld)

BY JENNEE GRACE U. RUBRICO, Sub-Editor

Beverage war brewing

Coca-Cola sets focus on flagship; San Miguel bares new line

Following the breakup of a partnership, beverage giants San Miguel Corp. and The Coca-Cola Co. have now turned competitors, each pursuing separate strategies in an effort to capture a bigger share of the ever-shifting domestic beverage market.

While the Atlanta-based firm has opted to regroup and focus its efforts on its flagship brand Coke, San Miguel, through subsidiary San Miguel Beverages Inc., has taken the aggressive route by launching new products that are targetted at the mass market.
Last month, The Coca-Cola Co. and San Miguel ended their partnership in bottling firm Coca Cola Bottlers Philippines Inc., with the beer giant selling its 65% stake to the softdrinks firm - which then held 55% - for $590 million.
The bottler now handles a whole range of nonalcoholic beverage brands that were formerly under San Miguel. These covers brands owned by Coca-Cola, Cosmos Bottlers, and Philippine Beverage Partners, Inc. (Philbev).
Part of the deal was a non-compete provision, which prohibited San Miguel from coming out with products that directly compete with Coca Cola Bottlers’ range of beverages.
The purchase agreement was reached after both companies acknowledged they were not happy with the Coca Cola Group’s performance.
San Miguel, in its most recent financial report to the Philippine Stock Exchange, said that for the third quarter of 2006, the Coca Cola Group posted a 12% decline in volume from the same period the previous year. The group also posted a decline in operating income to P423 million from P657 million the previous year.
San Miguel blamed the lack-luster performance of its then nonalcoholic beverage unit on "seasonally-bland demand," stiff competition from both carbonated and non-carbonated beverage products, and more expensive raw materials.
In a press conference yesterday, The Coca Cola Co. chairman and chief executive E. Neville Isdelle said that following the acquisition of San Miguel’s 65% stake in Coca Cola Bottlers, his firm had decided to focus its resources on supporting Coke because it is the firm’s strongest brand.
"If you can grow your strongest brand, given the base, think of the actual growth you can get out of that. You can get a higher percentage from a small brand, but that does not add a lot," he added.
He also said that once Coke regains lost ground, the company will focus on strengthening its other softdrink brands, namely Sprite and Royal True Orange.
"Then we will go to the wider range" of other products and brands, he said.
Acknowledging that the Coca Cola group suffered from lack of attention from its parent firms, the Atlanta-based executive said that this time, The Coca Cola Co. will bring in experts from abroad, loo for new ways of packaging the product to make it attractive, and allocate funds for marketing to improve the sales of its Philippine operations, which is now its 20th biggest revenue contributor.

New line for San Miguel

As this developed, however, its former joint venture partner San Miguel announced its reentry into the nonalcoholic beverage market through the launch of a line of juices and green tea products.
In a statement, San Miguel yesterday said it was now selling low-priced bottled juices and teas under its Magnolia brand. The bottled juice and tea products are being sold at P5 per 250 ml bottle.
The juice, called Magnolia Fruit Drink, is available in lemon, apple, orange and pineapple flavors. The tea, called Magnolia Health Tea, is available in lemon and apple flavors.
The products are already available in parts of Metro Manila, and will be available nationwide by yearend. The products are targeted at the mass market, the San Miguel statement said.
Analysts and stakeholders polled byBusinessWorld noted that the developments indicate the start of a beverage war among beverage giants.
"Is there a beverage war going on? Definitely. There are new categories being created in the beverage industry an San Miguel is moving quickly. San Miguel is quick to market new brands and what we’re talking about here is share of throat," said Richard Cruz, Asian Institute of Management professor and equities expert.

Competition remains

He noted that while The Coca Cola Co. and San Miguel are focused on different beverage segments - with the cola firm still concentrating on carbonated drinks and San Miguel taking advantage of the green tea and healthy drinks craze - they both still have to compete in the same industry.
"There is inter-segment competition, and this (San Miguel’s launch of new beverage products) will make an impact on Coke," Mr. Cruz said.
He added that even within the carbonated drinks segment, The Coca Cola Co. faces stiff competition from fellow global player Pepsi as well as from low-priced carbonated brands RC Cola and Virgin Cola.
But he also said the move of Coca Cola to focus on its flagship brand was a good option. "Without Coke, Coca-Cola could not sell its other brands, so they have to strengthen this," he said.
Wally Panganiban, The Coca Cola Export Corp. media relations manager, acknowledged that San Miguel has become a competitor and that its move to reenter the nonalcoholic beverage market barely a month after it divested was "understandable."
"There has always been a notion that San Miguel would put out their own products. We are happy with competition. We’re constantly focused on innovation, in anticipation of competition in the market today," he said.
A source from San Miguel, meanwhile, said that the firm’s new products do not directly compete with Coca Cola Bottler’s existing beverages - particularly since San Miguel’s products will be sold in small stores while those under Coca Cola Bottlers are sold in supermarkets - but admitted that it has always been the plan of the country’s biggest food and beverage firm to reenter the beverage business.
"San Miguel has all the advantages. It has a glass plant, and it will maximize its use. Also, now, the firm no longer has to pay royalties for its beverages, so San Miguel can offer the products at a range that is affordable to the mass market," the source said.
He also said that San Miguel aims to grow its nonalcoholic business over the next five years.
"With Philbev, the brands were not owned by San Miguel, so it didn’t have control over the marketing and other arrangements. Now that we own the brand, we will be aggressive," he added.

Prospects said bright

Claire Quiray, an analyst from Accord Capital Equities Corp., said the product line will likely be successful. "Many consumers have switched to healthier lifestyles, a lot of them now prefer teas and juices more than cola."
She added that Universal Robina Corp., which sells green tea product C2, would likely have to develop a cheaper tea product to compete with San Miguel’s new lineup. — with a report from Allan E. Lalisan