Co-Opetition - Adam M. Brandenburger [38]
But the war was over before it began. Just prior to the U.S. patent expiration, both Coke and Pepsi signed new long-term contracts with Monsanto. When, at last, there was real potential for competition between suppliers, it appeared that Coke and Pepsi didn’t seize the opportunity. Or did they?
Neither Coke nor Pepsi ever had any real desire to switch over to generic aspartame. Remembering the unfortunate result of the New Coke reformulation of 1985, neither company wanted to be the first to take the NutraSweet logo off the can and create a perception that it was fooling around with the recipe. If only one switched over, the other would most certainly make a selling point of its exclusive use of NutraSweet.4 After all, NutraSweet had established a reputation for safety and good taste—and not by accident. Searle, and then Monsanto, made huge investments in creating the brand identity. They gave discounts of up to 40 percent to manufacturers who agreed to use 100 percent NutraSweet and to display the distinctive red and white NutraSweet “swirl” logo on their products. This was backed up with extensive consumer advertising. By 1986, 98 percent of American diet-soda drinkers who used “artificial” sweeteners recognized the swirl logo.5 Even though generic aspartame would taste the same, most consumers would be unfamiliar with the unbranded product and would likely view it as inferior.
Another reason not to switch was that Monsanto had a significant cost advantage. It hard spent the previous decade marching down the learning curve—cutting its manufacturing costs by 70 percent—while Holland Sweetener was still near the top. With its investment in branding, advertising, and cost reductions, Monsanto appears to have followed the biblical lesson: use the seven years of plenty to prepare for the seven years of famine.
So what Coke and Pepsi really wanted was to get the same old NutraSweet at a much better price. This they accomplished. The new contracts led to combined savings for Coke and Pepsi of $200 million annually.
That was the predictable outcome. Compare Monsanto’s bargaining position before and after Holland Sweetener entered the game. Beforehand, Monsanto was in an extremely strong position. Coke and Pepsi had no good alternative to NutraSweet. With cyclamates banned and saccharin under a cloud, NutraSweet made a safe, good-tasting low-calorie drink possible. Its added value was huge. When Holland Sweetener came along, NutraSweet’s added value was substantially reduced. NutraSweet’s added value was now based on the comparison with generic aspartame rather than with saccharin. What was left was NutraSweet’s brand equity and manufacturing cost advantage.
Where did this leave Holland Sweetener? Its entry into the game substantially reduced NutraSweet’s added value, and that was worth a lot to Coke and Pepsi. Thus it would have been quite reasonable for Holland, before entering the game, to demand compensation—perhaps a fixed payment or a guaranteed contract—for coming in. But it was much harder for Holland to make money actually playing the game. It had an unbranded product and higher production costs than NutraSweet. Holland didn’t have any added value. The pie would have been no smaller without Holland—it just would have been divided up differently. Dooley was right when he said that all manufacturers want a second source. The problem is that they don’t necessarily want to do much business with it.
Coke and Pepsi did well to encourage the entry of a new player, thereby reducing their dependence on NutraSweet. Monsanto did well to create a brand identity and cost advantage, thereby minimizing the negative effects of entry by a generic brand.
As for Holland Sweetener, perhaps it was too quick to become a player. Holland could save