Inside Coca-Cola

by Neville Isdell

  Then Craig Cohon, whose father had engineered the first McDonald’s in Moscow, managed to land a seat next to Mayor Popov on a ten-hour flight to the U.S. The mayor agreed that Coca-Cola would add value to the city and endorsed cutting the initial payment to $800,000 from the outrageous $5 million and extending the lowered lease payments over a 49-year period.

  From October 16–25, we revised the lease agreement another ten times, deciding that the $800,000 initial payment would be allocated for scholarships at the International University of Moscow, and for medical supplies at a children’s clinic. More negotiations ensued and we revised the lease agreement six more times, finally getting all the required signatures at 5 P.M. on December 17, the last minute of the last day before government closed down for the holidays.

  We were not finished yet. The land lease could not go into effect until the land registry was signed. Unfortunately, there was no land registry for Moscow or Russia. We spent the month of January helping the privatization committee create a registry. In March 1992, the Central Bank of Russia signed the land registry and the property officially belonged to Coca-Cola. We ordered the medical equipment and transferred money for the scholarships. Construction began. However, the saga was still not over. The city refused to honor the terms of the deal that required the city to pay for the connection of utilities. Coca-Cola had to spend an additional $500,000 or face even more delays.

  The time, effort, and resources required to do even basic business transactions in the former Soviet Union were enormous. Yet the potential was also enormous.

  Pepsi was initially outselling us 10 to 1 and was deeply entrenched with the communist government. As the central government weakened and formerly state-owned plants were privatized, Pepsi’s advantage diminished. We swooped in to invest millions in ten factories where beer and cognac, in addition to soft drinks, were bottled. It was a roll of the dice because our legal team was writing some of the first private contracts in Russia, and even though the contracts were well-fashioned, there was no certainty of a court system that would enforce them in the event of a dispute. These were crazy deals as far as Pepsi was concerned. Yet they had failed to realize how quickly the power of the central government was failing. No longer did the central government have the money even to provide spare parts for the bottling plants. In the end, we recouped our investment on all but one of the plants. Our only loss occurred after the plant owner died of throat cancer and his son was debunked by the local mafia. Not surprisingly, the mafia refused to honor the contract.

  I appointed Michael O’Neill, whom I had first met in Germany when our daughters attended the same international school, as Coke’s new manager in Russia. A former trade representative for Ireland, he was stationed in the Soviet Union in the late 1970s and spoke Russian fluently.

  When I lit the Coca-Cola sign at Pushkin Square, Michael was shivering on the roof of the building, making sure the electricity worked and that the sign did not fall on the crowd below.

  Michael lived in a brick dacha built by German prisoners of war, in the forest about forty-five minutes outside Moscow. Stalin had once stayed there. During one of my visits to the dacha, I really started to get a sense of Russia. You were in this thick forest of birch trees. It was winter and it had snowed, but the sky had cleared and you could see the stars. There was the moon, a blanket of snow, the trees, and the stillness of the night. It was like a scene from Dr. Zhivago, whose author lies buried less than two miles away. Russia is a tough land, a hard land, but beautiful at the same time. You begin to understand the Russian soul, the depth of feeling for the earth.

  Pamela and Cara would sometimes accompany me to Russia and one of their favorite spots was an open-air market where you could buy delicate rugs from the Caucasus at very low prices. Cara once bought two for $130 and promptly wrapped one of them around her to shield against the bitter Russian cold.

  During one visit, Michael and I had been scheduled to go on a boat trip with a large group of business leaders. We arrived early so Michael suggested we drive a couple of kilometers away on Leningrad Highway to visit a cognac plant that we were using to bottle Coca-Cola products while the Moscow plant was under construction. The first batch of Fanta was just coming off the bottling line. The assistant manager proposed a toast, and we drank Fanta, mineral water, and cognac and ate bread and Russian sausages. He brought in three or four of the plant supervisors, who were all women, as was common in the old Soviet Union. With Michael acting as translator, we talked for hours about life in the new Russia and I was so enthralled we skipped the boat tour entirely.

