Case Analysis, Quaker Oats

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Quaker Oats- Gatorade/Snapple

Background

Quaker Oats acquired the Gatorade brand in 1983 but the sports drink actually was developed in 1965 for the University of Florida Gators. At the time of the acquisition Gatorade sales were about $100 million. But the most notoriously known sports drink would grow in sales to over $1.1 billion worldwide by 1994. Gatorade wasn’t the only division produced by Quaker Oats. The company also had divisions in breakfast foods, pet foods, golden grains, convenience foods as well as international sales in Canada, Europe and Latin America. However, Gatorade was still the largest producing division for the Quaker company. Despite holding 77 percent of the $1.2 billion in U.S. sports beverage category management still pushed to increase market share in foreign countries. The company’s profit margins took a hit with the expense of underwriting Gatorade’s entry into new country markets. Quaker looking for new ventures to strengthen their position in producing/marketing beverage substitutions for soft drinks found acquiring the Snapple brand to be their answer.

External Environmental Analysis

In 1994, Quaker Oats had a solid footing in the food and beverage company ranking twelfth largest with worldwide sales of $6 billion and operating 54 manufacturing plants in 16 states and 13 foreign countries along with sales offices in 21 states and 18 foreign countries. Almost one third of the corporate revenue came from sales outside of the United States.

With the acquisition of Snapple Quaker Oats were entering the health drink market that had much competition. Multiple companies had similar drinks and some even had tea just like Snapple. They would have to find some type of competitive advantage to continue to help them continue to grow as a brand.

Internal Environmental Analysis

Quaker’s top management was committed to achieving real earnings growth of 7 percent and providing total shareholder returns that exceeded the S&P 500 stock index over time. Management also believed it could enhance shareholder value by prudently using leverage.

With the purchase of Snapple came the revelation that neither company manufactured their products the same. Snapple had a loose manufacturing process that could take weeks to output while Gatorade could be manufactured in days.

SWOT Analysis

Quaker Oats had many strengths that made them already a formidable company producing-marketing beverage substitutes for soft drinks. They commanded 85 percent of the sports drink segment in the United States, generating worldwide sales of almost $1.2 billion. They were the 12th largest food and beverage company in the United States, with worldwide sales of $6 billion. They had manufacturing plants in 16 states and 13 foreign counties, and distribution centers and sales offices in 21 states and 18 foreign countries. Buying Snapple’s brand name and distribution put them 3rd to Coke and Pepsi and dispelled rumors of being taken over and strengthened their position as a producer and marketer of substitutes for soft drinks. Quakers acquisition of Snapple elevated the company into a non alcoholic beverage powerhouse with nearly $2 billion in sales, trailing only Pepsi and Coke. However, hours before the Quaker- Snapple agreement was announced, Snapple reported a third-quarter earnings drop of 74 percent. With the news of the purchase of Snapple and their earnings drop, Quakers stock dropped 10%. Quaker took out a $2.4 Billion loan- $1.7 Billion went to pay off Snapple shareholders, $100 Million helped pay off Snapple’s previous debt, $350 Million went to refinance Quakers debt, and the last $250 Million was to be used as working capital.

The threats facing the company were predicted by Wallstreet analyst. They warned that Quaker had overpaid for Snapple by $1 billion. Snapple’s drop in third quarter earnings was attributed to oversized inventories and intensifying competition...
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