That same year, Pepsi unveiled its “Pepsi Generation” ad campaign that challenged baby boomers to rebel against the conformity of their parents. Finally, both companies had an advertising style—and neither said a word about what the soda actually tasted like or contained. Despite the competition, the real winner was the soft drink market. Between 1954 and 1964, per capita consumption rose nearly 25 percent, from 174 servings per capita in 1954 to 227 in 1964. Along with the advertising face-lift, Coke also had a new face of the company. As the 1960s dawned, new president J. Paul Austin was the first in decades to emerge from the shadow of chairman Robert Woodruff to drag the company into a new corporate era. Even as Pepsi merged with Frito-Lay snack company to become PepsiCo, Coke finally got over its single-product fetish to branch out with Minute Maid juices, diet soda Tab, lemon-lime Sprite, and fruit-flavored Fanta (a name it kept despite its Nazi origins).
Austin also confronted the changing reality of America, as blacks, women, and other groups were finally demanding their civil rights. The civil rights debate began, in fact, when four students at a Woolworth’s counter in Greensboro, North Carolina, demanded their right to a Coke, by now the symbol of American prosperity. Caught between rumors it financed White Citizens’ Councils on one side, and the National Association for the Advancement of Colored People on the other, the company stayed on the sidelines. “I’ve heard the phrase ‘Stand up and be counted’ for so long from both sides that I’m sick of it,” groused one vice president. “Sure, we want to stand up and be counted, but on both sides of the fence.” Taking a moral stand, after all, could only lose the company customers. Even as Woodruff personally risked his reputation in Atlanta to support a Nobel Prize dinner for Martin Luther King, Jr., the company dragged its feet on producing racially integrated advertising.
Similarly, when the war in Vietnam broke out, the company virtually ignored the controversial conflict; there would be no soldier made of sugar in Danang, no “Have a Coke” in Saigon. With nothing much to lose, Pepsi filled the gap, courting hippies and love children with the countercultural slogan “You’ve Got a Lot to Live, Pepsi’s Got a Lot to Give.” Not that Coke slipped behind the times. When the “depth boys” at McCann told Coke that youth of today didn’t like phoniness in their leaders, lyricist Bill Backer reached into the World War II archive to pull out “The Real Thing,” a slogan that could brilliantly appeal to disenfranchised youth searching for a more authentic world, as well as disaffected adults longing for a simpler time before all of the national discord.
The times were catching up with Coke, however. As the socially conscious 1970s hit, farm labor organizer César Chávez followed up his successful grape boycott with a campaign protesting the deplorable conditions in Florida orange groves—focusing particularly on Coke’s Minute Maid subsidiary. An NBC documentary revealed substandard housing and inadequate toilet facilities for workers making less than minimum wage. Coke was livid at being singled out by the program but appeared publicly contrite. Testifying before the U.S. Senate, Austin sympathized with the “profound sense of futility” suffered by the workers, and promised to change. Eventually, Coke signed a union contract with the United Farm Workers in 1972, leading to higher wages and benefits for Minute Maid workers compared with other fruit pickers. (The contract lasted only until 1994, however, when Coke sold its Florida orange groves, which effectively ended union representation in the state.)
On some level, Austin’s rhetoric about changing the world was genuine. Under a principle he dubbed the “halo effect,” the company launched new initiatives on recycling and acquired a company called Aqua-Chem to produce desalinization plants to provide clean water in the Middle East—even though the subsidiary never turned a profit. The company’s new social thrust, however, wasn’t completely uncalculated. Now that love beads and folk music were safe cultural touchstones, Coke glommed on to the hippie movement for its biggest transformation in decades. The company had already gone from a medicinal cure-all to sign of good breeding, from refreshing pause to all-American icon. Now it would tackle world peace.