  One woman was already nostalgic for communism, primarily because she had fared well under the old system.

  “Where do I send my kids in summer?” she asked. “It used to be that the state paid for children to go away for camp. What do I do now? My kids are on the street. I have to pay for my own vacation. The rents have gone up.”

  Conversely, a younger supervisor could clearly see the long-term benefits of market reform and the upside potential it promised. This was a common debate in Russia and was often delineated by age. It became an issue even inside Coca-Cola with older employees in Russia sometimes unable or unwilling to embrace the new system.

  The frank discussion at the cognac plant was one of the most fascinating evenings of my life. Sadly, six months later, the manager of the plant was gunned down by the mafia.

  “He was approached by the mafia to produce illegal cognac for them and he refused,” Michael shared in an interview for this book. “They said they would ask a second time but would not ask a third. Unfortunately one morning leaving his apartment, he never got to his car.”

  It was not uncommon to occasionally hear gunfire on the streets of Moscow as I discovered on a trip with Doug Ivester to tour the new bottling plant in Moscow. Doug had left the hotel about thirty minutes before me. As I was about to leave my room, I heard gunfire in the street. The Coca-Cola Company driver was caught in the crossfire of a mafia gun battle and was seriously wounded. Ivester had missed the bullets by a mere thirty minutes.

  The more time I spent in Russia, the more deeply I became involved in its government, business, and culture. I was appointed to Russia’s Foreign Affairs Advisory Council and we would meet every six months with the prime minister and the cabinet. The council was nominated by the PM and had most major international companies on it including the likes of British Petroleum and Mitsubishi, most represented by their CEOs. We discussed issues such as taxes, courts, and customs. That is where I built up many relationships and really started to understand Russia. I later followed Bob Strauss as chairman of the U.S.-Russia Business Council. I was never a true China hand, but I was becoming a Russia hand. The business connections led to cultural connections. I was named to the international board of directors of the Hermitage Museum in St. Petersburg, one of the largest and oldest museums in the world, founded in 1764 by Catherine the Great. As an amazing fringe benefit, I had the privilege of touring the ancient artwork in the basement, rarely displayed to the public; a truly priceless moment.

  Coke’s growing business in Russia made for some interesting trips to headquarters in Atlanta. We quickly learned that when the Russian bottlers were visiting, we had to empty the hotel minibars of all products except for Coca-Cola and beer. Otherwise, the Russians would empty the entire contents each day, taking the stash home with them in their suitcases, leaving a minibar bill that often exceeded the cost of the room.

  Craig Cohon entertained a visiting delegation of Russians at a famous Atlanta nude-dancing establishment, the Gold Club, submitting an expense account to the company for several thousand dollars, a code of conduct violation which outraged the head of internal auditing. He wanted Craig to be fired. We worked it out so that Craig would pay the bill out of his own pocket. Craig, who is now vice chairman of Cirque du Soleil, framed the receipt and to this day it hangs on the wall in a bathroom at his home.

  On a separate visit to Atlanta, the mayor of St. Pet
ersburg, Anatoly Sobchak, purchased Coca-Cola underwear at the company gift shop. In typical Russian fashion, he rolled down his trousers during a meeting and proudly displayed the new boxer shorts.

  We had agreed to build a bottling plant in St. Petersburg, with a young, steely-eyed former KGB agent named Vladimir Putin handling the negotiations as head of the city’s Foreign Economic Relations Department.

  Coca-Cola was soon gaining on Pepsi, which never seemed to realize what had hit them.

  “They were sleeping,” Michael said of our competitors in blue. Pepsi lost its 10 to 1 advantage and by 1994, Coca-Cola gained the lead, which it retains to this day.

  Coca-Cola helped deliver capitalism to Russia and Eastern Europe. We discovered citizens hungry to learn how a successful company works, realizing they had been educated in the past using theoretical concepts which ultimately failed.

  In the early years after the Wall fell, smaller foreign companies lacked the resources and patience to participate in this transformation. Coca-Cola was large enough to take the risk, breaking ground for others to follow. Capitalism provided the foundation not only for new business enterprises but for new nations.

