Woodruff had another reason, related to his overseas operation, for concern over the coca situation. In 1930, he had formed The Coca-Cola Export Corporation to replace his Foreign Department. Throughout the following decade, Coca-Cola’s already established overseas outpost gradually grew, while new countries were added—small islands like Curaçao, Java, Trinidad, and Jamaica as well as major territories such as England, Scotland, Ireland, Norway, Denmark, Germany, Hong Kong, Peru, Bolivia, Chile, Switzerland, Austria, Australia, New Zealand, and South Africa. As sales increased abroad, Woodruff decided to build plants worldwide to manufacture concentrate. That way, only the secret flavoring ingredient, 7X, and Merchandise No. 5 would have to be exported. In 1935, with logic only a government bureaucrat could comprehend, the Bureau of Narcotics ruled it illegal to export No. 5, even though it was perfectly all right to import the whole coca leaves and to decocainize them under direct governmental supervision. Through delicate lobbying (including discreet monetary support for antinarcotics organizations), the Company maneuvered a reversal in 1937. Otherwise, Woodruff’s Peruvian facility would have become indispensable.
In 1932, Woodruff was searching for someone with connections to help with the importation of coca leaves, negotiate with Washington officials, and advise him on the most appropriate (and useful) targets for Coca-Cola philanthropy. He found Ralph Hayes. Courteous, resourceful, and infinitely tactful, Hayes, a former aide to Secretary of War Newton Baker, was regarded as one of the few men in Washington who could keep a secret. After Baker’s retirement, the accomplished young man headed the New York Community Trust, one of the first nonprofit foundations, and, by cultivating the right people, he built its coffers to over $175 million before retiring in 1967.
When Woodruff approached Hayes in 1932, the lonely, urbane bachelor was immediately attracted to the charismatic Coca-Cola boss, who replaced Newton Baker as his surrogate father. Hayes and Woodruff were an odd couple. While the Boss was taciturn and almost illiterate, Hayes was a voracious reader who wrote long, witty, insightful letters replete with Shakespearean quotations. He loved to give after-dinner speeches and enjoyed attending all of the parties that Woodruff shunned. For the next thirty-five years, Hayes would work behind the scenes as Woodruff’s diplomat, lobbyist, and occasional spokesperson and speechwriter.
For decades, Hayes would bestow his obsequious charms on Harry Anslinger, the long-time commissioner of the Bureau of Narcotics. On Coca-Cola Company stationery identifying him as vice president, Hayes wrote in 1937, “I want you to know how deeply we appreciate the cooperativeness that has marked your personal attitude in this matter,” after Anslinger authorized the legal export of Merchandise No. 5. “With this question now behind us, let me assure you again that our purpose, as always, will be to support every project looking to the enhancement of the prestige of the Bureau that has been so well developed under your distinguished leadership.”
In return for Coca-Cola’s support, Anslinger sent Hayes information about coca farmers in Latin America, along with maps of Peruvian cocaine factories, and alerted him to media inquiries and requests from potential competitors who wanted access to decocainized flavoring. Through this cozy relationship with a U.S. governmental agency, Coca-Cola maintained a steady monopoly on legally imported coca leaves.*
STUBBS AND FARLEY HIT THE ROAD
Hayes could cope with the American regulators, but fighting the same battles in every nation around the world caused massive headaches by the late thirties. The Cubans impounded a major caffeine importation, while the German health authorities protested the coca leaf content. Mexican officials demanded the formula before allowing the concentrate into the country. In Peru, the Coca-Soda people protested an American company attempting to monopolize the word “Coca” when the leaves themselves were actually Peruvian. The list of foreign woes appeared endless.
To help combat them, The Coca-Cola Export Corporation retained Stephen P. Ladas, a Greek native specializing in foreign patents and trademarks in New York. For the next twenty-five years, Ladas, in conjunction with Coca-Cola’s legal counsel, masterminded worldwide strategy. In 1940, Coca-Cola lobbyist Ben Oehlert, who, along with Ralph Hayes, would surface repeatedly in the next three decades wherever quiet pressure and diplomacy were necessary, suggested the firm find a seasoned lawyer to travel for the Company, putting out fires where necessary. As a result, Coca-Cola hired Roy Stubbs, a small-town Georgia country lawyer.
