A Shift in the Beverage Landscape
In a move that’s sending ripples through the restaurant industry, Subway recently announced its decision to switch from Coca-Cola to PepsiCo products. The news has left many wondering what this means for the future of pouring rights agreements and beverage deals. As a consulting company specializing in negotiating these types of agreements, we’re here to break down the key takeaways from this significant shift.
Understanding the Deal Terms
Subway’s switch to Pepsi is more than just a change in soda suppliers. It’s a pouring rights agreement, which means Pepsi will be the exclusive beverage provider for all Subway locations in the U.S. for a long time horizon. The terms of the agreement have not been publicly disclosed, but it’s likely that Pepsi offered a competitive package, including a significant marketing and advertising commitment.
Here’s what we do know:
- 10-year agreement, commencing January 1, 2025
- Subway’s Frito-Lay agreement (products owned by PepsiCo) extended to 2030
- Includes a “larger selection of Gatorade beverages”, as well as Lipton, Aquafina and Tropicana
- Includes media and marketing partnerships between the two companies
Key Takeaways for Restaurant Execs
Pepsi Now Has 3 of the Top 5 Restaurant Brands
Pepsi has made significant strides in expanding its presence in the restaurant industry of late. According to Beverage Digest, Subway was the single largest American restaurant customer of Coca-Cola (by number of locations) until this switch.
In addition to Subway’s 20,000 locations, PepsiCo also converted Dunkin’ Donuts’ nearly 10,000 locations in January 2023. Between these two conversions, Pepsi has added over 25% of the physical locations of the top 10 restaurant chains in the US In the last year and a half — and nearly half of the top 5. Pepsi can now boast of having 3 of the top 5 largest chains (by number of outlets) in the US (Subway, Dunkin’ and Taco Bell).
This is a substantial gain for PepsiCo at a time where its soda brands are losing share in the retail channel. It demonstrates that PepsiCo is hungry for restaurant business and that at least a selection of the largest chains in the U.S. are not afraid to switch to the challenger brand.
As the battle for pouring rights continues, it will be interesting to see how Coca-Cola and other beverage companies respond to Pepsi’s growing presence in the industry.
Source: FoodyData
PepsiCo’s Bottling Network Makes It Simpler for Packaged Beverage Deals
Another significant factor that may have contributed to Subway and Dunkin’ Donuts’ decision to switch to PepsiCo brands is each company’s bottling network. As both chains rely heavily on packaged beverages, a streamlined and competitive bottle and can program is crucial. But the two beverage companies have vastly different approaches to its bottling strategies.
PepsiCo’s ownership of the majority of its bottling network gives it a distinct advantage in putting together an attractive pricing and deal structure for brands which have a broad geographic footprint. With a largely unified network, Pepsi can offer a single, comprehensive program to its prospective clients, making it easier to manage and negotiate.
In contrast, Coca-Cola has sold off all of its bottling territories to independent bottlers, making it more challenging to offer a cohesive program. This fragmentation requires Coca-Cola North America to negotiate these deal terms with multiple of its third-party bottlers, leading to a more complex and potentially less competitive offering. It also means that multiple entities are involved in the agreement for the length of the agreement – leaving the potential for variances in reporting and service standards.
As packaged beverage offerings have gained significance in the world of third party delivery and off-premise business, bottle and can beverages become more important to the overall deal structure.
PepsiCo Leverages Their Snack Business
PepsiCo’s ownership of Frito-Lay, a leading snack food company, may have also played a significant role in Subway’s decision to switch to Pepsi (at least they are touting so in their press release). As Subway is one of the largest global purchasers of Frito-Lay products, PepsiCo stands to benefit from meal bundling and cross promotional activity, and Subway stands to benefit through a streamlined supply chain and operational support team.
This move demonstrates Pepsi’s willingness to invest in deals that involve both its beverage and snack businesses, creating a synergy that Pepsi can advertise as a benefit to its partners. By bundling its offerings, PepsiCo claims it can provide a more extensive range of products and services to its clients.
A Global Balancing Act
Subway has historically maintained a nuanced relationship with both Coca-Cola and PepsiCo, strategically staggering contract renewal dates across various international markets. While the US business was previously tied to Coca-Cola, other markets like Canada, the Netherlands and Germany have long been partnered with Pepsi.
This approach allows Subway to keep both beverage giants competing for its business, ensuring the best possible terms and offerings. For brands that have an international presence, staggering contract renewals can work to maintain leverage in between long-term agreements.
A Shift Beyond Cola
It is interesting to note the number of non-carbonated beverage offerings mentioned in the press surrounding Subway’s decision. As traditional soda consumption continues to decline year over year, the importance of which beverage supplier is chosen is becoming less about cola and more about other factors — service levels, relationships, deal financials, cross-brand partnerships, the breadth of offerings, operational support, etc. And while consumers are switching towards non-cola options such as isotonic beverages and teas, they are not as brand loyal in these categories.
In addition, brands which continue to serve Dr Pepper (like Subway) have some insulation from the risk of switching cola brands due to Dr Pepper’s strong brand loyalty. Regardless of which cola is on the fountainhead, consumers know they still have Dr Pepper — a brand that is continually capturing more market share at retail.
The bottom line: at large, restaurants are entertaining a switch in beverage suppliers at a pace we haven’t experienced in recent memory.
Don’t Rely on Old Assumptions
Subway’s switch to Pepsi is more than just a change in soda suppliers – it’s a reminder that pouring rights agreements should be regularly reviewed and renegotiated, and that flexibility and adaptability are key in the ever-changing beverage landscape. It’s a good idea to look at your beverage partnership with a fresh set of eyes, focused in on our current reality.
Key Takeaways:
- Large restaurant customers are increasingly willing to change beverage partners, with 2 of the top 5 restaurant chains switching in the last 18 months.
- The decline of traditional soda consumption and the growing importance of non-cola options are changing the dynamics of beverage partnerships.
- With the rise of delivery and off-premise business, bottling dynamics have an increasingly important role in beverage contract negotiations.
- Bundling deals that involve both beverage and snack businesses can be a powerful strategy for driving growth and securing favorable terms.
- Restaurants that serve Dr Pepper may have some insulation from the risk of switching colas due to the brand’s strong loyalty.
Additional Resources:
Do Companies Really Switch Soft Drink Providers?
How to Increase Beverage Revenue: The 5 P’s of Growing Beverage Incidence
Top 50 QSRs: Coke, Pepsi or Dr. Pepper?
