Seminar Management & Marketing Ethics

Case Study

“Coca Cola”

Fallbeispiel: The Coca-Cola Hot Weather Vending Machine

Wir alle kennen die typischen Lehrbuchzusammenhänge von Angebot, Nachfrage und Preis:Wenn bei gleichbleibender Menge eines Produkts die Nachfrage steigt, erhöht sich der Preis.

Also sollten auf realen Märkten die Dinge nach dieser idealtypischen Marktlogiklaufen – tun sie aber nicht:

1999 wollte einen neuartigen Typus von Getränkeautomat einführen, und zwar einen solchen, der die Außentemperatur misst und dann den Preis mit steigender Temperatur anhebt.

„If you’re a standard marketing theorist or a standard finance guy, that is a dream! Because you really can price differentiate“ (Norman E. Bowie 2005)http://www.darden.virginia.edu/corporate-ethics/Video_Theory_Philosophy/index.html

„Coca-Cola is a product whose utility varies from moment to moment. In a final summer championship, when people meet in a stadium to have fun, the utility of a cold Coca·Cola is very high. So it is fair that it should be more expensive. The machine will simply make this process automatic“ (M. Douglas Ivester 1999; CEO Coca-Cola 1994–2000)

Und zudem sei diese Preisdifferenzierung wegen der Korrelation von höherem Nutzen und Preis auch gerecht:

Es ist für Marketingleute ein Traum, weil sie mit einer solchen Preisdifferenzierung die Zahlungsbereitschaft der Konsumenten optimal (maximal) ausschöpfen können.

„This technology is something the Coca-Cola Co. has been looking at for more than a year“ (Rob Baskin 1999 (Assistant Vice President and Director of Marketing Communications).

Doch als die Sache an die Öffentlichkeit kam, brach ein Sturm der Entrüstung los und Coca-Cola beeilte sich zu dementieren, dass man einen solchen Getränkeautomaten einsetzen wollte:

STATEMENT ON VENDING MACHINE TECHNOLOGY ATLANTA, October 28, 1999

Contrary to some erroneous press reports, the Coca·Cola Company is not introducing vending machines that raise the price of soft drinks in hot weather.We are expiring innovative technology and communication systems that can actually improve product availability, promotional activity, and even offer consumers an interactive experience when they purchase a soft drink from avending machine.

Source: www.coke.com (1999)

CEO Ivester hatte die Fairness-Vorstellungen der Konsumenten völlig falsch eingeschätzt:

„Mr. Ivester […] forgot, that in addition to finance and marketing people have intuitions about fairness. And if you violate those, then you’re up to suffer real financial reversal“ (Norman E. Bowie 2005)http://www.darden.virginia.edu/corporate-ethics/Video_Theory_Philosophy/index.html

lmlI3 Harvard Business School

~9·500·068

R... Dcarnb<r I. 2llll

Coca-Cola's New Vending Machine (A): Pricing ToCapture Value, or Not?

On December 17, 1999, The Wall 51"'! jaunlal ran. fronl p.ge slory he.dlined ·Iolle Dtaf:Ivesler Has Allskills 01 aCEO bul One: Ear lor Polilical uance." The .rtiele del.iled how Coca-Colaehainnan .nd Chiel Execulive Officer M. Douglas Ivesle~s handling of Olle flap alter .nother ""Ihirn the eake Board's confidence, eventually leading hirn to abruptly announce that he would stepdown fram his position in April 2000.

Ooe of the many events highlighted conccrned lvester's comments about Coke's oewvending machine technology. The article reported:

A few months 1ater came another public relations gaffe. Asked by a Braziliannewsmagazine about Ceke's testing of vending machines that coulrl change pricesaccording to the weather, Mr. Ivester gave a theoretical response \hat came across asboth • delense 01 the lerhnology and • confum.lion lhal il 1V0uid hil the s!reets."Coca-Cola is aproduct whose utility varies from moment to moment," he said, "In afinal summer championship, when people meet in a stadium to Mve tun, the utilityof. cold Coca·Cola is very high. 50 il is lair Ih.1 il should be more expensive. Themachine will simply make this process automatie,"

ACoke spokesman says the remarks were taken out of context. Though the companyhad tested the technology in a lab, it never had an intention of introducing it thespokesman says, .nd ICoke] bottlers confirm lhis. Nevertheless, the CEO's ansIVercreated aflap, seeming 10 cast the rompan}' a5 one thai wasn'l cuslomer·fricndly.

