Goizueta refused to accept these excuses. While cultural deterrents existed, they were not insurmountable. The same traditional methods that had prevailed in the United States would work anywhere in the world, with appropriate modifications. The Cuban CEO coined an alliterative slogan—availability, affordability, acceptability. Before the drink could be sold, it must be available, or, as Woodruff always put it, “within arm’s reach of desire.” Coca-Cola should elbow its way into every conceivable retail outlet, while vending machines dotted roadsides and invaded sports arenas, factories, offices, shopping malls. Because soda fountains had always remained a strictly American phenomenon, convincing small cafes and bistros to dispense “post-mix” Coke posed problems, though as McDonald’s franchises spread throughout the world, fountain Coke tagged along.
Second, Coca-Cola must be affordable even to those living below the poverty line. While maintaining a hefty profit margin, the soft drink shouldn’t ascend to luxury status. Increasingly, the Company pushed larger containers of two and three liters, resulting in bulk sales at lower cost. Keeping Coke cheap enough for cash-poor African consumers proved particularly challenging. In Latin America, where governmental controls checked price and packaging, the Company had little choice but to offer the drink at low cost.
Third, and perhaps most important, Coca-Cola had to be accepted by consumers as a refreshing, healthy, sparkling beverage associated with good times, friends, achievement, athletics, and patriotism. Massive advertising and promotion were essential to that acceptance. Attractive, smiling girls must carry trays with free samples at Company-sponsored sporting events, overwhelming any negative rumors with a wave of good feeling.
In each country, Keough and Goizueta understood, implementation would vary somewhat, depending on the culture, economy, and stage of industrial development. They coined another Company slogan: “Think globally, but act locally.” In China and Indonesia, for instance, the first task involved building a strong infrastructure—concentrate factories, glass manufacturers, bottling plants, trucks, point-of-purchase signs, and the like—in American terms, time-warping back to 1905. In Germany, on the other hand, the Company already had a well-established business, but, as in the United States, too many bottlers vied in small territories. In 1985, Neville Isdell left a thriving Philippine business to supervise Germany, where he undertook the delicate task of consolidating the country’s ninety-six bottlers.
THE 49 PERCENT SOLUTION
Shortly after the centennial celebration, The Coca-Cola Company fortuitously found itself in possession of two gigantic bottling concerns. Jack Lupton, the grandson of the original Whitehead partner, elected to sell the JTL Corporation for $1.4 billion just before the California bottling concerns owned by Beatrice Foods went on the block for $1 billion. Coke snapped them up and, together with the bottling plants it already owned, wound up controlling a third of American Coke production. The purchases matched Company strategy, but they added unwieldy debt to the bottom line. In addition, they threatened the Company’s profit margins, since selling syrup and concentrate was far more profitable than bottling, and less capital intensive.
Doug Ivester solved the problem by creating an entirely new corporate entity called Coca-Cola Enterprises. As with other joint ventures, The Coca-Cola Company would retain a minority interest—in this case, 49 percent, guaranteeing control while shoving the huge bottling operation’s debts off of Big Coke’s balance sheet. Goizueta tapped Brian Dyson, a fine guerrilla fighter in the cola wars, as the new head of CCE, removing him from the main Company, where he was too closely linked to the New Coke disaster. The week before Dyson’s appointment, Sergio Zyman resigned, providing another convenient fall guy for New Coke in the public mind, though Zyman continued to serve as a well-paid consultant for the Company.
In the next two years, Big Coke gobbled stray bottling concerns and added them to CCE, consolidating the world’s largest single bottler. Despite its mammoth size and Dyson’s best efforts, the new corporation stumbled from the start. First, CCE was embarrassed when reluctant capitalists twice forced its initial stock offering—the largest in history—down from $24 a share. By the time it finally hit Wall Street, CCE stock sold for $16.50 and promptly lost another $2 a share within a few days of going public. Investors remained unimpressed by the much-touted cash flow, which would supposedly boost the stock price. While huge amounts of money did wash in and out of the bottling concern, its profits remained razor thin because of price wars with Pepsi.
