Current Cases/News

How Coke Pushed Rivals Off the Shelf

August 6, 2000

By CONSTANCE L. HAYS, New York Times
August 6, 2000 DAINGERFIELD, Tex.

DRIVE around this exceptionally hot and thirsty place in midsummer, when the mercury regularly tops 100 but people still have to sell watermelons from their trucks and take their places on the production lines at Lone Star Steel and get their chores done along the plain-looking downtown streets, and you begin to understand why it turned into prime territory for the latest skirmish in the cola wars.

It was here, in the state courthouse off Route 259, that lawyers for nine bottlers and distributors of Royal Crown Cola squared off this spring against the Coca-Cola Company and its largest bottler, Coca-Cola Enterprises. The trial took place six years after the Royal Crown group sued Coke and its bottler.

The plaintiffs contended that Coke, working with Coca-Cola Enterprises, had tried unfairly since the early 90's to keep them out of supermarkets and convenience stores. Coke, they said, had exhorted store owners to sign increasingly restrictive marketing agreements that benefited it at the expense of other brands.

The carrot for the store owners was the prospect of making money from popular Coke products. The stick: the fear of having to pay higher wholesale prices than the store down the road.

One supermarket chain got a $2 million signing bonus from Coca-Cola Enterprises, a publicly traded company of which Coke owns 40 percent. The chain promised, among other concessions, that Coke products would usually be advertised exclusively.

On June 21, after a six-week trial that detailed the intense competition along the front lines of the soft-drink business, the jury found Coke and Coca-Cola Enterprises guilty of breaking Texas antitrust laws through their demands for exclusive advertising, displays, signs and vending machines. The Coke companies were ordered to pay a total of $15.6 million, and plaintiffs' lawyers want the judge to force Coca-Cola Enterprises to sell its Dr Pepper franchises -- a stiff penalty indeed.

(PepsiCo and its local bottler had been named as co-defendants, but they settled earlier this year under undisclosed terms.)

A spokeswoman for Coca-Cola, Polly Howes, called the verdict, which Coke may appeal, ''incorrect.'' She added: ''I don't think they presented a case that there was a lack of competition. There was too much competition.''

The case provides a vivid glimpse at the way Coke, already the world's best-known brand, battles for an ever bigger slice of the market. To keep growing, court documents show, it has developed a variety of tactics intended to make sure that rival brands remain all but invisible. Coke says the deals it makes with stores are typical in the industry. Plaintiffs counter that they keep rivals from having a fair shot. For consumers, it can mean limited variety, and in some cases, higher prices.

And the situation in and around Daingerfield, an East Texas town with a population of about 2,700, is repeated around the country, other bottlers say. In Worcester, Mass., a pizza restaurant is in the middle of a five-year contract that gives Coke exclusive soft-drink rights in exchange for a discount on the wholesale soda price. In Tucson, a 7Up bottler says he routinely has trouble advertising his products through stores that have signed marketing agreements that favor Coke.

THE Daingerfield case began small in 1992 with a complaint from one Louisiana distributor, but by 1994, when the suit was filed, it had widened to include Royal Crown dealers in Texas, Oklahoma and Arkansas. The plaintiffs were people like Bruce Hackett, who left a job with the local Coke bottler after nine years in 1994 to start Hackett Beverages in Monticello, Ark. By 1997, he said, he had been squeezed out of store after store.

As Mr. Hackett drove around to check on his accounts, he would find that his ice barrels -- which he had left near the cash register, packed with ice and RC Colas to attract impulse buyers -- had been turned upside down and left at the side of the road. In 1996, he had 52 ice barrels throughout southern Arkansas; he now has two. One after another, he said, store owners told him that he could not put up signs advertising his drinks; the signs now sit in his basement. And a big refrigerated case he bought for a store in Eudora, Ark., and filled with Royal Crown products, traditionally priced lower than Coke or Pepsi, simply vanished one day. When he asked the manager about it, ''he told me Coke emptied it and took it around to the back of the store,'' Mr. Hackett recalled. ''He told me to come pick it up.'' A new marketing agreement with Coke had gone into effect.

