Prepared Foods April 26, 2005 enewsletter

Coca-Cola is buying out Groupe Danone's share of a short-lived U.S. bottled water venture between the companies.

The agreement, which had been long expected, means Coke will pay roughly $100 million to become sole owner of CCDA Waters, which was formed three years ago by Coke and Paris-based Danone.

Coke, which will acquire Danone's 49% share of the underperforming venture, will take ownership of five plants that produce Dannon and other bottled spring waters. Danone will continue to own the brand names, and distribution will stay the same.

The Coke bottling system also will continue to handle Danone's famous Evian water in the U.S., but Coke has agreed to boost advertising and promotional spending by 20% in hopes of bolstering sales.

The end of the Coke/Danone joint venture does not — for now, at least — change Coca-Cola's ongoing use of a three-tiered water strategy in the United States. Coke sells Evian on the high-priced end, Dasani in the middle, and Dannon and other brands on the low.

"We have a strong partnership with Danone, and both companies believe in the potential of this category," Don Knauss, president of Coca-Cola North America, said in a memo to employees.

However, analyst Bill Pecoriello of Morgan Stanley said in a report that Coke's approach had been a failure.

The joint venture has lost money, he said. Coke has slashed prices on waters involved in the deal by 20% but without gaining enough market share to come out ahead.

Pecoriello questioned whether Coke's strategy would change, including the possibility that Danone might eventually retake control of Dannon-brand bottled water.

For months, Danone has been trying to deal with challenges in its U.S. water businesses, which include its venture with Coke and a separate home-and-office delivery deal with Suntory Ltd. of Japan.

In 2004, the Coca-Cola/Danone venture — including Dasani, Dannon and Evian — lost 2.2 points in market share, falling to 21.9%. Nestle, whose brands include Zephyrhills and Poland Spring, built on its market-leading position, up 3 points in market share, to 42.1%.

Distribution of Dannon water has been especially challenging to handle. Dannon is not distributed by Coke bottlers, so it is effectively a competitor of Dasani, which flows through the Coke bottling system.

"Much of the rapid growth of Dannon has come at the expense of Dasani," Pecoriello said.

With disappointing performance for the joint venture, Coke was likely making payments to Danone to cover shortcomings, Pecoriello said. "Coke likely decided it was better to terminate it rather than make continued cash payments," he said.

Coke spokesman Dan Schafer declined to comment.

Coke initially paid $128 million for its 51% majority stake in the venture.