Author Topic: The End of Coca Cola, P&G and the traditional distribution model  (Read 5187 times)

vegaseller

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Going to be stepping on some holy grounds here so please hold the crucifix for now.

One of the things I got to thinking over the past several years was about whether the business model we have seen Buffet and other investors invest in continue to make sense or not. I know this sound crazy but hear me out. We all know the story of Coca Cola, the low price, inelastic, semi-addictive product then converted into large global distribution base and brand portfolio. The story of the company for the past 40 years was about building out this massive global distribution footprint to the point where it was easier to find a bottle of coke in some rural Indian village than a bottle of water. But there are some problems to this model, primarily that A) You can't really find another 1-2 billion consumers now B) It is hard to capture consumer surplus (price segregation is impossible and C) it is hard to capture increasing share of the consumer wallet as living standards improve. (people will cap out on how much product to drink a day).

And I got to think about the problem with mass distribution or infrastructure models, usually the core is highly profitable and end up subsidizing the hinterlands, the last mile country road to a small town is a very unprofitable investment. In my mind, this is also a problems existing CPG companies face, the last customers is hard to reach, expensive to acquire, at some point it is much better to increase wallet share and/or capture the consumer surplus of your core base of customers. This is why targeted ads are changing marketing so much, as it allows companies to price segregate by customers (different tier of a similar product) and big data is so valuable (increasing wallet share).

I wonder if the time for traditional companies that relies on the formula of building out distribution, acquire/develop a bunch of products and push through your channels is over. The rise of third party infrastructure rails like Amazon and facebook for distribution and customer aggregation also has removed the needs for doing that yourself. I feel the economic laws revolving around specialization will push companies to being more product oriented and focused on capturing consumer surpluses through niche products. The obvious play is that the infrastructure rails will capture a large part of the economics, but who knows if big scaled brands even exist 10-20 years down the line?

Just some foods for thoughts, feel free to join in on the conversation.
« Last Edit: July 31, 2017, 03:46:27 PM by vegaseller »


Green King

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Re: The End of Coca Cola, P&G and the traditional distribution model
« Reply #1 on: July 31, 2017, 04:05:44 PM »
A distribution built out is based on cost benefit analysis of your product. Low margin high volume vs high margin low volume.

Coca Cola is a very profitable product and will be for a long time. These products might not carry the same share of mind as they used to but still worth something. would love to buy it at 5 times earnings. It is over priced and there is too much competition in those names.

It is harder to create massive focused influence as compared to the past. But I wasn't around during the golden age of tv so I am not sure.

Also share of mind over entire market share changes slowly due to the limitation of the human mind.
« Last Edit: July 31, 2017, 04:15:13 PM by Green King »
GK

vegaseller

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Re: The End of Coca Cola, P&G and the traditional distribution model
« Reply #2 on: July 31, 2017, 04:44:28 PM »
A distribution built out is based on cost benefit analysis of your product. Low margin high volume vs high margin low volume.

Coca Cola is a very profitable product and will be for a long time. These products might not carry the same share of mind as they used to but still worth something. would love to buy it at 5 times earnings. It is over priced and there is too much competition in those names.

It is harder to create massive focused influence as compared to the past. But I wasn't around during the golden age of tv so I am not sure.

Also share of mind over entire market share changes slowly due to the limitation of the human mind.

I would argue mind share has changed significantly over the past 10 years due to the rise of mobile and the consolidation of the internet by categories

Green King

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Re: The End of Coca Cola, P&G and the traditional distribution model
« Reply #3 on: July 31, 2017, 04:48:13 PM »
A distribution built out is based on cost benefit analysis of your product. Low margin high volume vs high margin low volume.

Coca Cola is a very profitable product and will be for a long time. These products might not carry the same share of mind as they used to but still worth something. would love to buy it at 5 times earnings. It is over priced and there is too much competition in those names.

It is harder to create massive focused influence as compared to the past. But I wasn't around during the golden age of tv so I am not sure.

Also share of mind over entire market share changes slowly due to the limitation of the human mind.

