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enlivenThe Winner? Smart Businesses Looking for Leverage on their next Exclusive Pouring Rights Contract.

The Coca-Cola Company launched Freestyle, its revolutionary, make-it-yourself, customizable fountain drink dispenser, in 2009 to mixed reviews. In 2014, PepsiCo launched Spire, its competing touch-screen fountain unit

that also allows consumers to create their own custom-flavored drinks.

Both Freestyle and Spire have generated a lot of debate and commentary from all quarters, some of which we’ll get into below. Most commentators have focused on the overall consumer experience of making a drink with the new technology—how great it is, how terrible it is, what it says about changing consumer tastes and expectations, etc.

But no one seems to be focused on the incredible leverage that this newest iteration of the Cola Wars provides for business owners. Let me explain.

Since the beginning of the soft drink era, Coca-Cola has been the dominant player in the fountain soft drink business. For many decades, over 70% of all restaurants with a fountain machine have had a Coca-Cola branded dispenser that serves Coca-Cola products (and often Dr. Pepper products, which are curiously tolerated by both cola warriors).

All these years, Coca-Cola has made the claim that “food just goes better with Coke.” However, the real reason that Coca-Cola has enjoyed such dominant share in the fountain business is that the company made it a strategic priority and invested heavily in infrastructure, training, exclusive pouring rights deals, and overall brand marketing efforts to achieve this high share.

Starting in the late 1990’s, in an effort to become an even more dominant player in this channel—and in an effort to be more responsive to rapidly changing consumer tastes overall, the Coca-Cola Company began to make a huge investment into what would become Freestyle technology. Some estimate that Coca-Cola has invested approximately $1 billion into the effort. The company spent over $100 million on just one manufacturing facility expansion to make the new Freestyle product cartridges.

Yet, despite its traditional dominance in the fountain category and despite this enormous expenditure on R&D and product launch, nearly seven years post-debut, today there are only somewhere between 20,000 to 30,000 Freestyle units installed nationwide. As a frame of reference, there are more than 500,000 soda fountain accounts overall in the U.S. and probably more than 750,000 fountain dispensing units.

Why has Freestyle penetrated just 6% of the overall fountain account universe seven years after launch? A more interesting and telling question may be, why has Freestyle penetrated just 9% of the approximately 350,000 fountain accounts that Coca-Cola already controlled at the time Freestyle was introduced?

There are a lot of reasons for this. Let’s start with the challenges of introducing any truly new and disruptive technology to a mature marketplace. First, Coca-Cola has had to build a lot of new, expensive, complicated, internet-connected machines. That just takes time.

Second, the raw materials that go into these new machines have to be packaged in an entirely new way. Old “bag-in-a-box” (BIB) containers of syrups and flavors have been replaced by new “micro-dose” ingredient cartridges. Coca-Cola has had to invest heavily in new manufacturing facilities, new software and new distribution methods and partners for this new way of making soft drinks at the point of sale.

But, even understanding all those real-world challenges associated with equipment, raw ingredients and distribution, the fact is that the food service industry overall has been slow to accept Freestyle. Case in point, how many Freestyle machines have you seen at Coca-Cola’s largest global restaurant customer, McDonald’s? Not many.

Most business owners haven’t embraced Freestyle or Spire yet for the following reasons:

1) Longer Wait Times
Self-serve consumers experience longer wait times, especially during the busiest times of day. Traditional fountain drink machines with multiple nozzles dispense a limited number of flavors in a very fast and efficient way to more that one customer at a time. Whereas Freestyle and Spire machines with single nozzles dispense an almost unlimited number of flavor combinations to one consumer at time, who is enticed—even encouraged—to linger and think about all the possible options available to her while she is engaged in the process of pouring her drink. This set of circumstances inevitably creates longer wait times for all customers who must access the same Freestyle or Spire machine to pour their own drink. Wait times do go down over time, as the novelty of the experience wears off and consumers begin to develop a portfolio of “go-to” flavor combinations that they know they will enjoy. But wait times will likely always be greater with Freestyle and Spire equipment versus traditional BIB equipment. Simply adding more Freestyle or Spire machines is not practical because of increased costs and space constraints.

