A Strategic Framework for Diversification in Beverages and Other CPGs

November 3, 2021  •  David Pring-Mill

By David Pring-Mill

The following text has been excerpted from Sections 4.5—4.5.4 of the Policy2050 report “Consumer Trends, Diversification & Strategies in the Global Beverage Industry, 2021,” in order to serve as a product sample and fulfill Policy2050’s mission “to keep the most socially-relevant insights outside of any paywall.”

Companies have become larger, more enduring, more resilient, and even more trusted by diversifying their products, thereby becoming relevant to multiple aspects of consumers’ lives.

An impressive, long track record across a range of endeavors can make a brand seem credible and solid in the minds of consumers. This can be true even if some of the innovations don’t click with the market.

A good example of this would be General Electric, which made enough good products over a long enough period of time that consumers implicitly trusted the brand promise: GE was innovating to make their lives easier. If a particular type of appliance was prone to breaking, the consumer figured they could mitigate that risk by selecting a known brand.

Like appliances, some diversification strategies are also prone to breaking. There have been many cases where companies tried to enter into new markets only to discover that their resources and knowledge didn’t translate, or the barriers to entry were greater than expected.

Issues/challenges

In the 1990s, Richard Branson tried to parlay Virgin’s edgy brand into a private-label cola, determined to undertake “an inch-by-inch fight along the shelves of the supermarkets.”

A physical press kit that still remains from this beverage industry experiment reveals Virgin’s perspective on market penetration at the time: “At present the soft drinks industry in the U.S. is worth $50 billion (with cola accounting for just under half this figure), if we secure a 1 percent share of this huge soft drinks market we have already sold 100 million cases of Virgin Cola — now that can’t be bad.”

Despite these simultaneously modest and reaching ambitions, Virgin Cola did not succeed. Diversification has its limits. Even for the aforementioned General Electric.

Under the leadership of former CEO Jeff Immelt, General Electric explicitly decided to become less of a consumer products company and more of a high-tech infrastructure company. A recent Forbes headline quipped that they have “unplugged” from the consumer products business.

That is fine and probably a smart move, considering the global shift in consumer purchasing from “high quality that lasts” to “good enough and cheap.”

But even within GE’s completely new identity, are they diversifying with long-term vision, or diversifying and then un-diversifying prematurely? Phrased another way: are they trying to build a company, or a series of financial transactions?

GE sold a promising biopharma unit to Danaher for approximately $20 billion in net cash proceeds, in order to de-risk the balance sheet and solidify the company’s financial position.

The GE of today serves food/beverage and consumer packaged goods companies by technologically establishing real-time visibility over expensive equipment on the plant floor. Production line data is used to optimize batch variation, ingredient consumption, quality costs, waste, and operational management. Unplanned downtime costs between $8K-15K/hour in the food and beverage space. Nestlé uses GE software to handle alarm notifications at its ice cream freezing facilities. This has reduced their average alarm response times by up to 60%.

GE also integrated ultrafiltration and reverse osmosis technologies on a single skid that can treat water used in the production of beverages. This system was designed to process poor quality source water, or highly variable raw water quality, removing particulates, microorganisms, and total dissolved solids.

Just a few months after making this technological announcement, GE announced that it had sold its water and process technologies business unit to SUEZ — again, for the sake of having “a more simplified and focused business,” and also due to product line overlap resulting from its merger with Baker Hughes.

The water and process technologies business had generated $2.1 billion in revenues in 2016 and was sold to SUEZ for $3.4 billion.

Baker Hughes became a majority publicly owned company again only two years later, after GE reduced its stake.

It’s little wonder that some analysts seem to yearn for the consumer products days, when they could clearly see what the company was and where it was going.

And yet, those very same analysts could be part of the problem. GE has been selling off its most innovative business units, in part, to satisfy Wall Street.

As a publicly traded company, GE must be clearly responsive to investor perceptions. However, it appears at times that the company is diversifying into promising technological areas, making progress, and then divesting before maximum profit is extracted in order to accommodate other, quickly-changing plans and perceptions as well as financial obligations.

