This was a huge breakthrough not only for McDonald’s and Coca-Cola, but for all Western business, engineered beautifully by a McDonald’s executive from Canada, George Cohon, after a chance meeting with Soviet officials during the 1976 Olympics in Montreal.
For the first time, foreigners were allowed to stay at the President Hotel, thanks to Cohon’s breakthrough. It was an average hotel by Western standards but a big step above the poorly maintained hotel where I had stayed on my previous visit. Every floor had a woman who would hand you a room key and record the time you left and returned. There was a room at the end of the hallway and occasionally the door would be open and you could see a man wearing headphones, clearly monitoring the listening devices planted in each room. When you had a really important conversation to make, you literally took a walk in the park.
McDonald’s scheduled a tour of its new factory that supplied the new restaurant and Willie Van Eupen, Coke’s region manager in the Soviet Union, rented a stretch limo to transport the Coca-Cola executives, including company President Don Keough, a clearly lavish gesture that would have embarrassed all of us before one of our largest clients, McDonald’s. There was no time to get another car, so we halted the limo two blocks away and trudged through the snow to the factory, hiding away the limo.
That night there was a huge celebratory dinner at the Kremlin, complete with a fashion show and music from the band of the Kremlin Guard. I was sitting at a table with Don Keough and other top executives when Craig Cohon, George’s son who worked for Coca-Cola’s fountain division in Atlanta, approached me. He had hooked up with one of the Russian models, telling her he was an American movie mogul, and asked me if I would go along with the ruse. I agreed and as we were talking to a group of models, the Kremlin band broke into a rendition of “A Hard Day’s Night” by the Beatles. You’re in the Kremlin. There’s Beatles music. You have to dance to it. Craig grabbed one model, I grabbed the other, and we danced. We were having fun, dancing, and suddenly I looked up and there’s another woman, a beautiful blond, waving at me. It was my wife. I sheepishly waved back.
After the dinner, Pamela and I joined a group back at the hotel bar, including the models and Moscow City Council members, Don Keough and others. Pamela gave up around 1 A.M. I kicked on to around 2:30. I have a photograph somewhere of Don and myself, Craig Cohon and his brother and the Russian models. All of us looked rather the worse for wear. The larger point is that relations with the Soviet Union were improving. Here we were having fun in a hotel reserved for the Soviet hierarchy, which our tour guides had never been inside. The opening of the first McDonald’s, along with the Coca-Cola neon sign on Pushkin Square, was a harbinger of better days ahead.
I had to learn quickly how to endure an old business ritual in the Soviet Union: the ubiquitous vodka toast, which requires you to balance the vodka glass on the edge of one hand, raise the glass to your lips, and lower it without dropping it. First, they would make a toast and you would knock back a shot of vodka. Then you would be expected to make a toast and it would go on for a dozen rounds or more. The idea, it seemed, was to get you drunk enough so that you would do something stupid. This could be at any time of the day or night. The day after the opening of McDonald’s, Don Keough and I had a meeting at the Kremlin with the minister of foreign economic affairs. It was 7:30 A.M. “We have to have a toast,” the minister said, bringing out brandy from his desk drawer for a round of toasts before breakfast.
I developed a survival system. Everyone during the toasts had water as a chaser. I would ask for a Coke as well. I would knock back the first two shots of vodka in the normal fashion. From then on, I would spit most of the vodka back into the water glass, chasing the toast with my Coke to make it appear normal. I was able to essentially drink less than half the volume of the others. I remember one Russian complimenting me, “You can really drink your vodka. You’re strong!”
