Inside Coca-Cola

by Neville Isdell

  There were a number of small soft drink companies which controlled only tiny shares of the market. One was called Goldberg & Zeffert and it had the 7UP franchise in South Africa. Its strategy was to price its soft drinks 15 percent below Coca-Cola’s, producing very thin profit margins. As a result, Goldberg & Zeffert was always the first to go to the government seeking price increases.

  Coca-Cola’s profit margins were quite healthy, however, and each time the government granted a price increase, it enhanced our bottom line even further. However, if the government denied a price increase, small operators such as Goldberg & Zeffert might well go out of business.

  The decision before the government bureaucrat was very simple: Does he put the small operator out of business or does he grant the price increase and ensure the continued high level of profitability of the main player? It was an interesting conundrum and illustrates what happens when the natural order of the marketplace is disrupted by government intervention. The effect was that most consumers in South Africa paid more, not less, for their soft drinks. It illustrates why, in my opinion, government price controls rarely work.

  I sensed from day one in Johannesburg that mine was a transitional job, and that if it went well, it would launch my career out of Africa onto the world stage. This was confirmed about a year after taking the general manager’s job, when I got a call from Ian Wilson, who was now in Atlanta, in charge of Coke in Asia. Wilson had become the consummate Coca-Cola insider, bird hunting with company patriarch Robert W. Woodruff at his South Georgia plantation, Ichauway. Woodruff would send Wilson roses on his birthday, just as he did to other top Coke executives in the inner circle.

  “Neville, are you ready yet to work outside South Africa?” Wilson asked me. I told him I wasn’t quite ready yet, that I wanted to gain more experience at the bottling plant before moving out. “When you’re ready, call me,” he replied.

  In late 1979, during my annual performance review, I was offered the job as head of all the bottling plants in Southern Africa, a major promotion. I turned it down. I was now ready to leave South Africa, to gain global experience. I then made the call to Wilson in Atlanta. He circulated the information around the North Avenue tower and in the spring of 1980, I was called to Atlanta. Wilson offered me the job as Coca-Cola’s general manager in Australia.

  There was one company-owned bottler in Sydney, which would report to me. The other bottlers were franchisees. This was a regional manager’s job, but the promise was that within a year, I would be a division president, in charge of Australia, New Zealand, and the surrounding islands, one of only eighteen divisions in the world. I flew from Atlanta to New York to get a visa, and then on to Australia for a briefing on the new position. In that one week, I flew literally around the world, from Johannesburg to Atlanta, Atlanta to New York, New York to Sydney, and then back to Johannesburg.

  It was with great sadness that we left South Africa, a country I still love, a country where in many ways, I had become a real adult. Pamela was also sad to be leaving “our” continent after twenty-six years. We still return to Africa yearly and support many NGOs there.

  When we moved to Sydney in early 1980, Cara was only two years old. Sydney reminded us, on the surface, of South Africa. In my view, of the five most beautiful cities in the world, Sydney and Cape Town are both on the list. Looking for a house, we had grandiose ideas of water views and being able to go down to the beach every morning for a swim and the like. Yet we found ourselves half a million dollars short of that goal, settling instead for a $200,000 Cape Cod home with a deck and pool on a beautifully wooded lot about ten miles north of the city.

  We were still only twenty minutes away from the beach and we would often load a cooler with prawns, oysters, and a bottle of wine and set off to the beach to watch the sunset and have a late swim. We attended the opera, the ballet, horse races, and a ball to raise money for the duck-billed platypus. We made some friends, the closest being Lyn and Mike Hall, and discovered some second and third cousins living in Australia.

  While Sydney had great physical beauty, we found it to be a very provincial city and we were never really happy there. It’s an international city now, but it wasn’t then and I found it difficult to make friends outside the office. There were constant labor strikes that disrupted business as well as day-to-day life. The cost of living was about 10 percent higher than in South Africa, and even more for any service that involved labor, such as gardeners, babysitters, and garbage collection.

