Sunday, November 18, 2012

For 70 Years, Why Coca-Cola Cost a Nickel

If there's one thing that they teach us in economics, it's that prices change over time.  As sure as the sun rises in the East, prices react to supply and demand-- and supply and demand react to changes in price.  It's so fundamental, it's one of the axes on standard supply and demand curves.  But for 70 years, from the first Coca-Cola sale at Jacob's Pharmacy in Atlanta on May 8, 1886 until some time in 1959, you could get a 6.5 oz. Coca-Cola, in a bottle or from a fountain, for the exact same price: five cents.

A product remaining at a single price for this length of time is unheard of.  Especially when if you consider everything that happened during those 70 years: world wars, radical changes in technology and industrialization, new competitors in the market, the Great Depression... but throughout all of this, you could count on a nickel getting you six and a half ounces of ice cold Coke. 

The Planet Money folks at NPR looked into this economic anomaly and put together an amazing report with all the details (and really, if you have the time, track down the podcast version of the story, it's 18 and a half minutes long, with a lot more detail). 

So the story of 5 cent Coke goes like this: in its early days Coca-Cola was a fountain drink, and the Coca-Cola company sold syrup to soda fountains to make Coke.  In the late 1800s, sodas were largely fruit flavored, and generally 7-10 cents.  So Coke priced itself at 5 cents to market itself as an affordable product among its competitors.

In 1899, two lawyers from Chattanooga, Tennessee visit Coca-Cola headquarters and ask to sell Coke in bottles; they would buy the syrup from Coca-Cola, then bottle and sell it themselves. They meet with the President of the company who believes at the time that Coke is a soda fountain business and no one is going to be interested in bottled beverages (why would they be?).  So he ends up signing a contract with these lawyers, and some speculate he does so just to get these guys out of his office.  The contract, however, sells not only the bottling rights, but is a contract to sell the syrup for a fixed price... forever.

Bottled drinks take off, and Coca-Cola is stuck in this contract with these bottlers; there's nothing stopping bottlers from charging any price they want and pocketing the difference.  And because economics state that higher prices mean fewer customers, and none of the extra profit from the higher price would come back to Coca-Cola, it is all around a bad deal for Coke. Coca-Cola can't put a 5 cent price tag on each bottle of Coke, and it can't force the corner store fountains to sell Coke at that price, so it has to decide what it is going to do about its strategic pricing.  Coke remains committed to its price point, and in response blankets the entire country with advertizing that declares that Coca-Cola is 5 cents.  The bottlers and fountains are still free to charge whatever they'd like, but the public expects its Coke to be a nickel so anyone charging more than a nickel is a jerk.

Eventually, in 1921, Coca-Cola is able to renegotiate contracts with its bottlers.  So Coca-Cola regained control over its pricing, and a Coke didn't have to be a nickel any more. But even without the contract, Coca-Cola chose to keep Coke at 5 cents. Partially because of the decades of advertising had convinced customers that Coke was a nickel, and partially because all of the company's vending machines could only take a nickel.  (To give you a sense of the size of this latter issue, in 1950 there were 460,000 vending machines in America and 400,000 of them belonged to Coca-Cola.)

But in spite of these external issues, there was a significant period of time between the contracts and the vending machines where Coca-Cola could have changed its price, but chose not to. Internally, the company had decided for a number of reasons that "Coke costs a nickel," and when they really looked at their product and their brand and everything that was Coca-Cola, the company decided to stay at that price.  And that price is what helped shape Coca-Cola into the business that it is today; by sticking to the same price for all those years, the company needed to make up for its smaller margins with volume, which is why the company was so aggressive for so many years to get Coke into every corner shop and Main Street in America.

In fact, what finally killed the nickel Coke was inflation. When the U.S. abandoned the gold standard, prices for the ingredients Coke used stopped fluctuating up and down and started only going up.  The 5 cent price point was no longer sustainable.  Since then, Cokes have gotten bigger, and they certainly cost more.  But Phil Mooney, an archivist with the Coca-Cola company, points out that in a weird way, the nickel coke is still with us.  If you think about Coke on a per ounce basis, when you buy a 2 litre of Coca-Cola for $1.29 at the grocery store, it's still pretty close to a nickel for 6.5 ounces.  Which I think is a nice way to think about it.

Questions: What do you think of Coca-Cola's decision to keep its price frozen for so many years, even after external concerns had ceased to be relevant? More generally, do you consider a price a "promise"?  Do you know of any other products that have had a fixed price for an extended period of time?  This particular case demonstrates how internal analysis can most directly affect the "softer" attributes of a product, which are harder to quantify; as a strategy maker, how can you effectively weight these benefits against a short-term bottom line?

Link:
NPR-Planet Money: Why Coke Cost A Nickel For 70 Years

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