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Berkshire Hathaway
Coke's Missed Opportunity

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By Woodrow887007
February 7, 2001

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I work for a major convenience store chain that deals extensively with the major food vendors including Coke, Bud, Miller, Pepsi, Frito Lay, etc. Since we sell the largest dollar value of all these products worldwide in our stores, I have had the opportunity to evaluate what potential impact Pepsi's acquisition of Quaker Oats (Gatorade) might have on Coke and I think Buffet and the Coke board have missed the boat on this one. I believe that Pepsi will overtake Coke's dominance in the U.S. within 5 years.

First, a little background about how we do business. All sales reps approach each store, evaluate proper orders through build-up books, and then send their orders to their distributors. In many cases, such as Coke and Pepsi, these distributors are not connected to the same info that the sales reps have and so there are often communications errors between the two entities.

Currently, soft drinks are declining about 5%/year in the U.S. (consistent with industry trends) while non-carbonated beverages are growing about 30%/year. Again, consistent with industry trends. Gatorade is currently being distributed by a general distribution center per the orders placed by the store managers or franchisees-and often they do not closely evaluate sales data and may run out of stock on top selling items/flavors.

When Pepsi acquires Gatorade, Pepsi will incorporate their current sales model so that sales reps take Gatorade orders and submit them to distributors. Sales reps (for Pepsi) make VERY sure that their clients do not run out of product and they make VERY sure key new items are in the store. This fact alone should lead to an increase of about 10-15% in Gatorade sales volume per store. Second, as our corporation sees increased sales in the non-carbonated drink set, we will continue to allocate more cold vault space to this category and decrease the amount of facings available to the declining categories (i.e. Soft drinks). Coke, then, gets hit with a double whammy. Coke does not have any products to compete with Pepsi in this non-carb set (Pepsi owns/distributes Gatorade, Frappucino, Aquafina, Sobe, Tropicana, etc.) and the retailers will give more available spacing to Pepsi because Pepsi's products move and Coke's are slowing down. Ouch.

Although Buffet claimed the price for Quaker was too high, the cost of not doing it, I believe, is even higher. There is a HUGE barrier of entry in this business as the big just get bigger and the smaller wither and die--Coke knows this well. What costs will Coke need to pay to invent a product to get a foot into this category? How long will it take to get retailers to buy into that new product and how long will they have to wait to see measurable, meaningful, sales from the customers?

Buffet's mistake in his analysis of Quaker Oats was that he relied too much on Graham's economic value principles and not enough on Fisher's true business worth/capabilities principles. It will cost Coke dearly--but that's just the perspective of one who works in the industry. . .

jered