It is interesting to compare a number of brand and business models within the same category. This illustrates how one cannot understand market leadership simply in terms of brand image. Structural factors such as production costs, the type of competition, and the trading structure of the sector need to be incorporated into the analysis. Why not take as a field for analysis the very symbolic one of colas? Colas as a commodity have succeeded remarkably in ‘decommoditisation’, unlike other soft drinks. They are also the market in which the largest brand in the world, Coca-Cola, operates.
What is a soft drink? In a material sense it consists of water, flavourings, a sweetening agent and carbonate. In the fruit juice market, brands are having a hard time: in Germany, hard-discount labels hold more than 50 per cent of the market. The same process is taking place in the UK and all over Europe, where unlike in the United States, distribution is very concentrated and discount labels do not mean poor-quality products. The problem faced by brands is how to differentiate a product like orange juice that seems generic.
In addition, the raw cost of orange juice is high: this creates pressure on the margins, and as a consequence on the level of advertising budget affordable, when selling prices are under pressure from retailer own-labels and unbranded generic products.
In the fruit juice market, there are not many ways of finding a favorable economic equation. Tropicana follows a premium price strategy, based on permanent product innovations (freshly collected oranges for instance) and a premium image. These are value innovations, increasing the price paid by consumers per litre. It is the premium market leader, and a global brand, but in each country it is a small player in volume.
As always, Procter & Gamble followed a high-tech approach to differentiate its product. It introduced Sunny Delight as a competitor in the fruit juice market although it has almost totally artificial ingredients (there is only 5 per cent orange in it, for legal reasons). These created a taste and texture that beat all the competitors using natural fruit juice.
It also added vitamins to appeal to mothers. Thanks to its name, its colour (orange, and variants for the different flavours) and logo (a round sun), Procter & Gamble created an innovative product, which was reminiscent of orange juice and was certainly thought by some consumers to be orange-based. Its artificial chemical formula is patentable, which creates a barrier to entry and prevents it from being directly copied. Most important, it is priced high, whereas its raw material cost is far lower than that of natural orange juice.
Consumer price (in euros/litre) of various orange-flavour drinks in Europe
Brand Price Hard discount 0.25 Carrefour Standard Orange juice 0.70 National brand 0.84 Sunny Delight 1.08 Tropicana 2.45 Tesco Finest 2.50
Coca-Cola is an opaque product: almost black, mysterious, with a secret formula, it created from the start the conditions, both real and psychological, of a product that is not fully substitutable. Also, since it is an invented rather than natural product, the brand became associated with the product, which can be described by no other name. It has since become the reference product for an entire genre of cola drinks.
Benefiting from the pioneer advantage, throughout more than a century the Coca-Cola brand has pursued one single objective, now on a worldwide scale: to continue to grow the cola category. It was in competition first with sodas in America, then with other soft drinks, and now with virtually all other types of drink, including water in Europe or tea in Asia.
Coke’s brand essence is ‘the refreshing bond between people everywhere’. In making its brand the number one drink in the world, it benefited from being made from a syrup that is easy to transport at low cost, with high efficiency (that is, it can be highly concentrated, so many litres of Coca-Cola are produced from a single litre of concentrate) and remarkably high resistance to temperature and time (it can be stored for a long time, anywhere, unlike most fruit-based soft drinks).
It is definitively a great physical product. In addition, the tuning of its acidity/sweetness ratio is optimal so customers can drink many glasses or cans in a row without being satiated. The cola syrup itself is very cheap to produce, thus allowing high margins and as a consequence high marketing budgets to reinforce its top-of mind position (a key competitive advantage in this low-involvement category, where the buying decision is based on impulse).
It is resold to bottlers at five times its production price, so profit can be located at the company level and pressure can be exerted on bottlers/ distributors to pursue a high-volume strategy if they want to be profitable.
