Inside Coca-Cola

by Neville Isdell

  In the Philippines, my ability as a public speaker started to improve. I could rally people. I learned how to control an audience. It was a major turning point for me. Visiting the Philippines, Goizueta and Keough saw me in a totally different light. I sensed that I was starting to get on their radar screen as the turnaround progressed, and I was later invited to address a global meeting and to speak to the company board of directors in Atlanta.

  Around this same time, I met President Marcos for the first time and noticed that he did not appear healthy. His face was puffy, an indication of what would later be diagnosed as lupus. Both his health and political empire were in rapid decline. That was unsettling in the long term, but in the short term, we did not let that interfere with our campaign to defeat Pepsi.

  At the end of the first twelve months, Coca-Cola was close to regaining the lead in market share, led by the energized sales force and by new products such as Mello Yello. Coca-Cola had also purchased a brand from San Miguel called Royal Tru-Orange, which did much better than Pepsi’s Mirinda brand. New packaging was the major contributor to a growth surge.

  Pepsi had been selling a 12-oz bottle for the same price as an 8-oz drink, which I was sure was not sustainable even with cross subsidies from the concentrate profits. San Miguel, which had been operating at a loss, had lacked sufficient capital to convert to 12-oz bottles but the Coke investment made that possible. Still, San Miguel’s glass manufacturing capacity was limited and importing glass was too expensive.

  The original plan had been to eliminate all the 8-oz bottles, as Pepsi had done, and go strictly to 12-oz. I decided to keep the 8 oz bottle, realizing there was a need for a lower-cost drink in the market and that Pepsi could not continue to sell the 12-oz at the current price as inflation was deteriorating their profit margin. Keeping the 8-oz bottle also saved us money because it lowered the number of new 12-oz bottles we had to produce. It also meant fewer new crates. At the time, we were shifting from wooden crates—which rotted easily in the tropical climate—to plastic ones. Much more important, keeping 8-oz bottles meant that we could accelerate by at least a year the national rollout of the new 12-oz bottle as manufacturing capacity for new bottles was limited and therefore constrained our aggressive rollout.

  It is hard to imagine now, in the world of aluminum cans and plastic bottles, how important returnable glass bottles were in those days. A large portion of a bottler’s assets were tied up in glass. That’s why companies charged deposits on bottles, to ensure that customers returned them for reuse instead of throwing them away.

  One of the first things I noted upon arriving in the Philippines was that there was a game going on between Pepsi and Coke. Both companies were “stealing” each other’s bottles in an attempt to drain the competitor’s assets by forcing them to purchase more glass. Both companies had mounds of their opponent’s bottles stacked in vast fields. And because of the damp tropical climate, weeds soon covered the fields and rainwater—followed soon after by algae—filled the bottles. I have seen companies steal one another’s bottles in other parts of the world, but the extent of it in the Philippines was unbelievable. Immediately I ordered the practice stopped on our end, prompting Pepsi forces to label King King, Tony Eames, and me the Boy Scouts. Quietly they began to reduce the level at which they removed our bottles.

  As we tried to figure out how Pepsi was making a profit despite the low prices they were charging in the marketplace for larger bottles, we began to suspect it might have something to do with the accounting for bottle deposits.

  The deposits were normally set by agreement between the two companies. It was not price fixing but an agreement on the value of an asset: the bottle. Both Coke and Pepsi had been increasing their deposits to the point where they were closing in on the full value of the bottle. Normally, the deposit was far less than the full value. The difference between the deposit and the full value of the bottle was supposed to be placed on a company’s balance sheet as a cost—amortized over the life of the bottle—and a debit against profits. For example, if a bottle cost the company 50 cents but the retailer had paid a deposit of only 10 cents, then the company had experienced, effectively, a loss of 40 cents that it would list as a debit on its balance sheet, spreading that loss over the anticipated life of the bottle.

