Last year proved to be one of the most difficult years bottlers have faced in awhile. Instead of focusing on rising raw material costs, fuel prices and consumers’ declining disposable income, Beverage Industry’s 2009 Bottler of the Year, Pepsi Bottling Ventures (PBV), Raleigh, N.C., looks at what it can control in a difficult year, says Keith Reimer, PBV’s president and chief executive officer.

“In that environment, what I look at now is: Are we growing faster than the categories that we compete in?” Reimer says. “Are we growing faster in those categories and the category overall? Are we growing faster than our competitors? And are we growing faster than our brethren in the Pepsi system?

 

“Overall, I can say what I feel great about is that we’ve exceeded the system. We’ve outperformed the system not only this year, but over the last three years, we’ve grown at a rate of almost twice that of the overall system. We’ve grown share in almost all the categories that we compete in … We continue to outperform the benchmarks, and I think we’re doing a good job of executing in the areas that we can control.”

 

In addition to improving performance in a less-than-perfect economy, PBV has made sustainability a key focus of how it operates, especially in the technology and equipment it has added as part of its recent $25 million expansion. The addition features a direct-blow-fill machine for bottling water, and is capable of producing lightweight bottles weighing 10.9 grams.

 

“I simplify it as ‘How can we do more with less?’” Reimer says. “It’s kind of an over-simplification. How can we continue to grow our business, but do it in a way that either costs less or handles more complexity at a lower cost, or leaves less of a carbon footprint on the environment? We got into this because we felt it was the right thing to do.”

 

 

PBV was born in 1999 as a joint venture between PepsiCo and Suntory Ltd., a $14 billion Japanese beverage company. PBV was established when Suntory’s PepCom Industries combined with five PepsiCo-owned bottlers as part of PepsiCo’s plan to consolidate its bottling network around a handful of anchor bottlers. At that time, PBV became the third-largest anchor bottler for Pepsi in the United States. Of the three anchors, PBV is the only limited-liability company, and therefore the only anchor not publically traded.

 

Suntory, which owns 65 percent of PBV, also has worldwide beverage interests that include liquor, beer and wine, and is the master franchisee for Pepsi in Japan. Suntory allows PBV to operate the business with a lot of autonomy. Reimer reports four times a year to a board of six individuals, four Suntory members and two from PepsiCo. In addition, three individuals from Suntory are positioned at PBV’s headquarters to help with corporate planning and act as liaisons with Japan.

 

When the joint venture formed, PBV operated businesses on New York’s Long Island and in North Carolina. The company immediately began to expand through North Carolina, and in 2004 PBV acquired Pepsi-Cola Bottling Co. of Salisbury, Md., located on the Delmarva Peninsula. The acquisition enabled PBV to branch into new territories in Delaware, Maryland and Virginia. In November 2007, PBV further expanded with the addition of Pepsi of Burlington, Vt. Pepsi’s third-largest bottler now operates 23 bottling and distribution facilities, which serve its franchise territories in North Carolina, New York, Maryland, Delaware, Virginia and Vermont.

 

PBV is organized into three divisions — East North Carolina, West North Carolina and the Northeast, which comprises the Delmarva Peninsula, Long Island and Vermont — that report to Paul Finney, senior vice president of sales and marketing. North Carolina is where most of the company’s volume lies, and therefore the territory is split into two divisions. PBV operates two production facilities in North Carolina, two on Long Island and one on the Delmarva Peninsula.

 

Headquarters works to provide centralized functional processes and go-to-market guidelines throughout its areas, but the tactical execution may vary to be competitive within each marketplace.

 

“Given our size, we can still be relatively nimble,” Finney says.

 

Operating in six states offers the company the benefit of scale, and it plans to further expand through acquisitions, partnerships and contract manufacturing.

 

“We have aspirations of growing,” Reimer says. “…We are trying to add scale, which is critical I think for the long-term success of probably any bottler today.”