I would argue mind share has changed significantly over the past 10 years due to the rise of mobile and the consolidation of the internet by categories

I agree with that. Relative to historical levels yes fast. Relative to the speed of Google facebook zero to hero much slower or Altavista Hero to zero.
GK

StubbleJumper

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Re: The End of Coca Cola, P&G and the traditional distribution model
« Reply #4 on: July 31, 2017, 04:56:16 PM »
Okay, that was a thoughtful piece.  I would observe a few things:

1) For KO, there is already some degree of market segmentation enabling the KO supply chain to engage in some degree of price discrimination and capture a portion of the consumer surplus.  They do this by selling coke through different retail outlets.  I can go to WalMart or a well known Canadian pharmacy chain and buy about 4.2 litres of Coke for roughly US$2.  Or, while inside Walmart or the pharmacy, I can buy a 500ml bottle of Coke for about US$2.  Or, I can go to the Coke machine outside the store and pay roughly the same US$2 for a 355ml can of Coke.  Or I can go to a restaurant and pay US2.50 for a glass of Coke.  Don't even get me started on the near-criminal price of Coke at the hockey arena!  In each circumstance, it's the same product that I am buying, but with drastically different pricing depending in which market that I am electing to make the purchase.  The supply chain captures more of my consumer surplus on the basis of the location where I buy the product.

2) The subject line of your post includes references to both KO and PG.  Interestingly, the Amazon distribution model makes a great deal more sense to me for PG than it does for KO, in large part due to the varied markets in which I buy KO's products (see above; I will not be ordering a Coke through an Amazon-type supplier when I am at the hockey arena, nor when I am at a restaurant).  However, most of PG's products that I buy are from either WalMart, CostCo or a large grocery store.  Rarely is there much urgency to my PG purchases because I don't wait until I am down to my last square of toilet paper before buying more, nor do I wait until I am completely out of Tide before I buy more.  If the pricing were right and the delivery was rapid, I could imagine myself no longer buying PG's products at WalMart.  I might even buy some of my bulk Coke purchases through an Amazon type of arrangement, but it would be the minority of my Coke purchases because I don't consume all of it at home.


I would say that KO's distribution model is tenable for the specific type of product that it markets, which is to say, a product with place-based consumption (ie, restaurants, or convenience purchases).  But, I say that you are right about the consumer staples that are consumed almost entirely at home.  That's a supply chain that is ripe for disruption if somebody can figure out a cheap way to ship 12 rolls of toilet paper or a 3 kg box of Tide.


SJ

vegaseller

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Re: The End of Coca Cola, P&G and the traditional distribution model
« Reply #5 on: July 31, 2017, 06:45:35 PM »
Okay, that was a thoughtful piece.  I would observe a few things:

1) For KO, there is already some degree of market segmentation enabling the KO supply chain to engage in some degree of price discrimination and capture a portion of the consumer surplus.  They do this by selling coke through different retail outlets.  I can go to WalMart or a well known Canadian pharmacy chain and buy about 4.2 litres of Coke for roughly US$2.  Or, while inside Walmart or the pharmacy, I can buy a 500ml bottle of Coke for about US$2.  Or, I can go to the Coke machine outside the store and pay roughly the same US$2 for a 355ml can of Coke.  Or I can go to a restaurant and pay US2.50 for a glass of Coke.  Don't even get me started on the near-criminal price of Coke at the hockey arena!  In each circumstance, it's the same product that I am buying, but with drastically different pricing depending in which market that I am electing to make the purchase.  The supply chain captures more of my consumer surplus on the basis of the location where I buy the product.

2) The subject line of your post includes references to both KO and PG.  Interestingly, the Amazon distribution model makes a great deal more sense to me for PG than it does for KO, in large part due to the varied markets in which I buy KO's products (see above; I will not be ordering a Coke through an Amazon-type supplier when I am at the hockey arena, nor when I am at a restaurant).  However, most of PG's products that I buy are from either WalMart, CostCo or a large grocery store.  Rarely is there much urgency to my PG purchases because I don't wait until I am down to my last square of toilet paper before buying more, nor do I wait until I am completely out of Tide before I buy more.  If the pricing were right and the delivery was rapid, I could imagine myself no longer buying PG's products at WalMart.  I might even buy some of my bulk Coke purchases through an Amazon type of arrangement, but it would be the minority of my Coke purchases because I don't consume all of it at home.


