The Coca-Cola Company announced today that it will buy Glaceau, the maker of Vitaminwater, for $4.2 billion in cash.The acquisition has been expected for weeks, as Coke pursued Glaceau, which is also known as Energy Brands, to upgrade its portfolio of noncarbonated beverages, the sales of which have been growing much faster than soda in the United States in recent years.In a statement, E. Neville Isdell, the chief executive of Coke, said: “Glaceau has built a great business with high-quality growth, as well as a strong pipeline of innovative products and brands. We envision even faster growth for Glaceau as part of Coca-Cola’s enhanced range of brands for North American customers and consumers.”While the price tag is substantial for a company with earnings in 2006 of about $350 million, analysts said the cost in avoiding the deal, given Coke’s relatively weak position in noncarbonated beverages, could also be high.It may also exorcise some ghosts in Coke’s past. For the last decade or so, Coke, which has 43 percent of the soda market in the United States, compared with 31 percent for the rival PepsiCo, has lagged behind in introducing noncarbonated beverages.
It was late in introducing bottled water to the market. And in 2000, Coke’s chief executive signed a deal to buy Quaker Oats that included Gatorade, but the board turned him down. Quaker was then swept up by PepsiCo.This year, PepsiCo’s share of the noncarbonated beverage industry in the United States — which includes bottled water, sports drinks and juice — was 50 percent. Coke’s market share was 23 percent, according to the trade publication Beverage Digest, which first reported the negotiations last month.William Pecoriello, an analyst with Morgan Stanley, called the acquisition, a “potential game changer” in the market for noncarbonated drinks. “It would fill a major gap in it’s noncarb portfolio,” Mr. Pecoriello said last week in a note to investors.Glaceau also makes Fruitwater, an energy drink called Vitaminenergy and Smartwater, which contains electrolytes. Mr. Pecoriello said the sale of Glaceau’s products could be expanded overseas. The jewel of Glaceau is Vitaminwater which is vitamin-fortified and offered in flavors.
It is among a fast-growing category known as functional foods, which market themselves as offering an additional benefit beyond basic nutrition. Energy drinks fortified with ginseng, orange juice with added calcium and yogurt with live bacteria called probiotics are examples of fortified foods. Each bottle promises a specific benefit. Kiwi-Strawberry flavored Vitaminwater, for example, promises “focus” and “healthy support for eyes and skin” with Vitamin A and lutein, described as a natural antioxidant that protects against eye disease. There is also a Vitaminwater with green tea extract, which promises to “rescue” because of its purported cancer-fighting properties. Glaceau’s Web site says, “Welcome to the Center for Responsible Hydration.” The company was founded in 1996 by J. Darius Bikoff, who remains chief executive. He could not be located for comment.Glaceau is based in Whitestone, Queens. Last year, an Indian tea company, Tata Tea, bought a 30 percent in Energy Brands for $677 million.
At that time, a Tata executive told Dow Jones that Glaceau’s revenue for the year would be $355 million and would jump to $700 million in 2007. The company sold 77 million 192-ounce cases last year, a standard industry measure, according to Beverage Digest, a 103 percent increase over the previous year. By contrast, Coca-Cola sold 5.5 billion cases in the United States alone.When he took over as chief executive in 2004, Mr. Isdell, a longtime Coke executive who had retired to Barbados, said his turnaround effort would focus on ironing out turmoil within the company, improving morale and focusing on rebuilding its core soda brands. He also vowed to improve the company’s innovation pipeline. But once the company was stabilized, Mr. Isdell said he would be prepared to make more transformational acquisitions.“It’s the right play,” said Tom Pirko, president of Bevmark, a consulting firm to the food and beverage industry, including Coke. “When you look at what’s happening with Coke, they can’t innovate their way out.
They have to buy their way out.”In America, soft drinks account for 67 percent of the nonalcoholic beverage business, with bottled water making up 17 percent and other noncarbonated beverages, 16 percent, Beverage Digest said. But in 2006, soft drink volumes declined slightly while bottled water was up 17 percent and other non-carbonated drinks increased 13 percent.The soft drink conglomerate Coca-Cola Co. (KO) a revenue machine. As of 2015, the company owns 20 brands that each generate $1 billion or more in annual revenues, including big names such as Dasani, Odwalla, Minute Maid, Powerade, Sprite and Gold Peak Tea. It also has large ownership stakes in other brands, such as Monster Beverage. However, none of these acquired brands have grabbed market headlines like Glaceau's vitamin water, which was purchased by Coca-Cola in 2007 for a then-company high of $4.1 billion. The years subsequent to the Vitaminwater purchase saw Coca-Cola's marketing team do wonders; Vitaminwater went from annual sales of $350 million to more than $1 billion.
The sweetened water beverage entered new markets and, by nearly any measure, performed very well. Many touted it as Coca-Cola's most ambitious and successful purchase to date. That argument became muddier after Coca-Cola was forced into a $1.2 million settlement over a Vitaminwater lawsuit in 2013-2014. The lawsuit, filed by residents of Florida, Ohio, Missouri and the Virgin Islands, contested the possibly misleading health benefits tied to the Vitaminwater product. There is also the question of valuation. Coca-Cola spent in excess of $4 billion for a company with only $350 million in revenues. Some contend the company overpaid, which is something it rarely does when making acquisitions and strategic partnerships. In 2006, Glaceau Vitaminwater was owned by Energy Brands Inc. and was evaluated at roughly $2.2 billion. Coca-Cola swooped in one year later and eventually purchased the brand for almost double that amount. The $4.1 million acquisition sent shock waves through the soft drink world.
By 2011, Vitaminwater had grown from $350 million in annual revenue to more than $1 billion. A similar story happened with Del Valle, which was purchased by Coca-Cola in 2007 and reached $1 billion in annual sales by 2010. Changes in marketing, ingredients and the health lawsuit all damaged Vitaminwater over the next several years. Between 2012 and 2013, the dollar sales of Vitaminwater dropped by more than a quarter. Depending on which income numbers you decide to use, Coca-Cola brought in as much as $47 billion in revenue in 2014. Vitaminwater accounted for approximately $950 million of that amount; it is substantial but nowhere near as big as the major Coke brands: Coca-Cola, Diet Coke, Sprite and Coke Zero. The original lawsuit over Coca-Cola and Vitaminwater actually occurred in 2009 and was filed by The Center of Public Interest, or CPSI. CPSI specifically contested some of the scientific and biological claims that the drink could "promote healthy joints, support optimal immune function, and reduce the risk of eye disease."
Coke responded by changing the sugar content of Vitaminwater. The original drink used a combination of cane sugar and crystalline fructose, but the altered version used a blend of cane sugar and stevia. However, fans of the soft drink rejected the stevia alteration, and Coca-Cola performed an about-face in 2014 and switched back to the original ingredients. Others quickly joined the CPSI lawsuit, and eventually all of the class-action suits were consolidated into one case. Coca-Cola settled for $1.2 million, but that settlement is being protested by the Truth In Advertising organization, or TINA. There are two different aspects of the Glaceau Vitaminwater deal that make it tough to suggest it is Coca-Cola's best purchase. The first, and obvious, is the lawsuits about Coca-Cola's health advertising. The alternating ingredient swaps also damaged Vitaminwater's sales, particularly in 2012 and 2013. They also cost the company legal fees and settlement dollars. Perhaps the more interesting aspect is, despite the unquestioned growth of Vitaminwater sales since 2007, Coca-Cola probably overpaid for the brand and may have been better off just buying its own shares.