For the next fifteen years, Stubbs crisscrossed the globe for Coca-Cola. “I became a sort of legal journeyman,” he wrote, “from one trouble spot to another in Latin America, Australia, Europe and the Middle East.” Already fifty-five when he started his new career, Stubbs proved to be an invaluable employee who recorded his sharp observations and research in an impressive series of bound “compilations,” one for each country.
It took Stubbs a year to guide Coca-Cola’s registration through the Mexican government without revealing the formula, during which time he taught himself Spanish. He then embarked on a whirlwind tour of Latin America, where he made careful observations of potential markets and interviewed local patent lawyers, seeking competent and politically well-connected retainers.
Stubbs found that he had to adapt himself to the lethargic pace of Latin life, where the lawyers customarily strolled into their offices around eleven, departed soon for long lunches at home, worked a desultory hour or two, then left for the day. Though frustrated, Stubbs, like many of Woodruff’s Georgia emissaries, was remarkably sensitive to other cultures. “It takes an interminable time to get things started here,” Stubbs wrote to a Coca-Cola lawyer in 1941. “Interminable red tape and delay—delay—about matters that would be wound up in our country in twenty minutes. . . . You have to catch [someone] in the right frame of mind, and catch him at the right place and at the right time, and rub him the right way—and above everything else—take your time. They have no appreciation of our notion of getting it done. And don’t think anybody can change it.”
Americans, Stubbs recognized, were often perceived by foreigners as arrogant and obnoxious—for good reason. “An American generally rears back on his hind legs and skids along on his ignorance,” he wrote, “thinking all the time what a smart fellow he is.” Stubbs did not make that mistake, and he soon came to have genuine respect for his Latin American colleagues, who valued tradition, culture, and style, finding time for “the protocol of amenities.”
At the same time Stubbs was combing Latin America for legal talent, James Aloysius Farley was making his first goodwill trip for Coca-Cola through the same territory. “Big Jim” Farley, the imposing postmaster general who had masterminded Franklin D. Roosevelt’s brilliant 1932 campaign, publicly split with FDR when the President ran in 1940 for a third term. Smelling opportunity, Robert Woodruff hired Farley as the chairman of the board of The Coca-Cola Export Corporation, a position created for the occasion, and promptly dispatched him to Latin America, where he was received as a visiting dignitary rather than a Coca-Cola executive. His daily itinerary made the pages of the New York Times. For the next thirty-five years, Farley, friend of every subsequent president, would represent Coca-Cola’s interests around the world.
DEAR FDA
While Stubbs and Farley combated health issues in foreign countries, similar problems cropped up in the United States with a resurgent consumer movement. “The tide has turned against us,” W. C. D’Arcy gloomily told his fellow ad men in 1934. The thirties and the New Deal also brought criticism of big business opportunism. The authors of Partners in Plunder, a 1935 book whose subtitle warned against “business dictatorship,” heaped abuse on Coca-Cola, pointing out that the ingredients of the nickel drink cost a bit over one-half cent.
Members of the harassed FDA Food Control Division had to answer quite an array of letters in the FDR years. School officials and concerned parents asked whether the drink harmed children, who quaffed it with “fanatical zeal.” An elderly woman inquired in a shaky hand whether Coca-Cola
contained narcotics, since it increased the irritability of her grandson, a divinity school student with “a most Hypersensitive Nervous system.” A Mormon wrote from Salt Lake City urging that Coca-Cola be banned and, incidentally, wondering whether FDA officials might consider a course in “the Word of Wisdom.” Several writers wanted to know whether Coca-Cola was made with guano, a question that was not quite as wacky as it sounds, since caffeine could be synthesized from bird or bat dung. Others inquired about the effect of taking Coca-Cola with aspirin, which was persistently rumored to create a “high” or act as an aphrodisiac. Among the complaints about foreign ingredients was one from a North Carolina woman who found a large spider in her drink. “I have had a Poison Stomach every since,” she wrote. In the end, however, one letter stated the case more accurately than any of the others: “Everybody says, ‘don’t drink it,’ but I notice everyone does just the same. I like it.”
While Coca-Cola officials had always been overly cordial to the FDA, in 1939 they became downright obsequious. The year before, during a New Deal wave of consumer consciousness, the Congress had passed a tougher Food, Drug and Cosmetic Act that required that all foods and beverages list ingredients on the label, throwing the entire soft drink industry into an uproar. Coca-Cola was particularly averse to the idea of labeling, since it would mean identifying its caffeine content, a subject tabooed by Robert Woodruff.
