Here, too, there was a fundamental difference between my view and former management. The belief had been that by running the company with strict divisions of roles, neither “interfering” with the other, the relationship would be enhanced. In the short term, this was true. As a bottler, I had strived to have maximum independence. However, the truth was that we were one business, joined as I would put it, by veins and arteries, and that this is how the customers and consumers saw us. Remaining in our seemingly separate silos reduced disputes, but those disputes are at the heart of the benefits of the franchise structure, with the bottler’s day-to-day skills meshing with the more long-term, strategic view which was the role of the franchisor. That we had recently taken a short-term view did not mean that we needed to fundamentally change the relationship, but primarily the way we at the Coca-Cola Company worked. We all knew this level of reengagement would be fractious, but was necessary for a functioning system and to avoid what had been happening: a hardening of the arteries.
That same summer, I made one of the most important decisions of my tenure, one that will continue to impact the company for years to come. Muhtar Kent, who had been so valuable to me in Eastern Europe, had gone on to head the European Division of Coca-Cola Amatil, the large Australian-based bottler. His promising career was derailed after authorities in Australia investigated Muhtar for insider trading of Amatil stock. Muhtar’s financial advisor in late 1996 executed a short sale of 100,000 shares of Amatil stock just before the company issued an earnings warning. I believe it was an honest mistake. Muhtar’s financial advisor had authority to execute stock trades on his behalf and made the short sale—essentially betting that the stock would soon go down—without Muhtar’s knowledge. Muhtar settled the controversy by paying $30,000 and relinquishing the $324,000 profit from the short sale. The real penalty was much greater. He was forced to leave his high-profile position at Amatil, which likely would have led him eventually to an executive’s job at Coke headquarters. In 1998, Muhtar became CEO of Efes Beverage Group, a brewer and the largest shareholder of the Coca-Cola bottler in Turkey.
Muhtar and I had always stayed in touch and he had been one of those who lobbied hard behind the scenes for me to become Chairman and CEO after Daft resigned. Shortly after the board offered me the job, John Hunter, whom I trusted completely, flew to Barbados to brief me on the state of the company. I commented on the fact that there was no clear insider candidate to be president and John agreed. A move I needed to take, I told John, was to appoint an international president and yet there, again, was another void. I could not envision anyone in the company who was competent to take that job either. “You should bring Muhtar back,” John said. I had been thinking about Muhtar all along but John’s recommendation sealed the deal. It was clear to many of us that Muhtar was one of the most talented executives in the Coca-Cola system. We had worked closely together during that intense period after the Wall fell in 1989 when there was no margin for error, yet at the same time success demanded rapid risk-taking. It was the ultimate proving ground. I knew what Muhtar could do.
He also has the rare talent of diplomacy that is invaluable in high-level international business. Muhtar’s father, Necdet Kent, was a Turkish diplomat stationed in France during World War II who had saved Turkish Jews from the Holocaust. Necdet demanded that Nazis release eighty Jews who were on cattle cars on their way to German concentration camps, and when the Nazis refused he boarded one of the cars and would not leave until the Jews were freed.
Muhtar operated comfortably in the highest government circles, becoming not only a respected business leader but a confidant to national leaders such as Sali Ram Berisha, president of Albania. Muhtar also had the invaluable experience of having worked on both the franchisor and franchisee side of the company. He understood both sides of the business and had empathy for both.
I knew I was going to bring Muhtar back, the only question was when. Yet when I called him, he declined my offer. “After all this, how can I come back?” he said. A few weeks later, Muhtar reconsidered, telling me he would consider returning as a group president, but I did not make an immediate move. This was a controversial decision and I would have to wait until the timing was right.
My first overseas trips as CEO were to India and China, a signal of the future. I arrived in India to a media circus. Dozens of reporters wanted to interview me, yet I had vowed not to do any interviews until I had been on the job for one hundred days and fully understood the landscape. With more than thirty reporters staking out the hotel lobby, I had to enter and exit the hotel through a service elevator, walking through the kitchen to the rear door. You know you have arrived when you get to use the service elevator and leave the hotel with the garbage trucks. The Indian public relations staff wanted to tell the press that I had already left India, but I insisted, firmly, that we were not going to mislead the media.
Mary Minnick, who was in charge of Asia out of Hong Kong, was then the group president responsible for India. She had brought in a man named Patrick Siewert from Kodak to oversee China and India. The company had hired him with the thought that he had the potential to one day be a group president. Although very personable and persuasive, Siewert was really very lightweight in terms of any knowledge of the soft drink business. He tended to operate at the high social end of the managerial scale rather than get his hands dirty, which did not endear him to me. That’s just not the way I operate.