What puzzled Mr. Hackett was that the actions appeared to contradict the training that Coke had given him as an employee of the local bottler, Ouachita Coca-Cola Bottling. ''When I worked at Coke, I was told that you couldn't ask for exclusive anything,'' said Mr. Hackett, whose sales at the Eudora store dwindled from 35 cases a week to less than one a month. ''It was considered predatory. You could ask for first position'' -- the display space closest to the cash register, for example -- ''but you couldn't ask for the only display in the store.''

As part of a consolidation drive that has made it the largest Coke bottler in the world, Coca-Cola Enterprises, based in Atlanta, acquired Ouachita in 1996. Now, Mr. Hackett said, ''I can be selling my products for 39 cents, and there is no way for a customer walking into the store to know that, because I am not allowed to put a sign up.''

Lawyers for Royal Crown, part of the Snapple unit of Triarc Inc., say Coke demands preferential treatment in areas where its bottlers also handle Dr Pepper. That can give the bottler 70 percent of the soft-drink market in many areas. Dr Pepper concentrate is made by a unit of Cadbury Schweppes, but in many areas, the drinks are packaged and distributed by a Coke bottler. To level the playing field, the lawyers say, Coca-Cola Enterprises must give up those franchise rights. In November, the Texas judge will hold a hearing on the request, and Coke says it may file an appeal after that.

Forcing a bottler to give up a franchise is highly unusual, and not what Cadbury wants. ''Our preference is to retain our Coca-Cola bottling relationships in that part of the country,'' said John Brock, Cadbury's chief operating officer. ''The Coca-Cola system there is very strong and Dr Pepper does very well in that system.''

AT the root of the Royal Crown case is the quest for profits in a sluggish industry. Over all, domestic soft-drink sales grew just 0.5 percent last year, according to Beverage Digest/Maxwell, which tracks the industry. But Coke has a perennial goal of 7 to 8 percent annual volume growth; last year, volume grew just 1 percent.

Both Coca-Cola and its archrival, Pepsico, have suffered declining margins for years in supermarkets, where soda prices had changed little in a decade. Then, in the last year alone, Coke, Pepsi and their bottlers increased supermarket prices by 5 percent, which slowed sales.

At the same time, soft-drink companies have long enjoyed higher profits from convenience stores and other places where consumers make impulse buys and are usually willing to pay more.

Convenience stores -- there are nearly 120,000 nationwide -- typically get about half their sales from beverages, according to the National Association of Convenience Stores. Profits on single bottles or cans average about 32 percent.

One Coca-Cola Enterprises document introduced into evidence at the trial indicated that Coke aimed to be the prime soft drink available at convenience stores in Texas, Louisiana and beyond. In 1997, Coke started a program in northern Texas known as ''Operation Red,'' with ''Red'' being short for ''Retail Execution to Drive Volume.'' The objective, the document said, was to increase volume and profit for store owners.

Under the program, a 1998 agreement with an Arkansas store called Monster Mart gave Coke half the nonrefrigerated display space, plus 75 percent of the refrigerated space. Coke also got ''the highest quality and the greatest number'' of items like ice barrels and promotional signs, the document said. A year later, Coke wanted, and received, 75 percent of nonrefrigerated display space as well. If sales rose and all the requirements were met during 1999, the store owner would get a bonus of at least 25 cents a case, the document stated.

Such deals, known as calendar marketing agreements, were originally made between manufacturers and store owners to arrange promotions, like advertising and special displays.

But in the last few years, bottlers say, marketing agreements have grown unusually aggressive: Coke now insists on exclusive rights to advertising, display space, cold-drink equipment and sometimes even the signs that dangle from the ceiling. The pacts are signed yearly with stores large and small, but the impact has been most pronounced in convenience stores. Rebates to the store owner range from pennies a case to as much as $2.

One agreement, signed in 1998 between Coca-Cola Enterprises and an Arkansas drugstore chain, U.S.A. Drug, specified truly exclusive terms. Submitted as evidence in the trial, the document states: ''Coca-Cola products will occupy a minimum of 100 percent of total soft-drink space.''

Laura Asman, a spokeswoman for Coca-Cola Enterprises, said the company had done nothing unusual. ''We have always tried to conduct our business operations with the highest integrity and compliance with all laws and regulations,'' she said.