For Big Coke, however, CCE fulfilled its purpose. Because the parent company could call the shots, it sold concentrate to CCE at relatively high prices, leaving the bottler to scrape out narrow margins. Emmet Bondurant scornfully called CCE “a syrup pump for Big Coke, pure and simple.” Ivester didn’t care what it was called. The “49 percent solution,” as insiders dubbed the arrangement, made financial sense. Quickly, he employed the same trick with Company-owned Canadian bottling plants, spinning them off as TCC Beverages Ltd., with the Company maintaining a 49 percent interest.
Shortly afterward, Ivester again performed his “financial alchemy,” as a Fortune writer put it. He packaged all of the Company’s entertainment holdings as publicly held Columbia Pictures Entertainment Inc., merging with Tri-Star in a stock swap leaving Coke with an 80 percent stake. He avoided an awkward initial stock offering by issuing 31 percent of the stock as a “dividend” to Coke shareholders. When the smoke cleared, The Coca-Cola Company owned just less than half of the new movie conglomerate, while netting $1.5 billion—about the same amount it had paid for everything in the sector. Goizueta was delighted with the new arrangements, which swept $3 billion in debt off the Company books, reducing the debt-to-equity level to a modest 12 percent and disassociating Big Coke somewhat from Columbia flops. Finally, it constituted what the Wall Street Journal termed “a potent takeover defense,” with “layer upon layer of poison pills.” Goizueta declared that Coca-Cola led the vanguard of “the emerging post-conglomerate era,” comparing unwieldy traditional corporations to fifties cars with gratuitous tail fins.
PLACATING THE DO-GOODERS
Only months after the anti-apartheid activists picketed the centennial celebration, The Coca-Cola Company revealed that it planned to disinvest in South Africa, following a boycott threat from the Reverend Joseph Lowery and his Atlanta-based Southern Christian Leadership Conference. Furthermore, it would try to sell its bottling plants to qualified black owners. The Company set up an Equal Opportunity Fund (EOF) with a $10 million endowment, to be administered by Nobel Peace Prize winner Desmond Tutu and the Reverend Allan Boesak, among others. Finally, the Company’s concentrate plant relocated from Durban to black-controlled Swaziland, instantly doubling the tax revenue of that tiny country.
Most apartheid critics lavished praise on Coca-Cola for “making a strong moral statement,” as the Reverend Lowery said, while Mayor Andrew Young proclaimed it “a bold and significant step in the battle against apartheid.” In fact, Coca-Cola had reduced its actual ownership of bottling plants in South Africa since 1976 because of the politically unstable situation, and its divestment involved less than $50 million in assets. The Company had no intention of relinquishing its domination of the South African soft drink market, continuing to supply its independent bottlers with syrup and marketing advice.
A few hard-line anti-apartheid activists challenged Coke’s “disinvestment.” Tandi Gcabashe, the daughter of former African National Congress leader Albert Luthuli, lived in Atlanta and persistently agitated for a boycott. She argued that for every eighty-cent bottle of Coke sold in South Africa, ten cents went as tax revenue to the government and that Coke therefore still supported the racist regime. She dismissed the $10 million EOF as “an insult, a drop in the bucket.” When critics pointed out that other American companies offered more logical targets, Gcabashe shrugged them off, pragmatically asserting that Coke was the ideal scapegoat because of its worldwide presence and image. “They are so visible and so good with
their advertisements,” she explained, “that it works to our advantage. We can say, ‘What company profits from apartheid? Coke is it!’” College students, ever eager for noble causes, fervently responded to Gcabashe’s anti-Coca-Cola pamphlets, forcing the Company to counter with its own literature. Suave Carl Ware, Coke’s highest-ranking black executive, traveled to reassure students personally of the Company’s exemplary position. Desmond Tutu, visiting Atlanta to deliver the commencement speech at Emory, posed with Keough, Goizueta, and the Atlanta archbishop for a photograph in which all four smiled broadly. The boycott sputtered, though Gcabashe refused to let it die completely.
In the meantime, Coca-Cola Foods provoked an international uproar as well. Late in 1985, frustrated by repeated freezes that had decimated Florida orange groves, the Houston-based subsidiary purchased 196,000 acres of Belizean forest and grasslands, intending to clear 25,000 acres to guarantee a supply for Minute Maid. Paying only $6 million, Coca-Cola suddenly owned an eighth of the entire landmass of tiny Belize, formerly British Honduras. The deal, helped along by a new probusiness Belizean regime, quickly translated into a cause célèbre for environmentalists, nationalists, and angry native fruit growers.