Bill Backer supposedly came up with the idea when his plane was fogged in in Ireland, and he saw his fellow passengers sharing Cokes to pass the time. At that moment, he realized Coke was “a tiny bit of commonality between all peoples.” He set out to re-create the vision with a new commercial assembling two hundred international teenagers with stereotypical national clothing, to sing the earnest lyrics: “I’d like to teach the world to sing, in perfect harmony, / I’d like to buy the world a Coke, and keep it company. . . .” In reality, the shoot was a nightmare, with the unruly kids constantly breaking formation to run down the hill to get more Coke. But the ad worked, turning the act of buying a Coke into a nod to international harmony, and spawning a radio hit that Newsweek noted was a “sure-fire form of subliminal advertising.”
As hope of the 1970s settled into economic malaise, however, Coke showed how easy it was to appeal to the other side of the political spectrum. A new series of ads featured lighthouses, redwoods, and corn silos, set to a song called “Look Up, America!”—a nod to the new “moral majority” backing conservative president Ronald Reagan. Through it all, sales of soft drinks continued to soar, from 242 cans per person in 1970 to 363 cans per person in 1980. As Pepsi’s new CEO Roger Enrico once said, “At Pepsi, we like the Cola Wars. . . . The more fun we provide, the more people buy our products—all our products.” It was Pepsi, however, that changed the rules of engagement, leading to the Coca-Cola Company’s biggest blunder, and the Coca-Cola brand’s greatest triumph.
What’s amazing , in retrospect, about the Pepsi Challenge isn’t that Pepsi had the audacity to compete with Coke on the basis of taste. It’s that it hadn’t done so before. Here, the two soda giants had been fighting it out for decades on which soda refreshed or relaxed you better, on which one made you feel younger or more nostalgic—as if to distract consumers from the simple idea that they could just drink the one they thought tasted better.
It took a state of near desperation to try it. Coke had trounced Pepsi on market share for years in Texas before a new regional manager decided on a fresh approach. He found it in television commercials inviting shoppers to try two sodas head-to-head, filming their surprised expressions when it turned out they liked Pepsi better. The campaign doubled market share in just a few months, and Pepsi eventually rolled it out nationally, reaching 90 percent of the market by 1983.
The campaign rocked Coke to the core, leading to its own tests revealing that Pepsi did actually outperform Coke on taste by a small margin. Nonetheless, both companies fired off competing ads, each claiming they actually tasted better, at the same time slashing prices and offering discounts at supermarkets to win back customers. After a year or two, however, they realized the scorched-earth tactics only hurt both of them.
“The Pepsi Challenge, if managed differently, might have resulted in a real Cola War, one that was price-based,” says historian Richard Tedlow. “This, however, is precisely the kind of competition both companies want to avoid.” Pepsi’s incoming president, Roger Enrico, called off the campaign almost as soon as it began, and both companies soon returned to more traditional forms of advertising—with Coca-Cola releasing the new slogan, “Coke Is It!” which, like “Things Go Better,” was ambiguous enough to open itself to any interpretation.
Inside Coke, however, executives continued to fret. Every year, Pepsi chipped away at the company’s market share a little bit more. From a high of 60 percent after World War II, Coke’s share had fallen to just 22 percent by 1984—compared with Pepsi’s 18. What was worse, when Coke applied a pseudo-scientific measure called the Advertising Pressure Index (API), it found “advertising alone couldn’t account for Pepsi’s aggressive advance, or Coke’s devastating decline”—as if the thought that a company could grow or falter due to something other than its advertising image had never occurred to them. That realization set them up for a drastic mistake under the leadership of Coke’s
new president, a Cuban chemist named Roberto Goizueta.
A member of Cuba’s financial elite who fled the island before Castro’s takeover in 1960, Goizueta got a job with Coke first in Miami, then Atlanta, where he gained the trust of the senior executives and even learned the secret formula. His eventual rise to the top came the old-fashioned way: sucking up to the boss. Robert Woodruff was now in his eighties, but he was still chairman, and when Paul Austin flared out in a very public bout with early-onset Alzheimer’s, Woodruff was back in charge. As the aging Boss suffered illness and depression, Goizueta visited him every day, and in one of the old man’s last acts, he tapped Goizueta for the hotly contested top slot in 1981.