The Soviet Union was slow to adapt to capitalism, but progress was rapid in the smaller countries of Eastern Europe. One absolute gem was Romania, which was virgin territory for both Coca-Cola and Pepsi. Just two months after the February 1990 overthrow of Romania’s communist president, Nicolae Ceauşescu, a letter arrived on Roberto Goizueta’s desk from Ion Staminichi, who ran two state-owned bottling plants in Romania and wanted the Coca-Cola franchise. The letter was passed to me and from me to Muhtar Kent, who was deputy division president in Essen, Germany. We set up a meeting with Staminichi and were impressed. Staminichi had never buckled to Ceauşescu and yet had managed to survive. Although the plants he ran were old and really run down, and produced only flavored drinks and not cola, this was an opportunity to be first in the door. Georg Fleischer and I made a pitch to Don Keough for $8.5 million for a joint venture, arguing that it was a meager investment to be first on the ground in a European country of 20 million people. Don pounded the table, as he was sometimes known to do.
“You’re asking me to invest $8.5 million of Coca-Cola’s money in Romania and you don’t even know how to get that money out of Romania?” he said.
“Yes, Don,” I replied. “I believe things will change. For $8.5 million, to be first in against Pepsi, to capture that market, is the right thing to do. It’s leadership and we need to be the leader.”
Don looked at me and said, “OK, go do it.” The message was: Don’t wilt. Don, a brilliant manager, was trying to ensure I was committed. In the end, that was more important than Don’s own opinion of the deal, since I would be the one making sure it worked. “OK, Don, we’ll deliver,” I said. Romania has proven to be a very profitable market for Coke, with strong leadership over Pepsi.
As we invested quickly in one Eastern European country after the other, Muhtar was my most valuable lieutenant on the ground. “We took some risks and made some things work fast for the company in Eastern Europe,” Muhtar recalled. “We made sure that people up the chain knew what we were doing so that there was never a surprise. We pulled the bureaucracy with us, so to speak. They were hanging on to the train.”
Coke decided to invest in Romania before the country had even written a foreign investment law, Muhtar recalled.
“We were buying a factory and we were going to put a two-year supply of concentrate in as our equity,” said Muhtar. “Don asked, ‘What are you going to do after two years?’ We had faith. We knew it would take care of itself. It was a very genuine belief that all of those countries, as the Berlin Wall fell, were actually going to fall into a capitalist system, sooner or later, one way or the other, and they all needed foreign investment, they all needed free-floating currency. It was a risk worth taking.”
Every country had its own story, its own leaders, its own way of doing business.
“In Poland, there was no private ownership of land,” said Muhtar. “How are we going to get land for the first Coca-Cola plant in Eastern Europe? We did a deal with the Catholic Church because the church was the largest land owner in Poland and had been for centuries. Even the Soviets, no matter how much they pressured the Polish government, could not get the Polish government to confiscate land from the church because it would have been considered heresy.”
We signed a deal with the church to lease land for the first bottling plant. “That land to this day is still leased from the church,” said Muhtar.
We built the new bottling plant in Gdynia, a few miles from Poland’s shipbuilding center, Gdansk, where the Solidarity Movement had been born. Don Keough flew in for the opening along with other executives from Atlanta. It was Coke’s first new bottling plant in Eastern Europe, a very big deal. That Sunday morning, Don informed us that we were all going to mass at the historic St. Brigid’s Church, which counted among its parishioners Solidarity leader Lech Walesa. The pastor at St. Brigid’s was Henryk Jankowski, Solidarity’s chaplain.
They seated the Coke delegation in the first row of the packed church. We couldn’t understand Jankowski’s entire sermon, but it was laced with the term “Coca-Cola.” It sounded almost as if he was te
lling members of the congregation that if they didn’t drink at least one Coke every morning, they would be sentenced to eternal damnation. We learned later that he was detailing the economic benefits of the new plant in bringing jobs to the community. It was an education on the benefits of capitalism, straight from the Catholic Church.
Soon, it was time to collect the church offering. Don, an American Catholic, placed U.S. dollars in the plate and smiling, passed it to me, an Irish Protestant. I put my money in and handed it to Georg Fleischer, a German Lutheran. Next was Andrew David, the Greek Orthodox bottler who was scouting investments in Eastern Europe. He passed it on to Muhtar, an American-born Turk and Muslim. The last member of our delegation was Danny Moskovitz, an American Jew. Here was the Coca-Cola delegation and it was totally ecumenical, long before the burst of globalization of recent years. This is why the Coca-Cola Company is so fascinating. It’s a United Nations, a functioning and profitable United Nations.