I would say that KO's distribution model is tenable for the specific type of product that it markets, which is to say, a product with place-based consumption (ie, restaurants, or convenience purchases).  But, I say that you are right about the consumer staples that are consumed almost entirely at home.  That's a supply chain that is ripe for disruption if somebody can figure out a cheap way to ship 12 rolls of toilet paper or a 3 kg box of Tide.


SJ

I agree, I think KO has some ability to price segregate. Although I was more comparing it to say mobile games, where you have the ability to offer the product to most customer for free but also have the ability to capture people who will spend thousands. The model where you are trying to find the 1 person who would spend the $1000 rather than the 1,000 people who would spend a $1 seems to be the winner in the new world.

rukawa

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Re: The End of Coca Cola, P&G and the traditional distribution model
« Reply #6 on: July 31, 2017, 06:56:52 PM »
I had similar thoughts to this some time ago...though my arguments were a bit different:
the-rise-and-fall-of-brands

Basically I think the rise of brands is due to two things: limited distribution channels and limited advertising spots on broadcast television. The rise of cord-cutting, the demise of broadcast television and finally the infinite shelf-space of Amazon spell the death of brands in the long run.

The question everyone should really ask is where the hell did brands even come from in the first place?! We tend to think of brands like we think of the air around us...like they are some inevitable fact of life. But why didn't we have brands in the 19th century? My argument is that we didn't have brands because we didn't have broadcast television and we didn't have highways.  Broadcast television heavily favored the rise of brands because the limited advertising spots and massive reach of the medium created dynamics that favored larger companies that could afford massive advertising budgets.

Highways enabled the rise of chain stores which needed the highways to provide distribution. The rise of chain stores heavily favored national brands since chains stores preferred to hold a single product nationally instead of many different local brands. In addition chain stores had limited shelf space and so often pushed companies to pay for national distribution (e.g. slotting fees) . Again this favors a few big brands.

All of this is changing now. Amazon's shelf space is infinite. Think of the viewership of a show like Bonanza and compare it to any hit show today. Audiences are much more fragmented and with cord cutting and PVRs many people are not even watching commercials. There is simply no advertising medium comparable to broadcast television in its heyday.

All this spells the death of brands like Coke. Other brand names may exist but will only thrive if they have a reputation for quality or service...think Toyota.
« Last Edit: July 31, 2017, 07:25:06 PM by rukawa »

oddballstocks

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Re: The End of Coca Cola, P&G and the traditional distribution model
« Reply #7 on: August 01, 2017, 04:50:11 AM »
Interesting piece.

I would argue that we did have brands in the 19th century.  Go back and read old newspapers, there were definitely brands, but they were different.  They were established with advertising.

Ever see a Mail Pouch barn?  That was branding at its best.  They paid farmers to paint the brand on their barns.  It's very common in the Midwest, the barns are still painted although faded.

I don't think brands are going away.  I think in a sense they're actually stronger than ever, but different.  The old guard brands built their reputation by blasting us with ads on TV and in magazines.  Do you remember seeing TV ads that'd say "For more information see our ad in Family Circle magazine."  Brands established themselves regardless of the quality of the product.

This new paradigm is very consumer driven.  Consumers are finding the best brands and then telling each other about them via the Internet.  One of my hobbies is backpacking and there's a Reddit sub I frequent devoted to lightweight backpacking.  There are 'blessed' brands that have been trail tested that provide the best product at the best price.  They're all niche brands, but they can all be purchased online.  People write about products they love in blogs and give extensive reviews.  Finding an extensive review about anything in 1987 was difficult.  There were magazine articles, but that was it, and discoverability was tough.

There's also a backlash against big brands.  I know a lot of people who's rather buy "Dr Organic Wholesome Made From Angel Feathers Detergent" and pay 3x the price of Tide just because it's not Tide.  Even if the item sits on the same shelf and has 99.9% the same components, the branding making it unique sells.  This is an opportunity for P&G if they can produce and sell these sorts of products.

