Coca Cola and Nestle End U.S. Tea Party, Focus on Overseas Growth

Coca Cola Co (NYSE:KO) and Nestle SA have agreed to scale back their beverages joint venture. The companies will phase out partnership in U.S. by the end of the year and focus on Europe and Canada. Coca Cola will also enter into a license agreement with Nestle in Taiwan and Hong Kong. ^[1] The joint venture between the two companies, known as Beverage Partners Worldwide (BPW), sold Ready-to-Drink (RTD) teas under the label Nestea. We think that this is a move in the right direction as the RTD segment is growing in the U.S. and Nestea sales were flagging. The move will also give Coca Cola the freedom to launch its independent RTD tea brands. Coca Cola currently competes with companies like PepsiCo (NYSE:PEP) and Dr. Pepper Snapple Group (NYSE:DPS), among others in the U.S.

See our full analysis for Coca Cola

Joint Venture Did Not Reap the Expected Benefits

The joint venture has not been as successful as the one formed between PepsiCo and Unilever under which PepsiCo will market and distribute Unilever’s Lipton Ice tea in the U.S.

According to Beverage Digest, Coca Cola sold 78 million cases of Nestea in U.S. in 2010, down from 93 million cases in 2005. Compare that to Pepsi, which sold 247 million cases of Lipton Ice Tea in 2010 and the reason for the move becomes apparent. ^[1] However, we  think that (RTD) tea segment’s contribution to Coca Cola’s stock price was not significant in the first place so this move is likely to have no major negative impact on the stock price.

Coca Cola Well Poised to Launch Own RTDs

Since the cola sales in the U.S. are declining to consumers’ preference for healthier products, it is important for Coca Cola to grab a foothold of the fast growing RTD segment. Coca Cola’s current portfolio in the RTD includes Gold Peak iced tea, sold in the refrigerated cases of grocery stores. The company recently also purchased organic tea maker Honest Tea and will soon launch Fuze teas, a fusion of tea and juice flavors, to replace Nestea. If the company is indeed able to make a mark in the RTD segment, we could see an upside to the stock price.

We estimate a $75 price for Coca Cola, which is about 10% higher than the market price.

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1. Coke, Nestle part ways on tea in U.S., elsewhere, Reuters, January 6, 2012 [↩] [↩]