The "tieIe also poinled out th.l:

To Mr. Ivesler, Ihe acrounl.n\ the roncepllol ch.nging prices based on theambienl temperaturel was just the law of supply and dmand In action, To the board,the ensuing flap was Murphy's Law at work.

For Cl. consumer-product company that in the words of a person dose to theboard, "is agiant image machine," the pummeling of Coke's image was increasinglyintolerable.

Earlier, on October 28, 1999, Ilic Ne", Yark Ti.ltS (NY1) h.d reporled th.1 Coke w.. leslingvending machines that could raise prices in hot weather (see Exhibitl). The NYT story precipilated

ProfrssM CJuults J(jng 1Il and Das Namyandas prrplrrd Ihis cast using pubficly /Wllifabll sourccs as Iht l1asis fix dIJSSdiSCftss",tl mthtr t/um 10 ilfus/mlt tiJher tfftc/Wt or int/ftdivt /wildling ofIIlll1dmillistm/it't situation.

Copyright C2(0) by the Presidcnt and Fellows of Harvard College, To order copics or requcst pemussion 10reproduce materials, caJll-800-545-76S5, writc Harvard Business School Publishing, Boston. MA 02163, or go tohttp://www,hbsp.harvard.edu. No pilrt of this publication may be reproduced, slorcd in a relricval systcm,used in a spreadsheet. or transmitted in any form or by any mcans-electronic, mechanical, pholocopying,recording. or othenviSt'-without the permission of Harvard Business Sel1001.

500.068 Coca-Cola'! New Vendlng Machlne (A): Priclng To Capture Vatue, or Nol?

an immediate response fram the Coca-Cola Company (see Exhibit 2 for the company press releaseposted on the Hrm's web-site on the same day), triggercd a lampoon in 17le P/Jilndelphin blq/lirer onGetober 31, 1999 (see Exhibit 3), and generated national and international controversy (see Exhibit 4).

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CoclI·Cola's New Vendlng Mach!ne (Al: Prlclng To Capture Va!ue, or Not?

Exhibitl Text of the article that appeared in 71re Ne-tU York Tilll~ on Detober 28, 1999.

Coke Tests Vendlng Unit That Can Hike Prices in Hot Weather

by Constance L. Hays

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ITI aking full advantage of the law of supply and demand. Coca-Cola Co. has quietly beguntestlng avending machine that can automatically ralse 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 consumermarket.

The potential was heralded. though, by the company's chairman and chief executive in aninterview earJier this month \\~th a Brazilian newsmagazine. Chairman M. Douglas Ivester describedhow desire for a cold drink can increase during asports championship final held in the summer heat."So, it is fair that it should be more expensive," Ivester was quote<! as saying in the magazine, Vtjd.1'he madUne will simply make !his pr0Ce5S automatic.M

The process appears to be (tone sirnply 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 anotherindustry what has become thc practice for airlines and other cornpanies that seil products andservices to consumers. The falling priee of computer chips and the increasing ease of connecting tothe Internet has made it practical for companies to pair daily and hourly fluctuations in demand withfluctuations in priee -- even if the product is acan of soda HIat sells for just 75 cents.

The potential for other types of irulOvations is great. Other modifications under discussion atCoca-Cola, Baskin said, include adjusting prices based on demand at a sp.ecific machine. 'What couldyou do to boost sales at off-hours?" he asked. "You might be.able to lower the price. It might bediscounted at a vending macmne in a building during the evening or when there's less traffic.M

Vending machines have become an increasingly irnportant source of profits for Coca-Colaand its archrival, Pepsico. Over the last three years, the soft-drink giants have watched their earningserode as they waged a price war in supermarkets. Vending machines have remained largelyuntouched by the discounting. Now, Coca-Cola aims to tweak what has been a golden goose toextract even more profits.

"There are a number of initiatives under way in Japan, the United States and in other parts ofthe world where the technology in vending is rapidly irnproving. not only from a temperature­scanning capability hut also to understand when a machine is out of stock,M said Andrew Conway./-abeverage analyst for Morgan Stanley. 'The increase in the rate of technology breakthrough in vendingis pretty dramatie.'·

Bill Hurley. a spokesman for the National Automatie Merchandising Association inWashington. added: "You are ooly limited by your creativity, since electronic components arebecoming more and more versalile.M

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500-068 Coca·Cola's New Vending Machln. (A): PrJclng To Capture Value, or Not?