Unfounded rumors flew that Coca-Cola had bought the land for use as a resupply base for Nicaraguan Contra rebels, since Contra chief Adolfo Calero was, after all, a Coca-Cola bottler. Calero’s Coke plant had been seized by the Sandinista government in 1983 when he was out of the country. When other growers discovered that Prime Minister Manuel Esquivel had sweetened the deal by granting Coke a fifteen-year tax holiday, they were livid. Nor were the U.S. grove owners pleased with the situation, since the Coke move directly threatened their profits. The American citrus lobby blocked the issuance of essential “political-risk insurance.” Without it, the Company couldn’t reasonably proceed.
The greatest agitation, however, developed from environmental groups such as the International Audubon Society, Rainforest Action Network, and Friends of the Earth, which screamed that the contested forest nurtured unique wildlife such as ocelots, pumas, howler monkeys, harpy eagles, and the world’s largest jaguar population. By 1987, the protests were garnering international headlines, with demonstrations in Stockholm and the occupation of a German bottling plant by Green Party activists. In September, Coke finally relented, placing the Belize citrus project on “indefinite hold.” In addition, the Company donated forty thousand acres as a nature preserve and declared its intention of selling most of the balance. The Company managed to transform a public relations disaster into a bonanza. Coca-Cola, a Sierra Club publication declared, had “joined the rainforest generation.”
THE “APRIL MASSACRE”
Meanwhile, Judge Murray Schwartz had recovered from his mysterious ailment and delivered two 1986 interim judgments, apparently decisive victories for the upstart bottlers led by Bill Schmidt. First, Schwartz issued a “preclusion order” in the Diet Coke Case because of the Company’s refusal to divulge its secret formulae. In doing so, he allowed Emmet Bondurant to assert that the difference between Diet Coke and Coca-Cola was “as narrow as the width of a piece of paper,” varying only in type of sweetener used. Unfortunately for Bondurant, Schwartz stopped short of saying that Diet Coke was exactly equivalent to Coca-Cola and therefore covered by the same contract.
Later in the year, Schwartz ruled in the E-Town Case that high-fructose corn syrup did not equal cane sugar according to the wording in the original bottling contract. The Company did not, therefore, have the right to switch to HFCS without the bottlers’ permission. In his summary, the judge wrote that “this case was a pleasure to try because of the outstanding ability of both teams of lawyers,” but suggested that their talents were misdirected. What was the use of the protracted, bitter dispute, since it was clearly in the best interests of both parties to compromise? Surely, these superb lawyers could convince their clients to negotiate a more reasonable contract with the object of “increasing the bottom line rather than incurring horrendous litigation expenses.”
The judge’s gentle admonition fell on deaf ears. Bondurant and Schmidt, jubilant over their apparent victories, were not about to relent. Nor, it soon appeared, would Big Coke. In an unexpected move the following March, the Company reacted to Schwartz’s sugar judgment by insisting on supplying the non-amended bottlers with cane-sweetened syrup, even though that would cost the Company a projected $7 million annually. At the same time, the Company cut off all cooperative funds to non-amended bottlers. “We underestimated the vindictiveness of The Coca-Cola Company,” Bondurant lamented, switching tactics to insist that the corn syrup had become the standard and must therefore be supplied under the contract. “The Company,” he wrote, “is attempting to win through unfair and coercive tactics a victory it has lost to the bottlers in court.” The Company responded by declaring that non-amended bottlers had until May 1 to sign the 1978 amendment. After that, the window of opportunity would stay closed forever.
Many of the non-amended bottlers panicked, particularly the smaller outfits that relied on other bottlers for cans and large plastic containers. They knew that the bigger amended supplier would cut them off rather than arrange for a separate cane syrup flow through their lines. Bill Schmidt, a medium-sized bottler who supplied nearby plants with canned Coke, wasn’t in such dire straits, though he would now have to run two separate lines—one for amended, another for non-amended bottlers. He assured his fellow plaintiffs that he would ship them canned goods, but that failed to stem a flood of defections that Schmidt lamented as the “April Massacre.” Many bottlers called in tears to apologize. “I believe in what you’re doing,” they said, “but I’m scared. This could ruin my whole business.” Within a month and a half, the number of non-amended bottlers fell from sixty-four to twenty-nine. As the lawyers jockeyed, however, the final outcome of both trials remained uncertain.