  I had agreed to one deposit increase with Pepsi just after I arrived in the Philippines because with inflation, I was worried that the deposit was not high enough to motivate consumers to return the bottles. Pepsi later came back with a proposal to raise the deposit price above the value of the bottles. That’s when the penny dropped. Pepsi was using the deposit increases to fuel its profits and those profits were funding the battle with Coca-Cola. When I refused another deposit increase, the game was over and Pepsi’s false profits evaporated. What I had not realized was that every time the deposit price increased, Pepsi’s local management was writing up the value of their bottles, including the redundant ones sitting in the fields, and they were showing their gains as an operating profit. Pepsi was forced to take an $85 million charge to profits, some of this related to Mexico, where a similar practice was being undertaken. In the aftermath, with completely new management, the company decided to lower its deposit, which instantly took money out of the pockets of the dealers who held those bottles in their stores. If a dealer had paid a 50 cent deposit for the bottle, he could redeem it now for only 25 cents. This created an angry network of retailers.

  In order to stay competitive, we were forced to match Pepsi’s deposit decrease. Otherwise, when a dealer wanted to expand his inventory, Pepsi would have a cost advantage because of the lower deposit and therefore lower cash outlay the dealer would pay. In order to keep our retailers happy, we decided to pay them the old, higher deposit for the bottles they already had in stock. So if they paid a 50 cent deposit, they could return the bottle for 50 cents, not the new, lower rate. This amounted to a $1 million loss for our company. That was a large sum, since at that time we were making only $2 million a year in profit. The decision, however, shifted the market psychology further against Pepsi, which lost its integrity with the dealers. With the sales growth that followed our decision, we recouped the $1 million within a year. I credit our Filipino treasurer, Chito Gonsalves, for pushing me to make this decision based on the values we shared. It was a victory for integrity.

  Another big mistake made by Pepsi was failing to attack Coke’s market share on the island of Mindanao. Since Coke had a strong market lead in Mindanao, we could charge higher prices. Those profits were used to combat Pepsi in Manila, where Coke was outsold 4 to 1. Since Pepsi had such a big lead in Manila, it had to spend four dollars to match every dollar we invested in the capital city. If Pepsi had applied the same strategy against Coke in Mindanao, it would have strangled our top profit center. For some reason, Pepsi never seriously challenged us in Mindanao, a major strategic mistake.

  And so, in 1983, Coke took the lead in the Philippines, one of the fastest turnarounds in a major market in the company’s history. At the same time, the Marcos regime was looking shakier by the day, with growing protests and political upheaval. I walked through one protest in the financial district of Makati and saw a typewriter nearly hit the mayor of Manila, the typewriter having descended from a window seventeen floors above to the stage where the mayor was speaking.

  The unrest had a chilling effect on foreign investment in the Philippines. Yet Coke continued to gain over Pepsi and our profits increased steadily. We built a new bottling plant in Manila and undertook massive upgrades at four other plants. The quality of our existing plants soon rose from a score of 29 to above 90, and equaled world averages by 1985.

  * * *

  Meanwhile, our family life was also undergoing some changes. Cara transferred from a Montessori school to the British School in Manila, trading her Philippine accent for a British one.

  We spent many weekends at some of the beautiful beach resorts in the Philippines, in particular Maya Maya with its nipa palm huts,
bamboo floors, and magnificent view of the beautiful South China Sea. With profits made on a “bet” on yen appreciation against the dollar, we bought a speedboat which allowed us to explore the coast and also gave me great pleasure as I developed my water-skiing skills.

  Then we used the $200,000 bonus for accepting the Philippines job to buy our first house in France, taking advantage of the depressed French economy and weak franc, which was due in part to the then socialist government, which cohabitated with the communists. Our farmhouse was built in the eighteenth century, with stonewalls a foot thick that backed up to a giant forest. Although we loved the Philippines, we felt like we needed a base in Western culture, a place to return for three or four weeks each summer to unwind after countless fifteen-hour workdays in Manila.