Perhaps because of his unusual ascent, Goizueta immediately declared the company would no longer be afraid to take risks. “There are no sacred cows,” he announced, up to and including Coke’s secret formula. “Reformulation of any or all of our products will not stand in the way of giving any of our competitors a real or perceived product advantage.” Case in point, he oversaw the introduction in 1982 of Diet Coke, violating the sacred dictum that Coke was a “single thing coming from a single source”; within two years, it had become not only the best-selling diet drink, but also the number three soft drink overall. That success led to the act of ultimate hubris: changing the sacred formula of Coke.
The company should have known better. While developing Diet Coke, marketers discovered that the word “Coke” alone was enough to drive sales: When they tested Tab against Pepsi, it lost by a 4 percent margin; when they poured the same drink into a Diet Coke can, however, it caused customer preference to jump 12 points. Despite these findings, marketing chief Sergio Zyman led a two-year search for a new sugar-sweetened formula that would beat Pepsi in blind taste tests, finally hitting upon a sweeter version that consistently outranked Pepsi by 6 to 8 points. The project was so secret the company didn’t even tell its advertising agency McCann until January 1985, just three months before its introduction.
Company executives stood up before a packed press conference on April 23, 1985, forever after known as “Black Tuesday” among the Coke faithful. Unfortunately for Coke, word of the change had already leaked. The day before, Pepsi had taken out a full-page ad in The New York Times declaring victory in the Cola Wars with the statement “The Other Guy Just Blinked.”
As Goizueta followed a montage of cowboys, the Grand Canyon, and the Statue of Liberty onto the stage, the press corps leaped: “To what extent are you introducing this product to meet the Pepsi Challenge?” “Have you simply added more sweetness to make it more competitive with Pepsi?” In the face of such direct questions, Goizueta temporized. New Coke wasn’t any sweeter than old Coke, he said, rather it had a “rounder . . . bolder . . . more harmonious flavor.” Pepsi had nothing to do with it.
The press didn’t buy it, and neither did the public. Anguished calls and letters came pouring into Coke headquarters—more than 400,000 by the end of the ordeal. “You’ve taken away my childhood,” read one. “Changing Coke is like God making the grass purple,” sputtered another. Finally, Coke capitulated. “We have heard you,” Goizueta assured consumers at a press conference in July announcing old Coke would return. Pepsi continued to bask, with CEO Roger Enrico rushing out a book, The Other Guy Blinked, in which he sneered: “I think, by the end of their nightmare, they figured out who they really were . . . caretakers. . . . All they can do is defend the heritage they nearly abandoned.”
History, however, hasn’t exactly seen it that way. Within a year after its release, New Coke faded into oblivion, while “Coke Classic” again topped Pepsi in market share. It was the ultimate triumph of image over reality. Consumers rejected the two sodas they actually liked better in blind taste tests, in exchange for the one whose brand image made them feel better.
Marketing exec Zyman, who was responsible for the debacle more than anyone, later claimed the disaster was all but intentional. “A lot of people said it was a big fat mistake. It wasn’t,” he wrote. “New Coke was incredibly successful in reattaching consumers to Coke.” Zyman left the company in 1987, the apparent fall guy for the disastrous reformulation, but was hired back as chief marketing officer in 1993. Neither he nor the rest of the executive suite at the Coca-Cola Company ever forgot the lesson: Taste aside, image was the most valuable asset the company had. If the company was to succeed, it must be protected at all costs.
THREE
Biggering and Biggering
By the end of the 1980s, it seemed like the Coca-Cola Company could do no wrong. For nearly a hundred years, it had been growing larger and larger, selling more and more of its sugary sweet pleasure. Now, after the New Coke experience, it had survived its biggest stumble ever, and somehow come out stronger for it. After decades of advertising, Coca-Cola’s brand had been cemented into the American consciousness as something good and patriotic that brought people together not only in the United States but around the world as well. And now, it represented something more: a part of every American they suddenly realized they’d be heartbroken to lose. For its hundredth-anniversary celebration in 1986, Coke pulled out all of the stops, turning Atlanta’s convention center into a huge indoor party for 14,000 people, complete with floats, marching bands, and food including 66,000 pieces of shrimp, 9,000 barbecue ribs, and a fourteen-foot-high Coke bottle popping out of a 7.5-ton cake.
