Gatorade's Switch To DSD Brings Up Pricing Issue

Retailers expected the move, but some are uneasy

PepsiCo's recent move from warehouse delivery of Gatorade products in the c-store channel to direct-store delivery (DSD) through company-owned and independent bottlers has led some industry players to rethink the beverage category and question the channel's decades-old pricing structure.

As 2010 drew to a close, retailers were asking: how will this move affect them.

“I knew [the switch to DSD] was going to happen sooner or later because that was the original plan when Pepsi purchased Gatorade,” said Matt Paduano, vice president of category management, Nice N Easy Grocery Shoppes Inc., an 80-store chain based in Canastota, N.Y. “But it's still kind of took me by surprise. I see this as a competitive reaction to Coke being able to distribute, merchandise, market and control its PowerAde brand.”

For its part, PepsiCo said the move to DSD for convenience, up and down the street (UDS) and dollar channels is an example of the company resetting systems to best serve its customers.

“We remain dedicated to the existing warehouse distribution system for some of our beverage products, but the change to direct-store delivery makes sense for Gatorade as we redefine the sports nutrition category through the G Series,” Massimo d'Amore, CEO of PepsiCo Beverages Americas, said when the strategy was announced last September. “As a company, we are committed to bringing a wider variety of products to market more quickly and efficiently than ever before.”

But Paduano said Pepsi's DSD strategy may mean fewer Gatorade SKUs in Nice N Easy's cold vault. “With Pepsi carrying some Gatorade, as well as the wholesalers, there was competition between the two for share of space,” he said. “With one distributor this should go away.

“In addition, they also tell me they will consider increased frequency of distribution if warranted. Some of our stores were getting twice-a-week delivery from our wholesaler, and Pepsi is well aware of that.”

In the past, it was not unusual for Nice N Easy to put 150 cases of isotonic drinks in a store and sell them down to avoid distribution issues during peak selling season. “My Gatorade and Pepsi rep are on top of the issues and want to make sure this gets off to a good start,” Paduano said.

The retail executive's biggest concern is the beverage giant will try to build minimum share of isotonic space into their retail contracts.

“We have resisted this with Gatorade when it was coming from the wholesalers and will look to be doing the same with Pepsi DSD,” Paduano said.

His latest contract, however, continues to keep Gatorade business separate from other Pepsi products and is tied to cooler space and maintaining a maximum retail price differential between Gatorade products and the competition.

For its part, Pepsi management said the move to DSD is the first large-scale step toward optimizing delivery systems resulting from the company's bottling acquisitions in early 2010. The expected synergies related to these changes are included in the company's target of $400 million in pre-tax annualized synergies from the bottling acquisitions once fully implemented by 2012.

“The distribution of Gatorade in key trade channels of convenience, UDS and dollar is well-suited to the direct-store delivery model due to its high velocity, so the switch will result in better store-level customer service,” said Eric Foss, CEO of Pepsi Beverages Co. “By achieving greater speed, simplicity and flexibility, we will be able to better serve the current and future needs of both our retail customers and consumers in the marketplace.”

“The warehouse model is remarkably more efficient. What will the switch do to price? We don't know.” Gus Olympidis, Family Express Corp.

Other PepsiCo brands that are warehouse-delivered to c-stores, including Tropicana, Quaker and Naked Juice, will not be affected by the change.

More than two months after the announcement, there was still uncertainty about how the move will play out.

Gus Olympidis, CEO of Valparaiso, Ind.-based Family Express Corp., a self-distributing operator of 52 stores, said the company occasionally diverts product, buying on deals in areas outside the Northwest, North Central Indiana market.

“We don't know yet how this move will affect pricing to c-stores,” Olympidis said. “PepsiCo is exercising its legal rights to place Gatorade on DSD trucks and is looking, I suspect, to manufacture low and sell high. The critical question is not how will this affect pricing in the channel, but how may it affect the extraordinary price differential we see in the beverage category between the convenience channel and the other channels for the exact same product? It could be inconsequential, problematic or even therapeutic. Who knows?”

There is some industry concern, too, that the Gatorade DSD delivery model will be less efficient than the warehouse distribution model was. “The warehouse model is remarkably more efficient,” Olympidis said. “What will the switch do to price? We don't know. One could argue the [added cost of] the lack of efficiency will have to be passed on to the retailer.”

But Joe Jacuzzi, vice president product and brand communications for Pepsico Americas beverages told CSNews the beverage company's DSD system will allow speed to market, address high velocities in peak months and improve reach to all convenience stores.

“Gatorade, with its high turns and acceleration of consumer demand in the hotter months, is well-suited to this method of delivery,” he noted. “We will also be a more tightly linked total beverage partner for our customers and will be able to increase flexibility and responsiveness to the competitive influences in the marketplace.”

For more retailer reaction to the Gatorade move, go to the Special Feature tab at www.csnews.com

For comments, please contact Barbara Grondin Francella, Senior Editor, at [email protected].