Machines are already in place that can accept credit cards aod debit eards for payment. InAustralia and in North Carolina, eoke bottlers use machines to relay, via wireless signal ortelepponc, information about which drinks are selling and at what rates in a particular loeation. Thetechnology is known as intelligent vending. Baskin said, and the information gathered and relayed byInternet helps salespeople to figure out ",hich drinks will seil best in which locations.

"It all feeds into their strategy of micra.marketing and understanding the local consumer,~

Conway said. "lf rou can understand brand preferences by geography, that has irnplications fOT otherplaces with similar geography."

Coca-Cola and its bottlers have invested heavily in vending machines, refrigerated displaycases, coolers and other equipment to seil their drinks cold. Over the last five years, Coca-ColaEnterprises, Coke's biggest bottler, has spent more than $1.8 billion on such equipment. In supportCoca-Cola has spent mil1ions more on employees who monitor and service the equipment. In 1998alone, it spent $324 million on such support to its biggest bottler,

And last weck, Coke's chief marketing officer unveiled thc company's plan to pump moresalcs of its flagship soft drink. Coca-Cola Gassic. The program indudes a pronounced emphasis onCoke 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 salesworldwide came from vending machines, said John Sicher, the editor of Beverage Diges~ an industrynewsletter. In the United States, about 1.2 billion cases of soft drinks were sold through vendingmachines.

In Japan, some vending machines already adjus their prices based on the temperatureoutside, using wireless modems, said Gad Elmoznino, director of the Trisignal division of EiconTechnology, a Montreal-based modem maker. ;rhey are going to be using more and moreeommunications in these maehines to do interaetive priee setting," he said.

Industry reactions to the heat-sensitive eoke machine ranged from enthusiastic tosanctimonious. "lt'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 mueh change they have andraises the priee accordingly?"

Bill Pecoriel1o, a stock analyst with Sanford C. Bernstein, applauded the move to increaseprofits in the vending-machine business. 'ihis is already the most profitable ehaMel for the beverageeompanies, so any effort to get higher profits when demand is higher obviously can enhance theprofitability of the system further, "he said.

He pointed to a possible downside as weil. "You don't want to have a price war in thischannel, where you have discounting over a holiday weekend, for example,~ he said, "Once thecapability is out there to vary the pricing, you ean take the priee down."

A Pepsi spokesman said no similar iMovation was being tested at the No. 2 soft-drinkcompany. 'We believe that machines that raise prices in hot weather exploit consumers who live inwarm c1imatcs," declared the spokesman. Jeff Brown. "At Pepsi, we are focused on innovations thatmake it casier for consumers to buy a soft drLnk, not harder."

Source: Copyrlghl C 1999 by lhe New Vork Times Co. Reprinled by permIssion,

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Coca·Cola', New Vending Machlne (Al: Priclng Ta Caplure Value, or Not? 500-068

Exhibit 2On October 28, 1999, the Coca-Cola Company posted the following press release on itscorporate website.

STATEMENT ON VENOING MACHINE TECHNOlOGY

ATlANTA, OCtober 28, 1999· Contrary to some erroneous press reports, TheCoca·Cola Company is not introducing vending machines that raise the price of softdrinks in hot weather.

We are exp~ring innovative technology and communication systems that canactually improve product availability, promotional activity, and even offer consumers aninleractive experience when they purehase asoft drink from avending machine,

Our commitment for 113 years has been to putting our products within anarm's reach cf desire. Offering the prcducts that people want at affordable prices isprecisely why Coca·Cola is the favorite soft drink of people in neariy 200 countriesaround the world.

The new technologies we're expl01ng will 0 Ij enhance our ability to deliver onthat promise,

Source: Coca·Cola Company Websile: hltp:ltwww.coke.com

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500-068 Coca·Cola's New Vendlng Machlne {Al: Prlclng To Caplure Vatue, or Not?

Exhibit 3 Text of the arlicle that appeared in Tlre PlIi/ndelplzia /nqllirer on October 31, 1999.

Have a eoke, and Big Brolher is sure 10 smile

by JeU Brown

Now for the latest evidence that the world is going to hell in a handbasket: The Coca ColaCo., seeking ne\\! ways to make thirst pay, is working on a weather·sensing vending machine thatwill raise prices when it's hot. lsn'rthat immoral? 1mean, if a man crawls in from the desert dying oftlurst, would you demand aC-note for aglass of water?

No, but a eoke ... th~t's different. lt's just an indulgence. So what's wrong with chargingwhat the market will bear - more \·hen it's hot-Iess when it's cold?