Amazon isn't going to eliminate every store either.  I find for myself that I've been moving back to brick and mortar with a number of things.  In general if I can find an item and it's within ~15% of Amazon's price I will buy it in person verses buying online.  B&M needs to focus on niche items though, that's where the value and markup are.

Amazon needs to get their bots under control too.  For example I was looking for a cheap pool float this weekend.  I looked on Amazon for the one that had broken.  One seller had it for $238.  Yes, someone wanted $238 for a float, it was probably driven by supply and demand and inventory, but the price was insane. I wanted it for that day to use in the pool.  Went to a pool store (for something unrelated) they had a sale, and sale prices were usurious.  Went to Target, floats were all $19.99, about $10 more than they should have been.  Found one at Target for $5, purchased on the spot.  The problem with Amazon is my mind is tainted from that.  I know it was a wrong price, but it was so far wrong that I probably won't look there again.  Anchoring on price is important.  Amazon would have done themselves a favor by having a simple "Out of Stock" message.  This is what retail stores do.  You don't see an empty shelf at WalMart with an item sign for $200.


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vegaseller

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Re: The End of Coca Cola, P&G and the traditional distribution model
« Reply #8 on: August 01, 2017, 11:36:52 AM »
"In the case of consumer packaged goods, most are manufactured by CPG behemoths who rely chiefly on two aging mechanisms for building consumer awareness: broadcast marketing and physical retail shelf-space. Dollar Shave Club, and similar modern lifestyle brands like Warby Parker and Bonobos, view these dependencies as a disadvantage and have turned the model on its head. Broadcast marketing, in the age of social media, looks as out of touch to digital natives as President George H. W. Bush looked to us when he was surprised by a supermarket price scanner. Now, brands are built by having direct conversations with your customers, not shouting at them, engaging them to provide real time feedback on your products and services and enlisting them to vouch for their satisfaction with your brand. Brands are now built by your customers, not announced to them. And because of this, product discovery is shifting away from physical shelves into the social streams we all follow. If your brand does not occupy meaningful share in the minds of your customers, it won’t move through the streams and allow influencers to introduce you to new customers."

http://www.pakman.com/2014/09/29/dollar-shave-club-and-the-modern-brands/

Actually the interest thing about DSC is that their razors are manufactured by a company called Dorco and sold directly through Amazon. I wonder if the future of CPG shifts away from Brands and  back into the OEMs.

rkbabang

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Re: The End of Coca Cola, P&G and the traditional distribution model
« Reply #9 on: August 01, 2017, 12:11:10 PM »
"In the case of consumer packaged goods, most are manufactured by CPG behemoths who rely chiefly on two aging mechanisms for building consumer awareness: broadcast marketing and physical retail shelf-space. Dollar Shave Club, and similar modern lifestyle brands like Warby Parker and Bonobos, view these dependencies as a disadvantage and have turned the model on its head. Broadcast marketing, in the age of social media, looks as out of touch to digital natives as President George H. W. Bush looked to us when he was surprised by a supermarket price scanner. Now, brands are built by having direct conversations with your customers, not shouting at them, engaging them to provide real time feedback on your products and services and enlisting them to vouch for their satisfaction with your brand. Brands are now built by your customers, not announced to them. And because of this, product discovery is shifting away from physical shelves into the social streams we all follow. If your brand does not occupy meaningful share in the minds of your customers, it won’t move through the streams and allow influencers to introduce you to new customers."

http://www.pakman.com/2014/09/29/dollar-shave-club-and-the-modern-brands/

Actually the interest thing about DSC is that their razors are manufactured by a company called Dorco and sold directly through Amazon. I wonder if the future of CPG shifts away from Brands and  back into the OEMs.

I'm all for removing the middlemen.  I switched directly from Gillette to Dorco years ago.  I don't understand the appeal of DSC or the other one Hanks(? I think that's wrong).  Why pay more for the same product from the same manufacturer?  I've got over 3 years worth of Dorco cartridges at home so I won't have to even think of razor blades for a while (save both money and mental effort).