
Why Coke Cost A Nickel For 70 Years  - riffraff
http://www.weku.fm/post/why-coke-cost-nickel-70-years
======
travisp
>In 1886, a bottle of Coke cost a nickel. It was also a nickel in 1900, 1915,
and 1930. In fact, 70 years after the first Coke was sold, you could still buy
a bottle for a nickel.

Without getting into a huge argument about the _causes_ of inflation, it's
really weird that they didn't even mention the word inflation until almost the
very end.

In 1886, an ounce of gold cost $20.65 and in 1930 an ounce of gold cost
$20.65. 70 years after 1886 (1956) it had increased to $34.99 (a 70%
increase). But surely a large part of the reason that a Coke cost a nickel for
70 years was that there was no real inflation for a large part of that time,
during which time Coca-Cola also had the opportunity to significantly increase
production and cost efficiency.

~~~
Symmetry
The price of gold might have remained constant, but that's hardly the binding
factor here. All inflation is measured with respect to a basket of goods and
if you choose "an ounce of gold" as your basket of goods then under a gold
standard you'll get 0 inflation by definition.

But the relevant basket of goods here is the inputs in materials and labor
that go into a bottle of Coke, and that ought to be fairly close to the CPI,
which rose from 27 to 50.2[1] from 1886 to 1930. Now, of course, I presume
they found ways to economize and automate but it's still rather impressive
that they could hold the product price down over that timeframe.

[1] According to estimates from the Minneapolis Fed
[http://www.minneapolisfed.org/community_education/teacher/ca...](http://www.minneapolisfed.org/community_education/teacher/calc/hist1800.cfm)?

~~~
WalterBright
Inflation was a net 0 up until 1914, when the US switched to a fiat money
system. There was about 85% inflation between 1914 and 1929, yet the
government maintained a fixed exchange rate between the dollar and gold.

This imbalance I'm pretty sure led to all the runs on the banks in the banking
collapse, as people finally realized they could nearly double their money by
converting it to gold. This collapse continued until the government suspended
gold exchanges.

What I find peculiar is I never see this mentioned in explanations for the
banking crisis.

~~~
SiVal
So true. The reason the head of Coca-Cola, a successful major corporation
would do something as apparently outrageous as to agree to sell syrup at a
price guaranteed _forever_ was that the history of the US currency from its
creation to 1899, when he made this contract, was one of a rock-solid dollar.
According to the Federal Reserve itself
([http://www.minneapolisfed.org/community_education/teacher/ca...](http://www.minneapolisfed.org/community_education/teacher/calc/hist1800.cfm?)),
prices for goods fell over the decades as the dollar stayed solid and the
industrial revolution increased productivity every year. It was clear to any
intelligent person that, while prices for specific things fluctuated with
supply and demand, a constant, reliable dollar combined with increasing
productivity (due to technological improvements) made _overall_ prices
something that would go down over the long run forever. Why not agree to sell
at today's prices forever?

Then the Federal Reserve was created in 1913 to allow the Federal Government
to play a more active role in the economy and all that "solid as the US
dollar" stuff became a quaint historical relic. According to the Fed itself
(link above), prices that had gradually come down from $50 (for a basket of
goods sized to show the index value as dollars) in 1800 to $29 when the Fed
was created, suddenly turned around and shot up to ABOVE $700 today (est. Nov.
2012 value).

In other words, since the Federal Government decided to take a more active
role in "managing" the dollar instead of merely guaranteeing it, they have
managed to destroy more than 95% of its value.

It wasn't the CEO of Coke who was incompetent at managing finances; it was
that he couldn't imagine a day when the US Federal Government would become so
utterly incompetent at managing finances.

~~~
anigbrowl
Something you gold fetishists might like to keep in mind is that for the first
century of the US (and arguably quite a bit longer), the country was
benefitting from massive amounts of virtually free capital, if you discount
the fairly minor cost of driving Native American tribes off the land. When the
US government needed to raise money in earlier times, it just sold off vast
tracts of land for cheap. Obviously, this strategy couldn't go on forever, and
by the time the west coast was properly settled the country needed to switch
to a more conventional form of public financing, ie a central bank.

