Thursday, 1 May 2008!
HandWritten on; 22:14
Coke Tests Vending Unit That Can Hike Prices in Hot Weather
Taking full advantage of the law of supply and demand(Price elasticity concepts actually), Coca-Cola Co. 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 Co. 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. Chairman M. Douglas Ivester described how desire for a cold drink can increase during a sports championship final held in the summer heat-- demand is more price inelastic as it becomes almost a necessity. "So, it is fair that it should be more expensive,(increase in prices--> increase in total revenue)" 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 Wednesday.
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, 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."-- Demand is more price elastic because it is not a necessity anymore --> Decrease price will lead to increased revenue.
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 remained largely untouched by the discounting. Now, Coca-Cola aims to tweak what has been a golden goose to extract even more profits.
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 No. 2 soft-drink company. "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." (Yay for pepsi!)
- Faith
Labels: econs