In fact computer chips may soon enable vending machines to constantly adjust pricesaceording to any number of factars that cause momentary fluctuations in supply and demand, notjust weather.

So, some busy fall evening in the not-too-distant ture, you sidle up to a well-lit Cokemachine in South Philly. The box has no buttons, does not display any prices. A spotlight shines onyour face as sensors zoom in on your vit.ll signs. A head-high video screen fliekers on.

The machine sees you're in jeans, not a suit, so it seans its library of pcrsonalities, skippingthe efllditc Englishman and the slinky French model. lt displays the good-natured face of Sylvester5tal1one.

"Yo!" the eoke machine calls. "What can I do ya f r?" 51y smiles, thinking of his royalty,pcrhaps.

"A eoke Classic, please."

"No problem. Four bucks."

"Whoa! They're 50 cents at thc supermarket."

The machine pauscs while its accent analyzer determines you aren't from the neighborhood.

"You see asupermarket around here?" it says. "Fout dollars."

You decide to bluff. "Look, the machine Mound the corner gave me a Pepsi for half that."

"When?"

"A couple of haurs ago."

"Yeah, it's rush hour now, You won't get a two-dollar soda anywhere." The head on thescreen shakes from side to side sympathetically. Then the red and white machinc goes silcnt, letting

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Coca-Cola', New Vendlng Machine (Al: Ptlcing To Capture Value, 01 Not? 500-068

you sweat. This is going to be tougher than you'd thought. You pull out your Palm Pilot X, link tothe.lnterne~ and go to sodamachines.com,

'There are 14 soda machines within four blocks," you report, holding up the Palm Pilot forthe machine to see. "You're telling me Ican't beat four dollars?"

The Coke machine tallies the 90 seconds it has expended on this negotiation. lts motionsensor detects two customers moving around impatiently behind you. Hs atomic c10ck repoTts thatrush hour i's winding down.

"Okay, three dollars," it offers, peeved.

"No way.? You stuff your wallet into your pants and step back.

The Coke machine fOCllses an infrared scanner on your lips, calibrating your thirst. It countsits inventory and finds asurplU's of Diet eoke. Its hard drive whirs for asecond.

"1'11 give you aCoke Lite for $2.50," it offers resentfully,

'Terrible aftertaste," you say.

"With a bag of nuts:'

"Nah."

"Look, pal, if you're not buyin' move along,"

Traffie is getting light,r, The!wo people behind you give up ,nd leave.

"All right," the box grumbles.

You deposit hvo dollars, get your can, and tum to go.

"How about those peanuts?" the machine asks hopefully. "Fifty cents."

'Tm allergie," you answer.

The machine pauses a nanosecond 'Ivhile electrons zip aroUnd its circuit,s. !t's a week day.Rush hour. Statistics suggest you work nearby. You'll be back. The machine activates its customerrelations software.

"Have a ruce evening, bud," it calls as you turn away, the face smiling widely.

"Hey!" it calls. 'Tm a soft touch today, lust got my drcuits cleaned, Don't expect a deal l1ikethis next time!"

As you disappear around the corner, the macrone counts its remairung cans, assesses theodds of making asale this 1ate in the day, and looks at how it's doing on its sales goal- a little behind.lt cranks up the volume on its Rocky voice and calls out to the nearly empty street.

"eoke Classic! Get your Coke C1assic here!

"Only adollar!"

Source; Reprinled with pennission 01 lhe Philadelphia Inquirer.

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500-068 Coca-Cola'! New Vendlng Machlne (Al: Prlcing To Caplure Valut, or Not?

Exhibit 4Excerpts from an article that appeared on the About.com web-site on November 3, 1999.

Mean Vending Machines

by lohn 5. Irons

This past weekend the news wires were an buzzing about the latest idea to come trom theworld of soft drinks. Coca-Cola is apparently considering creating a new kind of vending machinethat would test the outside temperature and adjust the price of a can of soda upwards when it iswarmer outside. Here's some of the typical reactions to the idca:

"a cyokal ploy to exploit the thirst of faithful customers" (Siln Francisco Chronic1e)

~lunk-headed ideal' onolulu Star-Bulletin)

"Soda jerl,s" (Miami Herald)

"Iatesl evidence that the 1V0rid is going 10 hell in a handbaskel" (PhiladelphiaInquirer)

• "ticks me ofr (Edmonton 5un)

Whal did they lhink Ihe Coca-Cola company lVas doing anYlVay? 5elflessly providing the1V0rid lVilh , glorlous bevorage 10 further Ihe goals of all mankind? Why should ,11 Ihese people besuddenly offended by a company trying to maximize profits?

