For cost and calories, Coca-Cola thinking at the margin

Is “MexiCoke” Making a Mistake?

Nov 8, 2013 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Entertainment, Government, Health Care, Households, Regulation • 960 Views    No Comments

In Nevada convenience store coolers, at Wal-Mart or Costco, people empty the shelves the minute the Mexican Coca-Cola arrives. Coke says the glass bottle is the reason. Coca-Cola drinkers say they prefer “MexiCoke” because it is made with sugar cane, not fructose like US Coke. Said to have near cult status, “MexiCoke” costs $3 for a 12 ounce bottle and people say they love it.

Now though, a Mexican tax on sugar, levied to fight obesity, has created the incentive to use a cheaper Coke sweetener. In a conference call, the Mexican Coca-Cola bottler said, they could “move to more fructose.” While Coca-Cola says the secret formula is the same everywhere, because local bottlers can choose between fructose and cane sugar, like Mexico, Colombia Coke is made with sugar while Argentina’s has the fructose. And people claim there is a big difference.

Defined as a market structure with few very large firms that compete, oligopolies typically have 4 (or so) firms that dominate sales. There could be many smaller firms but the big ones share more than 50% of the market’s revenue. Hoping to avoid price competition, an oligopoly depends on product differentiation. For Coke, that differentiation relates to taste.

In Econ 101 1/2, I tell the story of how Coca-Cola disastrously tinkered with Coke’s flavor when they marketed New Coke during the 1980s.

Here is an excerpt:

Pepsi had begun to worry Coke’s new management. Whereas in 1955 Coca-Cola sales were double those of Pepsi, by 1984 Pepsi was behind by only 4.9 percent. Furthermore, Pepsi’s diet sodas had become a threat. Before Coke introduced Diet Coke in 1982, the combined sales of Diet Pepsi and Pepsi Light exceeded Coca-Cola’s Tab. To the executives at Coke, it was “the Pepsi Challenge” that was becoming “the real thing.”

Project Kansas was initiated in 1984. Its goal was to develop a new taste for Coke and to predict the consumer response. Assessing how consumers would react to a newly formulated Coke was somewhat tricky because no one could actually disclose that the company was contemplating a replacement for Coca-Cola. Field testing, therefore, had to be somewhat oblique.

In one opinion poll, consumers were told to decide which they preferred—a Coke that had been “processed” differently or Pepsi. They selected the new Coke. However, when the test group was given the sweeter version of Coke but was told it was the old, original Coke, they selected Pepsi. Even more crucially, Pepsi drinkers indicated they might switch to Coke if it had a different taste. The Coca-Cola people concluded that their test results proved that consumers would not only tolerate a newly formulated Coke but would actually prefer it.

Before they could decide whether or not to proceed with the new Coke, the company had to solve one dilemma. Could there be two Cokes if one Coke had always been “the best”? Furthermore, if two Cokes split their market share, Pepsi could become number one. From their perspective, the sole alternative was to make new Coke the one and only Coca-Cola.

There were satellite hookups around the country with film crews, and journalists waiting for the big announcement. From Lincoln Center in New York, a razzle-dazzle media extravaganza unfolded with the Grand Canyon, old Coke commercials, wheat fields, and cowboys. From the stage in front of an audience of seven hundred, Roberto Goizueta exclaimed, “The best soft drink, Coca-Cola, is now going to be even better.”

All appeared to go well until the questions began. Asked one reporter, “Are you one hundred percent certain that this won’t bomb?” Another wondered whether they were responding to “the Pepsi challenge.” A third said, “Are you tell— I mean, if we wanted Pepsi, we’d buy Pepsi.”

The reporters’ questions at Lincoln Center foreshadowed the public onslaught that followed. In Coca-Cola’s taste tests and opinion polls, people had been responding to a new flavor, not losing the old one. When it was announced that the new formula would replace the original one, the uproar was unexpected. The company was horrified.

Actually, sales of new Coke and old Coke initially were good. Across the nation, people were buying the new drink to taste it. Fearful that the drink they loved would disappear, others were stockpiling old Coke. The company, meanwhile, faced an avalanche of telephone calls protesting its decision. Two months after the announcement, eight thousand telephone calls poured in daily. During a sports event at the Houston Astrodome, people booed the commercials for new Coke that flashed across the viewing screens.

Similarly, letters to Coca-Cola expressed a love for Coke and anger over its demise. Few indicated they would be willing to drink the newly formulated version. One person said, “Until you bring the old Coke back, I’m going to drink R.C.” Another complained: “Changing Coke is just like breaking the American dream.” In response the company said over and over again—in a form letter, over the phone, and through the media—that the better tasting new Coke had replaced the old one.

The public reaction of the company veiled what was really happening at headquarters. Within weeks, they knew they had made a monumental mistake. Coke’s chairman, Roberto Goizueta, said that after he announced Coke’s decision, he slept like a baby: “I wake up crying every hour.” Quickly, they sought to minimize the damage. The decision was made to retain new Coke as a “sister” to the older version, which henceforth would be known as Coke Classic. As Newsweek said, “Hey America, Coke Are It!”

Sources and Resources: H/T to Quartz for its story about MexiCoke. It was also handy to read a local Las Vegas paper for its description of MexiCoke’s popularity. My story of New Coke is from Econ 101 1/2.

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