Coke and Odwalla: The Attraction of Opposites?
Published: Saturday, December 01, 2001
HALF MOON BAY, Calif.—What a difference a few years can make—especially for natural juice maker Odwalla (ODWA).
On the rocks six years ago because of lawsuits resulting from E-coli-bacteria contamination in a small number of its fresh-drink products, Odwalla will fetch a cool $181 million from Coca-Cola (KO) in a merger set for completion Dec. 6. The deal is an all-cash tender offer for ODWA stock at $15.25/share and will allow the company to operate as a stand-alone unit under CEO Stephen Williamson within Coke’s Minute Maid division.
Odwalla did not return repeated requests for comment on this story.
According to RBC Dain Rauscher Corp. Denver-office Director Carole Buyers, the merger is valued at 1.45x trailing sales.
Analysts are hailing the pending deal as a triumph, not only for the smaller natural foods company, but also for the mainstream soft-drink giant. With the deal, Coke gets entrée into premium juices—the fastest-growing sector of the beverage market. Immediately Coke gets a line of fruit and vegetable juices, smoothies, spring water and the OdwallaMilk category of dairy-free shakes. It also gets a leg up on its main rival, PepsiCo (PEP). Pepsi bought South Beach Beverage Co.’s SoBe line of fruit and energy drinks in 2000 for about twice as much as Coke will pay for Odwalla.
Odwalla, on the other hand, gets enhanced distribution opportunities and an attractive exit for its investors. Currently, Odwalla, through its own direct-store delivery fleet, has distribution in about 30 states. “They’ve had mostly East Coast and West Coast distribution until now,” says Scott Van Winkle, an analyst with Boston-based Adams, Harkness & Hill. “There are giant holes in their distribution in the middle of the country.”
It’s assumed that teaming with Coke will close those holes by giving the juice maker a foot in the door everywhere Coke and Minute Maid have space on the shelf. “This allows Odwalla to go to national distribution pretty quickly,” Buyers says.
Given the above, the merger sounds like the best of all possible worlds.
But the marriage of these two incredibly different companies points again to the Faustian dilemma faced by growth-oriented, mission-based companies. Many natural products industry entrepreneurs know it well: If you want to change the world through your products and practices, you have to make them available to as many people as you can. To do that you need money, lots of it, to grow your business. But big money usually comes with strings attached. As a result, the more money you get, the farther away from the mission you drift. If you’re lucky, you bring your products into the mainstream. And that’s the good news. But often you do so at some considerable cost to your mission.
Odwalla’s founders wanted to offer its healthy fruit and vegetable juices to consumers everywhere—making a product that was good for you and profitable for them. Bolstering its commitment to environ-mental responsibility, Odwalla delivered its goods in alternative-fuel-powered trucks. To be socially responsible, Odwalla practiced community-based marketing, spending 100 percent of its ad dollars inside local communities.
Ironically, muses Greg Steltenpohl, co-founder of Odwalla with Gerry Percy and Bonnie Bassett, “The vision in my head was to see Odwalla everywhere Coke was.”
With the Coke deal, it looks like Steltenpohl’s early wish has come true. And he’s cautiously optimistic about the pairing. “From a product availability standpoint, it’s the best thing that ever happened,” he says.
But Steltenpohl has some serious thoughts about what has to happen to companies such as Odwalla along the way to the realization of their mass-distribution vision. When major corporations buy entrepreneurial brands, it’s usually the endgame of a series of capital investments, he says. And each investment along the way toward that end tends to enhance traditional investment-banking goals and dilute social-mission goals.
In Odwalla’s case, none of the founders remained on the company’s board when the decision to sell to Coke was made. Odwalla’s fate was determined by the company’s largest shareholder since 1997, Boston-based Bain Capital. Fortunately, Bain Capital’s investment saved Odwalla from what could have been an early demise after the company’s shattering experience with E-coli contamination. Unfortunately, the investment served to dilute the company’s social and environmental mission.
“When I look back at how much commitment there was to mission over the past three years, it was a secondary priority,” Steltenpohl says.
If a growth-oriented company wants to retain its social mission undiluted, it would do well to plan for that eventuality well in advance, he says. “I’d like to see alternative forms of ownership participate in growing successful brands.”
Steltenpohl believes the co-op structure is one such alternative structure. It’s a structure that has been used successfully in Italy for years. But in the U.S., he argues, “We haven’t fully recognized the opportunity for merging the financial freedom of corporations with the longevity of the cooperative holding structure. Some of us hope that our industry can evolve that.”
Currently, Steltenpohl sits on the board of Norway, Iowa-based Frontier Natural Products Co-op and is assisting in that organization’s restructuring process.
As for the future of Odwalla’s mission under Coke’s mantle, Steltenpohl has hope that Coke will see the wisdom of supporting the brand in its full representation. “I’m hoping it will continue to commit to sustainable fuels and community-based marketing as furthering its sales effort rather than as a cost issue,” he says.
As for the future of Odwalla products, his hope is that the brand he helped create doesn’t lose its traditional consumer. “One of my fears is that when people know that Coke owns it, they will not support the product. Our brands have 20 years of innovation behind them, and they still deserve support,” he says. “ I think they still represent hope to many people.”