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The beginning of Plan B? Coca-Cola's direct-to-consumer sales model for its KMX energy drink could easily translate to bigger brands--Coke's and others'--that are supermarket staples. (Online Retailing).

Last October, when Coca-Cola announced that it had decided to sell the multipack sizes of its KMX energy drink online direct to consumers via the KMX Web site, there was a flurry of speculation about Coke's motivations: Is this a ploy to force multipack distribution at retail or a more serious corporate test of a direct-to-consumer option that Coke might choose to expand to other brands?

Or, more simply, is this just what it seems: a vehicle for KMX to provide time-pressured heavy KMX users with a convenient way of stocking up on their favorite energy drink and avoiding the hassle of having to go a supermarket where they can only buy KMX in singles?

To put the answers to these questions in perspective, let's clarify how Coke and KMX are going about this. KMX is a niche product positioned against a narrow consumer segment and never destined to do blockbuster volume. KMX was introduced in 2000 and sold in singles to retailers through the Coca-Cola Enterprises (CCE) distribution network. What Coke is offering to consumers via the KMX Web site is the opportunity to buy KMX 12s and 24s (same size cans as singles, just different case packs) at delivered prices comparable to what they would pay if they bought these packs at retail stores. To promote this initiative, which Coke acknowledged is a first for the company, Coke is running banner ads that target AOL users in Atlanta, Boston, Miami, Los Angeles, and Washington. For those of you reading this who might be loyal KMX users, the Web site is www.kmxusa.com/buy/kmx.

To deliver KMX 12s and 24s, Coke is using Beverages Direct, in online retailer that handles all shipping and billing on behalf of its suppliers. By our count, Beverages Direct carries approximately 65 brands, including some well-known names like SoBe and Red Bull and a variety of lesser-knowns like Hype Energy Drinks, Cool Mountain Gourmet Sodas, Intelligentsia Coffees and Teas, and Barritts Bermuda Ginger Beer.

Narrow segments

For the most part, most of the more than 300 SKUs sold by Beverages Direct would have a tough time justifying shelf space in an average supermarket because, like KMX, most are positioned against highly targeted and relatively narrow consumer segments. Because consumers who drink these types of alternate beverages tend to be fanatically loyal, Beverages Direct provides a genuine service to both suppliers and consumers in making these products available.

Nor does Beverages Direct gouge on shipping costs. Versus an average supermarket retail of $1.99 per can, KMX customers can buy 12packs direct for $19.30 plus $6 shipping and 24-packs for $30.99 plus $9 shipping. On a per can basis, this comes out to $2.11 per can for 12-packs and--get this--only $1.67 per can for 24s.

Given this scenario, let us stipulate that the most obvious reason Coke is doing this is to sell more KMX without the hassle and expense of having to justify and pay for the additional space required to shelve K.MX 12s or 24s. Far from alienating retailers, this approach actually provides Coke with a selling point that makes good sense for both parties: "We will not ever ask you to carry something which we know may not meet your profit and sales per square foot criteria, or would not improve overall category performance. In the case of KMX, carrying singles makes sense because broad scale retail availability is essential to trial and impulse sales. On the other hand, 1 2s and 24s--which include the same size cans--are for heavy loyal users. Until the volume supports it, we will continue to sell these packs direct on a targeted basis."

Almost equally obvious is the advantage that online direct-to-consumer sales of KMX multipacks will give Coke help in identifying where, exactly, KMX heavy users are located and clustered. Selling direct enables Coke to take names and make lists. As these lists grow, Coke can use these to build a case for limited retail distribution of KMX multipacks in selected retail outlets- something that only a DSD distribution system like CCE can handle effectively. As opposed to being a ploy, this, too, just makes good business sense for both Coke and the participating retailer.

So far, so good, right? Maybe.

Eventual uses

The interesting part is to think about the uses to which Coke may eventually put the knowledge it gains from this experiment. Let us say up front that we strongly doubt that when Coke authorized this initiative, the company had anything longer term or more serious in mind than providing a convenient way for loyal KMX users to build pantry stocks of their favorite energy drink. The fact that Coke chose a retailer, Beverages Direct, to sell and ship this product rather than handling these functions itself directly from the KMXWeb site, would suggest that Coke has no intentions of deviating from its traditional retailer-centric business model.

