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Business as usual (1)

02/04/2017

Today a bottle of Coca-Cola sold from a vending machine apparently costs around $1 or €1 (give or take a few cents in either direction, and depending on the country you’re in); but in the first 73 years of the product’s history a 6.5 fluid-ounce (200-ml) bottle cost a fixed amount: 5 cents. This made it cheaper than other soft drinks on sale in the United States at the time, and allowed you to pay for it with a single coin (a ‘nickel’) – two strong incentives to buy it. In the early days inflation was low, and high sales encouraged the company to stick to the same price for over seven decades. Another reason not to raise it was that the drink was often sold from vending machines that were conspicuously marked ‘5¢’ (indeed, the vending machine was at first almost a symbol of Coca-Cola, which at one point owned 85% of American ones), and they did not always give the right change. So it was easier for everyone if you could simply insert a nickel and retrieve your bottle.

However, by the early 1950s the company was fighting a losing battle with inflation, which meant that ‘nickel Coke’ was less and less profitable. But it would also have been very costly to alter all those machines every time the price increased, as well as ensure they gave the right change (since you would now need more than one coin, and finding exactly the right amount would have been fiddly or impossible). The only ‘single-coin’ solution would have been to increase the price to 10 cents (a ‘dime’), but this had two serious disadvantages: doubling the price of a product overnight is a good way to lose customers, and vending machines are notorious (even today) for being unable to handle small or light-weight coins, such as the minuscule dime.

What to do?

It seems that Coca-Cola’s director actually approached the US Treasury to ask if a new 7.5-cent coin could be minted – simply so that the company’s customers could continue to pay for its products with a single coin (but at one-and-a-half times the previous price). According to the Wikipedia article on the subject, ‘the Treasury was unsympathetic’. This is hardly surprising. No other country in the world had ever had a 7.5-unit coin, and introducing one would have caused countless problems with cash registers and other machinery throughout the country, while complicating the business of working out the correct change in your head (this was in the days before pocket calculators and computers eroded people’s mental arithmetic skills). What is more, even such a business-minded government as that of the United States would surely have felt uncomfortable at the idea of altering its monetary policy so profoundly just to benefit a single company – something that could well have been seen as unfair interference in the workings of the ‘free’ market, and collusion with certain private interests to the detriment of others.

Having failed to bend the federal authorities to its will, Coca-Cola now resorted to outright trickery, by arranging for one in every nine vending-machine bottles to be empty (in those days they weren’t visible from the outside). This meant that unlucky customers had to insert a second nickel if they wanted a drink, or else leave their first one in the machine and get nothing in return. It also effectively increased the sales price to 5.625 cents a bottle; but even that wasn’t enough to tackle the inflation problem. The cost of pretty much everything – except Coke at the point of sale – was rising rapidly, and of course that included the company’s supplies, equipment and salaries. On the other hand, raising the number of ‘dummy’ bottles to one in every eight, let alone seven or six, would soon have drawn unwelcome attention to what was going on, and done Coke’s reputation no good at all. If there’s one thing customers hate more than paying too much, it’s being tricked into paying too much. For more on this dubious – but undoubtedly common – business practice, see my earlier posts entitled The best policy (1) and (2).

And so, in 1959, the Coca-Cola company finally gave in, and took their product off the ‘5-cent standard’. You could say they’d dug their own grave by becoming so dependent on vending machines in the first place; but sales of Coke have of course continued to expand, and it is still one of the world’s best-known brand names.

Yet I sense in Coca-Cola’s business strategy an underlying arrogance born of being the ‘top dog’ for far too long. This re-emerged in 1985 when, faced with a declining share of the soft-drink market, together with growing evidence that customers actually preferred the taste of its main rival Pepsi-Cola, the company abruptly replaced the traditional flavour with what became known as ‘New Coke’. The move has gone down in history as a colossal marketing blunder; sales plummeted amid indignant public protests, and within months the old formula was brought back, as ‘Classic Coke’.

Sales then rose to above their former levels, and it has been suggested the whole thing was staged by Coca-Cola itself (more trickery?). But I wonder. The following year Pepsi-Cola director Roger Enrico published a book on the affair called The other guy blinked: how Pepsi-Cola won the cola wars. I suppose that in today’s convoluted, amoral business world it is just possible that Enrico was recruited behind the scenes as an accessory to his rival’s manipulations; or else he was simply taken in along with everyone else. But I’m still inclined to think that the Coca-Cola company, thinking itself invincible, made the classic (!) mistake of ‘changing a winning team’.

Not that I much care, since I wouldn’t touch the stuff with the proverbial bargepole. To me, the whole thing is just part of ‘business as usual’.

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