Lower-priced competitors like Royal Crown say they are having trouble getting the minimum shelf space they need. And as bargain brands are squeezed out, Coke's prices can rise -- as can those of Pepsi and Dr Pepper. Where Coca-Cola Enterprises controls Dr Pepper, marketing agreements seem more demanding, documents show. At Nu-Way, a convenience store in Daingerfield, a 20-ounce bottle of RC Cola is 69 cents, while 20-ounce bottles of Coke, Pepsi and Dr Pepper are 92 cents. At EZ Mart, a short distance away, there is no RC Cola -- and Coke, Pepsi and Dr Pepper each cost $1.09.

Agreements cover supermarkets, too. The $2 million signing bonus was paid to Brookshire's, a regional chain, testimony shows. And when a Coca-Cola Enterprises employee, Scott Holloway, was asked by a Royal Crown lawyer if the bonus was paid ''so that C.C.E. could promote the products the way C.C.E. wanted to promote them,'' he replied ''Yes.''

Coke's position is that exclusivity makes the most sense -- for Coke, and for the retailer. ''We are spending a lot of money with retailers on marketing,'' Ms. Howes said, ''and it doesn't make a whole lot of sense to provide retailers with money to promote our products if, when the consumer goes into the store, it doesn't look like you are the featured product.'' She added: ''The research we've done says it doesn't help the retailers' business either. Promoting a whole bunch of soft drinks at the same time means you are discounting the product to people who would have paid a higher price if it wasn't on promotion. It sort of devalues the category.''

During the trial, a convenience-store owner from Atlanta, Tex., testified that he was not pressured by Coke into signing a marketing agreement. ''Nobody tells us how to run our operation,'' said the owner, Jim McClure. When asked on cross-examination what he would do if competitors received lower wholesale prices from the Coke bottler that allowed them to charge their customers less, he replied that he would have to match those prices.

A lawyer asked him: ''And so you would have to make a choice of either having higher prices and risk losing customers or cut your prices and make little or no profit?''

Mr. McClure responded, ''Those are the two choices.''

Others say marketing agreements are getting too elaborate for their own good. ''For the last decade, it has been intensifying in supermarkets every year,'' said William Trebilcock, who retired as vice chairman of Beverage America, a Michigan-based bottler bought by Cadbury Schweppes in 1998. ''They have gone from a simple agreement to a complex 15- or 20-page document, and from a 20-cent rebate to a $1.50 or $2 rebate.''

The battle is waged most intensely in the display cases of convenience stores. ''Coke will take brands that represent a small part of their portfolio, like Fruitopia and Mr. Pibb, and tell the store owners, if you will give us a full door for them, we will pay you a $4-per-case rebate, and if you want to get a 50-cent rebate on Coke, you've got to take that program,'' Mr. Trebilcock said. The introduction of the 20-ounce bottle in 1992 fueled such efforts, he added, because store owners saw them as more profitable, for the same effort, than 12-ounce cans.

Coke rivals say they don't want to play by those rules. ''We don't believe you should have to pay people to put your product in the store,'' said Leslie Dudley, whose Har-Mar Beverages in Paris, Tex., bottles RC Cola, 7Up, A & W, Snapple and other brands. Har-Mar, with about $3 million a year in sales, was a plaintiff. ''Consumers should be able to choose what they want to drink.''

COKE'S payments to store owners fall under a broad category called marketing support, which has grown substantially in recent years. In 1997, Coke paid $604 million to Coca-Cola Enterprises for marketing support. In 1998, the figure rose 49 percent, to $899 million. Last year, one of Coke's worst ever, it slipped to $767 million.

Coke's annual reports provide no details about marketing agreements. But, court documents show, some deals barred supermarket chains from advertising non-Coke brands in newspapers during certain weeks. Also, two of three vending machines outside supermarkets and gas stations often had to be devoted to Coke, which usually meant that Coke got the only machines, said Jeffrey Angelovich, a Royal Crown lawyer.

In some convenience stores, the pacts dictated that products not made by Coke, like RC Cola, could amount to only a couple of bottles visible on bottom shelves, out of sight for all but the most determined shoppers, witnesses said. To drive home how difficult it would be to find soft drinks displayed that way, Nelson W. Roach, a Royal Crown lawyer, questioned one witness while on his hands and knees.