  I am a firm believer that capitalism is the most potent form of foreign assistance. We should consider whether some of the many billions governments now devote to social development projects would be better spent on tax credits to encourage companies to invest in poor countries. Unlike social development projects, business investment has a larger multiplier effect and usually leads to even larger, more profitable companies that follow, literally freeing people from poverty.

  Along with the rapid changes taking place in Eastern Europe came another momentous event: Nelson Mandela was released from prison on February 11, 1990, having spent twenty-seven years behind bars. The days of South African apartheid were clearly numbered.

  Carl Ware, who by 1991 was working for me as deputy group president overseeing Africa, set up a luncheon in Johannesburg with three members of the African National Congress: Mandela, Thabo Mbeki, and Yusuf Surtee. I knew Yusuf from my time in Johannesburg. Because I was tall, I required tailored suits and Yusuf was my tailor, which was his day job. Little did we know that this charming merchant was also working with the ANC. Eventually, he popped up as one of the key people helping Mandela.

  In this, my first meeting with Mandela, I felt the need to subtly mention that I had opposed apartheid. As I started telling the story of my college activism, Mandela put his hand on my forearm and, speaking slowly and deliberately, said “Mr. Isdell, don’t worry. We know all about you.” Mandela could have let me continue with my uncomfortable spiel but instead displayed a real sense of empathy.

  Yusuf, who had obviously briefed Mandela about me, beamed. I felt more confident than ever about the future of South Africa and Coca-Cola’s role there.

  In October 1993, I was extremely honored to present Mandela with the first J. William Fulbright Prize for International Understanding, a $50,000 award funded by the Coca-Cola Company. It was a powerful and emotional event.

  Presenting the award, I recalled how my fellow college students and I had demonstrated for Mandela’s release: “Though it was, in fact, thirty years ago, I have very vivid memories that somewhat overwhelm me today, memories rendered indelibly on the impressionable mind of a young, red-headed Irishman, who was inspired by the courage of those who were brave enough to risk their lives to end organized injustice in South Africa.”

  Mandela spoke about South Africa’s first democratic elections scheduled for 1994: “Incredible as it may sound, at the age of seventy-five I have never, ever participated in a general election,” he said. “The prospect of finally receiving the opportunity to participate is one that is indeed very exciting. It will be the culmination of decades of political struggle and personally a goal for which I have striven throughout these years.”

  Mandela not only voted in that election, he was elected president of South Africa, a truly historic milestone.

  Mandela was succeeded by Mbeki. Carl then was in charge of Coke in Africa. I had a new challenge, this one involving nearly a billion people.

  Six

  GOING BACK TO INDIA

  Coca-Cola left South Africa over apartheid. In the Middle East, we were ejected for selling our products in Israel. In India, we departed for an entirely different reason: the secret formula.

  In 1977 a newly elected Indian government demanded that we partner with an Indian company and disclose the secret formula, which we refused to do. Then we packed our bags and left the world’s second most populous country. For those who believe the secret formula is nothing more than a marketing myth, let India be a lesson. In defense of our secret formula, we walked away from a market of a billion people, as did IBM after refusing to reveal its source code.

  India began liberalizing its economy in the early 1990s under Manmohan Singh, then the finance minister and now the prime minister. Coke had the opportunity to return.

  As the reentry slowly progressed under John Hunter, I gained India as part of my territory in 1993, although I lost Africa to Carl Ware. I liked and respected Carl but was very unhappy about this decision because of my lifelong ties to Africa. Also, without Africa, the sales volume in my group was diminished by half since sales in the Indian market were minuscule at the time. Once again, I was given a turnaround market.

  It was a blow and I considered leaving the company for the first time since that night in Germany when Heinz Wiezorek and I vowed to resign. The difference now was that I would soon turn fifty and retirement was within reach. I was going to have to live with it. I told Pamela, “I’m going to build what I have into something as big as what I used to have. I’ll show them just what I can do.” I also was reassured by Don Keough and John Hunter that the move was in no way performance related but situational and that my future was still bright.

