Ploy or Precedent?

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=110 BGCOLOR="#666699" TEXT="#080000" bgproperties="fixed" background="04900840erlcjm.png"> <div> <B> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="1" WIDTH="600" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="LEFT" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 103 ><NOBR><div> <A HREF="index.htm" TARGET="_top" TITLE="Hoytnet Home"><U><B><IMG SRC="063775a0.jpg" border=0 width="119" height="90" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></B></U></A></div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> <B>Hoyt & Company</B></div> <div> <A HREF="services.htm" TARGET="_top" TITLE="What We Do"><U>What We Do</U></A> | <A HREF="who.htm" TARGET="_top" TITLE="Who We Are"><U>Who We Are</U></A> | <A HREF="articles.htm" TARGET="_top" TITLE="How We Think"><U>How We Think</U></A> |<A HREF="contact.htm" TARGET="_top" TITLE="Contact Us"><U> Contact Us</U></A></div> </NOBR></tD> </tR> </TABLE></B></div> <bR> <div> </div> </td> </tr><tr> <td valign="top" width=165 BGCOLOR="#CCCCFF" TEXT="#080000" background="04311c00egdysm.png"> <div> <A HREF="articles69.htm" TARGET="_top" TITLE="Chris Hoyt Articles"><U><B>Back to:  Articles</B></U></A></div> <bR> </td> <td valign="top" height=370 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> <B>Beverage Aisle - 02/03</B></div> <bR> <div> <I><B>Ploy or Precedent?</B></I></div> <bR> <div> BY<B>: Chris Hoyt</B></div> <bR> <div> <B>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 website, there was a flurry of speculation about Coke's motivations in doing this:</B><FONT SIZE="3" COLOR="#000000" FACE="Arial" >  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?</FONT></div> <bR> <div> 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 CCE distribution network.  What Coke is offering to consumers via the KMX website is the opportunity to buy KMX 12s and 24s (only) at <I>delivered</I> 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, L.A. and Washington, DC.  For those of you reading this who might be loyal KMX users, the KMX website may be found at <FONT SIZE="3" COLOR="#0000FF" FACE="Arial" ><A HREF="http://www.kmxusa.com/buy/kmx" TARGET="_top" TITLE="http://www.kmxusa.com/buy/kmx"><U><U>www.kmxusa.com/buy/kmx</U></U></A></FONT>.</div> <bR> <div> To deliver KMX 12s and 24s, Coke is using Beverages Direct, an online retailer who handles all shipping and billing in behalf of its suppliers.  By our count, Beverages Direct carries approximately 65 brands, including names like Hype Energy Drinks, Cool Mountain Gourmet sodas, Intelligentsia coffees and teas and Barritts Bermuda Ginger Beer - get the point? As this would indicate, most of the over 300 SKUs would have a tough time justifying shelf space in the 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.</div> <bR> <div> Nor does Beverages Direct gouge on shipping costs.  Versus an average supermarket retail of $1.99 per can, KMX customers can buy 12 packs delivered from Beverages Direct at 2.11 per can ($25.30 per case) and 24s at - get this -- $1.67 per can ($39.99/casse).  In addition, Beverages Direct also runs promotions:  until 12/31, KMX customers could buy 24s at $38.60 delivered or $1.61/can - not bad when the alternative is $1.99 for a single at the supermarket (plus gas and time).</div> <bR> <div> 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 shelf KMX 12s and/or 24s.  Far from alienating retailers - as some pundits initially thought - this approach actually provides Coke with a selling point:  “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, 12s and 24s - which include the same size cans - are for heavy loyal users and until the volume supports it, we will continue to sell these packs direct on a targeted basis.”</div> <bR> <div> Almost equally as obvious is the advantage that online direct-to-consumer sales of KMX multipacks will give Coke in identifying where, exactly, KMX heavy users are located and clustered.  Selling direct enables Coke to take names and make lists.  As these lists build, 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 - as some pundits have called it - to us this just makes good business sense for both Coke and the participating retailer.  </div> <bR> <div> So far, so good, right?</div> <bR> <div> Well, if you are a retailer, keep reading because we think you might be interested in knowing how Coke might use this seemingly innocuous experiment to change the way in which some brands go to market in the future.  Will this have an impact on your business?  You bet.</div> <bR> <div> It is well known that brand marketers do salivate over the idea of direct-to-consumer sales. The biggest reason is the opportunity to gather detailed consumer data - names, locations and demographics - coupled with the volume consumed.  