allege that if the Company utilizes lower cost HFCS-55, they should be entitled to a pass-through of the realized savings. See Coca-Cola Bottling Co. of Elizabethtown, Inc. v. The Coca-Cola Co., 98 F.R.D. 254, slip op. at 9 (D.Del. 1983).
The Company has introduced soft drink beverages other than Coke. For example, TAB, a low calorie cola sweetened with saccharin, was introduced in 1963. Other beverages include Sprite, Fanta, Mr. Pibb, Fresca and Ramblin' Root Beer. These beverages are not sold pursuant to the Bottler's Contracts for Coca-Cola Bottler's Syrup; rather the syrup and beverage base
are sold under a separate term contract between the Company and the bottler and are priced according to a Company schedule without regard to the market price of any sweetener.
B. Introducing diet Coke
As noted, the Company introduced TAB in 1963. Since that time, TAB has become the largest selling diet soft drink. Lawrence R. Cowart, a senior vice president of the Company, testified that TAB's two leading diet cola competitors, Diet Pepsi and Pepsi Light, however, have a greater combined market share than TAB. Transcript of April 4, 1983 Hearing ("Tr.") at 35-36. In addition, the diet soft drink market currently constitutes approximately 20 percent of the total soft drink market, and some projections call for it to reach 30 to 40 percent by 1990. Id. at 40. In this, the most rapidly growing segment of the beverage market, competition is intense and the financial stakes are high. For example, a 10 percent growth in market share translates to retail revenues of approximately $5 billion. Id. at 36-37.
Given this growth potential, the Company reviewed its market offerings and determined that TAB, while a market leader, suffered from a relatively narrow market appeal.
In order to meet their anticipated market expansion, the Company developed a "three cola strategy" comprising Coke, TAB, and another diet cola with broader market appeal. Id. at 37. In 1980, the Company began a two-year market and technical research project aimed at developing the new diet cola. On July 8, 1982, diet Coke was introduced with great fanfare.
The name was chosen carefully and focused on the descriptive nature of the word "diet" and the tremendous market recognition of "Coke." Id. at 41. The advertising emphasized the taste of the new cola and its relationship to Coke, rather than its low-calorie nature.
The advertising campaign has been intense and effective. The Company spent some $50 million in research and marketing, has budgeted $31 million for 1983 advertising, and has expended approximately $20 million to date. Id. at 48. The response has been tremendous and diet Coke may surpass even TAB's market share.
The Company sold diet Coke syrup to bottlers at the same price as TAB syrup -- $3.02 per gallon during the first quarter of 1983.
As noted, the price of Coke syrup to amended bottlers was $3.049 per gallon and $2.69 per gallon to the unamended bottlers during the same time period. The sweetening agent in diet Coke is saccharin which costs approximately $1.59 per gallon less than the granulated sugar/HFCS-55 mixture used in Coke syrup.
The bottlers want to benefit from this cost savings while the Company insists the higher profit margin is necessary to cover the large research, development, marketing, and advertising costs relating to diet Coke. All agree that the bottlers sell diet Coke at a profit even without the pass-through of savings; therefore, the dispute centers upon who should receive the incremental profit -- the Company or the bottlers.
The situation is complicated by the manner in which diet Coke was introduced. The bottlers were not consulted before the introduction and no price terms were discussed. Cowart testified that this failure to consult the bottlers occurred because of competitive pressure. Tr. at 40. The Company's fear of the imminent introduction of Pepsico's caffeine free colas necessitated the accelerated introduction of the Company's new entrant in the cola market. In fact, these caffeine free colas, Pepsi-Free and Sugar-free Pepsi-Free, were introduced two days before diet Coke. Id. This series of events had several unfortunate effects from the bottler's viewpoint: first, the lavish advertising campaign precipitated immediate demand for a product to which the bottlers did not have immediate access; second, this demand strengthened the negotiating position of the Company and weakened that of the bottlers regarding the marketing terms for diet Coke; and third, the failure to consult resulted in somewhat bruised egos.
Naturally, bottlers began requesting, if not demanding, diet Coke syrup and beverage base. Many felt that the Company was obligated to provide diet Coke under the terms of their existing Bottler's Contracts for Coke, whether they be amended or unamended bottlers. The Company, however, took the position that diet Coke was not within the scope of the existing contracts and a new term contract with flexible pricing would have to be developed.
On October 7, 1982 the Company formally presented a proposed Phase I/Phase II negotiating procedure to the chairman of an Ad Hoc Committee
which was followed by a formal presentation to the Board of Governors of The Coca-Cola Bottlers' Association.
Phase I of the process constitutes the execution of a Temporary Amendment to the Bottler's Contract which governs the pricing of diet Coke pending a final agreement on a permanent contractual arrangement.
Phase II represents negotiations towards the permanent pricing and marketing of diet Coke and other new cola beverages.
Phase II negotiations are in progress at this time.
The Temporary Amendment is intended to be an interim measure which permits the sale of diet Coke pending permanent resolution of the Bottler's Contract issues. Approximately 191 first-line bottlers have signed the Temporary Amendment and approximately 181 first-line bottlers, while having not signed, have agreed to the terms of the Temporary Amendment.
These 372 first-line bottlers are receiving diet Coke syrup or beverage base and are marketing diet Coke within their exclusive territories. The plaintiffs in this case, who represent approximately 3 percent of the Company's domestic sales of Bottler's Syrup, could have access to diet Coke but have refused to either sign or accept the terms of the Temporary Amendment. Consequently, the Company has refused to provide diet Coke syrup or beverage base to these bottlers unless and until they either sign or accept the terms of the Temporary Amendment. Plaintiffs basically object to one clause of the Temporary Amendment which states:
9. It being the intent and purpose of the Bottler and the Company that this Temporary Amendment shall in no way prejudice or otherwise affect their respective rights and obligations under the Bottler's Contract or from any other source, or their respective legal or equitable claims, the Bottler and the Company expressly stipulate that this Temporary Amendment shall have no such effect. It is possible that other bottlers may seek through judicial interpretation or otherwise to require the Company to supply Coca-Cola syrup or beverage base for diet Coca-Cola under their existing Bottler's Contracts at the price then in effect for Bottlers' Coca-Cola syrup absent this Temporary Amendment. It is further agreed, however, that during the period this Temporary Amendment is in effect, the price of Coca-Cola syrup and beverage base for diet Coca-Cola as between the parties hereto shall be determined solely under this Temporary Amendment.