  One of the more taxing tasks that I had during my time in the Philippines was to be a judge—along with the U.S. consul general and others who were believed to have a fine eye for the female figure—in the Miss Philippines contest. The consul general and I had appeared on Two for the Road, a live television talk show hosted by journalist Elvira Manahan. The topic was the Miss Philippines contest and what we thought about Filipino women. The show proved to be very popular and a year later we were invited to appear again. We agreed, but insisted that we sit in the audience and not appear as guests. Yet I was in for a surprise. On this live show, Elvira announced a surprise segment, approached us in the bleachers, introduced me, and posed this question: “You’re so tall. How do you manage with women?” It was live television and I had to say something, so I managed to deflect the question by replying, “My wife is five foot eleven. And therefore there isn’t really a big height difference whatsoever.” She wasn’t going to buy that one. “No, no,” she said. “With us Filipinos?”

  I sometimes get myself in trouble by being too quick-witted and flippant and this was one of those occasions. “It’s all a matter of perspective,” I said with a big smile on my face. “You are judging in the vertical plane. In the horizontal plane, it’s no problem at all.”

  The next day my phone rang! Some people thought the episode was extremely humorous, but others berated me for overstepping a line in terms of what I should be saying as president of the Coca-Cola bottler in the Philippines. I learned a lesson from that incident and became a lot more disciplined as far as what I said in public.

  One of our strangest encounters during our time in the Philippines was watching a demonstration of “psychic surgery.” This was practiced widely in the Philippines and also Brazil.

  Pamela and I were attending a meeting of the Young President’s Club, an organization for corporate presidents under the age of forty, at a Manila hotel. The psychic surgery demonstration was offered as part of the program’s entertainment.

  We gathered in a hotel room with dim lights, kept back a safe distance from the “surgeon.” A woman who was a member of our group and a cancer patient lay on a bed. The “surgeon” performed with his hands only, starting by rubbing the woman’s stomach. She was conscious the entire time and in no visible pain. After a few minutes the doctor could be seen—using only his hands and no instrument—pulling blood and tissue out of the woman, which he dumped into a bucket. The woman, her cancerous growth allegedly removed, had no scar but only a red stomach from the surgeon’s rubbing. It’s typical magician stuff, although we’ve heard some people endorse it and say that they felt relief from their ailments after the encounter. I tend to think it’s a classic case of mind over matter, the power of the mind to bring about a cure.

  One of the people with us when we witnessed the surgery actually stole a bloodstained towel which had been used during the operation on his wife. He brought it back to the United States and had it tested. The stain was identified as human blood, but was too old to determine whether it matched the woman’s blood type. Sadly, her cancer was not cured.

  Another interesting encounter in a Manila hotel involved First Lady Imelda Marcos and the Playboy Club. And no, it did not have anything to do with shoes. It was during the visit by Don Keough and John Georgas in 1985.

  Danding Cojuangco, a Marcos associate, had gained control of San Miguel, in effect pushing out the Soriano family. In a meeting at the San Miguel offices, Cojuangco had offered to attend a bottler dinner and awards ceremony that evening.

  This being the Philippines, Cojuangco arrived an hour late, escorted by his security team. Coke had security around Keough, the company president. Members of the two security teams were eyeing one another nervously, since they were all carrying weapons. We managed to get on with the evening, when all of a sudden Cojuangco left to take a phone call. It was Imelda, inviting us to the Presidential Palace. We declined, saying we were occupied with the awards dinner. So Imelda decided to join us at the hotel, arriving a short while later, her security team in tow. Now we had three security teams operating independently.

  We had a separate room set aside to meet with the first lady, and Imelda immediately charmed everyone, including my wife, Pamela, and the wives of Keough and Georgas. It was a typical modern hotel meeting room, lacking in ambience. Yet suddenly, with the arrival of Imelda, the room was electrified.

  First she made an upbeat speech about the Philippines and her husband’s future, even though he was ill and only a year away from losing power. Imelda then proposed a toast to the business partnership, mixing San Miguel beer and Coke, half and half. We reluctantly followed her lead, mixing the same unsavory drink and spoiling good beer and great Coca-Cola. It was a clear demonstration of the first lady’s political savvy.

