Inside Coca-Cola

by Neville Isdell

  I left just as the Marcos regime began to totally unravel. Marcos was forced from power in February 1986 following the assassination of opposition leader Ninoy Aquino at the airport as he returned from exile. Marcos fled to Hawaii, where he died in 1989. Aquino’s widow, Corazon, led the EDSA revolution along with Fidel Ramos. Both went on to become president. The Aquinos’ son, Benigno, is the current president. Before Marcos relinquished his presidency, San Miguel was the target of a boycott by Marcos opponents because of Cojuangco’s connections to the regime, causing a temporary 20 percent drop in the value of San Miguel stock.

  In retrospect, the most important business lesson I can impart from my time in the Philippines is the importance—the necessity—of learning how to rally the troops. You can be the best accountant in the world, the best technician or global strategist, you can work one hundred hours a week, but if you can’t motivate the men and women who are the company’s frontline in the marketplace, you are not likely to succeed as a business leader. Of course, it’s more complicated than that. We need superior strategies and tactics and a strong balance sheet and always, the power of the world’s greatest brand, Coca-Cola. In the end, however, it’s all about people.

  When I look back at images of a younger version of myself in the Philippines doing pushups on the stage, wearing a general’s uniform, riding in a tank, smashing Pepsi bottles against the wall amid the blaring lyrics of “Eye of the Tiger,” it is a distant world from the staid Coke boardroom of later years, where I wore expensive suits and had the privilege of meeting with some of the most powerful business leaders of the world.

  I now realize that without the motivational skills I developed in the tropical islands of the Philippines, I would never have been able to successfully lead Coca-Cola or any other large company.

  In retrospect, I also see how important it was to have plunged into a corporate turnaround battle, which was to prove valuable when I became Chairman and CEO of the company nearly two decades later. It was risky, yes, but for any business executive, there is no greater opportunity, both in the short and long term, than transforming a money-losing operation into a profitable one.

  The Philippines made my career.

  Four

  STAGNATION IN WEST GERMANY

  There could not have been a greater contrast between the tropical Philippines with its relaxed, fun-loving atmosphere, and the often cold and rainy, sophisticated, and stoic West Germany—informality to formality, relaxed to disciplined. We moved from one extreme to another on every point of the scale.

  While back in Atlanta for eight weeks of training—technically I’d been away from the Coca-Cola Company for four years—Pamela traveled to Düsseldorf, which was buried in snow. In a week she found a house for us to rent, a school for Cara, and opened bank accounts, evidence of an amazing skill set that contributed greatly to my career advancement over the years. Then Pamela flew back to the Philippines to pack up our belongings for the move to Germany. Cara was only seven and had already lived in four countries and on three continents.

  I was the first non-German since 1933 to head Coca-Cola in Germany, which was vying with Japan to be the largest division in the company’s international portfolio. While on a visit to the Philippines, Don Keough had offered me the new job during a meeting at the famous Manila Hotel. He wanted an outsider to shake up the business and energize a profitable but stagnant market. I was up for the challenge, even though I spoke very little German despite a one-week course I took in New York.

  My new job came with the title of Division President of Central Europe, with Switzerland and Austria also part of my territory. It was a tumultuous year for Coca-Cola, which had in a bold move introduced a new, sweeter formula, New Coke, in the spring of 1985.

  Consumer backlash was palpable, as I discovered while in Atlanta for my orientation on Germany. Checking in on a flight from Atlanta to Savannah for a meeting on bottler restructuring, an airline attendant saw the Coca-Cola tag on my luggage and promptly said, “I hate you. You took my Coca-Cola away. You’ve ruined my life.”

  You could feel the tension at headquarters, which was fielding similar complaints, even from bottlers who said they were ostracized at their hometown country clubs. The Coke leadership called in executives from all over the world, telling everyone in no uncertain terms to stay on message during the controversy and not to criticize New Coke.

  Germany had been scheduled to be next behind the U.S. to launch New Coke but it became clear in my first meeting with the German bottlers that they wanted no part of it. I then discovered that we were about to launch Cherry Coke in Germany so I requested headquarters to delay New Coke, arguing that there wasn’t anything wrong with New Coke (wink, wink), but that handling two launches at once would be too difficult. I was buying time and it worked.

  New Coke had been one of the most heavily researched products of all time, and while many consumers liked the taste, the studies never detected the impact of killing the old formula, which over decades had developed an extremely strong and nostalgic following. As Keough later said, the original formula reminded many consumers of their youth, and Coke was taking that away. In fact, some believed the New Coke fiasco was a clever marketing trick since sales actually increased as lapsed users rediscovered their favorite brand. Keough has always captured the truth when he said, “We are not that dumb and we are not that smart.” It was a great lesson on market research. You have to be sure you’re asking the right questions in the right way in the right context. No one researched what the reaction would be if the result of New Coke was taking the old formula away. It was also a much deeper lesson: The brand belongs to the consumer. While the formula was under lock and key, what it stood for was locked into the minds of consumers. The brand was bigger than the company. Many years of history had unequivocally defined the brand to its loyal consumers and even to its lapsed consumers.

