Rise of the machines: Coke bets on Freestyle growth

No question, the technology provokes oohs and aahs. Now to the bigger question: Will restaurants be impressed enough with the gizmo to help Coca-Cola meet its ambitious goals of covering the country with the machines?

Coca-Cola plans to put 2,000 Freestyle machines in about 15 markets this year, up from about 120 machines in use now. About 20 Freestyle machines are built every day. The machine has reached restaurants in Atlanta, Dallas and southern California. Coming soon: Chicago, Orlando and cities yet to be announced.

"We have fairly aggressive aspirations," said Gene Farrell, vice president of Coca-Cola Freestyle for the company's North America division. "If we stay on the pace that we're on, we think it has the potential to be very successful. We're moving at a jog, and we hope eventually to get to a full sprint."

Much is at stake for Coca-Cola. Freestyle could be a way to pump up Coca-Cola's sales in North America, which fell for nine straight quarters before posting growth in the second quarter of the year. The machine is a key part of the company's strategy to assert dominance in the fountain business by adding new accounts and selling more beverages at places Coca-Cola is already sold. Coca-Cola already controls 70 percent of sales at U.S. soda fountains, according to Beverage Digest.

"We see customer excitement with the Freestyle and we believe this will benefit our business," CEO Muhtar Kent said recently. "I want to stress that it is a long-term play and we will see benefits of this in the decade."

Coca-Cola won't say how much it spent to develop the machine. But it spent $100 million to expand an Atlanta plant to allow it to churn out concentrated ingredients for the Freestyle.

The machine and its ingredients can cost restaurants about 30 percent more than a regular soda fountain. Coca-Cola leases the machines for $320 a month. But Coca-Cola executives, who have been working on the Freestyle machine for five years, tell restaurateurs that Freestyle will more than pay for itself. They say Freestyle correlates with double-digit increases in beverage sales and growth in traffic to restaurants.

Having the Dr Pepper and Diet Dr Pepper brands in Freestyle machines is worth between $115 million and $135 million to Dr Pepper Snapple Group, the Texas-based company said earlier this year.

Executives at a number of eateries say this summer's pilot testing of the Freestyle machine is going well so far, with excited customers and bumped-up drinks sales. But some restaurateurs stress they will need more time to evaluate how well the machine fits into their business models.

By the end of next year, Coca-Cola executives will know whether they have a major win on their hands, said John Sicher, editor and publisher of Beverage Digest. It's early, but one major advantage of Freestyle is that its touchscreen technology jives with the smart-phone proclivities of younger consumers, he said.

"That can't really be underestimated," Sicher said.

During the lunch rush last week at a Schlotzsky's near Cumberland Mall, customers lined up six deep in front of the machine. A small boy reached up to push the button for grape Sprite. Maxine Miller of Smyrna juggled two cups and deftly toggled between Dr Pepper and Coca-Cola.

"You just got to get the feel for it," said Miller, who retired from a nursing career and was having lunch with her husband Tom.

Not everyone was as impressed. Two customers groused about the lines, which stretched six people deep several times after 1:00 p.m.

As Freestyle machines move into restaurants, everything from the type of ice to the development of a drive-through version for fast-food customers has to be considered. Coca-Cola is testing a drive-through model at one restaurant, and hopes to have more in tests later this year. The company also says restaurants will have some flexibility to tailor the brands in Freestyle to meet their unique preferences.

Costs are an issue beyond the upfront price of the machine. One pizza buffet chain, Stevi B's, reported that restaurants had to spend between $2,000 and $11,500 to get ready for the new machines if tradesmen had to cut granite countertops or rebuild cabinets. The super-strong concentrate is more expensive than the regular stuff. (To compensate,  Coca-Cola recommends restaurants raise beverage prices by a dime.)

"We know it's not going to work in every customer's outlet," said Farrell. "But on a relative basis, it provides significantly more value for the consumer."

Matt Loney, president of 36-restaurant chain Stevi B's Pizza, said it will take about six months to tally Freestyle's overall costs and benefits. The machines are in four Stevi B's stores, with five more on the way. Sales have ticked higher at the stores with the machines, Loney said.

"We've been pleased," he said. "If it's a good idea, the franchisees will convince other franchisees to do it. We're not requiring this. It's a significant capital investment. I want franchisees to do it because they think it's a good idea for their stores."

Jeff Sinelli, founder of sandwich chain Which Wich, said Freestyle's ability to allow customers to make personalized drinks is a good fit for the restaurant, which sells made-to-order sandwiches. But a few kinks had to be ironed out. Some franchisees, for example, were adamant that the machine needed to have Mello Yello. (Coca-Cola is working to include the brand.)

"Some of our operators are not willing to give up their machines," said Sinelli. "Some of our operators will resist the new technology."

There's not much resistance among Boston Market franchisees. "Our operators are reaching out and raising their hands as fast as they can," said Gretchen Paules, vice president of marketing. One month of experience shows the machines create  interest and extra beverage sales, Paules said. But she added that she does not have a "complete commitment" to the next phase.

Marcia Harris-Daniel, vice president of marketing at Texas-based Wingstop, said some store operators are eager to get the machine. But Wingstop, which has a handful of Freestyle machines, prefers to be conservative, she said.

"There is some cautiousness to the whole thing," she said. "We need to make sure we’re seeing what we need to see. We want to see if it increases our beverage sales. So far, so good."

When Austin-based Schlotzsky's installed the first Freestyle machines less than two months ago, restaurant staffers noticed that beverage times slowed down and guests congregated around the machine, congesting the beverage line. So, Schlotzsky's asked employees to step out from behind the counter and help people use the machine.

George Schaefer, vice president of restaurant operations and training, said he needed perhaps another month to evaluate Freestyle's performance. For one thing, the habitual drinker of Coke and Diet Coke may not be overly excited about making a peach Diet Coke.

"But customers who have tried it really like it," he said. "We're getting a lot of buzz out of it."

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