Rent the Razor, Sell the Paper

“The dairies did not buy the machines, but rented them for a relatively low cost. Tetra Pak made money instead by charging production royalties and by requiring customers to commit to only buying Tetra Pak’s specially treated paper. When the contracts were drawn up, Erik Torudd wanted a clause that would force customers to pay triple royalty if they used someone else’s paper. However, Holger considered it unnecessary, as Tetra Pak could always sell its paper as cheaply as any competitors. Torudd protested, fearing that paper mills would soon gain access to Dupont’s coating method and start producing equivalent paper on their own. He argued that it wasn’t certain that Tetra Pak would be able to withstand the competition and since the paper was the company’s major source of revenue, it would ultimately threaten the operation. But Holger had Ruben on his side. “Yes, yes, that’s enough for us to take back the machine if there’s any cheating,” Ruben commented. “Are you really willing to take back the machine if it means a whole city then has no milk distribution possibilities?” asked Erik Torudd, who did not believe Ruben was serious. “Of course,” Ruben replied. It turned out as Ruben had said. What Tetra Pak committed to in return for the stringent contract terms was a reliable service organization. It was a factor whose importance could not be underestimated. For a dairy, it would be a minor disaster if the machines came to a stop and the milk spoiled. Tetra Pak promised to quickly fix any faults or immediately supply replacement machines. This unique service would later become one of the company’s most important selling points, if not the most important. Once Tetra Pak had gotten the machines into the dairies, the retailers were the key group, as a retailer convinced that the tetra was much easier to handle would soon stop buying bulk milk for their stores. But Tetra Pak also had to try to overcome consumers’ resistance to buying, since enough protests from consumers could potentially push the dairies to revert to delivering only bulk milk or glass bottles.”

“During the 1980s and up to the purchase by Gad, Tetra Pak had acquired a market-leading position, especially for aseptic packaging systems. However, this dominant position began to be questioned by competitors as well as within the EU. In 1983, the Norwegian competitor Elopak, with its Pure-Pak packaging, accused Tetra Pak of abusing its dominant position. During the legal process that followed, the EU also began questioning the highly successful and ingenious business model that Tetra Pak had used from the start. The model was based on selling or leasing the packaging machines and primarily making money by selling packaging materials to dairies. Tetra Pak also attached a service agreement to the packaging machines, committing to solve any operational problems at short notice, as well as handle maintenance, deliver spare parts, and train the staff. However, the service agreement was valid only if the dairy used Tetra Pak’s paper materials. The terms of the agreement could vary somewhat from country to country. What Elopak objected to was not Tetra Pak’s business model but their practice of “dumping” the price of paper materials for pasteurized packaging.”