Capture Value or Not?
Coca-Cola, the renowned beverage is a flagship product of The Coca-Cola Company. The company is not only a manufacturer but also a distributor and a marketer of many other non-alcoholic beverage concentrates and syrups. Coca-Cola was invented by pharmacistÂ John Stith PembertonÂ in 1886. The Coca-Cola formula and brand was bought in 1889 byÂ Asa CandlerÂ who incorporated it in The Coca-Cola Company in 1892. Besides its namesake Coca-Cola beverage, Coca-Cola currently offers more than 400 brands in over 200 countries. Originally Pemberton only sold 9 glasses each day. The Coca-Cola Company now sells more than 1.6 billion cans each day.
Coca-Cola means much more to its customers than being just a soft drink. It is a preferred drink during summers and social gathering and so has become an integral and essential part of each one's life. But lately Coca-Cola has been under a tremendous amount of media scrutiny. On December 17, 1999, The Wall Street Journal ran a front page story headline "Tone Deaf: Investor has got all skills of a CEO but One: Ear of Political Nuance. A few months later came a public relations gaffe, word got out that Coke was testing a new vending machine technology that changes price based on weather conditions. Coca-Cola would have earned $328.5 million annually if they sold cans at 85 cents on HOT days and for 55cents during the colder days. This rampant price discrimination had angered the consumers, since Coca-Cola was taking undue advantage of their necessity.
After carefully analyzing the case, three key points for this controversy were addressed.
Temperature reading technology itself.
Pricing and Promotional matters
The first issue is the temperature reading technology itself. Chairman M.D Ivester was interviewed by a Brazilian newsmagazine, Ivester had described how the demand increases during the sports championship finals held in the summer heat. "So, is it fair that the cans should be more expensive?" to which Ivester quoted "The machine will make this process automatic" which will alter the net income for the company. In such a case, can the computer chip be considered reliable? Another question was on what basis were the maximum and minimum temperatures set?
These sort of questions need to be answered.Â There can be better alternatives to increase the profit margin rather than changing prices in accordance with the weather. An article had appeared in New York Times on 29th October 1999 stating that if alternatives are not chosen, then in near future Coca-Cola might come up with a machine that X-rays the customer pocket and will fix the price accordingly.
The second issue was the actual pricing and promotional matters involved with this new technology. The value of each product is different for different group of consumers. Hence, the pricing of a product is directly related to the term value, and this term value cannot be based on any single set criteria. The ideal price for any product or service is one that is acceptable to both buyer and seller. Whereas, "Coca-Cola had taken full advantage of the Law of supply and demand and quietly began testing the weather sensitive vending machine" as quoted in New York Times, which was aimed to make profits from consumers money. Â Coke was also not able to show the value of its product to the consumer with this new growth strategy. Â Additionally, after the public relations mess that went along with this story, the consumers already had a bad taste in their mouths.
There was great potential for diversified innovations which would have been aimed to gain consumer trust. They could had adjusted prices based on demand at a specific machine or lower the price to boost sales at off hours or when there is less traffic.
Vending machines has become an increasingly important source of profits for both Coca-Cola and its arch rival PepsiCo. The vending machine has remained largely untouched by discounting. Therefore, "There were a number of initiatives underway in Japan and United States where the technology in vending is rapidly improving not only from a temperature scanning capability but also to understand when the machine is out of stock", said Andrew Conway, a beverage analyst for Morgan Stanley. Since the electronic components are becoming more and more versatile and cheap, so, profit is limited by ones creativity. Bill Pecoriello, a stock analyst also applauded the move to increase profits in vending machine business.
The third issue was, How will Coke's brand image be affected or affect this strategy. According to the report presented byÂ Interbrand, aÂ brand consultancyÂ company, theÂ image of Coca-ColaÂ Co. was overall the most valuable for eight years in a row. It has been around for over 100 years and is known for its top notch marketing and social responsibility company. So Coca-Cola wouldn't have played with its million dollar brand value, brand value is the amount that a brand is worth in terms of income, potential income, reputation, prestige, and market value. Brands with a high value are regarded as considerable assets to a company, so that when a company is sold a brand with a high value may be worth more than any other consideration.
Consolidated Balance Sheet - January 31, 2001
Dec. 31, 2001
Dec. 31, 1999
Cash & Equivalents
Short Term Investments
Total Current Assets
Long Term Assets
Property, Plant, & Equipment
Note: The Balance Sheet of Coca-Cola for the financial year 2001 are adapted from the "Annual Report 2001 - Coca-Cola Hellenic - Passion for Excellence"
Coca-ColaÂ HBC Annual ReportÂ 2001, retrieved from
In Table 1, the Total current assets include all the expenditure and investments in that financial year. And the Total assets are the investments of the company from the year when it was founded. We can see that the Goodwill/Brand value is almost 10 percent of the total assets it had invested. So this would have a positive effect on any product it would launch. But in this case the brand value would be at stake since the machine had created animosity in the consumers.
Therefore in order to dissolve this animosity, I feel that that Coca-Cola should launch the machine so that they can gain back the consumers' confidence and also earn profit. This can be achieved if they launch the same weather sensing vending machine but with a slight modification, instead of increasing the price on hot days they should reduce it so that consumers would be happy, as they would get the much needed Coke at a cheaper rate when they it the most. With a combination of rise in number or sales and smaller profits both the conditions would be satisfied.