Franchise Law Practice Chair Jack Dunham quoted in St. Louis Post-Dispatch on beverage company and distributor contract disputes

September 29, 2002
"Lucrative pact goes flat for Marion Pepsi," by Thomas Lee for the St. Louis Post-Dispatch, September 29, 2002

Illinois bottler's dispute with PepsiCo underscores the tensions between family-owned distributors and large beverage companies.

Pepsi is a way of life for Harry Crisp. For more than 60 years, his company, Marion Pepsi-Cola Bottling Co. in Marion, Ill., has bottled and delivered Pepsi products to retailers throughout the Midwest.

It has been a profitable relationship for Marion Pepsi and for PepsiCo Inc., which sells the syrup concentrate and formulas used to make popular drinks, such as Pepsi, Mountain Dew and Gatorade.

But over the last three years, Crisp, the president and chief executive of Marion Pepsi, one of the largest independent Pepsi bottlers in the nation, has been locked in a bitter dispute with PepsiCo over a franchise contract that each side says the other has violated.

The companies are trying to reach a deal that would avert a lengthy and expensive trial, but the case underscores long-simmering tensions between family-owned distributors and large beverage companies.

The issue is not limited to soft drinks. The family of late baseball slugger Roger Maris and Anheuser-Busch Co. have gone to court several times over the company's effort to terminate the contract of the Maris beer distributorship in Gainesville, Fla.

But "there is more of that going on in the soda industry," said Jack Dunham, who specializes in franchise law with the Wiggin & Dana law firm in Connecticut.

For beverage companies, granting distribution rights to companies such as Marion Pepsi was the fastest way to expand sales and to gain market share. Marion Pepsi manufactured and delivered the product, and it also acted as PepsiCo's sales force, persuading retailers to buy more products and working to gain favorable display space.

The relationship was symbiotic: If distributors sold more Pepsi to retailers, PepsiCo would sell distributors more concentrate.

While beer wholesalers do not make the product, a brewer's financial performance still depends on its distributors' ability to persuade retailers to buy more beer. Each PepsiCo or A-B contract sets specific sales targets for distributors to meet.

Divergent interests

Over time, the interests of suppliers and distributors began to collide, said Mark Rodman, owner of Beverage Distribution Consultants in Swampscott, Mass., and a former general counsel to the National Beer Wholesalers Association. PepsiCo and A-B became publicly traded companies, whose primary duty is to create shareholder value and profits by, in large part, ensuring that their drinks reach consumers in every possible way, he said.

"The name of the game is volume," said Rodman, who has represented several distributors in contract disputes.

Distributors, however, operate on slim profit margins. Sometimes, they want to sell less to make more money because of the greater cost in servicing some retailers, especially in congested urban areas, Rodman said.

In recent years, suppliers have sought to consolidate their distribution systems. In a process known as realignment, smaller distributors are folded into larger ones to create greater scale and efficiency, a strategy needed to serve large national retail accounts, suppliers say.

According to documents filed with the U.S. District Court for Southern Illinois in East St. Louis, the Marion Pepsi dispute originated with PepsiCo's efforts to use commissaries to serve national fast-food chains and entertainment outlets instead of local distributors.

"National accounts increasingly have purchased most of their supplies, including soft-drink beverage syrups, through commissaries rather than through store-door delivery," according to the PepsiCo complaint. "Commiss aries carry thousands of items and supply all of a customer's needs at once, using consolidated single-truck deliveries and consolidated bookkeeping."

A lawyer representing PepsiCo declined to comment

The company says it offered bottlers compensation for the lost business with payments, price concessions and service programs.

Marion Pepsi, however, refused. PepsiCo's plan to use commissaries is another step in "efforts to force independently-owned Pepsi-Cola franchises to surrender their distribution rights and extend PepsiCo's control over the entire product processing and distribution chain," according to a Marion Pepsi statement.

Same strategies

One internal PepsiCo document that surfaced in the case describes the realignment and consolidation strategy. According to the document, called Project Broncos, the company hoped to create four to six "anchor bottlers" in a 12-month period that would create enough volume to counter the strength of rival Coca-Cola's bottlers.

In several ways, Project Broncos is similar to an internal A-B document used by Maris attorneys in their lawsuit. Both companies identified sales territories to be realigned and distributors to be bought out. Though Marion Pepsi never received an offer from PepsiCo., the distributor was included on the list.

The more controversial parts of the documents describe methods PepsiCo and A-B could use to pressure distributors to sell. In PepsiCo's case, the company could employ "provisions in current franchise agreements in conjunc tion with pricing and marketing levers to 'prod' alignment," according to the document.

Both companies said the distributors produced poor sales and did not meet performance standards, such as those governing sanitary plant conditions. Such violations justify the termination of their contracts, the companies have said.

PepsiCo obtained several affidavits from retail customers who said they received poor service from Marion Pepsi.

PepsiCo has terminated the contract only of one bottler in 103 years, said Gretchen Wahl, a spokeswoman. That demonstrates the company's commitment to developing strong partnerships with its bottlers, she said.

What particularly angered PepsiCo was Crisp's support for the 1999 Illinois Soft Drink Industry Fair Dealing Act, which set strong protections for soft-drink bottlers in disputes with suppliers, experts said. Such laws normally exist to prevent beer wholesalers from losing their contracts, not soda distributors, Dunham said.

In court papers, PepsiCo said the Illinois act is unconstitutional and was meant to reward Crisp, a wealthy Republican political donor.

Despite the rhetoric, PepsiCo and Marion Pepsi are said to be close to resolving their dispute.

"This is not a bullying relationship," Wahl said. "This is a partnership. If Marion does well, PepsiCo does well."

But the strong emotions associated with the case strike a chord with other family-owned distributors, experts say. Like Marion Pepsi, these companies, run by generations of families, are likely to resist suppliers' attempt to control or to consolidate them.

"The easy thing for me to do is just to walk away," Crisp has said. "But that's not what my employees want and what my family wants. Our desire is to continue on as a local, family-owned business."