 

Core competencies, such as a robust IT platform with SAP, and manufacturing, sales and marketing management at headquarters, offer the company particular advantages. In addition, because PBV has different competitors and product lineups in each state, the company has the opportunity to manage its portfolio differently in each area.

 

 

In 2008, PBV posted sales of more than $700 million, which marked a year of revenue growth for the company, but not the volume growth that is was used to. In 2008, PBV reported volume sales slightly lower than the prior year.

 

“Over the last five years, we’ve seen significant growth in our revenue and profit,” Reimer says. “It has been driven through a combination of organic growth, innovation and acquisitions.”

 

Weak carbonated soft drink sales contributed to PBV’s volume declines, although CSD sales did outperform the company’s expectations. In North Carolina, soft drinks own a high share of the beverage market, hence, soft drinks account for slightly more than 70 percent of PBV’s portfolio.

 

“We have a high per cap, and as a result that’s both good news, and I guess you could say in a declining environment, it’s a bit of a challenge,” Reimer says.

 

Fortunately, the largest portions of PBV’s business, North Carolina and Delmarva, have been experiencing more population growth than average across the United States, Finney says. Additionally, in large- format channels, PBV’s value packages, such as cans in 12-packs, and to a lesser extent, 2-liter bottles, posted higher sales than anticipated in those channels.

 

“What we’re seeing in our markets is with consumers looking for more value, soft drinks continue to be a great value,” Reimer says.

 

CSD flavors also are a growth category for PBV. Mountain Dew performs well in both Delmarva and North Carolina, Finney says. “In the small-format segment, Mountain Dew is actually double the share of regular Pepsi and Coke Classic, which is quite unusual,” he says.

 

Dr Pepper, which PBV carries in portions of North Carolina and Delmarva, also has helped boost flavor sales. In 2009, PBV expects the launch of Cherry Dr Pepper to further perk up sales.

 

“I think Mountain Dew and Dr Pepper are two brands that will continue to grow despite the CSD slowdown,” Finney says. “…We haven’t declined quite as quickly as everybody else has, and I really believe Mountain Dew and Dr Pepper being such a big part of our business has helped.”

 

This month, PBV plans to further grow its CSD flavors with the addition of Orange Crush in areas where it does not distribute Sunkist. It added Squirt in 2007. “We’re actually planning for a full point of growth out of Crush,” Finney says.

 

This year also brings some new introductions, graphics and packaging innovations from PepsiCo, for which the company has high expectations. In CSD flavors, PBV will add Mountain Dew Voltage, which was the winning flavor in the brand’s Dewmocracy campaign. In the middle of April, PBV also will begin distributing Pepsi Throwback and Mountain Dew Throwback, which features those brands formulated with sugar. For the flagship PepsiCo brands, Pepsi, Diet Pepsi, Mountain Dew and Sierra Mist, PBV also is beginning to distribute the brands featuring their new redesigned graphics and packaging, which is part of a holistic campaign aimed at drawing in younger consumers. PepsiCo also is launching a new advertising campaign with the release.

 

“We have very high hopes for the new package graphics, promotions and advertising plans,” Finney says. “With the solid base of Pepsi consumers here, we believe the changes will create new excitement for the brand and help us get carbonated soft drinks growing again.”

 

Packaging is another area Reimer and Finney expect to see more innovation in this year.

 

“We’re looking at ways to deliver better value and better entry price points for consumers on soft drinks,” Reimer says. “That could come in the form of an eight-pack of cans. It could come in the form of a 1.5-liter for take home, but you’ll see us continue to look and press the envelope around packaging to deliver value to the consumer, especially for that entry point. And given that people are seeking more variety, if we have a lower entry price point, we might better allow people to try different things within that CSD portfolio.”

 

Despite PBV’s CSD volume coming in under last year’s totals, the company is still optimistic about soft drinks over the long term. Reimer believes that new product news and innovation will be key.

 

“Despite the challenges we face today, I believe soft drinks have a bright future,” Reimer says. “They are great tasting, refreshing and low cost. With continued innovation in sweeteners and packaging, I’m bullish that we can start to see category growth in the near future and over the longer term.”

