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."