Part of Coke's defense was that the stores themselves wanted the marketing agreements. Experts say there is nothing inherently illegal about the agreements, unless they interfere with fair competition.

''We hauled in retailers, and they hauled in retailers, and all of them agreed that they had to be able to sell the No. 1 and No. 2 soft drinks at prices that were competitive,'' Mr. Roach said. ''And the only way they could get these prices was to sign the agreements.''

George Kalil, a Tucson bottler of 7-Up, Dr Pepper, RC Cola and other soft drinks, said: ''Is this Texas case the first time Coke has been forced to look at what they are doing to this industry? The reality is, what they are doing in this country is worse than anything I've read about them doing in any other part of the world. Some of their people at different levels have been applying manipulative pressures that I believe are a violation of federal laws.''

As an example, Mr. Kalil told of a deal known as a ''clean agreement'' that Coca-Cola Enterprises made last year with grocery stores in Phoenix. If the stores' weekly newspaper ads did not show Mr. Kalil's brands when Coke ads were running, the bottler would give the stores an extra 40 cents off each case.

''There are occasions when the grocer has to bump us out because he doesn't want to run ads for Pepsi, us and his store brand all in the same week,'' Mr. Kalil said. ''They call it clean. Clean us out is what they did.''

COULDN'T consumers just shop elsewhere? In Texas, Arkansas and Louisiana, as well as other parts of the country where convenience stores are often separated by long stretches of highway, ''the overwhelming majority of consumers aren't going to do that,'' said Thomas Stanley, a Houston lawyer who has been on the plaintiffs' side since the beginning.

''They are going to buy what's available,'' he added.

A Federal Trade Commission study, released in December, concluded that the acquisition of other soft-drink brands by the big industry powers often resulted in higher prices and lower volume, and that when concentrate companies controlled their bottlers, prices were 4.3 percent lower. Still, ''further study of these types of bottler acquisitions may be warranted,'' the study added.

Watching the Texas case unfold, many people in the industry say it is time for the government to take a closer look.

''Historically, the F.T.C. felt that as long as the price of soda was cheap, it didn't matter who was left,'' Mr. Kalil said. ''Now we get into a situation where the margins are coming back,'' which might spur the trade commission to act, he added. ''I just wish the competition would get back to the basics of service, price and fair play.''

A spokesman for the F.T.C. said, ''We are not currently looking into this issue, and have no plans to do so.''

Coke and its bottlers have faced similar allegations in other parts of the world. In Italy, a government investigation found that Coke had unfairly used its dominance to muscle out competitors. In December, the government ordered Coke to pay $16 million. Coke's efforts to buy the Cadbury Schweppes brands in most countries ran afoul of regulators in Mexico, Australia and the European Union, who said Coke would get too much market share.

Coke's chairman and chief executive, Douglas N. Daft, has said he wants the company to become a better corporate citizen, and play by the ''house rules'' in all of the countries where it does business.

Selling more high-margin soft drinks is a cornerstone of Coke's strategy worldwide. It is particularly intense in the United States, considered a mature market where people already consume so many soft drinks that it takes work to get them to guzzle more.

Investing in equipment that dispenses ice-cold drinks, ranging from refrigerators to vending machines to ice barrels, has been crucial to Coke's efforts. The company has committed hundreds of millions of dollars to buying such equipment over the last four years, exhorting its bottlers to do the same and spending more to support their efforts. This year in supermarkets, the company began a ''Shop Refreshed'' program, installing hundreds of vending machines and refrigerator cases.

In 1996, according to Coke's annual report, the company paid $120 million to Coca-Cola Enterprises to promote investment in cold-drink equipment by the bottler. By last year, the amount had almost tripled, to $338 million. In its own 1996 annual report, Coca-Cola Enterprises said half of its $622 million capital-expenditure budget would be used for ''the high-margin cold drink, or immediate consumption, channel.'' Noting that the company had focused its spending on this area for the last three years, the report added: ''This investment has contributed to our success in recent years by increasing our share of this high-margin channel.''

Mr. Hackett sees it in starker terms. ''The guy with the biggest checkbook is the one that wins,'' he said. ''Once they become the only one in the stores, you'll pay whatever they want you to pay. It will be $3 a can.''