The transformation of Eastern Europe continued, country by country, with Muhtar leading the charge through unstructured and uncharted territory.
“Travel was often very difficult,” Muhtar recalled. “I shared a hotel room with a Chinese guy in Albania. I turned the light on and there was a guy in the other bed. I thought I had the wrong room and went down to the lobby, but they said, ‘No, that’s your room.’”
We were corporate cowboys, and reporters sometimes described me as the Indiana Jones of Coca-Cola. “We were pioneers in an environment that was just beginning to become less hostile to capitalism and free enterprise,” said Muhtar. “The same thing has happened in China over the last ten years. I believe in the second decade of this century, a similar boom and opening will happen in Africa, which has a billion young people.”
Amid the opening of Eastern Europe, Muhtar and I faced an ugly stand-down with a bottler in Turkey. It’s rare for Coca-Cola to revoke a bottler’s franchise. Only in extreme circumstances is this done. Normally, the company tries to work with the bottler to resolve the problems. The Turkish bottler, the Has Group, controlled 80 percent of the volume in that country, and after the owner, a renowned and successful businessman, died, the quality of the operations began to deteriorate. The owner’s widow put her partner in charge and he was hostile as we tried to help him improve. In a meeting in Istanbul with Muhtar and me, sitting on the partner’s desk was a pistol, which I felt was a clear attempt at intimidation.
We summoned the bottler’s owners to Atlanta for a meeting and I instructed security to bring the boyfriend into the building through the basement and give him a thorough pat down; not the usual greeting for a major bottler, but in this case it was necessary to show the partner that we didn’t trust him.
During this same time period, Muhtar’s BMW was destroyed in an Istanbul car bombing. Fortunately, he was not injured and no link with the Turkish bottler was ever established. Yet these were tense days indeed, even more so when the bottler’s widow began lobbying the wife of Turkey’s president, Turgut Özal, to intervene on her behalf. Muhtar arranged for us to meet with the president and we arrived at his office on January 17, 1991, just as the U.S. began bombing Iraq, the launch of the first Gulf War. Özal was watching the war unfold on CNN.
He gave us a whiskey and the three of us watched it. “He was getting calls from President Bush,” Muhtar recalled. “In front of us, he talked to Bush twice because the line got cut the first time. In between, we were trying to tell him that we meant good for Turkey, we were here to invest. We were not trying to be harmful to anyone.”
When I asked President Özal why he was watching CNN when at the same time he was talking to President Bush, he laughed and said that Bush was also watching CNN as the network delivered information quicker than the White House bureaucracy.
Coke revoked the Turkish franchise, parted amicably with the Has Group, and built our own bottling plants. Today, Turkey is one of the company’s strongest growth markets.
The only other bottler dispute of that magnitude during my career developed in Norway and Sweden in the mid 1990s. I learned in a newspaper story that Orkla, the bottler in part of Norway, had taken over the Pripps Brewery, which was the Coke bottler in Sweden. Coca-Cola had never approved the sale, a clear contractual breach. Furthermore, Orkla wanted only the Coke franchise in Sweden, not Fanta and Sprite, which they would replace with their own brands. We refused, prompting Orkla to launch a campaign against us, with help from the trade union, charging that we were trying to revoke their Swedish franchise. I immediately left St. Petersburg, Russia, where I had been visiting with Coke’s new president, Doug Ivester, and flew to Oslo to set up, effectively, a war room.
Orkla, backed by the union drivers, took the drastic step of halting delivery of Coca-Cola within Norway until we relented in Sweden. Television news stories featured shots of store shelves being emptied of Coca-Cola products by union members. We tried to fill the gaps with other bottlers within Norway, but were making little headway. It was an attack on the integrity of the Coca-Cola franchise system and we could not back down. We were willing to pull out of Sweden and Norway if necessary. In this I had the full backing of Doug Ivester.