  My new position was also particularly difficult because of harsh tension between the Coca-Cola Company and the Australian bottlers. The man who ran the bottling plant in Brisbane, Arch Ball, was a rough character, street-smart and tough, but with absolutely no sophistication or culture.

  Just before we moved to Australia, a group of Australian bottlers, including Ball, just happened to be visiting Johannesburg. I hosted a dinner for them at our house, which was for sale because we were in the process of moving to Sydney. Ball cornered Pamela and told her, “It would be a bloody mistake for you to sell the house. You’ll need it again in six months after the Australian bottlers are finished with Neville.” He was serious.

  One of the first priorities in a new country is very simply to travel it and visit with the bottlers and the customers. It was also one of the most interesting voyages of discovery as there was no homogeneity, and each province or city has its own culture defined by its history, location, and climate. Brisbane, the capital of Queensland, is the brashest of the major Australian cities and Queensland’s history as a sugarcane state gives it a rough edge only slightly smoothed by the advent of tourism. Ball, the bottler general manager, was a former cane cutter and proud of it, and displayed a breadth of language and political incorrectness to match. On my first visit to Brisbane, he hosted a dinner at the top of the Hilton Hotel in a private room with a wonderful view. The major customers and wholesalers together with the owner of the largest tourism business and the owner of the dog racing track who was Ball’s best “mate” were there. Plied with copious amounts of alcohol and great seafood (yabbies are one of the world’s great crustaceans) they not too gently told me how they saw the world and their distaste for anything refined, or as they put it, the world of the “poofters.”

  In a way it was an evening of survival as I tried to bridge the gap by discussing sports. In Australia, this worked like a charm as it was and is the world’s most sport-obsessed nation. It’s a reflection of the outdoors lifestyle and the love of life that makes even the roughest Aussies fun to be with … but then I am a sports “nut” myself.

  The party wound up about midnight and I certainly knew that I’d imbibed too much as I battled with my room key to at last escape to bed. About five minutes later, there was a knock on my door and I yelled “wait” as I searched for a towel to wrap around my naked frame. (Being tall, I found hotel dressing gowns didn’t always provide sufficient coverage.) There at the door was an attractive and young dark-haired woman in a miniskirt who greeted me as Neville. I politely asked who she was and she asked to enter the room. As I hesitated and gathered my thoughts, she said, “Arch (the bottler) sent me and it’s all paid for.” Now we all know that alcohol weakens inhibition, and I don’t claim to be one of the world’s innocents, but I did have the good sense to politely say good night and close the door in her face. I had survived a test but I also had Arch’s number. Within the month, Mike Hall, one of my great friends throughout my Coke career and my life who was the marketing manager for the Australian division and worked for me, removed two Coke employees for code of conduct violations. They had worked very “well” with Arch. We were never able to prove specifically that they had accepted the bribe of a prostitute, but they had broken company policy in other ways by doing favors for the bottler.

  In the summer of 1980, I flew to Tokyo to make my first business plan presentation on Australia to Ian Wilson, who was now a company vice chairman. He had good news: He was about to be named Chairman and CEO o
f the Coca-Cola Company, replacing Paul Austin, who was retiring. Ian invited me to have a congratulatory drink with him later that night in his hotel suite. His executive assistant, Peter George, met me at the door. He and Ian clearly had been drinking. It turned out that Ian had just received a call from Atlanta informing him that the plans had changed. Roberto Goizueta, a Cuban who had defected to the United States in 1961 while on vacation in Miami, would be the new CEO and Chairman. I was sitting with an embittered Ian in his hotel room, his career at Coke over, all the stories and all the bile coming out. Austin had recommended Ian for the job and even held a celebratory dinner, wives included. Yet Robert W. Woodruff had overruled Austin in favor of Goizueta. Ian told me Woodruff did not want a South African to head the company. In 1980, international opposition to apartheid was rapidly building.

