DELTA BEVERAGE GROUP, INC.
It was July 1994, and John Bierbaum, chief financial officer (CFO) of Delta Beverage Group, Inc., sat at his desk at the company’s headquarters in Memphis, Tennessee. As he considered the company’s promising future, he reflected on how close Delta had come to bankruptcy a couple of years earlier. In the last six years, the group had managed to turn around operations, and recently it had been on a buying spree and had acquired significant new franchises in its area of concentration, the South Central United States. The recently completed recapitalization plan had helped put the company back on solid financial footing, and Delta seemed to be poised for some real success.
During the first half of 1994, however, the price of a core raw material, aluminum, had risen 30% on the London Metal Exchange. Because aluminum cans were a key cost component for Delta, Bierbaum expected that the price Delta paid for its cans would be raised when negotiations with suppliers came up for renewal in a few months. Fueled in part by their quest for volume, the price charged by the can producers had been trending downward during the past few years. Although the past changes in can prices had been independent of how the price of aluminum had changed, Bierbaum wondered if this recent increase in aluminum cost for the can smelters, sheet makers, and can producers would flow through to the price Delta paid for aluminum cans. Perhaps now was the time for Bierbaum to consider a hedging program using aluminum futures contracts to offset the potential price increase and to help the company to maintain its financial footing.
History of Delta Beverage Group, Inc.
As one of the top five independent bottlers of Pepsi products in the United States, Delta Beverage Group had become an important part of the franchise system of PepsiCo, Inc., in 1994. Delta’s franchise areas included parts of Tennessee, Arkansas, Louisiana, and Mississippi. The company was originally the Mid-South Bottling Co. until March 1988, when it was purchased in a leveraged buyout (LBO) led by the Pohlad family, who themselves had over 30 years of bottling experience, including running the third-largest Pepsi bottler in the United States. At the time of the buyout, PepsiCo, Inc., (through a subsidiary) took a 16% equity stake in the company This case was prepared by Simon Constable (MBA ’97), under the supervision of Kenneth M. Eades, Associate Professor of Business Administration. Copyright © 1997 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to email@example.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 6/04. ◊
as well as a portion of preferred stock. It was then that Mid-South was renamed Delta Beverage Group, Inc.
Delta had a very strong line-up of brand names in its stable. Its franchised brands included Pepsi, Mountain Dew, Slice (orange, lemon-lime, red), Mug (root beer, cream soda), 7Up, Dr. Pepper, A&W brands (root beer, cream soda), Squirt, Lipton, YooHoo, and Canada Dry. The products were produced in a variety of containers, although PET bottles1 and aluminum cans dominated (Exhibit 1).
In 1988 around the same time as Delta was forming, Coca Cola Enterprises (CCE) succeeded in buying some of the competing brand franchises in the same areas that Mid-South had operated. A price war ensued, in which Delta suffered from compressed margins. By late 1989, the situation had become critical enough to prompt the hiring of a new management team from a Pepsi-owned bottling company. Over the next few years, the new management succeeded in stopping the fall in prices and the dwindling market...
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