  India proved to be a very interesting, enjoyable, and challenging assignment. It was equally the most fascinating country I’ve ever worked in and the most frustrating. The images in my memory of India are stunning. Pamela and I will never forget the Beating of the Retreat in Delhi, a military ceremony dating back to the 1600s. It’s theater like you’ve never seen, held each year in January, in front of the Parliament Building. As the sun sets, spotlights illuminate the Camel Corps. The best military bands play and soldiers march past the reviewing stand. There are soldiers playing bagpipes, wearing kilts. As a bugler sounds the call for retreat, the Indian flags are slowly lowered and the bands march away. Close your eyes and you will believe the British raj never left.

  When I assumed responsibility for India, Coke’s reentry was at a very tentative stage. Coca-Cola, under Hunter’s direction, had formed a joint venture with Rajan Pillai, who had gained control of Indian-based cookie-maker Britannia Biscuits. Pillai had also purchased the Asian operations of RJR Nabisco, with the help of a group of investors, including RJR’s former CEO, F. Ross Johnson, a friend of Don Keough’s.

  The idea was for Pillai to move his Singapore-based snack-food plant to a new factory in India, which would also produce Coke concentrate. Celebrating the joint venture, Pillai held a lavish party at his home in Mumbai, complete with fire-eaters and snake charmers, all the top film stars, and other members of the Indian glitterati. As I watched all this, it struck me as out of sync with the conservative image of the Coca-Cola Company. I smelled a bit of a rat. It turned out that Pillai was expensing the party through the joint venture. We were paying for this outrageous entertainment.

  Soon after, I started negotiating to sever our relationship with Pillai. At the same time, Pillai’s business empire was collapsing and he was indicted in Singapore for fraud. In response, he fled to India where he lived as a fugitive, moving from hotel to hotel to avoid arrest. I later ran into Pillai at the Oberoi Hotel in Delhi where, although a wanted man, he approached me as an old friend, and we exchanged warm greetings. He was, as the Irish saying goes, a likeable rogue. Sadly, he died in an Indian jai
l in 1995 of complications from cirrhosis of the liver.

  Our attention then shifted to Parle Beverages, which controlled 60 percent of the Indian soft drink market, and had developed the wildly successful spicy cola, Thums Up, after Coke’s exit from India in 1977.

  Jay Raja, my former group marketing manager who was leading the reentry efforts on the ground in India, was at first reluctant to talk to Parle, believing it had been behind Coke’s ejection from India in the first place. Parle had also opposed the Indian government’s 1992 decision to allow Coke to return. Jay suspected that Parle was also discussing a joint venture with Pepsi.

  At the same time, key Parle bottlers were approaching Jay about defecting to Coca-Cola,

  Parle was owned by two brothers, Ramesh and Prakash Chauhan, who were quickly realizing that they would not be able to effectively compete with giants Coke and Pepsi. “When elephants fight, the grass gets trampled!” Ramesh told Jay.

  Parle was not an ideal partner for Coke; its bottling plants were in dire need of upgrades. Yet Parle’s nationwide system would provide Coke with a speedy entry back into a potentially huge market, and Coke would instantly gain 60 percent of the Indian soft drink market, a lead that would surely grow once we reintroduced Coke products.

  We made an offer to purchase Parle for $32 million, which seems a grand bargain given the size of the country and Parle’s huge market lead. Yet India’s soft drink market was tiny then. “The total amount of soft drinks sold in India was about the amount sold in the city of Atlanta back then,” recalled John Heaton, my executive assistant who was in charge of executing the deal. “Many people in India just didn’t have any money to buy soft drinks. They drank tea, coffee, milk, and roadside fruit juice.”

  Annual soft drink consumption in India at the time averaged three bottles a person, Heaton said. You will recall that when I left the Philippines in 1984, the per capita consumption was 134 bottles per year. That illustrates how poor India really was and also how poorly soft drinks had been marketed, but also its enormous upside potential.