  The old formula, renamed “Classic Coke,” was resurrected after about ten weeks and New Coke gradually faded away, sparing me from facing that controversy in Germany.

  With that potential maelstrom averted, I began settling in to my new job and our new life. It was not easy at first, but we worked hard to connect to the local culture.

  While most of the expats chose to live near the American International School, where Cara was enrolled, Pamela and I decided to live in an all-German neighborhood. This was somewhat difficult at first since our neighbors were not prone to knocking on the door and introducing themselves. In fact, they hardly knew each other. Shortly after arriving, we held a dinner party for my direct reports and their wives; some of the wives of the senior executives had never met one another. Socializing with coworkers was not part of the culture. The dinner party was also a lesson in German punctuality. At ten minutes before the appointed arrival time, we heard the cars pull up. At two minutes to the hour, we heard the almost simultaneous opening and closing of car doors. Then the doorbell rang and there was everyone standing at our door!

  At the office, managers always kept their doors closed, a part of the German psyche. I had read about German culture and its do’s and don’ts. The classic American way was to make changes that alienated the culture, a big mistake. While the closed atmosphere did not match my style, the only change I made was to keep my own office door open, hoping to set an example.

  With the help of Heinz Wiezorek, my German equivalent of King King, I did try to make little moves to create a more relaxed atmosphere. Senior management ate lunch each day in the executive dining room, where there was a buzzer just beneath my place at the table. In a robotic procedure symbolic of the stilted office atmosphere, I would hit the button when we were finished with the first course and the door to the kitchen would open, almost instantaneously, and a waitress would march in to clear the plates for the next course of the three-course meal. After a while, I decided to close the executive dining room, requiring executives to begin eating lunch in the canteen with everyone else. I also had the offices repainted
in white and Coca-Cola’s signature red, covering up the depressing dark brown color scheme. We also eliminated preferential parking spots. These may seem like minor moves but they were symbolic of a more open culture, a less hierarchal culture that I was trying to create. My view is that people judge not just by hearing what you say but by seeing what you do.

  This was the era of a German terrorist group called the Red Army Faction, which killed and kidnapped leading business figures. Sadly, Alfred Herrhausen, Deutsche Bank chairman and a member of the Coca-Cola advisory board, was a victim of the Red Army Faction. I was reliably informed that my name was on the list. Our home was equipped with a panic button to the local police which we were forced to use one day after a drunk arrived at our door, shouting abuse. Police were there in ninety seconds. We were also provided with a company driver who would take Cara to and from school each day, always by varied routes. Most of the parents at the school came to believe that the driver was actually Cara’s father. It took me quite a few months to learn that although the drivers may not speak English well, they understood it completely. This allowed me to build a very useful relationship with them. They would pick up visitors from Atlanta at the Frankfurt airport for the two-hour drive to Essen. As they sat in the backseat, talking about the business and about me, the drivers would listen, understanding just about everything that was said. It took about a year before they started relaying the stories to me and I had a wonderful accidental espionage operation about what executives in Atlanta were saying and thinking. Lesson: Drivers have ears.

  In Germany, I faced a completely different business challenge than I had in the Philippines. Coke overwhelmingly dominated the German market and profits were good. However, sales were stagnant, as were profits.

  Part of the solution was to consolidate the 116 bottlers in West Germany. The bottling system had been developed after World War II, literally with bottling equipment that had been used to ensure that U.S. soldiers had Coca-Cola on the battlefront. During the war, Coca-Cola Germany remained intact, managed by Max Keith. Although it was impossible during the war to import Coca-Cola concentrate, Keith invented Fanta, the company’s first noncola product, which is now the leading orange drink in the world, although the Italians also claim provenance. In the war’s aftermath, smaller bottling plants made sense because there was a shortage of investment capital and many of the roads and bridges were still bomb-damaged. The trip from Essen to Düsseldorf, now a twenty-minute drive, took two hours in the early postwar years. In those days, the cost of distribution could actually outweigh the cost of production, so the solution had been to build many smaller bottling plants throughout the country. There was a bottling plant in Essen and a bottling plant in Düsseldorf.

  The German bottling system, precisely because the plants were small and locally owned, became one of the best in the world, trailing only Japan and the U.S. and counting among its owners many prominent citizens, including Max Schmeling, the former heavyweight boxing champion of the world, who defeated Joe Louis in June 1936 and returned triumphantly to Berlin aboard the Hindenburg airship, only to lose to Louis in a rematch two years later. Max told Pamela that he had been booked on the ill-fated final flight of the Hindenburg in 1937, saved only by a last-minute change of plans. Max, who had refused to join the Nazi Party and saved the lives of two Jewish children by hiding them in his Berlin apartment, was a hero in Germany for the remainder of his long life.

  Despite its lofty reputation, the German system had become a very high-cost operation by the time I arrived, lacking the economies of scale that consolidation could provide. Also, the original owners of the bottling plants were passing them on to their children, who were already wealthy; some of them drove Ferraris and Mercedes-Benzes and weren’t always as focused on Coca-Cola as their parents had been. It’s the classic story of family-owned businesses and one of the flaws in the franchise structure.