At the time, Sanjay Gupta was in charge of India’s operations. During a cocktail party with Coke’s Indian Advisory Board, which included some of the country’s leading business leaders, I was sidelined by at least three board members who told me Sanjay was just not up to snuff. The next day, Gupta had a presentation for me in the ballroom of a hotel, with booths displaying everything they were doing in India. I was shocked at the high cost of this presentation, which was exclusively for me. I also couldn’t help but notice that each time we stopped at a booth and someone started presenting, Sanjay would interrupt and take over the presentation. I am a great one for watching body language. Almost without exception, you could see the fear the employees had for Sanjay. That night, Sanjay hosted a dinner for me at his house in Delhi which was on three beautiful acres, with 150 guests. There were traditional dancers, the best wines. It cost an absolute fortune and the company was picking up the tab. I later told Mary and Patrick I didn’t think he was the right guy for the job. They strongly disagreed, saying he was a future group president. With all the other tasks before me at the time, I delayed replacing Sanjay immediately. There are limits to power. All I really had was an overall gut feeling and a few observations. That is not the way to overrule senior management.
Then it was on to Shanghai, to a company-owned bottler that was losing money. The plant manager was an old-timer I had known in Nairobi. He was good at keeping the old Shanghai bottling plant running but knew very little about marketing. I went out in the marketplace with him and it was patently obvious that he was not in control of his business. He, too, would later be replaced.
Next up were tense meetings with bottlers in Mexico City and Rio de Janeiro. Both groups of bottlers were unhappy. One of their core issues was that we were not investing enough money in the brands and were taking out large shares of the profit. The bottlers did not like the quality of our marketing and advertising. They believed we were not keeping our end of the bargain. We charged bottlers a premium price for concentrate but in exchange, we did the marketing and we were supposed to give bottlers superb advertising. Coca-Cola Company does the pull and the bottler does the push. When we don’t do the pull right, the bottler yells, either because the quality of the advertising is not good enough or we are not spending enough. I had Chuck Fruit working in Atlanta to track how much we had been spending on marketing and advertising in relation to our volume and to inflation. Media prices had been increasing over the years much faster than general inflation and Chuck discovered that our spending had not been keeping pace. This was a major s
ource of the friction with the bottlers. It was affecting their ability to compete and needed to be fixed.
My first board meeting was July 19–20. “You’ve elected me to do two things,” I told the board members. “You have brought me here as Chairman and CEO to run the company, reporting to the board of directors. I will undertake that with due respect to the board. I will try to keep the board informed to the best of my ability in regard to strategy and my actions. But you’ve also elected me chairman of the board, which means you’ve asked me to lead the board. It is my intention, to lead.” I know I did not always measure up to that high standard, but that was my intent.
In August, I met with another group of bottlers, this time in Spain, and this time they were happy, a welcome respite. Ivester as international president had attempted to do a bottler consolidation but had pulled back when they phoned Goizueta, very similar to the situation I had faced in Germany. Spain, like Germany, was a very good and strong system but the reality was it had stopped growing in the 1990s because their costs and prices were too high and there wasn’t enough investment in the marketplace. As group president, I met with the Spanish bottlers, trying to rebuild the relationship. The younger bottlers, tough and on the brink of hostility, started that meeting with a list of complaints, including transshipments into Spain from Coca-Cola bottlers in Germany, which was allowed under European Union law. I told them there was no way I was going to break EU law. We then discussed consolidation. I tried to explain that it was all about effectiveness and efficiency. If they did not want to relinquish their individual bottling franchises, I suggested that they create a so-called “virtual anchor bottler” to lower costs through joint purchasing and a centralized computer system. They already had a central organization for selling with supermarket chains and other large customers so they understood the concept and saw how it could increase efficiency and lower costs.
“If you do that and take the costs out, then the power of the local ownership is still there,” I told them. “That would be my preferred strategy.” I was also tough, telling them I had never met a more disenchanted group of bottlers and if that was how they felt about the system, they should consider selling.
The elders then suddenly moved in and took over the discussion, replacing the young execs in a kind of good-cop, bad-cop routine. We had a very good dialogue over the weeks and months ahead, working together with local management.
When I became Chairman and CEO, Spain had become an absolute gem in the Coke system in Europe, obviously aided by the growth in the Spanish economy and was led by a very innovative marketeer, Marcos de Quinto. I think some of my best relationships and best friendships were with the Spanish bottlers. They were a true example of how the franchise system could and should work. I was thrilled when they won the Woodruff Award for the best division in the world in 2007 after having been consistently in the top three for a number of years.
At the 2004 Summer Olympics in Athens, I approached the chairman of Coke’s Turkish bottler, which was partly owned by Efes Beverage Group, the company Muhtar now ran. “I just want to tell you that I’m going to come knocking on your door,” I told the bottler. “I really need Muhtar back.” He was devastated. “You have hurt me to my heart,” he said. It would still be a number of months before I moved on this but I was laying the groundwork. Luckily, the Turkish system has continued to flourish under the leadership of Michael O’Neill.
Also that August, Claus Halle passed away in Atlanta. He was the former president of international, a man with immense and deep knowledge of the business. He also had the skills of an international diplomat, something I aspired to develop and which I value in Muhtar. Claus could mix at the highest levels. He also displayed an enormous attention to detail. In Atlanta, Claus built an exact replica of the hunting lodge his family had lost in East Germany after World War II. He had the original plans and he had it rebuilt, bringing in old-style artisans to do the work, which he personally supervised. Typical of the man, he had mapped out his funeral, exactly who would speak and the hymns. I was honored to be on the list of those he wanted to deliver eulogies. It was a very emotional funeral and I had to choke back the tears. He was a giant of Coca-Cola and a great mentor. His life story deserves a book of its own, including the time he swam the Elbe River to escape the advancing Russians at the end of World War II and his beginning at Coca-Cola as a truck driver.