That GE biopharma unit, by the way, was involved in immunotherapy, which is likely here to stay, even if not in the precise formulation that it is now. A study recently showed that immunotherapy plus radiotherapy improved the overall survival odds of patients with brain cancer, when compared with radiotherapy alone.

Perhaps General Electric diversified wisely but not patiently. Fortunately for the beverage industry, the success of any particular beverage product or category can be more directly accelerated by strategic marketing, which is the incumbent beverage giants’ expertise. This is not the case with high-tech infrastructure or medical R&D, which typically necessitates a longer timeline and sometimes appears to be more tentative from certain executive and investor perspectives.

Today, any new beverage startups that do gain traction also gain attention, and if they’re acquired, they can be efficiently paired with established manufacturing, distribution, and marketing capabilities.

Whether it’s a rapid surge in the consumption of energy drinks or the emergence of so-called “beauty drinks” out of APAC, beverage giants can spot these trends and add new brands to established categories or even redefine the categories. Prior to reconsidering everything in the wake of COVID-19, The Coca-Cola Company offered over 800 drink varieties in the U.S. and consisted of over 500 brands globally.

Due to the increased concentration of wealth/market power, globalization, and real-time data, there may also be considerable time pressure associated with acquisition opportunities that didn’t previously exist to the same degree. In itself, this time pressure is a challenge for high quality, executive decision-making.

Unique strategic assets

In 1997, business professor Costas Markides noted that a business may choose to define itself by its product, customer function, or core competencies. A company like Sony could argue that it is in the business of electronics, entertainment, or “pocket-ability.” (Today, “pocket-ability” is anything but a core competency. It’s an expectation.)

Markides suggested that businesses evaluating diversification should think in terms of their unique, cohesive, “transportable” strategic assets, and also the ability of competitors to imitate or substitute those assets.

His Harvard Business Review article pointed to a few examples from beverages:

Markides contended that the Boddington Group “reaped the rewards” of honest self-reflection upon its vertically integrated brewery, wholesalers, and pubs within the U.K. The company acknowledged the consolidation happening within the beer industry, felt that they “could not play the brewing game with the big boys,” and decided to start a new game that they felt they could win. The success of their pubs pointed to retailing, hospitality, and property management expertise, which could be similarly leveraged across resort hotels, restaurants, nursing homes, and health clubs.

Looking back on this example, originally heralded as a positive diversification maneuver, one could also see the decline of an iconic, regional beer brand, substituted for assets that ended up changing hands (and brands) repeatedly.

In 1969, Charles Boddington had warned shareholders against an attempted hostile takeover by arguing that the brewery’s independence allowed for an individuality and character being largely eliminated across consumer goods. He railed against “mass-produced nationwide product of standardised quality.” Two decades later, the British company Whitbread successfully nationalized the Boddingtons brand following an amicable sale, making Boddingtons the fourth-highest selling bitter brand in the country.

But what followed?

The beer-less Boddington Group was taken over by Greenalls; then the pubs and restaurants were sold to Scottish & Newcastle Breweries.

Whitbread was acquired by Interbrew; Interbrew merged with AmBev to form InBev; InBev merged with Anheuser-Busch to form Anheuser-Busch InBev.

Boddingtons is no longer brewed in Manchester. Peak market share was reached in 1997.

Currently, Anheuser-Busch InBev doesn’t even list the beer on its website.

In what seems like a metaphor for a future being built upon ruins, a new college campus will be constructed on the former site of the Boddingtons Brewery in Manchester.

Did the Boddington Group diversify itself based on unique strategic assets, or did it lose its identity, cease to be more than the sum of its parts, and initiate a chain reaction of asset transfers?

Costas Markides offered another beverage industry example that holds up better. He mentioned, in passing, Quaker Oats’ entry into and fast, desperate exit from the fruit juice business through its Snapple acquisition.

Under its new ownership, Snapple was losing 20% of its sales annually. Quaker had acquired Snapple for $1.7 billion and sold it just 27 months later for $300 million, which meant Quaker essentially lost $1.6 million for every day it owned Snapple.

It’s now a somewhat classic business case study, with many reasons cited for the massive failure, including the argument that Quaker tried to normalize Snapple’s quirky brand identity. Sometimes, the “unique strategic asset” is, quite literally, brand uniqueness.

