BODY: Taking
full advantage of the law of supply and demand, the Coca-Cola Company
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 Company 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. M. Douglas Ivester, the chairman, 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,"
Mr. 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 yesterday.
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, Mr. 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 reamined 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 J. 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, Mr. 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," Mr. 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 an 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 D. 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
company, No. 2 in soft drinks. "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."