Seriously, if you have an entire continent at your disposal, running an
economy is easy. Likewise, after WW2 most of the the rest of the developed
world was in a shambles, and the US was the only industrial economy that
hadn't been bombed heavily. Unsurprisingly, a long period of great economic
growth followed, in time with the Bretton Woods system but not necessarily
because of it.

I'm very interested in monetary theory, but a lot of gold fans seem to
attribute stability or growth to the use of gold rather than extremely
favorable economic conditions. If you back and read the the _Wealth of
Nations_ , there's a very worthwhile (if long-winded) explanation by Smith of
how hard currency can act as a limit upon economic growth, as well as being
corruptible in its own right.

~~~
jpatokal
_Seriously, if you have an entire continent at your disposal, running an
economy is easy._

Which is why Australia has such a remarkably stable economy, right? Oh,
wait...
[http://www.abc.net.au/news/linkableblob/3873450/thumbnail/je...](http://www.abc.net.au/news/linkableblob/3873450/thumbnail/jericho070312chart2-thumbnail.jpg)

See <http://www.abc.net.au/unleashed/3872646.html> for context, and in
particular the bit about "mad boom and bust cycles".

~~~
dredmorbius
Australia has a _tiny_ population relative to its landmass. While it's rich in
extractive resources (mining, minerals) from which much of its present wealth
derives, it lacks both water and fertile land for agricultural production.

This itself is interesting: because Australia is an island continent, with few
or no internal volcanoes or rift zones, the land is, literally, ancient, with
many nutrients vital for ag production missing (one estimate I saw was that
seeding land with an infinitesimal amount of iron would greatly increase
production). Much productivity is due to windblown dust from the Indian
subcontinent and south-east Asia. Even where irrigation is possible,
evaporation causes accumulation of salts which degrade ag values. The first
settlements in Sydney very nearly starved due to difficulties in producing
sufficient food.

------
Spooky23
I think the answer really is that the steadily increasing cost of raw
materials for soda (which remained stable in real terms for most of those 70
years) was countered by other efficiencies.

For example, in 1886, 1,000 cases of coke were delivered by a bunch of
coachman with a horse-driven wagon serving customers in a limited area. In
1936, 1,000 cases of coke were delivered by a much smaller number of truck
drivers serving more customers in a wider area.

8 oz bottles of coke were also re-used. So the machinery used to wash those
bottled became more efficient throughout those 70 years.

Another key factor is alternate delivery mechanisms. At some point, soda
fountains became a common and higher margin channel for selling Coke. The
margins on bottles were tighter, but the bottles probably helped drive sales
at the fountain.

Remember that Coke the trademark owner is distinct from Coke the
bottler/distributor. The Coke bottler owned the relationships with stores and
restaurants, and probably had the ability to sell complimentary products
(pretzels, etc) when they were dropping off the Coke order.

------
kbutler
I'm going to go out on a limb here and assume that the primary materials cost
for Coke over this time period is sugar.

There are other costs (production, distribution) but over that time period,
those were benefiting from decreased cost through industrialization, etc.

This link gives a history of the sugar price (only back until 1912):
<http://www.tradingeconomics.com/commodity/sugar>

Basically, sugar did not increase in price over that time span - except for a
dramatic spike around world war I and relatively minor fluctuations.

That spike put Pepsi into bankruptcy, the company was sold at auction,
reorganized, and after the great depression started selling a DOUBLE-SIZE
(12oz) bottle for ... wait for it... $0.05).