The fall of 2004 brought great promise on the product development side of the company, the first really good news in a long while. We had developed a new diet cola, or we thought we had. It is more truthful to say we had a great name for a diet cola: Coke Zero. The name tested very well with consumers. It portrayed a stronger message than Diet Coke, which signaled fewer calories but not zero calories. So we had this great moniker. What would we do with it?
The first test version of Coke Zero included Splenda, the artificial sweetener that had just been approved for soft drinks. However, the research showed that only Splenda-loyal consumers liked it and that the new soft drink could be only moderately successful. In my opinion, Splenda had a distinct aftertaste, and I was opposed to using it for a new product with a great name like Coke Zero. At a meeting in September, I instructed the flavor scientists to use the original Coke formula for Coke Zero, which would be sweetened not with Splenda but with the best artificial sweeteners available from country to country.
A veteran flavor scientist quickly objected. “You can’t do that,” he said. “Mr. Goizueta and Mr. Woodruff before him instructed that we could never use the Coca-Cola formula in anything but Coca-Cola Classic.”
My reply was simple, “When do you want a new letter?” You could have heard a feather drop.
Coke Zero, designed to taste as close as possible to Coke Classic, was the most successful product launch since Diet Coke, attracting lapsed users of Coca-Cola who didn’t like the taste of Diet Coke and those who were cutting back on the number of Coke Classics they consumed. Now, they would be able to have one Coke Classic per day and two Coke Zeros. Coke Zero in 2009 became the thirteenth Coca-Cola brand to achieve more than $1 billion in annual retail sales. Just as important, Diet Coke continued to be strong and there was little “cannibalization.”
One very high-profile customer gave Coke Zero an early try. I chaired a fundraising campaign for the Kennedy Center and attended an awards ceremony at the White House. At a cocktail party afterward, we were ushered in to be photographed with President George W. Bush and First Lady Laura Bush in front of the Christmas tree.
“This is thirsty work, Mr. President,” I said. “You need a Diet Coke.”
“You know that’s what I drink,” he replied.
“How you tried Coke Zero?” I asked.
He had not heard of it but we arranged for Coke Zero to be delivered to the White House. I received a handwritten thank-you note from the president saying that he had tried Coke Zero and he had not yet made up his mind as to whether he liked it better than his mainstay, Diet Coke. I have the letter framed at my house in Barbados.
The fourteenth billion-dollar brand, Minute Maid Pulpy, was launched during my tenure as well, but I had far less input on this one, really only one word. “Wow,” I said when a Chinese flavor scientist asked me to taste it. I knew it would be huge! Minute Maid Pulpy became the first billion-dollar Coke brand developed and launched in an emerging market. In April 2011, Del Valle, which Coke acquired in 2007 in a joint venture with our Latin American partner, Coca-Cola FEMSA, became the company’s fifteenth billion-dollar brand, followed by Vitamin Water, also acquired on my watch. Coke Zero, Minute Maid Pulpy, Del Valle, and Vitamin Water, which were all launched or acquired on my watch, have provided a big boost to our bottom line, which we sorely needed, but it took time.
Meanwhile, the bottom line remained a serious problem. Reluctantly, we issued a statement on September 15, 2004, warning that profits would fall below analyst’s expectations for the remainder of the year, sending the stock briefly below $40 per share. “Th
e solutions are complex, requiring implementation over the next several years and making short-term benefits unlikely,” we wrote in a statement. My strategy all along had been “go slow to go fast later.” That is not what Wall Street wanted to hear, but it was the only way we were going to pull the company out of its deep malaise.
Two months later, I announced that we would spend an additional $400 million per year on advertising and made a plea for patience as we tried to right the company. The board backed me solidly, bolstered by Warren Buffett’s unequivocal statement: “I bought into this company because I believed in the brand Coca-Cola. If this is good for Coca-Cola, then I’m fine with it.” Wall Street, not surprisingly, was not impressed. It failed to see an immediate gain, only $400 million less per year in profits. Many analysts believed we were simply incapable of regenerating growth. The stock hovered barely above $40 and at one point dipped to $38.50. We couldn’t allow the stock price to drive our long-term strategy but at the same time, we had to keep a close eye on it. There were legitimate concerns that if it dropped too low, the company could be a takeover target. At a function in New York, I ran into David Rubenstein, cofounder of the Carlyle Group, one of the world’s largest private equity firms. He was talking about the possibility of having the first $50 billion leveraged buyout, in which investors buy a company, usually by taking on significant debt. “What’s your market cap right now?” Rubenstein asked me. At that time it was about $96 billion. “Well, that’s a bit out of our reach, for now,” said Rubenstein. In addition to a possible threat of an LBO, it was long known that Nestle coveted Coke and would, if the price was right, consider a takeover. We had to grow revenue and improve the bottom line to move our stock price up again, or we risked losing control of the company.
Inside Coca-Cola Page 16
