The Coca-Cola Company (KO) has terminated its partnership with Nestle SA to sell Nestea in U.S. and Asia and has instead chosen to focus on the sale of ready-to-drink tea in Europe and Canada. Coca Cola will also enter into a license agreement with Nestle for the Nestea brand in Taiwan and Hong Kong.
Apart from these, the dissolution of the Coca-Cola and Nestle’s joint venture named Beverage Partners Worldwide (BPW) is expected in most of the regions where it operates by the end of 2012, subject to any regulatory approval.
BPW is a 50-50 joint venture which was started in 2001; and the partnership concentrated chiefly on the ready-to-drink tea categories. It operated in more than 60 countries and was formed after these two companies worked together for 10 years in a joint venture called Coca-Cola and Nestle Refreshments.
According to the companies, Nestea has been performing well in the regions of Europe and Canada and has also boosted the presence of the joint venture. However, in U.S., Nestea struggled hard to compete with its rival brand Lipton, which is in the joint venture with PepsiCo Inc. (PEP) and Unilever NV (UN).
Although the ready-to-drink beverage market is still rapidly developing in U.S, Nestea is left behind in getting its share. According to the Beverage Digest data of 2010, Lipton was able to sell about 247m cases of Lipton in the US, while Nestea could sell just 74m cases.
Besides, as Coca-Cola ended its partnership with Nestle in U.S. and Asia, it has decided to launch a new tea brand under the label Fuze in U.S.and will also continue to focus on its Honest Tea and GoldPeak brands.
Coca-Cola has always believed in non-carbonated beverages and thus expects this new drink Fuze to attract the consumers as it offers both tea and juice drink products. Moreover, the demand for sparkling beverages has slowed down in U.S.
With the termination of the Coca-Cola and Nestle partnership in U.S., the company will now be able to focus on its other ready-to-drink tea initiatives, through mergers or acquisitions. Coca-Cola is currently on the look out for brands such as Arizona Iced Tea and Hansen Natural which it can acquire.
Besides, Coca-Cola is taking keen interest in the emerging markets, as the developed markets have minimal growth prospects. Apart from the 50% acquisition of Aujan Industries in the Middle East, Coca-Cola eyes the growing markets of India and has already invested over $1 billion in the last 18 years and still remains very optimistic about its Indian operations. In November, Coca-Cola, along with its bottling partners, planned to about invest $2 billion in India starting from 2012 in its consumer marketing, infrastructure and brand-building segments.
As part of an ongoing push into the emerging markets, Coca-Cola had also planned to invest in Russia and China to expand in its fast-growing consumer market.
Besides, Coca-Cola can seize the opportunity to explore and revitalize sales in the Middle Eastwhere Non Alcoholic Ready To Drink beverages are consumed at a high rate. Coca-Cola’s workforce of above 40,000 throughout the Middle East will also be helpful.
Coca-Cola also reported strong operating earnings of $1.03 per share in third-quarter 2011 in October that came ahead of the Zacks Consensus Estimate by a penny, and rose 12% from the year-ago quarter. It currently holds a Zacks #3 Rank, which translates into a short-term Hold rating. On a long-term basis, we maintain a Neutral rating on the stock.
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