Coca-Cola and Nestlé combine

One of the biggest marketing successes of the past decade has been the coffee shop chain. But the next move for coffee - and for its less hyped cousin, tea - could be to the fridge. Coca-Cola and Nestlé, two of the biggest names in the beverages and food sector, have spotted an opportunity in the so-called ready to drink (RTD) sector and have together devised a plan to dominate a fragmented global market by reinventing coffee and tea. One would have thought Coca-Cola already sold enough cold, flavoured, brown liquid. But this is different; the plan is to capture what could be a massive consumer trend by creating branded offers around the existing concepts of iced tea and coffee. The potential for growth is huge. According to Mintel's January 2002 Adult Soft Drinks report: ‘The category value of the global RTD market grew at a compound annual rate of over 6% from 1997 to 2002 (second only to bottled water) and is forecast to grow at close to 10% per annum in the next five years.' Coca-Cola and Nestlé's Zurich-based 50-50 joint venture, Beverage Partners Worldwide (BPW), wants to explore the RTD opportunities in every market and come up with a brand extension or repositioning of an existing product, or a brandnew offering. Hence the testing in Greece this summer of Black Ice, a spicy Mocha coffee-style RTD; hence trials in Belgium and Switzerland of microwave ovens in Coca-Cola vending machines, allowing the same can of coffee to be sold hot or cold; hence recent rebranding of Nestea in Europe and Asia. BPW is headed by Hans Savonije, a Dutchman who was previously with Coca-Cola for four years and with Unilever for 17 years before that. Of BPW's 46 marketing, product developing and finance people, 17 are from Coke and 10 from Nestlé. In the two and a half years since its launch, the venture has extended its operations to 55 markets, 17 of them in the past 18 months. In 2002-03 the rapidly expanding group introduced half a dozen new products and aims to achieve 25% growth a year. Mr Savonije declines to reveal how much the parent companies are investing in BPW but says it has an annual wholesale value between $1.2bn and $1.4bn (£690m and £800m). BPW comes up with a new RTD suggestion and develops it. Once it is cleared by both parents, it is up to BPW to get it on the shelves. Nestlé brings the food science and research and development know-how: Coca-Cola has the distribution and field marketing expertise. ‘We use existing resources of both companies and make them sweat a bit more,' says Mr Savonije. BPW has also been getting help from WPP-owned brand agency Added Value on product innovation and both Added Value and its sister design agency, Enterprise IG, have worked on Black Ice. The market is still immature except for Asian countries, particularly Japan. Unilever's Lipton Ice is the only big rival. More than 90% of BPW's business is still Nescafé and Nestea. Mr Savonije sees tea-flavoured drinks in particular as immensely versatile. ‘You can position different ranges of tea drinks from being close to Coke, which is very sweet, to water which is pure and boring.' And this is the trick because unlike Coke itself, whose flavour appeals worldwide, tea is much more of a local taste. In Egypt BPW has brought out El Rayek, a very sweet tea drink. There is ongoing work for the Argentine and Brazilian markets on an iced mate, the bitter, hay-like tea drunk incessantly through a straw in those countries. And while Nestlé Ice Rush with menthol flopped with consumers in North America, it has proved popular in Hong Kong and Taiwan. Mr Savonije is convinced of the category's staying power. ‘It won't be a fad,' he says. ‘The whole trend in society is towards more balance in life. It's a snowball and it won't stop.' Perhaps there is even potential to usurp Coke, the biggest soft drink brand in the world. David Nichols, managing director at Added Value, points out that the Swiss and Belgians now drink more iced tea than Coke, adding ‘It's eminently possible that tea etc. could take over from Coke, but it's a long way off.' But with Coca-Cola's efforts to transform itself into a leading drinks company in all sectors, and Nestlé hoping to become a total food company, BPW is hardly seen as a threat, says Mr Savonije: ‘It fits into their strategy.'

Question

1 How would you describe this joint venture?

2 What strategic benefits might result to either partner in this joint venture?