Thursday, July 06, 2006

Coke Trade Secrets Stolen

The Associated Press is reporting that three people have been arrested after stealing trade secrets from Coca-Cola and attempted to sell them to Pepsi for $1.5 million. The plot involved the theft of trade secrets and product samples (of an as yet unreleased Coke product) and one of the three alleged conspirators is a Coke employee. According to the article, after being contacted with an offer to buy the documents and samples, Pepsi contacted Coke and the FBI, which lead to a sting and the arrest of the three. The recipe for "Coca-Cola Classic" was not among the documents stolen.

What's strange about this story to me is what exactly Pepsi would do with this information. Clearly, the recipes for Coke are hugely valuable to Coke and, if released, would allow another producer to replicate Coke and sell it. But would Pepsi want to do that? Would they release a new version of Pepsi that tastes just like Coke? Release the secret formula into the public domain? Of course, since Pepsi voluntarily contacted Coke and the FBI, they didn't want these secrets, but hypothetically what would they do with it?

This just wouldn't seem to help them. If "Coke" entered the public domain and anyone could produce it, then presumably many would and Coke would be forced to reduce their prices, which would likely force Pepsi to do the same or risk losing lots and lots of sales. [But your supermarket brand cola would probably taste a lot better...] Pepsi is being played off as acting ethically here, which I guess they are, but it's more a matter of Pepsi following its profit motive to maintatin the very profitably duopoly that they have with Coke than any corporate desire for "fairness" or something like that.


Anonymous Anonymous said...

I think you have the analysis of Pepsi’s motives correct on several fronts. But, at the same time I believe you have misjudged Pepsi’s ethical motives. I agree that it is not about “fairness” per se. Rather I would like to suggest that Pepsi’s ethics are fundamental to their actions. It is about protecting their brand. For the record, I am not a Pepsi fan and have no connections or affiliations – product, business, or otherwise.

Corporate ethics is a topic that has been strongly discussed in the boardrooms of all major American corporations, including Pepsi’s. For those companies that intend to endure and succeed over the long term the discussion has broadly been concluded with the understanding that ethical behavior is a requirement.

Yes, it is about profits. But Pepsi’s profits do not depend or benefit, as you suggest, from the competitive presence that Coke presents. Both Pepsi’s and Coke profits, as long established consumer products, depend to a large extent upon their brand identify. Protection of that identity, untarnished, is at the core of their success. Nothing is probably more at the heart of Pepsi’s profit motive than beating Coke on every completive front possible. But in competing against Coke they will do so in ways that will be judged by their broad consumer base as ethically fair and reasonable. Stealing and using their competition’s secrets would only serve to damage their brand.

In the consumer space in which Coke and Pepsi compete, little is more important than brand. Today, for a few thousand dollars anyone with access to a modern analytical laboratory (which can be readily contracted by the job) can easily decipher the “secret formula” behind any Coke or Pepsi product. It’s not that hard (I am an analytical chemist). But even after it’s done, making a duplicate beverage that would have the same taste would not taste the same to consumers because it wouldn’t have the brand image.

Yes, taste is important. With the analytical resources at its command Pepsi can have (and probably already has) any Coke formula it wants. But it is well known in the marketing and sensory science fields that the “cola wars” are won and lost on brand image. Having a recipe for a new product from Coke is of inconsequential value to Pepsi. Having a new, better tasting recipe for Coke almost destroyed the brand.

There is, however, other value that Pepsi likely gleaned in the foiled cola caper that will probably be missed by most, other than Coke. I suspect that Pepsi learned the market segment that Coke is targeting with a new product in which they have undoubtedly invested millions. That is competitive intelligence that I would expect to be of significant value to Pepsi.

7/06/2006 9:25 PM  
Blogger Tony Vallencourt said...

That's a good point about the value of the competitive intelligence re: new market segments targeted by Coke.

And while I agree that brand matters, I maintain that neither Coke nor Pepsi would be better off if the recipe for Coke got "out." I can't speak to the ability of someone to backwards engineer the recipe, but the fact that nobody sells "unCoke" makes me think it's not that easy. Surely lots of people are paying for the brand, but at the same time, there's plenty of people out there who would happily pay 40-50 cents for "unCoke" if it tastes the same.

7/07/2006 10:50 AM  
Blogger Tony Vallencourt said...

that should be:

...40-50 cents *less* for "unCoke" if it tastes the same.

7/07/2006 10:51 AM  
Anonymous Anonymous said...

Here is a link to one study that reports the influence of brand knowledge on taste perception:

And here is a link to an efficient summary of a neuroscience study conducted at Baylor on the influence of brand on preference. The article was published in Neuron

7/07/2006 9:07 PM  
Blogger Tillerman said...

I'd link to think that Pepsi's motivation was partly based on ethics. But it was also probably influenced by hard-nosed thinking of the benefits and risks of using this propietary information from Coca Cola. As you dicussed it's hard to see what upside there is for Pepsi in using these secrets. But the downside for the corporation and the executives if they do buy the secrets and are then exposed as having committed this crime is huge.

Irrespective of current public perception of businessmen, the vast majority are not criminals and have no wish to risk spending their retirements in prison.

7/15/2006 11:48 AM  
Blogger Taterdono said...

You're right! Ethics is a legality. Had this operation been executed by a professional, Pepsi would have analyzed Coke's formula weeks ago. But this was amateur night from the beginning. (The lady sent a letter - a letter!) The legal and public relations liability would have been tremendous for Pepsi - and there is no way they would not have been caught dealing with this greedy secretary who saw a chance to score. So instead Pepsi scores a PR coup and perhaps the gesture will pay off with similar consideration from Coke in the future.

7/26/2006 1:03 AM  

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