PURCHASE, N.Y. -- As packaged-beverage distributors and suppliers formulate their responses to McLane Co.'sand other distributors'recent decision to move from a cost-based to a weight-based fee for its suppliers, one of the largest players, PepsiCo's Gatorade, may be leaning toward negotiation.
In a Webcast discussing its fourth-quarter 2006 earnings report, executives for PepsiCo and Gatorade (QTG) briefly touched on the distributor fee in response to an analyst's inquiry. Although carefully worded, their replies revealed an appreciation for the supplier-wholesaler [image-nocss] relationship.
We have multiple customers on the Gatorade part of the business, as you know, that are part of our distributor network, said PepsiCo North America CEO John Compton. We don't want to get into specific negotiations or tactics that we have with any; just rest assured that the Gatorade supply chain and go-to-market system is something that we value, we consider it to be an advantage and we're going to work going forward to ensure that we have that.
PepsiCo president and CEO Indra Nooyi added that the new distribution costs are an issue we have to address, and noted we'll figure out how to offset it, but our [2007] guidance factors all of that in.
Robert van Brugge, a beverage analyst with New York-based investment-management firm Sanford C. Bernstein and Co. Inc., interpreted the remarks as a sign that PepsiCo is willing to work things out with c-store distributors simply because they currently offer the lower-cost route to the c-store market.
What they said was they believe their route to market through McLane and their other distributors is part of their advantage for Gatorade, van Brugge told CSP Daily News. I would interpret that as meaning they want to keep it and not switch. Also they're basically saying, hey, it's a negotiation. My interpretation would be that McLane has made an offer and PepsiCo made a counter offer. I don't think they'll just accept the offer that they've been proposed.
Meanwhile, Roger Grogman, corporate marketing vice president for McLane, said he takes Nooyi's comment as recognition of the issue moving toward resolution. What she was referring to was the proactive position that her organization took to continue to maintain a favorablerelationship with the wholesaler community, he told CSP Daily News. We're trying to seek resolution to an issue, not unlike what everyone does when they recognize the cost of a service has exceeded the value received for it.
In a research note date February 7, van Brugge estimated that PepsiCo would be hit with $135 million in incremental cost if forced to pay the entire proposed price increase of 9.5 cents per pound to McLane and presumably all of the c-store industry's distributors.
He noted that because direct-store delivery (DSD) would provide a lower net cost to PepsiCo and that McLane's proposed fee increase is much greater than the marginal cost of providing the logistics service, we believe the most likely outcome is that McLane will compromise on the extent of its price increase, although a significant increase remains likely.
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