2) Increased Capital Expenses and Fees
The equipment is more expensive than a traditional fountain unit. In the past, any restaurant owner with any savvy could always get their fountain equipment and mechanical service included in the price of the syrup from both Coca-Cola and PepsiCo. Now, Coca-Cola charges a fee as large as $300 per month for the most advanced Freestyle equipment. The monthly fee is lower for smaller, less feature-rich versions of Freestyle equipment. PepsiCo charges a new (but lower) monthly fee for its various iterations of Spire equipment.  Of course, these fees are fair ground for negotiation during the competitive bidding process. In addition, build-out costs, especially for the higher volume non-countertop version of these machines, can be multiple thousands of dollars per machine..

3) Increased Product Cost
Freestyle product is more expensive. The new Freestyle cartridges, net net, are more expensive than old BIB ingredients. Granted, the cost differential is coming down over time, as Coca-Cola ramps up production and discovers greater efficiencies in manufacturing, packaging and distribution. But the cost differential remains. Spire uses traditional BIB ingredients, at no additional cost. Even with Spire, however, overall beverage costs will increase due to the necessity of purchasing the extra flavor shots that consumers can add to their drinks.

4) Lack of Price Transparency
It’s extremely difficult to figure out the actual cost of product when using Freestyle machines. Of course, the cost of Freestyle ingredient cartridges is known, but, because Coke does not disclose the exact number and quantity of micro-doses from various cartridges required to produce their classic brand flavors, let alone the number and quantity of micro-doses required to produce the hybrid flavors created by consumers on the fly, it is very difficult for restaurant owners to calculate their true cost-per-ounce for all beverages sold. Without that key bit of information, it’s impossible to know actual cost-of-goods and actual profitability with respect to one’s beverage business—a critically important part of any restaurant or store’s overall P&L.

5) Reported Flavor Inconsistency
Traditional fountain equipment has some fixed number of separate nozzles that are dedicated to one flavor of product. Some operators and some consumers assert that the single dispensary nozzle design of both Freestyle and Spire equipment is a design flaw that results unpredictable and off-putting flavor combinations. The argument is that since all drinks (both branded flavors made with specific recipes and custom-created flavors designed on the spot by users) flow through the same nozzle, and since the nozzle and line leading into it are not sufficiently flushed between drinks (a point contested by Coca-Cola), then it is inevitable that residue flavors from one drink will migrate into the next drink. Brand loyal consumers can detect even the slightest flavor inconsistency. For restaurant chains that place a premium on a consistent consumer experience (like McDonald’s), this is a big concern.

6) Hidden Costs of Change
Freestyle is a completely new piece of equipment. Operational policies and procedures, inventory tracking systems, and profitability dashboards all built around traditional BIB fountain equipment must be scrapped and new investments must be made to manage a business that switches to Freestyle. There is also a learning curve for staff that may have been trained on legacy BIB fountain equipment. And some operators have shied away from Freestyle because they perceive it as inherently more complicated and more likely to create operational challenges short-term and long-term than the simpler and more proven BIB equipment.

Despite all these challenges, some restaurant owners—and both Coca-Cola and PepsiCo—claim that Freestyle and Spire generate so much “consumer excitement” that it draws new (and repeat) customers to their business, drives beverage purchases up overall and even allows them to take a price increase on standard drink sizes. All these positive impacts of adopting Freestyle and Spire, they claim, drive overall profits up and outweigh all the negative aspects listed above.

Several regional and national restaurant chains like Firehouse Subs, Pei Wei Asian Diner, Five Guys, Zaxby’s and Burger King have either gone exclusive with Coke and its Freestyle equipment or have announced plans to encourage full adoption of Freestyle equipment among all franchisees.

It’s just a matter of time before PepsiCo begins to list and tout all the regional and national restaurant chains that have enthusiastically embraced PepsiCo’s product portfolio served exclusively through its new Spire technology.

How all this benefits business owners

The creative, risk-taking entrepreneur in me wants to cheer Coca-Cola for trying to innovate within the fountain drink sector.

But, as the founder of a firm whose sole mission is to help businesses negotiate and manage the best exclusive pouring rights contract possible with Coca-Cola or PepsiCo, I think Coca-Cola may have made a huge strategic blunder.