After a friendly visit from Ralph Hayes and Ben Oehlert failed to sway Dr. Dunbar of the FDA, the Company rallied its bottlers, who formed a well-organized local lobby. Letters poured in to the FDA from legislators and state health officials requesting that soft drinks be exempted from the new labeling requirements. In November, nine members of the American Bottlers of Carbonated Beverages (ABCB), including Harrison Jones, met with FDA officials, complaining that enforcement of the law would cost their industry some $80 million just in bottle stock replacement.
Predictably, Harrison Jones dominated the meeting. He claimed that the labeling requirement would lead to increased unfair competition and fraud, since an imitation cola could legitimately claim to have the same basic listed ingredients. Warming to his subject, Jones explained that the contour Coca-Cola bottle was practically a sacred object and must remain unchanged—and unlabeled. “It is grasped 18 million times a day,” he intoned dramatically. “Even a blind man can recognize a Coca-Cola bottle.”
The FDA caved in, granting a temporary exemption from labeling to allow the soft drink industry time to arrive at a suitable “standard of identity.” Once such a standard was in place—specifying allowable amounts of carbonation, caffeine, acid, and sugar—labels would be unnecessary, since consumers could refer to the regulations. Loath to submit to such an iron-clad standard, the industry managed to stretch the “temporary” exemption, at first using the advent of World War II as an excuse. For years, though consumers continued to complain to the FDA about the unspecified caffeine content of Coca-Cola, they failed to get a satisfactory response. When a standard of identity was finally established in 1966, the public saw no difference, since Coca-Cola remained unlabeled.
THE RESURRECTION OF PEPSI
Bureaucratic tangles weren’t the main problem Coca-Cola faced during the Depression, however. Surviving several near deaths, Pepsi-Cola emerged for the first time as a serious competitor during the 1930s. Coca-Cola, the undisputed king of soft drinks, suddenly found itself coping with an aggressive young contender. Pepsi’s roots went back almost as far as Coca-Cola’s, to 1894, when Caleb Bradham, a North Carolina pharmacist, developed a variant cola drink with pepsin, selling it as a tonic to relieve dyspepsia. Known merely as “Brad’s Drink,” its popularity grew until Bradham renamed it Pepsi-Cola in 1898. By World War I, the drink had achieved modest success, with franchised bottlers in some twenty-five states. Unfortunately, Bradham was caught in the same wildly swinging sugar market that trapped Coca-Cola. In 1920, when the price spiraled over twenty cents a pound, Bradham bought heavily. When the bottom fell out of the market, his business went bankrupt.
In 1922, Bradham tried to sell Pepsi to The Coca-Cola Company, but the Woodruff Syndicate wasn’t interested in the ailing soft drink. A Wall Street speculator named Roy Megargel bought Pepsi from Bradham in 1923, only to flounder two years later. Still hoping for some return on his investment, Megargel reorganized the company and limped through until 1931, when only two bottlers remained. On the edge of a second bankruptcy, he offered Pepsi to Coca-Cola. For the second time, the Company refused to buy the nearly defunct competitor.
At this point, there is little doubt that Pepsi would have gone the way of most Coca-Cola imitators if it hadn’t been for Charles Guth’s temper. Guth, a New Yorker long known as the “stormy petrel” of the candy business, had taken over the Loft chain of candy stores in 1929, purchasing the Happiness and Mirror stores the following year. Through the three chains’ soda fountains, Guth sold quite a bit of Coca-Cola—enough, he thought, so that he should receive a bulk discount. The Company thought otherwise. Infuriated with Coca-Cola’s inflexibility, Guth called Atlanta one Friday in 1931 and left a message with a secretary. “We are not going to buy through any jobber. We are going to buy direct or not at all. Unless I hear from Mr. Judkins [in charge of fountain sales] before this evening, I will issue orders that not another drop of Coca-Cola will be served in any of the Loft stores. And once out, it will stay out.” He repeated himself to make sure she wrote every word.