To grow the business through the expansion of the category, the strategy rests on three facets, which are always the same: availability, accessibility, attractiveness, in that order. Most people focus on communication, but the key of Coke’s domination is in these three levers:Availability, the distributive lever, comes first. ‘Put Coke at arms’ reach’. The aim is for people to find Coke everywhere: bars, fast-food restaurants, canteens, retailers, vending machines in streets and public places, refrigerators in offices, classrooms soon.… An essential point to appreciate is that building both the business and the brand image is tied to the active presence on premises.
On-premise presence gives status to a drink, and creates consumption habits. In addition, unlike multiple retailers (Wal-Mart, Asda, Ika, Carrefour, Aldi and the like), which do not sell one brand exclusively, but their clients have the choice, on-premise customers do give exclusive rights, thereby granting a local monopoly to the brand.
This is why Coke makes global alliances with McDonald’s and other synergistic organisations. One condition of this type of exclusive deal is that the supplier provides, and the outlet agrees to stock, its full portfolio of soft drink brands. The goal is to create a barrier to entry to any soft drink competitor. As part of competing on availability, one should not forget access to the bottlers: in many countries there are few good bottlers, and eventually one only. Controlling this bottler is a sure way to prevent competition entering the country. Conversely, it is a way to push competition out, as when the Venezuelan bottler that had formerly handled Pepsi decided to work for Coke.Within a day, Pepsi operations in Venezuela were closed.Accessibility is the price factor:‘In China, in India, sell Coke at the price of tea’. This is made possible by the low cost of syrup production, its easy transportability, and also the volume-based strategy. Economies of scale create another pressure on the competition, if not a total barrier to entry.
Having located the profit at the company level (exactly as Disney Corporation does through licensing royalties, while some of its foreign entertainment parks are not profitable), the Coca-Cola Corporation can afford to have its local companies lose money for the sake of rapidly growing a high per capita consumption rate. In addition, to push competition out of the market (whether it is defined as cola drinks or more widely), the company exerts a high-price pressure on the whole market.
For instance, it seems that specific prices on Coke are granted to trade distributors if they give preference to the company’s other brands, such as Fanta, Minute Maid and Aquarius. This is why the Coca-Cola Company is now being sued by the European authorities on charges of anticompetitive anoeuvres.Attractiveness is the third factor: it is the communication issue. Although Coke’s advertising is conspicuous, non-media communication (relationship, proximity, music and sports sponsorship, and onpremise communications) represents the main part of the budget.
Share-of-mind domination is made possible, let us remind, by the low production cost. Last but not least, Coke’s image is not that of a product but of a bond: it delivers both tangible promises (refreshment) and intangible ones (modernity, dynamism, energy, American-ness, feeling part of the world) which make it so special, much more now than its secret formula.
Coca-Cola’s main challenger worldwide, Pepsi-Cola, is following exactly the same brand and business model. Its differentiation is based on the fact that it was introduced more recently than Coke, and did not create the category. As a challenger, its brand image and market grip are lower. It challenges the leader on three facets: price, product and image:Price: it is a dime cheaper than Coke, at consumer level, but this creates a higher pressure profitability.Product: since it is not the referent, Pepsi is more daring and permanently works on the product to beat Coke on palatability and taste (the ‘Pepsi challenge’). Its formula is actually preferred to Coke in most blind tests. It pushed Coca-Cola Corporation to make the ‘marketing blunder of the century’ launching New Coke in 1985 to replace the classic Coke, the water of the United States. More innovating by necessity, it practised line extensions such as Diet Pepsi well before Coke.Image: Pepsi is younger than Coke.Capitalising on the only durable weakness of Coke, its advertising positioning makes Pepsi the choice of the new generation. Pepsi’s essence is ‘the soft drink for today’s taste and experiences’.
To secure a presence for Pepsi-Cola on premises and circumvent the barriers to entry created by Coke, the Pepsico Company had to diversify into restaurants and fast-food chains.
Other rivals to Coke have had an even harder time. In February 2000, Richard Branson of Virgin admitted defeat in its war against Coca-Cola and Pepsi in the United States, less than two years after he rode into New York’s Times Square in a tank to launch his challenge. On reviewing the brand and business model that is common to both Coke and Pepsi, it is easy to understand why Virgin Cola failed everywhere but in the UK, its domestic base. Even there it won less than 5 per cent of the market. Brand is not enough.