  In 1994 a still embittered Ian tried to launch a Pepsi franchise in South Africa after the fall of apartheid. The venture failed miserably. In 2001 Ian was sentenced to more than two years in prison after pleading guilty in the U.S. to securities fraud for misrepresenting the financial statements of Aurora Foods, a company he founded.

  After that awkward night in Tokyo, I returned to Sydney somewhat unsettled about my future. It had been Ian who engineered my move to Australia and had promised me the division president’s job, and he was now leaving the company.

  In early 1981, Sam Ayoub, an Egyptian who had succeeded Wilson as head of Asia, flew down to Sydney for a visit and we had dinner at the American Club. My boss in Australia, Robert Patterson, the division manager whose job I was supposed to assume within a year, was notorious as one who always had to retire early in the evening, demanding that company dinners end no later than nine o’clock. Just to annoy Patterson, Ayoub suggested we play the slot machines after dinner. Patterson declined but Sam and I walked over to try our luck. As we were standing there pulling the handles, Ayoub said, “You know the plan for you taking over from Robert, that’s still there. I’m taking him back to Atlanta. You’re going to be the division president.” Someone new had come in, taken a good hard look at the business, and decided that Ian’s plan was sound. I was greatly relieved.

  A few weeks later, Robert Patterson and I were visiting a bottler in Newcastle when Sam phoned. It was a Tuesday and he wanted me to be in Manila by Thursday to spend a week in the Philippines with John Hunter, the region manager, who was later to be one of the two principal operating officers of the Coca-Cola Company and clearly President Don Keough’s choice to be next CEO and Chairman. I told Robert that Sam wanted me in Manila on Thursday.

  “What’s that about?” Robert asked.

  “I don’t know, something about a joint venture,” I replied.

  “Don’t go,” Robert said, although he clearly realized that I had to make the trip. “That’s a crazy deal they’re putting together.”

  I hurried back to Sydney and was soon off on a plane to Manila. When we arrived at the scruffy airport, John Hunter was waiting for me at the bottom of the steps of the plane.

  Coca-Cola’s plans for me had changed dramatically and Hunter’s career and mine were to become happily intertwined.

  Three

  CONQUERING PEPSI IN THE PHILIPPINES

  Coca-Cola was losing the Philippines. And failure there might have marked the beginning of the end of the company’s global business.

  In 1981, the Philippines was the tenth largest soft drink market in the world, but Pepsi had a 2 to 1 market lead (double that in the capital city of Manila). The Coke bottler, owned by the famous beer maker San Miguel Corporation, was losing $5 million a year. It warned that it could no longer sustain the losses and threatened to exit the bottling business unless Coca-Cola shared the burden.

  At Coke headquarters in Atlanta, international markets were falling into disfavor as the U.S. dollar soared, which hurt overseas profits. John Collins, Coke’s new chief financial officer, made strong statements that the company was too exposed to international markets and that the goal was to increase the U.S. share of profits to more than 50 percent through acquisitions. This led to the purchase of Columbia Pictures and investments in the wine business.

  John Hunter, then head of Coca-Cola in the Philippines and later to become head of Coca-Cola International, was tenacious in convincing upper management that it would be disastrous for Coca-Cola to cede a Top Ten overseas market. His view was backed by the company’s new president, Don Keough, and other top executives including Sam Ayoub, who had succeeded Wilson as head of Asia.

  Hunter was the father of the deal. He worked out an agreement with members of the Sorianos family, who were major stockholders for decades, to sell Coca-Cola 30 percent of the bottling operation for $30 million. That doesn’t seem like much money now—in 2010 Coke announced plans to spend $1 billion in the Philippines over the next five years—but at the time it was Coke’s largest single foreign investment.

  Roberto Goizueta took the proposal to the board of directors, his first major decision as CEO and Chairman. At that time, it was very much a board of Southern gentlemen, many of an advanced age. It was not unusual, as I was to experience firsthand eighteen months later, for board members to nod off during meetings. I don’t know how much trouble Roberto had convincing the board to invest in a country run by Ferdinand Marcos, a dictator who was entering the end of his reign, where future stability was questionable. Roberto did tell me later that in order to avoid undermining him, a few board members had abstained rather than vote against the proposal.