  With a 6 to 1 lead in Germany, the strength of the Coke brand meant that we could charge a premium for our product, with our prices often 20 percent higher than Pepsi’s. Yet in the long term, I knew this was unsustainable. We were facing increased competition from imports and from Pepsi. We, as a system, had to bring down our costs.

  As Heinz and I went about trying to consolidate the bottlers, I found the command structure in Germany under which we worked strange and sometimes awkward. I was caught between three Germans: Klaus Putter, Claus Halle, and Eric Kreusch. Putter was head of Coke in Europe and Halle was International President. Both were based in Atlanta, but had a fractured relationship. Putter was technically my boss, but from day one Halle instructed me to report to him directly—though informally—as well as to Putter. Further complicating matters was the fact that Kreusch, my predecessor as head of Coke in Germany, had stayed on when I took over, and had been assigned to manage the bottler consolidation. This seemed to make a great deal of sense since Kreusch knew the bottling system and its owners, and the complexities of German law. Kreusch was detached from the day-to-day operations of the German business which I was undertaking with Heinz.

  In German management structures, all of the top executives are referred to as Geschäftsführer or business leaders. Unbeknownst to me, Kreusch was portraying himself to the bottlers as the head business leader, the speaker. Although he had been demoted and was reporting to me in the Coca-Cola structure, I was told he had set himself up among the German bottlers as my superior. I was forced to go to Atlanta and explain to Halle that I believed Kreusch was undermining me. I asked for permission to let Kreusch go, and Halle approved. I then sought and received Putter’s approval.

  It was a tough start for my new job. I didn’t speak the language, a key executive was working behind my back, and I was caught between two bosses who, although they had started in the German business within days of each other, had always had a frosty relationship.

  My next task was even less pleasant: I eliminated one hundred high-cost positions in the head office, which was overstaffed and over-bureaucratized. We were not investing enough money in the marketplace, hence the stagnation. In order to free up funds, I needed to cut costs. In Germany it’s very difficult to fire employees. You have to go through the Works Council and the process is laborious. A number of people who worked for me, including the head of human resources and the head of legal, told me it would be impossible. Within a year, however, it was done and the savings directed to marketing.

  If there is one commonality in my career it has been the cutting of unnecessary costs to fuel marketing. (I have seen how management cuts marketing to fuel the bottom line and make their numbers, to the detriment of the business in the long term.) My approach has to a degree earned me the reputation of not being tough enough on marketing costs, and while recognizing that there is always some waste in that area, at the end of the day marketing is the most important thing we can do to fuel the brands.

  In my first speech to the German bottlers, I told them, “You are looking at this Irishman who has come here from the Philippines, who knows nothing about Germany. You’re looking at him and saying, ‘Who is this man and why is he here?’ I’ll tell you why I am here. I’m here because this is a great business which is no longer performing. You are living in the past and we need to look to the future.”

  They thought they were the best bottlers in the world, yet there was no growth, which was indisputable. What was disputable, however, was a belief by some that we had reached the limits of growth.

  “I’ve come to bring growth back for you and for us,” I continued. “But I want to give you the good news and the bad news. The good news is that I’m a bottler and I know your business. The bad news is that I’m a bottler and I know your business.”

  The bottlers banged their fists on the table in a form of applause and appreciation, thawing the relationship temporarily, though many battles were yet to be fought. Germany had a very powerful Bottlers Association that was run by a bottler named Klaus Maurers. Klaus and I managed to strike up a close rela
tionship. He was a tough negotiator but an honorable man. Later, when I was Chairman and CEO of the company, the trust we developed during those early years would prove to be particularly valuable.

  As Heinz and I began examining the bottler consolidation issue, we realized that the Coca-Cola Company had a major bargaining chip. German bottlers had been reluctant to invest in canning plants, so Coca-Cola had built most of them instead, which made Coca-Cola the owner of canning operations in Germany. Over the years, cans represented an increasing percentage of overall sales and the German bottlers regretted that they had ceded this lucrative segment of the business. Essentially, the company had two profit streams: one from concentrate as was normal, and the second from production of canned products. The bottlers only had a modest distribution margin on cans although some did own shares in some of the canning plants.

  Heinz and I developed a plan: We would consolidate the 116 bottlers into one new company, which would include the lucrative canning franchises. The bottlers would receive shares in the new concern in exchange for their plants. The shares would have been much more valuable than the small bottling plants themselves, in part because of the canning franchises but also because of the enormous cost savings we calculated from consolidating the bottling operations.

  Max Schmeling, the boxing champion, was well respected and he and I had developed a strong relationship, despite the fact that his English was not very good and my German was weak. On his eightieth birthday, I presented Max with a sculptured boxing glove holding a Coca-Cola bottle, made of heavyweight Krupp steel. It encapsulated Germany’s solidity and Max’s life as a boxer and Coke bottler.