 

 

Like many bottlers throughout the country, PBV has experienced high non-carbonated and bottled water growth during the past three years. When Reimer joined the company in 2004, he was given the duty of maintaining PBV’s soft drink growth while at the same time going after the non-carbonated opportunity more aggressively. Rather fittingly, he had most recently served as vice president/general manager of the North American Coffee Partnership, a Starbucks and Pepsi-Cola joint venture company.

 

For PBV, Lipton ready-to-drink bottled teas experienced explosive growth in 2006 and 2007, and modest growth in 2008, Reimer says. Bottled water grew moderately in 2008 after three years of growth in which PBV saw water account for almost two-thirds of its overall volume growth.

 

“It’s obviously the economy and those challenges, coupled with a fair amount of negative press around water — bottled water in particular,” Reimer says. “To some extent, that doesn’t help our overall proposition. But overall, if you look at our algorithm, our non-carb and water portfolio is outperforming their respective categories and fueling most of our growth over the last several years.”

 

Lipton Iced Teas in 20-ounce single-serve bottles and 12-packs of half-liter bottles have contributed to PBV’s tea success. “Our large multi-pack tea has been extremely successful in engaging a whole new customer into that tea marketplace in the South that maybe wasn’t as engaged in it before,” Finney says.

 

Next year, PBV also is optimistic about a new sparkling Lipton green tea, since green tea performed well in 2008. This month, PBV will introduce the Lipton Iced Tea 1-gallon jug to its territory.

 

“The jug business is growing, and we believe ultimately that Lipton can play a part in that,” Finney says. “With us having a 70 share in the take-home category, we then could also have a pretty good growth opportunity when it comes to multi-serve take home.”

 

Energy drinks are another area where PBV has experienced growth during the past few years. PBV enjoys about a 25 percent market share in small format, Finney says. For the past 18 months, Amp Energy has driven the company’s energy drink business, which received a boost in North Carolina and Delmarva with the signage of popular NASCAR driver Dale Earnhardt Jr. PepsiCo’s No Fear also contributes 5 percent share. Additionally, Starbucks DoubleShot Energy + Coffee drinks have performed well in the short time they have been on the market, and the company plans to add an SKU to the line this year.

 

PBV, like many bottlers, has seen an explosion of SKUs, and currently distributes more than 500. Most of those new SKUs were added during the past three years, Reimer says. Many of the new SKUs are non-carbonated, and with less volume per variety, add an element of complexity to the company’s operations.

 

“That’s added a challenge for manufacturing, and it’s certainly added a challenge for the distribution warehouse side of our business,” Reimer says. “Clearly, what we’re seeing today is that people want more variety, and I think given that, we’ll continue to see growth in the number of products and type of products that we carry.”

 

Not every new SKU that a bottler launches is successful over the long term though, so PBV has developed a best practice approach to SKU rationalization. Reimer; Finney; Matthew Bucherati, senior vice president of operations and supply chain; Derek Hill, chief financial officer, and members of the sales and marketing team meet at minimum four times a year and use metrics such as marginal contribution, volume and revenue to evaluate the products the company has added.

 

“What we’ll do is bring a new product in and give it up to a year to succeed, but once it’s been on the docket for a year, if it’s not hitting volume and marginal contribution thresholds that we have, we’ll target that for SKU deletion,” Finney says. “So a product three months in might be a prime target for SKU deletion, but the fact is in three months it really hasn’t had enough time to take seed in our system.”

 

It’s not always as simple as removing an underperforming product from the market after the year is up.

 

“If we have competition that continues to grow and our product isn’t growing, we need to take a look at what we’re not doing correctly,” Finney says. “Do we have distribution where we need to have it? Is it priced correctly? Do we have the right package? … One of the things that we want to be careful with is that I think it takes a certain amount of time to nurture a product and ensure that it’s going to be successful. If we don’t give it the proper time to do that, we may let the product go before it has a chance to fully succeed.”

