Coke Pays $715 Million to Distribute Dr Pepper (USA Today)
For many years, Dr. Pepper fought hard to position itself as an alternative to cola products. So it is somewhat ironic that Dr. Pepper, owned by the Dr. Pepper Snapple Group (DPS), is working with the enemy by cutting deals in which it will now be distributed in the U.S. by its leading cola rivals. In the last six months, DPS, who also markets numerous other beverage brands including 7UP, A&W, Canada Dry and Snapple, has agreed to let Coca-Cola and Pepsi distribute some of its products including the Dr. Pepper brand.
Yet, why would DPS allow these competitors to distribute its products? For the most part, it comes down to customer access and product distribution. Coke and Pepsi have massive distribution networks that are superior to DPS’s network. Additionally, the beverage distribution model itself appears to be changing. Previously, most beverage distribution took place within a franchise relationship where the franchisee would bottle the product by adding water and other ingredients to the syrup product it purchased from the franchisor. These independent bottlers would often distribute multiple brands, and in some cases, sell competing products. However, this business model may be slowly fading in the beverage business. Over the last few years consolidation has occurred within beverage distribution networks with Coca-Cola and Pepsi acquiring several independent bottlers. In effect, they have taken distribution in-house.
As noted in this story, another reason for the distribution change is the introduction of new high-end fountain dispensers. These dispensers are a powerful form of distribution for reaching certain markets such as restaurants and sporting events.
As part of the deal, Dr Pepper and Diet Dr Pepper will be included in Coke’s new “Freestyle” fountain dispenser, which can mix more than 100 drinks. Dr Pepper paid Coca-Cola between $115 million and $135 million to be the only non-Coke product on the high-tech dispenser, which is expected to be in 500 locations by the end of the summer.
While access to distribution is the attraction for Dr. Pepper, what is the value Dr. Pepper brings to Coke and Pepsi?
Image by Lance and Erin