  After the dinner, we were to go upstairs to the Playboy Club for a show. “I’ll join you,” Imelda said enthusiastically, when she learned that the live show would feature the Filipino stars Pops Fernandez and Martin Nievera, both of whom had appeared in Coca-Cola commercials. The problem was that I had arranged for a group of young women to be there as dancing partners—just dancing partners—for the sales execs after the departure of key guests. Fearing that the women’s presence might be misinterpreted, I had to make sure the dancers were kept out of the Playboy Club while Imelda was there. Meanwhile, we progressed upstairs. Somewhere, I have a picture of Keough and Imelda walking up the stairs and a Playboy Bunny standing behind them.

  A few minutes later, with three security teams in place—Coke’s, San Miguel’s, and Imelda’s—someone dropped a metal chair on the parquet dance floor. I saw the security guys reaching for guns. Imagine a shootout involving the president of Coke, the head of San Miguel, and the first lady of the Philippines. The end of my career flashed in front of my eyes. It took a few seconds—it seemed like thirty minutes to me at the time—for the security teams to realize it was only a chair and to put down their weapons. It was a very scary moment.

  After the entertainment, Imelda was still raring to go. It was midnight and I had promised Don Keough an early evening since he had a 6 A.M. flight. “Let’s go and have some coffee,” Imelda said. I suggested we go back downstairs to the hotel room where we had eaten dinner. An agitated San Miguel executive blocked the door. “No, no, you can’t go in there,” he told us. It was the room where the dancing girls were still being closeted, waiting to join the festivities with our sales staff after our departure. Another potential career-ending moment missed!

  We retired instead to the hotel restaurant, talking until 2 A.M., Imelda entertaining us with stories of her husband’s greatness and how the Filipinos loved their first lady. Modesty was not her strong suit.

  Business continued to thrive in the Philippines. It was there that I first started paying attention to Coke’s multiplier effect on the local economy. In the smaller stores, Coke represented 20 percent of the total business. When you consider the thousands of Coke employees, store owners, and other vendors, the company had a massive effect on the Filipino economy, doing much to provide employment and help alleviate poverty, an effect that bolstered my belief in the power of capitalism.

  Toward the end of my time in the Philippines, Pepsi i
nvited me to breakfast with the company’s head of international business. I’ve always believed that there is absolutely no harm in meeting with the competition provided there are no illegal discussions. Such meetings provide a chance to talk about industry issues and also help one get a good feel for the competition’s level of confidence on individual issues. And they are good for both sides, which I knew.

  The meeting, however, turned out to be different from what I thought it would be. I was offered ownership of 10 percent of the Pepsi bottling franchise in Cape Town if I would sign a management contract for three years to try and resuscitate the business, which had been severely weakened by the Forbes family, owners of the Coke bottler there. I turned Pepsi down on the spot. I was too loyal to Coke. Secondly, I have a dictum, “Don’t sell something you don’t believe in,” which is why I have over my career rejected four offers from cigarette manufacturers. Finally, if I suddenly appeared in Cape Town to run the bottling franchise, Coke would do absolutely everything it could to make me fail. So not only was it something I was unwilling to do, it was something I would have been crazy to even attempt.

  In 1985, after four years in the Philippines, I was offered the chance to move to West Germany and head Coke in central Europe. Although San Miguel execs did not want me to leave, and I had a year left on my contract, Don Keough convinced them to let me go. I was off to a country I had never visited and a very different challenge.

  Before leaving the Philippines, we got in one last trip to Maya Maya for waterskiing and sun and took Cara to Tokyo for Disneyland and cherry blossoms. Then we packed up for Germany, taking Sebastian the basset hound with us.

  When we left the Philippines, Coke had a 2 to 1 lead in that huge market. Instead of losing $5 million per year, the joint venture was making a $4 million profit. The Philippines had a per capita annual soft drink consumption of 134 bottles per year, compared to 39 for Thailand and 10 for Indonesia. In 1984, my last full year in the Philippines, Coke sales increased by 11 percent, despite a 5 percent drop in soft drink sales across the country and a similar drop that year in the Filipino gross domestic product. Coca-Cola was selling more concentrate to the joint bottler and the value of its stake in the venture soared. A decade after the joint venture bottler was formed, the business was worth half a billion dollars, five times its value when I arrived.