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Soft Drink Distribution is Fascinating

Once upon a time I was the executive officer in charge of marketing at Dr Pepper/7UP companies. It was there I discovered the most compelling and savvy distribution insight I’ve ever seen or heard of — and it is from the soft drink industry.

The soft drink industry distribution has long been “governed” by the structure of exclusive territories which stipulates that a bottling entity (franchise or company-owned) in a given market is granted lawful exclusive distribution of the brands for which it has distribution rights. For example, a bottler of Coke enjoys sole distribution rights within a given market such that another bottler or alternative channel of distribution such as warehouse distribution cannot distribute Coke in that geography.

If you are a franchise company with beverage brands, in an ideal world, you would prefer to be bottled and distributed by a Coke or Pepsi bottling operation

Conversely, a bottler of a given type of beverage, using Coke as an example, cannot distribute another cola brand; most obviously in this example, Pepsi. The legal basis for determining a beverage type is what’s called a “standard identity” and is specified by the FDA. Coke’s standard identity is “A caramel colored cola drink.” 7UP’s standard identity is a “Lemon-lime Soda.” In this example, a bottler of 7UP cannot also distribute Sprite.

It’s no secret that a bottling operation is essentially a fixed cost business model and the more it can bottle and distribute, the more the variable profit acts as overhead absorption thereby reducing the overall cost per case of soft drinks. Big brands such as Coke and Pepsi were therefore significant core brands coveted by bottlers due to their volume which almost always gave a bottler low cost producer status, allowing it to compete for hotly contested shelf space, ad features, in-store displays, cold drink cooler and vending penetration, and fountain foodservice availability.

Even today with the dramatically different beverage consumption and proliferation of new beverage products Coke and Pepsi bottlers remain low cost producers and there really isn’t a close third place bottling network that can match them channel for channel across the board.

If you are a franchise company with beverage brands, in an ideal world, you would prefer to be bottled and distributed by a Coke or Pepsi bottling operation so your brand had the chance of riding the coattails of a low cost producer with distribution muscle; particularly if you can earn share of mind within that operation to make the cut as one or more of their vending buttons or foodservice valves that provide arms-length penetration and sampling among cherished young consumers as well as highly profitable fountain “syrup” to foodservice accounts.

In the 1960’s (no, I was not there, thank you) Dr Pepper was specified with a standard identity as a “caramel colored cola drink” which prevented its bottling and distribution by any Coke or Pepsi bottlers.

Then President and COO, Footes Clements identified the distribution insight of the 20th century when he petitioned the FDA for a re-evaluation of the standard identity for Dr Pepper; recommending a new labeling as a “Pepper Flavored” drink, making the case that Dr Pepper was an inherently different recipe of ingredients that did not include the elements used in Coke and Pepsi. The FDA approved Clement’s petition; and from there, the rest is a forgotten history (until now) that allowed Dr Pepper to re-constitute its distribution strategy by signing bottling and distribution agreements across America in low cost, big muscle Coke and Pepsi operations. Shrewdly, Clements divided Dr Pepper rights to roughly half Coke and half Pepsi bottlers to leave in place an implicit “Sword of Damocles” lest their bottler doesn’t give them commensurate participation in the bottlers key distribution channels (ad features, displays, vending, foodservice) there was always the threat Dr Pepper would take their distribution rights across the street to their nemesis, that being the other cola bottler; where 5–10 share points (varies by market) could tip the balance on low cost producer supremacy.

Additionally, by building a strong brand that gained distribution inside Coke and Pepsi systems; Dr Pepper also effectively blocked the “parent” or franchisors Coca-Cola and Pepsi-Cola from being able to launch a viable competitor to Dr Pepper! This alone explains Dr Peppers dominant market share of the now so-called “Pepper” category and why competitive brands like Mr Pibb (Originally named “Peppo” and then “Dr Pibb” before losing trademark cases filed by Dr Pepper) are effectively regional brands.

Now most marketers know of Dr Peppers outstanding marketing campaigns largely defined by the “P” for promotion; perhaps most famous, the “I’m a Pepper” ad campaign. It was great work and they’ve done a lot of good work both before and since. But if you ask me how large would Dr Pepper be but for the insight, vision, and savvy of Footes Clements (and an assist from the FDA) I would estimate, about one-third to one-half their present size at best. This isn’t a criticism. If you’re not available, you can’t sell anything!

Before his passing I had the privilege of hearing this account directly from Footes Clements one evening puffing on one of his favorite Travis Club cigars in his later years as Chairman Emeritus when I became executive officer in charge of marketing at Dr Pepper/7UP companies.