 

In 2009, SKU rationalization will help the company monitor the more than 100 SKUs it expects to add.

 

“If 100 come in over the course of the year, my sense is that we probably end up with a net new of 50 or so by the end of the year, or they might replace some other product that we’ve carried for a number of years,” Reimer says.

 

 

Going hand-in-hand with how it operates, sustainability is a concept PBV believes in. Water conservation, packaging, energy and fleet are the four key areas around which the company focuses its sustainability initiatives.

 

Water is an area of concern for PBV and North Carolina in general. The company’s two largest facilities are located in North Carolina, which faced a severe drought in 2008. Even though PBV had several water conservation programs in place before the drought, the company was still pointed out in the media as a “bad guy” because of its large bottling plant in Raleigh, Reimer says.

 

“In reality, we used much less than 1 percent of the water supply in Raleigh, and as we shared with people, they got to know more about what we stood for as it related to water conservation,” Reimer says. “We’re pretty proud of the fact that if you look at the business over the last three years, we’ve grown our overall volume in that particular facility by 12 percent, yet we use 2 percent less water. You don’t do that unless you have practices in place to conserve water.”

 

Practices such as trapping wastewater and reusing the water for cooling and fleet washing aid the company in water conservation. In 2008, PBV invested an additional $800,000 in equipment to improve reverse-osmosis efficiency that is expected to save an estimated 3 to 4 million gallons of water annually. The company also installed a waterless conveyor lubrication system, which is estimated to have saved more than 1 million gallons of water.

 

In regard to energy, PBV, along with PepsiCo’s two largest anchor bottlers Pepsi Bottling Group Inc. and PepsiAmericas Inc., purchase renewable energy certificates to match 100 percent of the electricity used by their U.S. operations. The three anchor bottlers combined purchase nearly 629 million kilowatt hours of green power annually.

 

PBV also began to convert its pre-sell vehicles to hybrid cars, and this year will purchase its first set of hybrid trucks for distribution. PBV’s biggest sustainability initiative for 2009 is its new direct-blow-fill machine addition. The new line will allow the company to take more than 40 percent of the PET out of its water bottle packaging, Reimer says. The new facility addition that accommodates the line also features energy-efficient lighting and an energy-efficient heating and cooling system.

 

“Every capital expenditure that comes across my desk has a section in there that asks people to tell me what we are spending money on to help drive sustainability,” Reimer says. “So if it’s buying a new fleet, we obviously are talking about: ‘Is this fleet going to be more fuel efficient than the other fleet?’ As it relates to this line, we challenged ourselves to make sure we had the most sustainable approach to delivering that direct- blowmold-fill line capable.”

 

The $25 million new line investment not only allows PBV to lightweight its bottles, but allows the company to reduce its carbon footprint and costs at the same time. “To me, it’s kind of the best of all worlds,” Reimer says. “We’ll be able to significantly lower the costs of putting that water on our warehouse floor. At the same time, we’ll reduce our carbon footprint and packaging.”

 

PBV plans to not only adapt to future demands with production upgrades, but again by executing in 2009 as well as it can against the things it can control. This year is expected to be an equally tough economy.

 

“We need to make sure that we keep value first and foremost in mind for our consumers and understand that our costs are going to increase,” Reimer says. “There is continued pressure on raw material increases in the year ahead, so we will need to make sure that we are structured right and continue to increase our bandwidth for handling more complexity next year because it’s going to be a very challenging year.”

 

That said, Reimer is proud of the fact that PBV’s team has been able to outpace the Pepsi system, its fellow anchor bottlers and its competition by almost all growth and revenue drivers. Adding growth through acquisitions and expansions also has proved PBV’s drive, he says.

 

“We’ve added and integrated some great organizations into our company, and we’re quick to integrate those systems into ours,” Reimer says. “We’ve been successful to the point that we’ve demonstrated not only to our board, but to others that we have the capability to grow beyond where we are today.”