In the meantime, Guth swung a deal with Megargel in which he maneuvered Pepsi’s third bankruptcy in return for a chunk of stock in the “new” company, which Guth would buy out of receivership. Megargel was also to receive a royalty of two and a half cents per gallon for six years. In July of 1931, the new Pepsi-Cola Company was born. Guth’s chemist dropped the pepsin and tinkered with the formula to duplicate Coca-Cola as closely as possible. Guth then ordered that all of his soda fountains serve only Pepsi-Cola, which he proclaimed to be “the best 5¢ drink in America. It is a real bracer.” The wily Guth was perfectly aware that Coca-Cola would be trying to prove substitution; in October, he advised his employees in writing, “Under no circumstances is Pepsi-Cola to be offered for Coca-Cola or compared with it,” and offered $10,000 to anyone who found one of his outlets substituting Pepsi for another soft drink.
Coca-Cola’s diligent investigators soon descended on Loft stores and found at least some employees who gave them a Pepsi in response to a call for Coca-Cola. In the spring of 1932, Coca-Cola sued. At the same time, Harrison Jones wrote to Guth claiming $30,000 as Coca-Cola’s prize for having proved substitution in Loft, Happiness, and Mirror stores. Guth responded with a barrage of seven countersuits. Four, filed individually by Pepsi-Cola and the three candy stores, claimed that Coca-Cola had interfered with sales and harassed their staff. The other three suits were for libel, claiming that the Harrison Jones letter was “defamatory.”
Guth soon sent The Coca-Cola Company a defamatory letter of his own. In July of 1932, he mailed a cartoon to the Company’s Atlanta headquarters, depicting a Pepsi bottle overturning a cart containing “Coke” and “Dope” apples, which were being eaten by “Coke” pigs. Underneath, Guth had written: “Pepsi-Cola will soon be the largest selling 5¢ drink in your city both in bottles and at the soda fountain.” While Coca-Cola executives must have been outraged at Guth’s gall, they had no evidence that he posed a serious threat in Atlanta or anywhere else. Pepsi’s sales were dismal, even with a guaranteed outlet at the candy stores. When Guth approached Coca-Cola the following year offering to sell Pepsi for $50,000, the soft drink behemoth refused for the third and final time.
Desperate now, Guth took an unexpected tack: he decided he had nothing to lose by promoting a twelve-ounce bottled drink for the same nickel Coca-Cola got for its six-and-a-half ounce container. In 1934, he test-marketed the oversized drink in Baltimore, putting it up in used beer bottles. It immediately scored in blue-collar neighborhoods where a Depression-era nickel buying twice the drink made Pepsi the obvious
choice, regardless of Coca-Cola’s ubiquitous advertising. Soon, Pepsi was selling nationwide in a motley assortment of recycled beer bottles, and Guth was turning a profit, with net earnings in 1934 of $90,000 on gross sales of $450,000. The additional cost of the actual twelve-ounce drink was minimal, since most of the expense involved bottling machinery, bottles, distribution, and advertising. By 1935, Guth realized that there was more future in Pepsi than in Loft, and he resigned from Loft to devote full-time to the Pepsi-Cola Company, where his field was clear, since Megargel had died two years earlier.
The Loft directors, led by new president James W. Carkner, realized they were left holding an almost bankrupt candy bag and decided to sue Guth for using Loft funds and personnel to develop the soft drink. They knew, however, that without a quick infusion of capital, they might well lose a proxy fight with Guth at their 1936 meeting. Phoenix Securities Corporation, which specialized in saving troubled companies, jumped in with the necessary funds at the last minute. Phoenix head Walter Mack, who had an unerring way of diagnosing a firm’s critical problem, usually assumed management responsibilities.* In Loft’s case, he decided that going after the upscale market was a mistake, redirecting sales efforts at five-cent candy. He knew that the real future of the company, however, lay in winning the court case with Guth. As Loft struggled, Phoenix continued to lend the candy firm money. In September of 1938, the case was decided almost completely in Loft’s favor. Guth had to turn over his 91 percent share of Pepsi.
WALTER MACK INHERITS WORLDWIDE LITIGATION
For six uncomfortable months, as the case remained on appeal, Walter Mack served as the president of Pepsi while Guth, as general manager, made Mack’s life as unpleasant as possible, locking him out of the men’s room and sticking him in a cubbyhole office above the boiler room. Finally, in April of 1939, Guth lost his appeal and Mack assumed full charge of the soft drink’s future. He found himself knee-deep in litigation with The Coca-Cola Company in twenty-four countries, the result of John Sibley’s master strategy.
For God, Country, and Coca-Cola Page 29