When the hubbub died down, the company’s executives turned to the future—where they saw nothing but blue skies on the horizon. Growth had always been a priority at the Coca-Cola Company. Asa Candler had made expansion part of Coca-Cola’s very business model; Robert Woodruff had pushed Coke’s expansion “within an arm’s reach of desire” around the world. But growth would become an obsession for the next generation of Coke executives, spurred by an unprecedented level of wealth in the stock market.
For the first time, average Americans began putting their money into the market in significant numbers—either on their own or through the vehicles of mutual funds or pension funds. These institutional investors began to push for higher and higher returns, and companies obliged them, focusing everything on their quarterly earnings statements in a new emphasis that became known as the “shareholder value movement.” The idea dates back to an obscure 1975 book by economist Alfred Rappaport. But the philosophy was articulated most famously by Jack Welch, the CEO of General Electric, who declared in 1981 that plodding growth of “blue chip” companies was no longer good enough for him. Instead, he pushed GE’s earnings into high gear by cutting waste and inefficiency wherever he found it—including downsizing through massive layoffs. He set the tone for other companies, who rushed to please Wall Street by any means necessary—including accounting tricks, stock buybacks, and rampant acquisitions of other companies. Flush with stock options, CEOs profited handsomely, even as they sometimes hurt the long-term success of their companies through an emphasis on short-term growth.
Outside of Jack Welch, no CEO was associated with the “shareholder value movement” more than Roberto Goizueta, who became a darling of Wall Street in the 1980s. “I wrestle over how to build shareholder value from the time I get up in the morning to the time I go to bed,” he once said. “I even think about it when I am shaving.” In the days before the Internet, he had a computer screen installed in a conference room on the twenty-fifth floor of Coca-Cola headquarters with a live feed from the New York Stock Exchange that continually monitored Coca-Cola’s stock price; he put another screen at the main entrance to Coke headquarters, so it would be the first thing employees would see as they walked in the door and the last thing they’d see as they left. The company sloughed off divisions acquired by Austin to create his “halo effect” that never turned a profit—such as his desalinization plants in the Middle East—and acquired lucrative new companies with nothing to do with soft drinks, such as Columbia Pictures, fresh off the success of Ghostbusters and The Karate Kid.
But more than anything, growth meant returning to the core business of
the company: selling more soft drinks. After the New Coke fiasco, Goizueta changed his tune about “sacred cows,” realizing he had acquired “a most unique company with a most unique product.” He abandoned any attempt to change the formula, concentrating instead on increasing per capita consumption, or “per-caps,” around the world. “If we take full advantage of our opportunities . . . eventually, the number one beverage on Earth will be soft drinks—our soft drinks,” he crowed in 1986. Ultimately, he told Fortune magazine, he envisioned a world where the C on the kitchen faucet stood not for “cold,” but for “Coke.” So comical do those comments sound today that they call to mind the Once-ler, from The Lorax, Dr. Seuss’s cautionary children’s book about corporate excess, who crowed about “biggering and biggering and biggering and biggering,” at least until the last Truffala tree was chopped down.
In Coke’s case, growth was never an end in itself—it was always a means to constantly raise the share price. The more bottles or fountain drinks, the more earnings from syrup sales. The more earnings, the more investors would put into the company. As the 1990s dawned, Goizueta was promising annual volume growth of 7 to 8 percent a year—translating into some 20 billion additional drinks sold around the world. That, in turn, meant 15 to 20 percent annual growth in earnings. Goizueta personally called the Wall Street analysts who covered Coke to discuss the company’s earnings, detailing the new markets where the company was constantly treading.
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