  Hunter convinced the Sorianos that the new joint venture needed to have an experienced Coca-Cola bottling executive as its president and controller. I was named the first president of the joint venture, in part because of my experience with two Coke bottlers in Africa.

  My executive assistant was from San Miguel, a man named Romy Dalandan, who would show me the ropes but was also clearly watching me and reporting back to the 70 percent shareholders. One of my main challenges, therefore, was to prove that I was independent of both Coke and the Sorianos and that I was running the company for the benefit of both groups of shareholders without being adversarial to either side. This was complicated to a degree since we were disengaging from central San Miguel services including sensitive areas such as purchasing.

  From day one, the Philippines was not expected to be an easy assignment. Coke had attempted a turnaround there before and failed. One apparent advantage for Pepsi was that its bottler in the Philippines was wholly owned by the parent company. So for Pepsi, any return on investment from higher bottler profits went entirely back to headquarters. Conversely, Coke would have to share a large portion of its gains with the Sorianos.

  Hunter’s view was that over time, the franchise model could work well in the Philippines and I fully agreed with him. Coke’s profit margins on the sale of concentrate are higher than the margins the bottler makes on its operations, justified by the power of the brand. Bottling can be an excellent business if well run. The lower profit margins for the bottlers force them to operate more efficiently. At the same time, Coke had to live up to its end of the bargain by building the brand.

  Conversely, the Pepsi structure in the Philippines did not produce the intense focus needed for running successful bottling operations in the long term, as they would soon discover.

  For the time being, however, Pepsi was outselling us 4 to 1 in some areas of the country, including Manila, not just with Pepsi but with Mountain Dew, Mirinda Orange, and 7UP. The Philippines was Pepsi’s number two market in the world and was featured in a 1981 annual report as a prime example of how to beat Coke.

  This was a risky venture and clearly a number of people had much to lose, including me. I was told by many people inside the company that failure was almost certain.

  Ian Wilson, who had been so close to being chairman and had given me my Australia opportunity, was sure this was a way of pushing me out the door for being his prodigy. I didn’t accept that since I knew I had strong support not only from Goizueta, but f
rom Keough and Ayoub. Goizueta, in his first meeting with me after I took the job, assured me that he was putting his own reputation on the line as well as Hunter’s. However, as the saying goes, success has many fathers and failure is an orphan. I knew the risk, but as ever, the challenge excited me. Also, I was young enough to take the risk and prove, not in the least to myself, that I could lead a large company in a complex environment.

  If I failed, I could either go back out on my own or find another opportunity. The other incentive was a $200,000 tax-free bonus for signing up for five years, a fortune to me in those days, but also an indication that others before me had turned down the job offer.

  I have a belief system that when the Good Lord created the world, he created Coke number one and Pepsi number two. The Philippines was a terrible aberration, one of only a handful of markets in the world where Coke trailed Pepsi. It was fixable. That wasn’t just my blind faith, despite the fact that the eighteen Coke bottling plants were run down and some should have been closed. The index measuring the quality of Coke plants in the country was 29 on a scale of 100. It was about the same as the market share against Pepsi.

  Then I looked at Pepsi and saw they weren’t a great deal better in terms of quality and execution. They were just more aggressive in the marketplace, but aggressive without discipline.

  However, when I took Pamela to Manila for three days to look over the place, my chance to lead the turnaround almost fell apart. Riding into Manila from the airport, Pamela was appalled at the country’s abject poverty. The road, unfortunately, ran adjacent to a horrible slum. We were both from Africa, but this was far worse than anything in Africa at the time. In the hot tropical climate, the garbage and the filth was starting to emit a foul odor.

  “Darling, I don’t think I can do this,” Pamela told me before we reached the hotel. I realized we had a problem and understood her reluctance, but convinced her that we should complete the three-day trip and then decide.