Marketers make expensive decisions based on consumer panel data from Nielsen and IRI and geodemographic data from Spectra - all helpful to their efforts but still based on sampling and projections.  The use of direct mail through retailer Frequent Shopper Programs allows marketers to tailor offers to their consumers but it's a one-way street - it allows the marketer to communicate to the consumer but doesn't allow the consumer to communicate back (other than the percentage of redemptions).  Marketers' websites and internet outreach programs are designed to get communications back from the consumer but generally lack the quantitative aspect of actual consumer purchase volume.  The beauty of direct-to-consumer sales is the ability to communicate directly with these consumers - back and forth - knowing how valuable each of those consumers is to one's brand.   </div> <bR> <div> Another aspect of direct-to-consumer sales that causes marketers to drool is the profitability.  With virtually no trade promotion expense and the consumer willing to pay for delivery, the profitability goes through the roof.  One bottler we know who ships directly to consumers from its website (more for consumer convenience due to limited retail distribution) sees its highest margin - almost 2.5 times the average - on direct-to-consumer sales, despite splitting the UPS cost with the consumer. </div> <bR> <div> With respect to KMX online multipack sales, let's hypothesize the return to the KMX brand in selling through Beverages Direct vs. selling at retail, using the following assumptions:</div> <bR> <div> <TABLE BORDER="2" CELLPADDING="1" CELLSPACING="1" WIDTH="607" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 38 WIDTH="245"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="38" ALIGN="bottom" WIDTH="245" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=TOP WIDTH="94"><div> Retail</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> Beverages Direct</div> </tD> <tD VALIGN=TOP WIDTH="149"><div> Beverages Direct vs. Retail Difference</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 19 WIDTH="245"><div> Unit price (24s)</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> $1.99</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> $1.67</div> </tD> <tD VALIGN=TOP WIDTH="149"><div> (-$0.32)</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 19 ><NOBR><div> Retail Margin (assumed 30%)</div> </NOBR></tD> <tD VALIGN=TOP WIDTH="94"><div> ($.60)</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> ($.50)</div> </tD> <tD VALIGN=TOP WIDTH="149"><div> +$0.10</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 19 WIDTH="245"><div> Balance</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> $1.39</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> $1.17</div> </tD> <tD VALIGN=TOP WIDTH="149"><div> ($0.22)</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 38 WIDTH="245"><div> Distributor Cost (assumed at 25% of $1.39)</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> ($0.35)</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> -NA-</div> </tD> <tD VALIGN=TOP WIDTH="149"><div> +$0.35</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 19 WIDTH="245"><div> Balance</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> $1.04</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> $1.17</div> </tD> <tD VALIGN=TOP WIDTH="149"><div> +$0.13</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 38 WIDTH="245"><div> Trade Promotion (assumed at 15% of $1.04)</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> ($0.16)</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> -NA-</div> </tD> <tD VALIGN=TOP WIDTH="149"><div> +$0.16</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 19 WIDTH="245"><div> Net Sales $ to KMX</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> $0.88</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> $1.17</div> </tD> <tD VALIGN=TOP WIDTH="149"><div> +$0.29</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 19 WIDTH="245"><div> Per case</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> $21.18</div> </tD> <tD VALIGN=TOP WIDTH="94"><div> $28.08</div> </tD> <tD VALIGN=TOP WIDTH="149"><div> +$6.96</div> </tD> </tR> </TABLE></div> <bR> <div> As this table illustrates, selling direct-to-consumers online gives the KMX brand  the advantages of actually selling 24s at a <I>delivered</I> price of 32 cents or 16% less per unit than retail and yet provides the brand with an additional margin of $6.96 or 33% more per case than if this case were sold through a retailer.</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >                                                                                                         </FONT><FONT SIZE="1" COLOR="#000000" FACE="Symbol" >ã</FONT> Copyright 2003, <FONT SIZE="1" COLOR="#3333CC" FACE="Arial" ><A HREF="contact.htm" TARGET="_top" TITLE="Contact Us"><U>Hoyt & Company, LLC.</U></A></FONT> All Rights Reserved</div> <bR> </td> </tr></table></body>