UN Unilever NV

Nestle SA (NESN.VX) and Coca-Cola Co. (KO) are scaling back their beverages joint venture, phasing out the partnership in such markets as the U.S. and instead focusing efforts to sell ready-to-drink tea in Europe and Canada.

In the U.S., Coca-Cola will launch a ready-to-drink tea brand under its Fuze label to try to gain steam in a category that's dominated by PepsiCo Inc. (PEP), which sells Lipton tea under a joint venture with Unilever NV (UN).

The PepsiCo-Unilever partnership has proved to be more fruitful than the Coca-Cola/Nestle licensing deal to sell Nestea in the U.S., which is ending this year as part of the restructured arrangement. Lipton's sales volume has grown under the partnership, rising 5% to 247 million cases in 2010, according to Beverage Digest, while Nestea has been in retreat for several years.

"Over the years, Nestle sources have expressed some unhappiness that Lipton...has grown so strongly and Nestea has not," wrote John Sicher, publisher of Beverage Digest, which first reported the new terms of the partnership Friday.

The termination of the licensing deal will allow both Coca-Cola and Nestle to pursue their own strategies on ready-to-drink tea in the United States. Coca-Cola, which recently bought the organic tea-maker Honest Tea and also has a brand called Gold Peak, will roll out the Fuze teas this year, which will be a "fusion of tea and fruit flavors" that will be fortified with B vitamins. Brian Wynne, Coca-Cola's president of still beverages, said having a product that dabbles in tea and juices will capitalize on a favorable consumer trend.

"The majority of growth in the refreshment space is coming from brands that offer dual tea and juice drink products," Wynne said in an internal letter that was provided to Dow Jones.

Coca-Cola and Nestle have a relationship dating back to 1991, and in 2001 created the joint venture. The relationship was initially rocky, according to Beverage Digest's Sicher, as both sides competed separately in the bottled-water category in many markets.

As part of the new arrangement, Coca-Cola will license to sell the Nestea brand in Taiwan and Hong Kong. In all other territories, the joint venture will be phased out this year.

Analysts said the fresh focus of the partnership shows that Nestle has enhanced its position in such key markets as China and the U.S., where it is strong enough to spur the growth of its iced-tea drinks itself. Nestle has recently increased efforts to spur growth in emerging markets but has also launched measures to enhance growth in Europe.

-By Goran Mijuk, Dow Jones Newswires; +41-43-443-80-47; goran.mijuk@dowjones.com; and Paul Ziobro, 212-416-2194; paul.ziobro@dowjones.com

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