October 28, 1999
Coke Tests Vending Unit That Can Hike
Prices in Hot Weather
By CONSTANCE L. HAYS
aking full advantage of the law of supply and demand, Coca-Cola
Co. has quietly begun testing a vending machine that can
automatically raise prices for its drinks in hot weather.
"This technology is something the Coca-Cola Co. has been looking at for
more than a year," said Rob Baskin, a company spokesman, adding that
it had not yet been placed in any consumer market.
The potential was heralded, though, by the company's chairman and chief
executive in an interview earlier this month with a Brazilian
newsmagazine. Chairman M. Douglas Ivester described how desire for a
cold drink can increase during a sports championship final held in the
summer heat. "So, it is fair that it should be more expensive," Ivester was
quoted as saying in the magazine, Veja. "The machine will simply make
this process automatic."
The process appears to be done simply through a temperature sensor
and a computer chip, not any breakthrough technology, though
Coca-Cola refused to provide any details Wednesday.
While the concept might seem unfair to a thirsty person, it essentially
extends to another industry what has become the practice for airlines and
other companies that sell products and services to consumers. The falling
price of computer chips and the increasing ease of connecting to the
Internet has made it practical for companies to pair daily and hourly
fluctuations in demand with fluctuations in price -- even if the product is a
can of soda that sells for just 75 cents.
The potential for other types of innovations is great. Other modifications
under discussion at Coca-Cola, Baskin said, include adjusting prices
based on demand at a specific machine. "What could you do to boost
sales at off-hours?" he asked. "You might be able to lower the price. It
might be discounted at a vending machine in a building during the evening
or when there's less traffic."
Vending machines have become an increasingly important source of
profits for Coca-Cola and its archrival, Pepsico. Over the last three
years, the soft-drink giants have watched their earnings erode as they
waged a price war in supermarkets. Vending machines have remained
largely untouched by the discounting. Now, Coca-Cola aims to tweak
what has been a golden goose to extract even more profits.
"There are a number of initiatives under way in Japan, the United States
and in other parts of the world where the technology in vending is rapidly
improving, not only from a temperature-scanning capability but also to
understand when a machine is out of stock," said Andrew Conway, a
beverage analyst for Morgan Stanley. "The increase in the rate of
technology breakthrough in vending is pretty dramatic."
Bill Hurley, a spokesman for the National Automatic Merchandising
Association in Washington, added: "You are only limited by your
creativity, since electronic components are becoming more and more
versatile."
Machines are already in place that can accept credit cards and debit
cards for payment. In Australia and in North Carolina, Coke bottlers use
machines to relay, via wireless signal or telephone, information about
which drinks are selling and at what rates in a particular location. The
technology is known as intelligent vending, Baskin said, and the
information gathered and relayed by Internet helps salespeople to figure
out which drinks will sell best in which locations.
"It all feeds into their strategy of micro-marketing and understanding the
local consumer," Conway said. "If you can understand brand preferences
by geography, that has implications for other places with similar
geography."
Coca-Cola and its bottlers have invested heavily in vending machines,
refrigerated display cases, coolers and other equipment to sell their
drinks cold. Over the last five years, Coca-Cola Enterprises, Coke's
biggest bottler, has spent more than $1.8 billion on such equipment. In
support, Coca-Cola has spent millions more on employees who monitor
and service the equipment. In 1998 alone, it spent $324 million on such
support to its biggest bottler.
And last week, Coke's chief marketing officer unveiled the company's
plan to pump more sales of its flagship soft drink, Coca-Cola Classic.
The program includes a pronounced emphasis on Coke served cold.
Sales of soft drinks from vending machines have risen steadily over the
last few years, though most sales still take place in supermarkets. Last
year, about 11.9 percent of soft-drink sales worldwide came from
vending machines, said John Sicher, the editor of Beverage Digest, an
industry newsletter. In the United States, about 1.2 billion cases of soft
drinks were sold through vending machines.
In Japan, some vending machines already adjust their prices based on the
temperature outside, using wireless modems, said Gad Elmoznino,
director of the Trisignal division of Eicon Technology, a Montreal-based
modem maker. "They are going to be using more and more
communications in these machines to do interactive price setting," he said.
Industry reactions to the heat-sensitive Coke machine ranged from
enthusiastic to sanctimonious. "It's another reason to move to Sweden,"
one beverage industry executive sniffed. "What's next? A machine that
X-rays people's pockets to find out how much change they have and
raises the price accordingly?"
Bill Pecoriello, a stock analyst with Sanford C. Bernstein, applauded the
move to increase profits in the vending-machine business. "This is already
the most profitable channel for the beverage companies, so any effort to
get higher profits when demand is higher obviously can enhance the
profitability of the system further," he said.
He pointed to a possible downside as well. "You don't want to have a
price war in this channel, where you have discounting over a holiday
weekend, for example," he said. "Once the capability is out there to vary
the pricing, you can take the price down."
A Pepsi spokesman said no similar innovation was being tested at the
No. 2 soft-drink company. "We believe that machines that raise prices in
hot weather exploit consumers who live in warm climates," declared the
spokesman, Jeff Brown. "At Pepsi, we are focused on innovations that
make it easier for consumers to buy a soft drink, not harder."
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