[http://suite101.com/article/soda-pops-of-
the-1800s-1900s-20s...](http://suite101.com/article/soda-pops-of-
the-1800s-1900s-20s-30s-40s-50s-and-60s-a363069)

~~~
eru
I wonder how much of the cost of Coke was materials cost, and how much
logistics and mark up for the retailer.

------
rb2k_
The original source is Planet Money on NPR:

[http://www.npr.org/blogs/money/2012/11/15/165143816/why-
coke...](http://www.npr.org/blogs/money/2012/11/15/165143816/why-coke-cost-a-
nickel-for-70-years)

I have no idea what "weku.fm" adds to the mix

~~~
eco
There is a version that is 5 times longer Planet Money did for their regular
(excellent) podcast.

[http://www.npr.org/blogs/money/2012/11/13/165046113/episode-...](http://www.npr.org/blogs/money/2012/11/13/165046113/episode-416-why-
the-price-of-coke-didnt-change-for-70-years)

------
zissou
Levy, the main author of the academic article behind this story, is one of my
mentors. We taught a class together while I was a PhD student in economics at
Emory. I first heard the Coke story during his presentation during a fly-out
weekend before starting graduate school, and it is to date still one of the
most interesting economic stories I've ever been told. The question is simple,
thought provoking and appealing to almost anyone.

The poster (Symmetry) that said "the relevant basket of goods is the inputs in
materials and labor that go into a bottle of Coke" is absolutely right, and
that's exactly what Levy/Young point to in the academic paper. However, the
puzzle that remains is that input costs still don't explain the [lack of]
variation in the price of coke over the relevant 5 cent years.

Although the CPI/inflation answers seem to be the reasonable explanatory
variables here, the most explanatory factor is pretty simple: menu costs +
marketing contracts/agreements.

Menu costs, which are the costs associated with changing your prices, used to
be a pretty popular topic in macroeconomics. However, as time has gone on and
with the rise of the Internet, menu costs have lost a lot of their explanatory
power since they are far less significant in a digital age. But of course, in
the early 1900s changing your price, especially for a good which was widely
distributed at the time, was a pretty costly matter. Tack that onto that the
agreements over price (but not quantity) that were made when the early
licensing deals were made and you have a completely reasonable explanation for
the sticky price of Coke.

~~~
nhaehnle
Menu costs and fixed contracts are not necessarily sufficient to explain what
happens in such cases - they may be sufficient in the coke bottle example
here, but they are insufficient for a similar story here in Germany.

Prior to the introduction of the Euro, the price of a standard bar of
chocolate has remained constant for around 50 years. The size of those
chocolate bars was also fixed, unlike the Hershey's example somebody else
mentioned.

The single most relevant factor explaining this is psychology: the price of
chocolate was very much ingrained in people's minds, and people simply
rejected the standard bar of chocolate above a price point of 0.99 DM.

Chocolate manufacturers had to squeeze the last bit of efficiency out of their
production lines, and turn to larger chocolate bars with special gimmicks or
other chocolate-related products for making a decent profit.

------
ajays
Who writes these things?

" In 1886, a bottle of Coke cost a nickel. . . . . In 1899, . . . Coke was
sold at soda fountains. But the lawyers were interested in this new idea:
selling drinks in bottles."

So was Coke sold in bottles in 1886 or not?

~~~
tptacek
No; according to Coke's historians, the first bottle of coke was sold in 1894.
The author of this Planet Money summary probably just misspoke, or meant "the
price of a bottle's worth of Coke".

------
bhanks
Price change is not fundamental to economics. It is fundamental to a post-Fed
inflationary policy that seeks for a low (or at least a consistent)
unemployment rate. That being said I think this is a great case study of "menu
costs" on steriods.

~~~
mindslight
Au contraire - price change is a fundamental aspect of economics. Why would a
new competitor selling the same commodity ever expect to be successful?
Because they've figured out how to provide the same product for less expense.
So even ignoring expected price decreases due to technological progress, we'd
still expect to see prices occasionally decreasing due to organizational
progress.

~~~
sageikosa
Not to contradict, but to add detail: land, labor, capital, material resources
and market seldom exist in the same location for any specific good/service,
and the cost of distance (and the cost to overcome those distances) affects
market bearable prices. It need not be technological progress that makes one
competitive, it may just simply be favorable proximity to resources and
markets that gives you an edge.