NOT FUN ANYMORE
The dwindling renegades were the last holdouts against the dramatic changes the entire Coca-Cola system had undergone in the prior ten years. The small-town bottler, king of his countywide domain, had been replaced by a warehouse. In 1937, for example, Bill Carson built his gorgeous plant in Paducah, Kentucky, with select maple, stained glass, and a thirty-foot round dome. Its gilded splendor now held only a few offices; no one actually bottled Coke in Paducah anymore. Instead, in an impersonal process known as “double-bottoming,” two loaded semitrailers pulled into the parking lot. In the old days, the bottler called each of his customers by first name, and each route driver developed a personal relationship with even the smallest account. For forty years, for instance, Charlie Schifilliti serviced Vermont. Because his name was difficult to pronounce, customers often called asking for “the Coca-Cola man,” and the operator would give out Schifilliti’s home phone number. If Pepsi dared to place a cooler, the typical Coke bottler would simply express disappointment in his old friend, who would remove the interloping machine. Now, the gigantic modern bottler shipped product hundreds of miles away, primarily to chain accounts: Kmart, 7-Eleven, Piggly Wiggly. Because of mergers and consolidations in almost every industry, including supermarkets, convenience stores, and service stations, the most important customers were bigger and bigger chains, which expected commensurately large, efficient service.
By 1988, the top ten U.S. Coke bottlers accounted for 78 percent of the brand’s volume, and Big Coke owned equity positions in half of them. The raging price wars between Coke and Pepsi steadily narrowed profit margins. As industry commentator Jesse Meyers put it, discounting had become “not just a way of life, but . . . life itself,” resulting in prices that were actually lower per ounce than in 1970, when adjusted for inflation. Inevitably, the squeeze on profits prompted a private cease-fire among some competing Coke and Pepsi bottlers—an illegal practice known as price-fixing.
Even though the Reagan administration’s trustbusters had been notably lenient, Tony Nanni, the litigation chief appointed under Carter, was relentless once he smelled soft-drin
k blood. In a speech before bottlers, he spoke of his job as a “mission,” and the shudder running through the room testified to his sincerity and power. After filing his first price-fixing case in 1986, he rapidly uncovered other cases of collusion. In 1987, CBS’s 60 Minutes, in a report called “Cola Payola,” revealed that Coke and Pepsi bottlers had conspired in hotel bathrooms, parking lots, fast-food booths, and airport coffee shops to forge price agreements. By the end of 1988, Nanni had filed twenty-nine separate legal actions against bottlers and was investigating many others. Jim Harford, president of a major Coke bottling plant, was jailed in 1987 for collusion in price-fixing and admitted that he had created “an environment where people got hurt. Frankly, we were street-fighters. We were cocky, really cocky, competitively boastful that we could do anything because we were winning the war.”
In this cutthroat world, only bullies won. Royal Crown and other smaller competitors were slowly being crushed between Coke and Pepsi, who literally left them no room through calendar marketing agreements (CMAs) in which the bigger bottlers paid supermarkets huge fees for the rights to exclusive end-of-aisle promotion space, dividing the year between them. Complaining that these CMAs were more properly termed “lock-out agreements,” Royal Crown unsuccessfully sued.
The frantic effort to reap profits in such a volatile market forced most Coca-Cola bottlers to apply severe pressure on their employees. Traditionally, the Coke delivery-man took immense pride in his work, since he represented a worthy, gracious product and company. Now, for a driver at Coke Consolidated (in which Big Coke held a 20 percent equity position), the job became “psychologically devastating,” to quote former route salesman Allen Peacock. During his fifty-four weeks with the Company, he routinely worked from 5:30 a.m. until 11 p.m. “They threatened termination if you didn’t finish your route,” he recalled. If the product didn’t sell before its ninety-day shelf life expired, the salesman had to buy it out of his salary. That sort of pressure led to a 260 percent annual turnover rate at Consolidated in Nashville, where Peacock worked. Working strictly on commission, he pulled down $35,000 a year, but the stress and abuse weren’t worth it. When his car broke down, he was told to appear anyway or face dismissal. The following day, his boss told him he could have one more chance. “I told him to kiss my ass,” Peacock said. “I had never been written up or missed a day of work. I walked out, and I’ll never go back.”
For God, Country, and Coca-Cola Page 58
