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Yesterday’s newsletter looked at the importance of Operant conditioning and Pavlovian conditioning in encouraging repeat purchases of Coca-Cola. Today we look at some other factors giving the Coca-Cola Company the ability to price its products much higher than its cost.
Social proof gives a boost
Social proof is the psychological phenomenon of being influenced by what we see others doing and of what they approve. This may be conscious or unconscious. Thus, if everybody else is buying a product such as Coke we tend to think it a superior drink. Human beings have a natural tendency to want to be in-step with others.
We often approach the difficulty of choice on a conscious level, e.g. “I don’t know much about the different products in this field. It looks as though other people know what they are doing. It makes sense to follow them”.
Coca-Cola’s ubiquity delivers social proof benefits in spades – potential consumers see people obviously enjoying drinking Coke in the cafes, walking down the street, at a ballgame, on the billboards and in TV advertisements.
How can a smaller or newer rival compete against this force even with billions at its disposal for advertising? It’s extraordinarily difficult to dislodge an incumbent benefiting from oodles of information advantages and social proof advantages.
Signalling
In some countries “signalling” is an important motivator for buying the Coke brand; American cultural associations mean that young people, in particular, will pay a premium.
Other economies of scale
If a business sticks to its knitting and establishes itself as the one with the greatest scale, then it can benefit from greater specialisation of task. Coca-Cola can assign a huge range of specialised manpower to say the establishment of a new markets such as in Soviet Bloc countries post-cold war; or it can continuously improve marketing in the US by having specialist in say Facebook advertising. Also, greater volume gives economies in distribution, finance, manufacturing and sourcing.
The Coca-Cola Company is able to grow owner earnings and return on capital employed by sub-contracting most of the bottling and distribution to other companies. These other firms are required to spend a considerable amount on buildings, plant and machinery, this leaves Coca-Cola with the lower capital commitment task of producing concentrate to ship to the bottlers, hence the high returns on equity capital (usually over 25%).
Coca-Cola ensures that the bottlers are not treated as customers – that would be to give too much power away to them. They are required to comply with Coca-Cola’s wishes in how they serve the retailers, be that in shops, kiosks, restaurants or sports stadia.
This means retailers can be offered Coca-Cola’s own package, including promotional material, signage and fridge with its logo – this helps to reinforce Pavlovian conditioning by plastering the logo everywhere; disadvantaging competing soft drink makers by discouraging retailers from sourcing elsewhere.
(A “free” fridge offer might come with the strings of giving prominent or exclusive space to Coca-Cola and/or the fridge has to be in a prominent position and/or permission to advertise Coke on the side of the building).
Lollapalooza at Coca-Cola
Lollapalooza effects, a term Charlie Munger employs a lot, often come from a combination of factors: many elements blend and link to one another creating amplification. It’s not simply an addition of benefits; it is an enormous multiplication of value once the factors are present in sufficient volume.
It’s rather like in physics when a combination of factors creates pretty mundane effects until the point of critical mass is reached when you get a nuclear explosion. Or in medicine the cure of cancer comes from using a combination of immunotherapy treatments with other more common drugs and radiotherapy.
Coca-Cola has this autocatalytic quality because it (a) has a taste people like and experience often along with sugar, caffeine and a cooling benefit, i.e. operant conditioning (b) Pavlovian conditioning and (c) strong social-proof effects.
Porter’s Five Forces
We can use Porter’s Five Forces to consider the competitive position of Coca-Cola’s industry:
- Supplier power? Coca-Cola and………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