~Price discrimination~ is the term economists use to describe the practice of selling the samegood to different groups of buyers at different prices. In the Coke case, the groups of buyers arescgmented by the outside temperature (i.e. JiJl when it is hot outside vs. 1i11 when it is cold). Ifpossible, a company would Hke to charge a high price to those who place a high value on the good,while charging less to those that do not.

So, are you personally oflended by Cokc's plan to charge more for soda's when it is warmoutside? WeiL you had better get over it pretty quickly, there is already plenty of peice discriminationout there. and there is MUCH more to romeo

Rampant Price Discrimlnation

Price discrimination is quite common. Ever wonder why hardcover books are produced firstand are so much more expensive than paperback books? Or, why it is so mueh cheaper to buy airlinetickets far in advance? Or, why there are student discounts? Or, why matinee prices are ~per formovies? Ever tried to buy asoda from avending machine at a hotel or at a movie theater?

All these examples are attempts by seilers to charge different peeple different pric~s for thesame good.

Much of the price discrimination in the e<:onomy may in fad be quite hidden. How do youknow that the Crate and Barrel catalogue yau just received has the same price for yeu as for someoneIiving in anether zip code? Those with a90210 zip code see higher prices on their cat.11ogues.

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Coca-Cola's New Vendlng Machlne (Al: Priclng To Capture Value, or Not?

Why Islhe Vending Machine different?

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In principle, the temperature sensitive vending machine is 11.0 different from any other fonmof price discrimination.

Although, I do think the idea thai Ihe process is automatie generates some additionaldiscomfort • it is Ihe idea that technology can effectively gauge our buying inlerests. rhe healsensitive machin, is asmall slep toward applying machine "int,lIigen,," to profit maximization.

If you think that the vending machin, id" i5 worrisome, just wait ·th, internet will be th,mosl sophisticaled price discriminalor th, world has cver seen. Smart v,nding machines will be theleast of your worries. Online vendors such as Amazon.com may know quite a lot about you . yourpast purchasing habits, your internet preferences, your zip code, etc, •and they may want to use thisinformation to adjust prices. Did you buy aSiephen King book last monlh? Maybe you'd like to buyanother, more expensive, Grisham novel this month wilh asmaller "discount" chosen just for you.

The internet is much better than the "real 1V0rld" at price discrimination, because il is somuch easier 10 change priees.ln fact they can set apri" jusl for you.l!'s hard 10 imagine aIradilionalstore doing this ("Hey, here comes lohn. Quick, raise the pri" of the nelV Krugman Book.j. But foran on·line Hommer" slore(tms is feasible and, lVith aclever programmer on the payroll, quite easy.

Not all bad: Discrimination m.ans increased efficiency. Actually, pri" discrimination canactually incr"5e the overall efficiency of amarket.

A1055 of economic efficiency may occur when a company has some ability 10 sei prices andthere is no discrimination. The seiler must piek apri" lhat balances their desire to charge ahigh pri"to those that really want aproduct. with their desire to seil a higher overall quantity to those lhat arenot willing to pay very much for it. Because of this, there are Irades which 1V0uid benefit both buyerand seiler thai do not happen ·the resultin p;i" is "100 high" and the tolal quantity Iraded is "100low",

By identifying individual gTOupS of consumer~ aseiler can provide an additional unit at alower pri" to someone who before would have been priced oul of the market. rhe company wouldnow be lvilling 10 do this since they would nol have to sacrifi" pro ts by lowcring prices for thehigh-demand group.

In Ihe Coke case, some consumers ·those who drink Cokes on hol days . will be 1V0rse offsince they musl pay ahigher pri", while some consumers ·those who drink Coke on cold days· willbe better off sin" they will re"ive a lower pri". The Coca·Cola company, 01 course, will be betteroff. The sum total lviII be positive (pick your favorite lntroduction to Economics lextbook to see why).

Would you really be as offended if it was described as adiscount on cold days?

So, if you are still slewing about the polential of higher Coke prices, Isuggest you stock upIhe refrigeralor and put some of that retiremenl money inlo Coca·Cola slock.

Soxte: C 1999 by JoIvl S.I"", 1_.aIxIoI.com). ticensed to AbouI.com. Used by permission 01 AbouI.com Inc.. wNchcan be fourd on lhe Web al YMW,about corn. AI rights AJserved.