In addition, it should be no secret to anyone reading this that Coke has invested massive energy and resources in building retailer partnerships over the last 10 years. On the face of it, it is therefore a real stretch to conclude that Coke would risk doing anything to unravel these relationships at this point, especially over a brand as small as KMX.

Nevertheless, it is not difficult to make the case that this seemingly innocuous initiative will arm Coke with sufficient knowledge and experience to develop a "Plan B"--defined as a "pure" online direct-to-consumer model which would involve selling direct to consumers from its own Web site and using the CCE distribution system to make direct-to-home deliveries.

Outrageous, you say? Consider this from Coke's point of view: By using retail margins as an umbrella for pricing and eliminating all trade promotion allowances--plus the costs associated with things like deductions, sales calls, returns, etc.--profitability from online sales goes through the roof. One bonier we know who ships direct to consumers via UPS from its Web site generates approximately 150 percent more margin from these sales than from its sales through retailers, despite splitting the UPS costs with its customers.

For most suppliers, dealing with a consolidated, vastly more powerful retail trade these days is growing exponentially more expensive with no end in sight, and Coke is no exception to this.

Coke and Pepsi are eternally locked in a share and profit death struggle in which Pepsi is gaining ground, at least in the U.S. With sales of carbonated soft drinks flat and the battle moving over to water, it is naive to assume that either company would not look for every possible way to gain a competitive edge.

Because of CCE, Coke is uniquely equipped to execute a direct-to-consumer business model on a cost-effective, customer-specific basis

The KMX experiment will give Coke the information to target KMX heavy users and begin to establish intimate relationships with these folks on a one-to-one basis if it desires--a process Coke could readily take in-house and expand to other brands.

What brands? Well, let's look at Diet Coke as an example. While no one would label Diet Coke as a niche product, the fact is that it has a heavy user profile much like the other niche products currently sold by Beverages Direct. As you can see from the chart on page 23, approximately only 8 percent of households consume 84 percent of total Diet Coke sold.

Valuable names

With current Diet Coke sales running at about $1 billion by Hoyt & Co.'s estimate, what do you think Coca-Cola would give to know the names of--and market directly to--the 8 percent of heavy users that are said to account for $844 million of these sales?

Diet Coke is not the only major beverage brand with this type of heavy user profile, and Coke is not alone in feeling the pressures of dealing with an increasingly demanding and expensive retail community All it takes is one: If Coke were to break out and apply KMX lessons to larger brands and do this successfully, is there any doubt in your mind that there would be an avalanche of followers? From a pure business perspective, the reasoning is simple: The enormous profit potential of online consumer-direct when applied to big brands such as Diet Coke more than outweighs the risk of retaliation from brick-and mortar retailers.

Besides, most retailers have no basis for making complaints in the first place: If Coke were to expand the KMX experiment to other brands that have built their franchise through brick-and-mortar retailers, is this any different from retailers who leverage manufacturer research and marketing monies to introduce their own private labels after manufacturers have built the category?

Moral of story: Next time you pressure your supplier for additional promotion monies, think hard. This can work both ways.
Diet Coke's biggest fans

The 8 percent of households that most heavily favor Diet Coke account
for 84 percent of the soft drink's consumption.

              % of households  % of profit

Heavy users          8%            84%
Medium users         8%            13%
Light users          8%             3%
Non-users           76%

SOURCE: MRCA INFORMATION SERVICES

Note: Table made from bar graph


Chris Hoyt is president of Hoyt & Co., an Arizona-based consulting and executive development firm. He can be reached at (480) 513-0547 or www.hoytnet.com. This column first appeared in Beverage Aisle, a sister VNU publication to PROGRESSIVE GROCER.
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Author:Hoyt, Chris
Publication:Progressive Grocer
Geographic Code:1USA
Date:May 1, 2003
Words:1561
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