Beverage Industry Braces for Convergence

UTRECHT, The NetherlandsWith an unprecedented level of margin pressure and changes in consumer preferences, beverage companies are being forced to develop new strategies to improve profitability, according to a new Rabobank report titled Convergence in the Beverage Sector.

To tackle some of those challenges, beverage companies often practice convergence through mergers and acquisitions, joint ventures or distribution agreements between different segments of the beverage sector.

Properly managed, convergence can be a means to grow revenues, increase operating efficiencies and improve the strategic positioning of a companys brand portfolio without cannibalizing existing brands and avoiding potential antitrust obstacles, said Steven Rannekleiv, executive director of Rabobanks Food & Agribusiness Research and Advisory (FAR).

Acquiring competitors within their core segment is becoming increasingly complicated for beverages companies, either because of potential cannibalization of brands or because of possible antitrust issues; therefore, many companies are expected to look for opportunities outside of their core segments.

Clearly, the opportunities for growth within their core segments are now limited for these market leaders, Rannekleiv said. Acquisitions outside a companys core segment can allow the company to grow revenues and improve operational efficiency in a mature market without cannibalizing existing brands and without raising antitrust concerns. Although revenue growth may be an obvious benefit of convergence, the opportunity to improve cost efficiencies is also important. Combining operations across segments can help reduce costs and maximize distribution efficiency.

The convergence process can help beverage companies improve their strategic positioning by building a strong portfolio of must-have brands across numerous segments. While convergence helps  improve negotiating strength with retailers, it also can improve a companys strategic positioning against competitors. By acquiring a complete portfolio of products, beverage companies can become a one-stop-shop for their clients, taking sales opportunities from competitors.