Coca-Cola (the syrup) is produced IIRC in only one place, and bottled/canned
with local waters in regional centers because the cost of shipping a product
that is mostly water around the country/world will drive costs up.

Many auto-makers in the US became "competitive" by closing factories where
labor costs were high and opening them where they were lower. Many foreign
producers of cars opened factories in the US to offset the increases of labor
costs in their own countries while also decreasing shipping costs (especially
for Asian car makers who cannot as easily ship to the Eastern US) and
nullifying punitive tariffs.

------
tron_carter
Whenever an article with price/inflation implications hits HN, it's like the
gold-bug bat signal goes off.

------
justsayin13
Fake account, but I wanted to say that I think Marijuana has been $10/gram for
as long as I can remember. People do alter price based on different
parameters, but $10/gram has been a long standing unacknowledged truth.

~~~
sievert
I think the weight may vary depending on the cost of production/risk but it
gets sold at the same price.

The idea of paying $10.50 for something like that due to inflation does seem a
bit strange :)

------
jivatmanx
>So they asked the U.S. Treasury to issue a 7.5-cent coin. At one point, the
head of Coca-Cola asked President Eisenhower for help. (They were hunting
buddies.) No luck.

I don't get it. Wouldn't a .5 cent coin make more sense?

~~~
coin
The vending machine could only accept one coin.

------
propercoil
Because the federal reserve wasn't printing money like crazy and devaluing the
currency. When comparing the price of a Coke with real money - gold or silver
the price hasn't changed

~~~
icebraining
Actually, it did. Coke remained fixed _in USD_ , so it had to change
relatively to "real money".

EDIT: I was wrong, sorry. I got the wrong impression from the podcast.

~~~
throwit1979
Nope.

Throughout the relevant 70 year timespan, Coke was priced in an environment of
first, the gold standard, and second, Bretton Woods.

The USD was not fully disconnected from gold until 1971, which is _after_ the
timespan the article talks about.

~~~
propercoil
beat me to comment the same thing - the gold standard. I don't understand why
he question marked "real money", i think he thinks the paper money he holds is
money and not gold. Let's wait a couple of years

~~~
icebraining
You're right, I got the wrong impression from the podcast, which is stupid
since I knew about the gold standard and price stability of the time.

As for the "scare quotes", I'm aware of the drawbacks of fiat money, but it's
still money. Gold is just non-fiat money.

------
redwood
It certainly is interesting to think about how, when you're dealing with
nickels, the concept of 2.77% inflation has no real meaning for price for a
good 7 or so years!

------
asdfprou
I'm surprised the bottlers didn't try to bottle different sizes and charge
pricing differences on the larger bottles that Coke wasn't advertising for.
Maybe this would have cut into their distribution/packaging costs though since
the bottlers would be typically making a smaller margin on the larger bottles?

~~~
eru
It would also decrease their benefit from the free advertising.

------
gadders
I always assumed that the syrup being sold to bottling plants was done for Tax
Avoidance purposes, like Starbucks does now. (i.e. bottling plants make a loss
because of high cost of the syrup, so no taxes to pay).

------
melvinmt
I see a great analogy with the whole Nexus strategy. The break-even approach
doesn't make economical sense at first sight but Google is selling Android
bottles for a nickel until there are no competitors left.

------
sievert
When trying to make my own version of coke it was interesting to learn that
the real secret is the flavorings, which are then mixed with sugar and
caffeine etc to form the syrup, which is finally mixed with carbonated water
to produce the final product.

As the flavorings are such a minor portion of the actual drink (<0.1%) it's
really hard to reverse engineer

------
atakan_gurkan
The vending machine part of the story is a bit strange. Why did they not make
a machine that would accept a dime and return a couple pennies with the coke?

------
dbbolton
IIRC Hershey kept the price of their flagship chocolate bar constant for a
long time by making the size smaller until it was no longer a practical
option.

