Neil Tambe

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I'm a Detroiter who happens to enjoy writing, national parks, orange juice, the performing arts, and fanciful socks. More than anything though, I aspire to be a good husband, father, and citizen.

Cola meets the maker movement?

I just finished a first read of a very interesting case for my Strategy class, it was about the history of the Carbonated Soft Drink (CSD) industry, focusing on Coca-Cola and Pepsi-Cola. Let me provide a little background, and then I'll infuse an interesting consumer-trend to describe a potential, new, business model.

Basically (and I'm being really basic) the CSD industry operates on a franchised bottling model. What we consider to be the company, let's just go with Coke, makes syrup which it then sells to bottlers. This "mothership" company also puts in a lot of marketing effort and deals with big national contracts. The bottlers add in carbonated water to the syrup sold by the mothership to make a finished product. The bottlers then sell and distribute the bottles within the territory they have exclusive rights for.

There's a lot of nuance, but this is basically it. There are a few other interesting facts about the CSD companies:

  • Recently (in the past few years / decades) Coke and Pepsi have been buying up bottlers, but operating them as separate companies
  • The companies have been expanding into emerging markets
  • US beverage consumption per person (all beverages) has been flat for the past forty's about 185 gallons per person, per year
  • Bottlers have high operating costs and relatively low margins
  • Retail consolidation has given larger retailers a lot of leverage when negotiating prices with bottlers / mothership companies
  • CSDs have been trying to expand into non-CSD beverage (e.g., bottled water, juices, sports drinks

So overall, it seems like the companies really have two options to increase profitability (duh): increase revenue (e.g., find new customers, sell more products) or cut costs. There are lots of ways to increase revenue and it seems like the companies are pursuing these strategies aggressively. By buying bottlers, the companies are looking to cut costs. All this is fairly straight forward.

An opportunity to do both
Buying up bottlers also presents an interesting opportunity: if you buy bottlers, they can't get mad at you if you eliminate them from the picture. What if the cola companies bypassed bottlers (and retailers) completely? They could then presumably dramatically lower the costs of production, pass the savings onto consumers, and increase consumption simultaneously with customer value. Here's how:

What if cola companies sold concentrate and at-home fountains directly to consumers? Kind of like the SodaStream machine, except you get Coke out of it instead of just soda water. Some of the benefits might be:
  • Cut costs by eliminating a few steps in the value chain and punting those costs to consumers themselves
  • Providing a value-add to consumers (coke whenever you want it!)
  • Provide consumers the opportunity to customize their product experience (maybe you have a cartridge for three types of soda and two types of sweetener)
  • Provide a direct-to-customer product, which probably has a better way of linking marketing and promotion to consumers, so you can probably develop a better relationship with those customers for upsell opportunities for product bundling (which becomes really useful as you diversity product mix beyond beverages or even just beyond CSDs)
  • Maybe you could even create retail locations and turn the product into a lifestyle brand with accessories and add-on opportunities for enterprising soda enthusiasts
What I think is interesting about this category (CSDs, I mean) is that it has not leveraged the really disruptive trend of DIY manufacturing and "making", given that the kitchen is the original maker space. Why couldn't you take advantage of the fact that consumers in developed markets have lots of power and desire to customize product experiences to their own tastes (pun intended) by creating an interesting new product?

This isn't terribly far-fetched. The tech to do this probably exists. It would take some chutzpah, though. And, if someone doesn't "change the game", so to speak, the cola wars will probably continue in this expand, consolidate, optimize pattern they have been going in. That'd be really boring and pretty "meh" for us customers.

Please do say hello: neil.tambe[at]gmail[dot]com