The Quaker Oats Company was, itself, acquired by PepsiCo in 2001. That acquisition also brought Gatorade under the PepsiCo umbrella. Originally developed by researchers at the University of Florida as a solution for their “Gator” athletes, the sports drink had been purchased by the Quaker Oats Company in 1983.

In HBR, Markides referenced The Coca-Cola Company’s own diversification failure. In the early 1980s, they tried to acquire their way into the wine business.

Markides wrote: “Having 90% of what it took to succeed in the new industry was not enough for Coke, because the 10% it did not have — the ability to make quality wine — was the most critical component of success.”

Markides’ emphasis on unique strategic assets seems to align well with Richard Branson’s takeaway from his cola experience. Branson concedes that he didn’t have something sufficiently unique and he has resolved to only go into businesses if his offering will be palpably better than all the competition.

“We had a great brand. But Coke had a great brand. The taste of the cola was maybe marginally better. But it was neither here nor there.”

— Richard Branson

We are in a whole different era now.

Consumers evaluate function just as seriously as flavor, if not more so. Brands are rethinking how to get their products in the hands of consumers.

Diversifying to gain knowledge

Diversification doesn’t always generate more sales but frequently it does generate more knowledge about changing consumers, new technologies, and evolving business models.

Unilever CEO Alan Jope has stated, “I think we’ve struggled more when we’ve moved beyond our core expertise.”

Dollar Shave Club was very rapidly gaining market share, with abnormally high retention rates, when Unilever acquired it for a billion dollars. At the time, business educator Michael R. Wade observed, “For as long as anyone can remember, the market for razors, or more specifically for razor blades, has been the closest thing to an annuity that exists in business. Unwanted hair stubbornly grows through all business cycles.”

The acquisition ultimately introduced some complexities to a D2C business that had been premised on simplicity. Subscriptions slowed down. It’s possible that some customers had been attracted to the quirkiness of the scrappy new D2C razor brand (a modern day parallel, perhaps, of the 1990s Snapple acquisition).

When Edgewell subsequently acquired Harry’s, another male personal grooming company, for $1.37 billion, they actively discouraged comparisons to Unilever’s acquisition of Dollar Shave Club, citing Harry’s product diversity, technology, and retail distribution. Some investors thought that Edgewell overpaid, or that it was a merger of equals; Edgewell’s stock hit a 52-week low. Another critic of that merger: the FTC, which sued to block it and maintain competition.

Speaking to their own acquisition, Alan Jope remarked, “Dollar Shave Club is also off the acquisition business case, though that was also part of learning about direct-to-consumer business models and we sure have learned a lot there. And have some very promising projects that we are working on, and some others that we’ve stopped as a direct consequence of our Dollar Shave Club learnings.”

Diversifying to monetize knowledge

Many beverage companies have innovated through packaging but very few have considered licensing that knowledge to non-competing industries.

Sometimes, the innovation in drinks goes beyond the drink itself. Most successful beverage companies end up developing extensive, valuable knowledge about manufacturing, distribution, and global trade. This could represent an under-utilized unique strategic asset.

C. J. Rapp, a beverage entrepreneur who helped to create the modern energy drink category, is now innovating on “cap technology” that separates and preserves active ingredients. He sees opportunities to further exploit that creativity and knowledge through licensing to non-competing categories, such as medical, pharmaceutical, and agricultural chemical. For Rapp, it begins with acknowledging the core idea, and its core value.

Shifting to “curation”

The pandemic has driven prioritization over diversification. Whittling down a sprawling product portfolio is now the natural reflex for multinational corporations that were hard hit by lost on-premise sales. Even if the pandemic hadn’t occurred, the best strategy for meeting the dynamic needs of modern consumer segments, on a large or global scale, may be cycles of diversification and curation. Today, premium functional beverage products might be more on-trend.

Diversification also varies from region to region. There are opportunities to leverage established regional brands and restructure operations to support local execution. Beverage companies must also augment their digital operations to connect consumers with new options on newly adopted channels.

The full report “Consumer Trends, Diversification & Strategies in the Global Beverage Industry, 2021” is now available for purchase on Policy2050.com.

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