If Coke Needs Retail Leverage Then You Do Too

By Ben Smith

I’m won’t be the first or last blogger to write about Coca Cola’s new “Freestyle” fountain system.  What’s been written so far covers a wide range, from marveling at the technology, to the variety it offers customers, to the financial impact.  But no one has really looked at it from the angle of the potential leverage this gives Coke with its retail customers – that is, until now.

Full disclosure (as you may have picked up in my Coke/Costco article), I’m a big Coke fan.  Ever since Matthew Modine made it clear in “Gross Anatomy” that he wasn’t just ordering a generic coke, but a Coca-Cola Classic, something clicked in my head and I have never looked back.  So the lens I view things through is one that believes that Coke tastes best at McDonald’s (combo of the wide straws, and the perfect mix of concentrate/carbonation), will drink water if Pepsi is the only choice, and wanted the groom’s cake at my wedding to be in the shape of a classic little 8 ounce Coke bottle.

A KILLER APP FOR RETAIL LEVERAGE:

Coke’s Freestyle system hits on a couple of our 5 points in how to gain Retail Leverage.

#1 Have The Hot Product With No Substitutes

While you can’t call Freestyle “hot” yet, it definitely doesn’t have any similar substitutes.  Freestyle allows the retailer to offer something to their customers that offers unparalleled choice (100 drink combinations), as well as unique drink formulations (there is a cherry, vanilla, orange, or zero of pretty much everything) that can’t be found anywhere else.  A manager at the Wendy’s near my house where I found the Freestyle went on and on about repeat customers they are seeing who rave about the product.  As we were talking, I saw a teenager create a concoction of multiple flavors for his Sprite zero.  It doesn’t take a great leap of faith to imagine that it could be a differentiator – for those who care.

Freestyle also gives Coke an edge on future product development, insight into usage, and pretty much anything else they’ll be able to glean from all the usage data that they can download from the machines back to the offices at North Avenue in Atlanta.  Coming from a printer industry background, it was invaluable to know which customers were the best, where they bought from, how often the purchased, what they printed, etc.  Coke has an opportunity to respond with more localized offerings, plus stay on top of key seasonal demand.

By the way, after using the machine, I can see other possibilities, such as for loyal customers, where they can scan a card or punch a code in and have it deliver their own special blend.  The current machine didn’t have that capability, but with all the technology packed into this thing already, they’d just need to add an easy way to scan/input the customer’s info.

#3 Be A Top Revenue Vendor

Okay – I’m sure Coke is already a top revenue vendor at their existing customers.  This provides an opportunity to further cement that.  And they have a pretty strong proposition to walk into potential customers with, showing how they can offer better financials that their existing provider.  How can they do this?  The answer is part technology, and part customer behavior.

On the  customer side, there are already reports of double-digit increases in beverage revenue from Freestyle in the test stores. I’m willing to bet there are a couple of slides in the Coke sales rep’s powerpoint deck that show the increased number of visits from existing customers, new customers drawn in by the existence of Freestyle, plus customers upgrading their drink size.  Not to mention, the retailer could increase their drink prices based on the premium that Freestyle offers, although that lever probably hasn’t been pulled yet.

On the tech side, from what I’ve learned, once you get past the high cost of the hardware, the cost of the consumables (primarily the concentrate) are significantly improved.  Those 100 flavors are based off several brand platforms (coke, sprite, fanta, powerade) and then the options come from all the variations you can do by flavoring (cherry, vanilla, orange, etc) and sugar substitute (whatever makes it regular, diet, or zero).   So this modular system allows them to reduce inventory, speed turns, and reduce out of stocks.  When you start multiplying these savings by 100’s or thousands of outlets, those savings have to add up.  There is enough profit freed up to improve margins to the retailer, while improving Coke’s bottom line also.

So when Pepsi or the generic fountain vendor comes in to pitch against Coke’s offering, unless they are willing to significantly cut their margins, I’m not sure they have a story to tell the retailer how they can help them make more money than Coke’s Freestyle will.

OTHER INTANGIBLES:

Currently Coke has approximately 50 test stores for Freestyle, across a wide swath of customers.   Now Coke could offer this to all customers, across all verticals (fast food & sub-segments, casual dining, cinemas, etc.  Or they could selectively offer customers exclusives in their own class (ie offer to Subway, but not Quiznos, Jersey Mike’s, Blimpie, etc).   I don’t know that this would be in their best interest, given they have pretty wide distribution already.  The real fear they want to play on from the retailer’s perspective is that if they aren’t able to offer this, their customers could choose to go elsewhere.  Could this be the silver bullet to put Coke into Yum Brand’s (Taco Bell, KFC, Pizza Hut)?  I know they aren’t officially owned by Pepsico anymore, but I’m sure there are still quite a few strings attached.

The net is, Coke is onto something that potentially everyone with a fountain could HAVE to have.  If they don’t, and the guy across the street does, you can be sure that the franchisees will be raising a big stink.

TAKEAWAYS FOR ANY MARKETER:

1. No matter how big your brand is, you still need Retail Leverage
2. If the big guys need leverage, what does that say about the smaller challenger brands?
3. Figure out what you have to exploit that others don’t and leverage it.
4. If you don’t have something unique / different / better, then be prepared to move to the 6th, rarely spoken of, painful way to get Retail Leverage: Price.

FURTHER READING / SOURCES:

More reading on Freestyle, from multiple perspectives:

• Fast Company,talking about all the data Freestyle provides
• Coke’s Facebook Page for the Freestyle System (check out how bad some of these people want it)
• Freestyle plus some other crazy Coke machines out there
• Uhh – buy some stock in Plexus corp, who makes the Freestyle machine for Coke
• The guy who invented the Segway was involved with developing Freestyle
• Great overview of Freestyle + video in Orange County Register

UPDATES:

• 5/10/2010 Article in the Wall Street Journal: “Coke Goes High-Tech to Mix Its Sodas”