Consumer Strategies Report September 14 2004/Trade Event

Hosted by Beverage Digest on June 14, 2004 at the Harvard Club again (1), this event is always a must attend for beverage industry pros. I personally didn't learn anything new this year, and was turned off that Pepsi's reviving their absurd marketing gimmick, the "Play for a $1 Billion" campaign (the CMO presented). However, this wasn't nearly as informative as the 15 minutes I spent with Jack Callahan, head of investor relations, after the conference, who informed me something I'm ashamed I didn't know sooner: that Pepsi's Frito-Lay and other snack foods businesses are together larger, contributing 18% more in operating profit, than their beverage business, despite also owning the Gatorade and Tropicana brands. And even though Pepsi makes about $6 billion more than Coca-cola, Pepsi's not as profitable, earning about $800 million less than Coca-cola (2). (Probably due to all those billions they're giving away to consumers who drink their beverages).

The average person in this country drinks about 52 gallons of carbonated soft drinks per year (3), of which, Pepsi claims we're drinking 18.20 gallons of their products. Based on what Pepsi spends on marketing their fizzy drinks annually (some $400 million out of $1.6 billion globally for all PepsiCo brands in 2003), it turns out that they're spending relatively efficiently, given the 294 million people in the U.S. (In other words, Pepsi is essentially paying about $1.36 to get us to drink 18.20 gallons of their drinks. This doesn't take into consideration whether or not anyone actually wins their $1 billion, which they've insured through Berkshire-Hathaway and worked it out to pay during the course of a lifetime).

There are 4 major strategies to making money in beverages and that's the problem, everyone's doing them:

Strategy 1 - Multi-brand vs. single-brand marketing; Although a rare commercial with all brands pops up every now and then, beverage companies with multiple brands love promotions that encompass as many of their brands as possible. This helps them realize greater value from their marketing budgets, while simultaneously increasing the consumer base of other less popular brands. (This is the real reason Pepsi's play for $1 billion is so popular.)

- Tactic 1 - Increase frequency of trips via marketing; which is completely irrelevant if the consumer buys less with each trip.

- Tactic 2 - Free samples; although this strategy always yields positive results, it's still too heavily relied upon as the strongest tool in the box. What happens when you can no longer rely on this tool?

- Tactic 3 - Mixed drinks; with the success of Red Bull via nightclubs and lounges, everyone is getting on this bandwagon of having their non-alcoholic beverage mixed with alcoholic beverages.

Strategy 2 - Acquire till the cows come home. Innovation is, sadly, a problem at big beverage companies. Few new concepts make it out of the biggies. As a result, innovation is acquired. The great thing about it is that r&d costs and initial marketing are expensed by the new firms (which are naturally way lower than what the biggies may have expensed). After acquisition, the larger bev firms' distribution systems and marketing platforms take over, quadrupling sales overnight.

- Tactic 1 - Have a diet; obesity is still rearing its ugly head in the beverage sector, making alternative drinks (like milk or "yummy" coconut waters like independent Zico [4]) and diet-offshoots a must in any bev portfolio.

Strategy 3 - Merchandizing dominations, particularly near compatible foods at grocers, delis, and restaurants; another industry fixture, PepsiCo has got this down to a science, thanks in large part to their Frito-Lays division. Coke enjoys dominating fridges located as close to the front of the store as possible or dominating endcaps. The ones who can, pay billions in "rebates" to command greater shelf space near eye-level. These rebates are supposed to be passed down by the grocer as discounts to consumers. Although this is a gray accounting area, it's widely done because it works. But what do companies without this merchandizing clout do? In-store sampling by reps? Partnerships with food and snack brands? Maybe focused relationships with the larger retailers, hoping your product's merits will get you ahead of the biggies (something that's worked at Wal-Mart once or twice.)

Strategy 4 - Play with package; Coke's sales of 12-paks have measurably increased as a result of their new fridge-paks which dispense cans more conveniently than traditional packaging. Glass bottles are making a comeback; and paper containers, like Zico's, will probably be the next trend (since it preserves natural flavors best). Meanwhile, cans contract in size and PET (plastic) bottles that bottlers love because of their low cost, have lost cache because of environmental concerns as well as lack of differentiation. (I suggest playing with shapes, using more rectangular than cylindrical shapes.)

Having outlined all these tried-and-true approaches to achieve market share, here's one I haven't seen in a long time: development of a quality product that I'd actually buy a lot because it's darn good.

Disclaimer: The recommendations, commentary and opinions published herein are based on public information sometimes referenced via hyperlinks. Any similarities or likeness to any ideas or commentary from any other sources not referenced is purely coincidental. al berrios & co. cannot control any results occurring from advice obtained from this publication nor any opinion(s) conveyed by any reader of this publication.

(c) 2004. All Rights Reserved. al berrios & company, inc. Published by al berrios & co. This Report may not be reproduced or redistributed in any form without written permission from al berrios & co., subject to penalty.

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