It just so happened that through my work with the Retail Research Council, I knew Stein Erik Hagan, who built one of the largest retail chains in Norway and was a purchaser not only of large volumes of Coca-Cola but also beer. “Leave it to me,” Stein Erik told me. “I know exactly how to solve this.”
He placed a large Coke order and when Orkla replied that it would not deliver, he told them not to bother delivering the beer either, which was a potentially devastating financial blow. It was as simple as that; in the short term the problem was solved and our products were returned to the shelves. It demonstrated not only the power of the retailer but also the power of good customer relations. Stein Erik saved the day. In the long term, we built our own bottling plants in Stockholm and Oslo, revoking the Orkla franchise and settling the lawsuit that ensued. We had successfully defended the integrity of the franchise system which later helped me as CEO when I finally completed consolidation of the German bottlers. They knew that my soft, collaborative side could be backed by a hard edge.
Meanwhile, business in the Eastern European countries including Hungary, Czechoslovakia, and even the smaller former Soviet republics such as Belarus expanded rapidly as we furiously built new plants and invested in existing factories.
Russia remained a much tougher market to crack. It started in 1990 with a McDonald’s in Moscow and the big red Coca-Cola neon sign, but not much else. In Russia, the gray area between communism and capitalism lingered longer than it did in other countries. The economy had been so primitive under communism that some vending machines still dispensed Cokes into glass cups secured by a chain. Even paper cups were scarce under the communist system. The coin mechanisms on the vending machines often would be broken so attendants would stand there to take the customer’s money. Each customer would drink Coke from the glass cup with the chain still attached. The next customer would drink from the same, unwashed cup. Clearly, we had a long way to go.
We struggled to secure a countertrade deal with Reynolds Aluminum for the production of can coil, with Coke guaranteeing to purchase $20 million a year of coil from the factory, but the Soviets could never quite grasp why they should have to pay Reynolds a licensing fee for the use of its technology. The Soviets spoke with great pride about how they had designed and manufactured the steel for their nation’s space program and they could not fathom why they, great steel-makers that they were, should have to pay a company for its proprietary technology. The concept was completely foreign to them. They really had a hard time grasping the concept of capitalism: selling a product for a profit was foreign to them and there were few laws, government regulations, or agencies at that time that could even accommodate private investment.
In early 1991, Coke decided to build a $12 million company-owned bottling plant near Moscow, but it was illegal then for a foreign company
to purchase land. Western investors normally worked in joint ventures with a Soviet partner, which would provide land as equity in the deal. We tried to lease land on our own, without a joint venture partner, the first time any Western company had attempted to do so. In fact, a law regulating the leasing of land was still being written and had not developed into anything concrete. Government officials also had no idea who owned the land: Was it the Soviet state, the Russian Republic, the Moscow City Council, or the state-owned farm that was then on the property?
Even if you could determine the rightful owner, what was the market price of the property when there was no market? And if you determined a value, there was no way to pay in convertible currency without 40 percent of the purchase price going directly to taxes.
We pushed on, despite all these obstacles, negotiating with the city of Moscow. The premise was, “We want to help you separate state from business.” Then the entire structure of Moscow city government changed right before our eyes following a failed military coup in August 1991 that marked the end of the old Soviet Union. After the coup attempt, Moscow Mayor Gavriil Popov destroyed the old communist system of managing the city. The decision-making process had been completely changed and we were no longer sure who was responsible for our building site. We were forced to forge relationships with the new government, the city’s privatization committee, the Russian Federation Land Commission, President Boris Yelstin’s staff, sanitation inspectors, and community action groups. We used eleven lawyers and went through fifteen revisions of the agreement before finally enduring a fourteen-hour meeting of the Moscow City Council.
The city priced the land, which was fifteen miles outside Moscow, at $5 million plus a lease payment each year, which made it as expensive as prime office space in Manhattan. It was an outrageous price and we walked out of the city council building without a deal.
Inside Coca-Cola Page 12
