Can Cadbury Dodge Big Cola's Bullets?

Coke and Pepsi have put new muscle behind their noncolas

If ever there were a bigger-is-better business, it's soft drinks. In the selling of sweetened fizzy water, a bigger market share equals more advertising clout, stronger bottlers, and better distribution--all of which usually equals still more market share. And as London-based Cadbury Schweppes PLC is learning after spending 10 years and $3.3 billion to reach the No.3 position in the U.S. soft-drink market, that means No.3 isn't a very nice place to be.

Cadbury's biggest push came last year, when it spent $2.5 billion to buy Dr Pepper/Seven Up Cos. in an effort to become the premier noncola soft-drink maker in the U.S. In the mid-1980s, the century-old chocolate company, with 1995 revenues of $7.4 billion, began a U.S. shopping spree, snapping up such brands as A&W Root Beer, Sunkist, and Canada Dry. Today an estimated 35% of Cadbury's total earnings and 21% of sales come from U.S. beverages. But its 47% share of the U.S. noncola market translates into only 16.3% of the U.S. soft-drink market as a whole, and therein lies a problem.

Cadbury got a solid product with Dr Pepper, the most popular noncola soft drink in the world. Last year, the U.S. market share of Dr Pepper and its diet and caffeine-free versions rose from 7% to 7.3%, and the brand accounted for 45% of Cadbury's overall U.S. beverage volume. With the Dr Pepper acquisition, earnings at Cadbury's Americas beverage unit jumped 139% last year, to $379 million on sales of $1.7 billion.

But much of Cadbury's lineup is flat--and facing a competitive onslaught: With the noncola market growing faster than cola, both PepsiCo Inc. and Coca-Cola Co. are moving aggressively into the sector, purchasing root-beer brands and other noncola drinks and unleashing big marketing campaigns. Coca-Cola has also renewed its focus on Sprite--at the expense of 7UP (box). To better compete, the company announced on July 29 a reorganization of its North American beverage unit. "We knew by acquiring Dr Pepper/Seven Up that we would not be below the radar screen of Coke and Pepsi," says John F. Brock, 48, CEO of Dr Pepper/Seven Up.

PATCHWORK. Perhaps Cadbury's biggest handicap is its distribution system. Unlike its giant rivals, which have assembled networks of closely affiliated bottlers, Cadbury's soft drinks are distributed by a patchwork of independents--plus a group of bottlers linked to its archrivals, Coke and Pepsi. With their distribution clout, those Coke and Pepsi bottlers are vital to Cadbury. But Cadbury's interests often clash with the agendas of those bottlers.

A case in point: Last April, Coca-Cola Enterprises, the world's largest Coke bottler, dumped A&W, Sunkist, and Welch's in certain markets in favor of competing Coke brands such as Barq's root beer and Minute Maid. It may be no coincidence that CCE is 45% owned by Coca-Cola. "Coke has drawn a line in the sand and said, `We dare you to compete with us openly,"' says Tom Pirko, managing director of New York consulting firm Bevmark. Analysts say the CCE defection alone could trim 1% from Cadbury's total U.S. earnings.

It wasn't a total betrayal. CCE did stick with Dr Pepper and some of the other brands, inking deals believed to extend for three to five years in certain markets. And so it goes: Coke bottlers keep the strong brand, Dr Pepper, and other bottlers complain that they're offered only the laggards. And in a market so dominated by the top brands, it's a constant struggle to get even second-tier offerings into stores. "The reality today," says George Kalil, president of Kalil Bottling Co. in Tucson, an independent bottler, "is that Coca-Cola and Pepsi lock many of our brands off the shelves."

In an effort to sort out its distribution problems, Cadbury is reorganizing its North American beverage unit. It will split the company into two operating units. Dr Pepper Co. will deal with bottlers carrying the star brand--primarily the Coke- and Pepsi-affiliated powerhouses. Cadbury Beverages/Seven Up will work with independent bottlers that don't carry Dr Pepper.

SUPPORT SYSTEM. The idea is that each group of bottlers will get coddled by a unit that focuses exclusively on that group. The company has set up a support staff to consult with the bottlers and is working on a program to help them buy more vending machines and refrigerated cases. The independents say such moves are overdue. "What I want to see is some long-term direction and stability in their management," says William A. Brown, president of Brown Bottling Group in Jackson, Miss., which distributes Cadbury products in most of Mississippi.

Cadbury's big shareholders also hope the plan will put some fizz back into the North American beverage operations. "Hopefully, they will be a little more focused [following the restructuring]," says Barbara Trebbi of Ivy Management in Boca Raton, Fla., an institutional investor holding Cadbury's American Depositary Receipts and regular shares. Those ADRs have dropped about 2% this year, to 31 1/2, while Coke's and Pepsi's stocks have posted double-digit gains.

Still, it's unclear how much extra control Cadbury can gain from the changes. "There's no such thing as a level playing field in the soft-drink industry," says Kalil. "When you're not Coca-Cola or PepsiCo, you can't miss a single trick." Some think that means Brock must shoot for more than his stated goal of 50% of the noncola market by 2000 if he wants real clout in the U.S.

With $1 billion coming Cadbury's way this month from the sale of its 51% stake in British bottler Coca-Cola & Schweppes Beverages Ltd. to CCE, there are rumors floating around the industry that Cadbury might buy Snapple, the ailing fruit-drink and iced-tea maker now owned by Quaker Oats Co.--or, conversely, that it might sell off some of its smaller brands and focus exclusively on Dr Pepper and 7UP. Most experts believe a bid for Snapple would be a costly distraction. "I think Cadbury's got enough on its plate without taking on what is clearly an enormous turnaround situation," says Julian R.M. Hardwick, an analyst at London-based BZW, an investment bank. Brock says he can't comment on market rumors.

Can Cadbury put more sparkle in its future? It's tough when such a key part of the company's fate isn't entirely in its own hands. "Cadbury needs to convince people that they are able to ensure their route to market," says Hardwick, "irrespective of what Coke and Pepsi may decide." Talk about a pressure buildup.