Virgin Cola bought the Canadian company Cott’s, which was able to make a very good syrup: it makes the cola sold under Loblaw’s President’s Choice private label. It proposed a cheaper price than Coke or Pepsi. But Virgin Cola never got the distribution, it never accessed the consumer. Branson’s whole idea was to save on advertising and thus make a cheaper price possible by taking advantage of the Virgin umbrella brand.
Unlike the two world-leading carbonated soft drink companies, which both follow a product brand policy (one brand per type of flavour), Virgin’s only brand asset is its core brand, which has been extended to all types of category, and in the process gained extensive worldwide awareness. As well as a low volume of advertising and selling a large volume on promotion, Virgin had a small sales force, a sure handicap for trade marketing and store-by-store direct relationships.
Finally, Virgin Cola was not able to work in the market without a full portfolio of soft drinks to support it. This is necessary to access the on-premise consumption sector, and is also the only way to make a true national sales force economically possible. As a rule, extension failures are immediately attributed to some image-based reason that it is impossible for the brand to extend to the new category.
The brand and business perspective shows us that this explanation is superficial. It was not the Virgin brand that was the source of the failure, but the fact that Virgin could not compete on the same brand and business model as its two Goliath competitors. Fairy tales are one thing, but most of the time David gets killed.
Virgin Cola failed to get enough distribution: in Europe, for instance, it never entered the main multiple retailers. It was not sold sufficiently in the fashionable bars and restaurants. To do better in distribution terms it would have needed a real sales force and a real portfolio of brands and products.
Arguably it should have looked for alliances with soft drink manufacturers looking for a branded cola. Without advertising, the cola was mostly sold on a promotional basis. It is questionable whether that creates the basis for a long-term preference. Also, Virgin wanted to be perceived as the anti-Coke cola. However throughout the worldwide market this role already belonged to Pepsi. Finally, is the Virgin brand image that strong among the young generation outside the UK?
What other brand and business model could exist in this sector? At this time, two alternative models are surviving: ethnic colas and colas dedicated to trade. In its edition of Sunday 12 January 2003, the New York Times published an article, ‘Ire at America helps create the Anti-Coke’. This announced the creation of Mecca Cola by a young Tunisianborn entrepreneur. He targeted it at the Muslims of France and soon of other countries.
This brand had two strengths. The first was immediate goodwill in the Muslim community: its identity is based on a real feeling of community and resentment against what is felt as an imperialist drink and brand. The second was an immediate presence in the specific channel of distribution held by this community, innumerable small convenience stores that open long hours.
It is too early to judge its success, since this will only be evidenced by long-term durability. However, sales are skyrocketing. Interestingly, other colas have burgeoned, based on the same approach: they capitalise on religious, ethnic or geographical feelings of community and identity. For instance there are Corsica Cola and Breiz’h Cola (sold in Brittany), aimed at two regions with strong identity and even independentist movements.
This model can be reproduced elsewhere: Irish cola? Scottish cola? In the era of globalisation, regional identities are revived to resist what is perceived as a loss of essence, soul, and quality of life. Such attempts access local distribution or the local stores of national multiple retailers. No store owner or manager wants to take the risk of hurting the local feelings of the community living around its store.
Monarch Beverage Company has created an interesting alternative brand and business model. It is totally trade oriented, thereby securing access to modern distribution, worldwide. However it is not simply providing cola for retailers own labels. This is a true branding approach.
The problem for multiple retailers is to get free from the grip of Coke and Pepsi. Unfortunately, with some exceptions (Sainsbury’s Cola in the UK, President’s Choice Cola in Canada), market shares of own labels remain very small. This is probably because compared with the real thing, private labels look like faked cola. Parents who buy own-label colas to save money risk being criticized by their children.
Private labels have no image in a category that has been decommoditised by brand image. Coke’s identity encapsulates the American dream, authenticity and pleasure. Pepsi has the same associations, although to a lesser extent, and also means youth. Own-labels create no such value in the eyes of the young heavy consumers. They create bad will.