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The Importance of Relevance with Retailers
Posted by: The Science of Hitting (IP Logged)
Date: October 16, 2012 09:10AM
In an article a few weeks ago about the dominance of PepsiCo (PEP)'s snack business, I made the following comment:
References to competitive advantages are often thrown around rather loosely (with the most oft-cited example being proclamations of “brand equity” in many cases where the company has little-to-no pricing power or affinity among consumers). To provide some merit for this particular advantage (clout among retailers), let’s look at an example recently addressed by Coca-Cola (KO) chief financial officer Gary Fayard, who was discussing the company’s push to replicate their dominant segmentation in Mexico to the U.S:
Think about this example: Coca-Cola decided that two price points (at home, via 2-liter and 12-packs, and immediate consumption, with the 20-ounce) were no longer adequate for their strategic goals, particularly in the face of rising costs that were due to compressed margins at a price point that was universally accepted (due to the reassurance of time) as the “right” price. What if a smaller player like National Beverage (FIZZ) or Reed’s (REED) wanted to make the same type of differentiated offering to the consumer? The reality is that few companies, namely PepsiCo and Coca-Cola, would have the clout to make such changes without being stalled by retailers.
But this is about more than just diversified product line-ups comprised of a handful of dominant brands: Coca-Cola also reinvests in its business. For example, KO spent more than $2 billion on capital investments in 2010, and $2.9 billion in 2011 (almost half was spent in North America) – with 2012 expected to cross the $3 billion mark. It’s important to recognize that reinvestment goes beyond brand relevance, product development, and route-to-market – Coca-Cola also spends a significant amount of capital on cooling equipment (both design and placement), which goes a long way to keeping retail fresh and avoiding a dilapidated approach to the consumer – with a recent example being the “eKOCool” in India, which operates exclusively through solar energy – a big plus in a country with erratic power supply. The company has also reinvented the experience at QSR, with restaurants noting sizable increases in beverage sales after adding the Freestyle machine; as noted by Mr. Fayard, these investments are targeted at driving immediate consumption – where the margins are much more attractive to Coca-Cola.
These actions, over time, have had the effect of taking Coca-Cola to a point where attempting to catch them, even with a better or cheaper product, is essentially futile (look at how much market share private label has grabbed in the U.S., despite selling at about half the price of a branded 2-liter). The company continues to make investments back into the business at attractive rates of return around the globe, and is working on expanding regional and category specific leadership into a globally unmatched empire (certainly on the right track) that will provide non-alcoholic ready-to-drink beverages to billions of consumers on a daily basis. The competitive position held by the Coca-Cola Company suggests that this is not just a possibility. With enough time and competent management, it appears to be a near certainty.
Stocks Discussed: KO, PEP, FIZZ, REED,
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