Essentially, Coca-Cola has just made it easier for Pepsi to compete with them on fountain business, and has given business owners leverage in contract negotiations that they previously did not have.

Now that PepsiCo has joined the fountain fray with its own similar but meaningfully different technology, we are about to enter new age of fierce competition between the cola giants.

If business owners play their cards correctly, they stand to benefit greatly from this new level of competition.  In the longstanding Coke vs. Pepsi war, now there is a new battlefront: custom-dispensed fountain equipment. The stakes are very high.

Let me explain why and how.

Three Ways Freestyle and Spire Impact Beverage Deals

1) Newfound Leverage

First, any business owner that has already made the decision to use Freestyle equipment has enormous leverage as they approach the last two years of their current exclusive pouring rights agreement with Coca-Cola. Why? Pepsi now has a viable and attractive alternative to Freestyle that, in many fundamental ways, is actually superior to Freestyle.

From the business owner’s perspective, Spire is cheaper to install, easier to operate, easier to understand and leverages existing, proven BIB systems and processes. There is a smaller learning curve and no new distribution system when it comes to Spire.

But, from the end consumer’s perspective, Spire delivers essentially the same “excitement” and same customizable customer experience value propositions as Freestyle. Smart operators now have instant leverage when negotiating beverage agreements.

2) Newfound Investment

We also know that with its launch of Spire in 2014, PepsiCo is making a commitment to invest more in the fountain channel.

"Food service is a growth area for PepsiCo," CEO Indra Nooyi said in an interview with CNBC at the National Restaurant Association trade show in Chicago [in May 2014]. 

“Our machine addresses a lot of the issues that restaurant owners said they had with other machines: wait times, the cost of the machine was too high. It required a new operating system; they had to train their workers how to use a new cartridge. So I think our machine is just different. It's the 21st-, 22nd-century machine."

Presumably, PepsiCo is ready to compete aggressively in this “growth area” identified by their CEO. Coca-Cola is eager to realize a return on its $1 billion investment and will be reluctant to let their 70% market share erode.

Therefore, both companies are placing a great value in getting their respective equipment placed in the right locations. For smart operators, this could translate into lucrative beverage agreements.

3) Newfound Excitement

Finally, it’s no secret that traditional sparking products – the flagship “Coke” and “Pepsi” brands – have been losing their momentum over the last several years. Consumer trends are moving toward products that are perceived to be “healthier”, while efforts have been renewed by municipalities to tax Coke and Pepsi’s flagship brands.  

These developments have both companies mobilizing to respond. Freestyle and Spire are one element of their response.  

The new fountain equipment is seen as an opportunity to a) shake up to a category that has been losing steam, b) highlight new brands developed to appeal to a healthier-minded consumer, and c) collect real time consumer taste data for developing new drink flavors in non-fountain formats. (This point, and others, are made in a recent Bloomberg article.)

As PepsiCo’s Nooyi points out, these machines are about more than just dispensing soda. "It becomes irrelevant whether it is carbonated or noncarbonated," she said. "What it really says is it doesn't matter what the base is, whether it's carbonated or noncarbonated. Pick a beverage, pick a base and bring excitement to it."

Excitement and dramatically expanded consumer choice. That’s really what Coke and Pepsi believe the new fountain technology is about.  

But it’s not just consumers that are excited. Coke and Pepsi themselves are excited about the promises of this equipment: to increase sales of lagging brands, to introduce new brands and varieties previous unavailable, and to generate actionable data to drive future beverage innovation.

Smart operators will use the beverage company’s excitement to their advantage when negotiating with their future beverage partner.

In summary, Freestyle and Spire bring a unique set of opportunities and challenges to foodservice operators. On one hand, this technology is a way to spice up the traditional fountain drink and makes a customizable experience out of a once limited choice environment. It can drive sales, traffic, and positivity to your brand. On the other, it can add costs, inefficiencies, reduced transparency and inconsistency to a critical piece of your business.

Operators will have to decide if the excitement is worth the risks of early adoption.

Regardless, what all this really brings to foodservice operators is incredible leverage in the next exclusive pouring rights contract negotiation.

We’re here to help you with that. It’s going to be fun!


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