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The Greatest Contract Ever Signed

By Procurement Bloggers
In Contract Management
Jan 25th, 2016
0 Comments
3573 Views

Nickel Coke

In 1886, a pharmacist by the name of John Stith Pemberton formulated a new soda fountain drink. Back then, most other soda fountain drinks were priced higher 7 or 8 cents, so as a promotional exercise he decided to price his drink at 5c. Little did he know that it would continue to sell at 5c for the next 70 years. This is the story of Coca-Cola and the nickel Coke.

Imagine this, from 1886 to 1959 the US was involved in 3 major wars, went through the Great Depression, the Coca-Cola company faced increasing competition and through it all there was one constant, the nickel Coke. The fascinating thing, it all started with a contract.

The Contract
In 1899, two lawyers from Chattanooga, Tennessee approached the then President of Coca-Cola Asa Griggs Candler to get the bottling rights for Coca-Cola. As the story goes, he tried to convince them that this was a bad idea. Coca-Cola was the soda fountain business, no one used bottles. They urged him to part with the bottling rights anyway. He relented (possibly just to get them out of the office) and in doing so committed a cardinal sin of contracting. He agreed to sell them the syrup at 90c/gallon without an end date on the contract, in other words, it was a perpetual contact.

The Solution
As bottles became popular, someone realised the contract was not a good idea. Coca-Cola had lost control of the retail price of the product. They had no control over the what got printed on the bottles. If the bottlers decide to start selling the bottles for 7c or 10c, Coca-Cola did not benefit. In fact, an increase in price might even hurt Coca-Cola. A higher priced Coca-Cola bottle might not sell as well as nickel Coke and they were contracted to sell syrup for a fixed price. At this point, they decided that to stay profitable and regain control of the market, Coca-Cola had to ensure Coke always sold for 5c a bottle.

Over the next 20 years, Coca-Cola plastered the country with advertising. All of which prominently mentioned you could buy a bottle of Coke for 5c. They also continued to sell the soda fountain drink for 5c and supplied the cups with distinctive markings so the consumer could see demand it was filled up to that point. There were posters, badges novelty item, painted buildings, radio spots and all of which mentioned that you could buy a bottle of Coca-Cola for 5c.

Constraints Beyond The Contract
This is the story of the greatest contract ever signed and it continued to impose restriction even after it was not valid anymore. In 1921, the bottlers relented and Coca-Cola was allowed to renegotiate contracts and change prices. But the 1920s were a different time. It was not easy to change 20 years of advertising as quickly as it is today. There was one more reason they couldn’t change the prices.

A key channel for the sale of Coca-Cola was the vending machines, and Coca-Cola was almost single-handedly responsible for their proliferation. By 1950, there were 460,000 vending machines in USA and Coca-Cola Company owned 400,000 of them. The problem was, Coca-Cola’s machines could not make change. They were designed to accept only one coin, the nickel. Somebody suggested they ask customers to deposit 6 or 7 pennies, but the expected loss of sale through this and idea never got implemented. So Coca-Cola approached US Treasury and the President to and asked them to mint a 7.5c coin especially for use in vending machines. They were turned down.

Finally, the price started changing, and the last documented sale for nickel Coke was in 1959.

Contracts are essentially documents where people and companies sign away their freedom for predictability. But sometimes contracts become debilitating and takes a special company like Coca-Cola to work through them. To ensure your organisation does not sign a debilitating contract check-out Zycus’ Contract Management solution iContract. Business and legal teams can collaborate to define terms and workflows ensure no single person including the companies President can sign contracts without the proper review.

Want to read more about nickel Coke? You can choose to read economists Daniel Levy and Andrew Young’s paper titled “The Real Thing: Nominal Price Rigidity of the Nickel Coke, 1886-1959” here.

You can also choose to listen to the NPR’s Planet Money podcast of the same topic here. It is much more entertaining than the paper.

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