The Coke Machine: The Dirty Truth Behind the World's Favorite Soft Drink

by Michael Blanding

  Not surprisingly, analysts rushed to jump on board the Coke gravy train, followed by institutional investors. “If you weren’t owning Coke, you were losing,” said one about the time. Another called Coke “the closest thing we know of to a perpetual motion machine.” Upon learning that Goizueta had been declared CEO of the year in a trade magazine, he said, “Hell, considering all he’s done for shareholders, you should make him CEO of the century.” Stock prices rose with each of their predictions; if an analyst predicted lower earnings, they were frozen out. Goizueta profited handsomely—eventually earning more than $1 billion in stock, his reward for raising the value of the company by more than $100 billion throughout the late 1980s and early 1990s. In 1991 alone, he received a bonus of $80 million when he exercised his stock options—at the time, the largest single payout ever given to an American CEO.

  Much of Coke’s growth in those years came in the form of new markets overseas, as the company gradually expanded into countries it hadn’t already colonized. At the same time, executives knew that to raise share value they would have to keep selling more soda in the country where it was created—and that increasingly meant selling not only in more places, but also in larger sizes. In all of the rush to expand volume, however, it never occurred to company executives to ask: Does the world really need that much Coke?

  In the age of Big Gulps and supersizing, it’s almost inconceivable that until the 1950s Coke was sold only in 6½-ounce bottles. Even as the company was selling in more and more venues around the country, it was still seen as an occasional treat for after meals or on Sunday afternoons. The arms race with Pepsi changed that. After the upstart company’s “twice as much for a nickel” campaign, Coke was under constant pressure to offer bigger sizes, too. Finally, in 1955, it relented, rolling out 12-ounce “King Size” bottles. Almost at the same time, it released 26-ounce “Family Size” bottles, intended for home consumption with meals.

  For decades, the price of sugar still kept a lid on how big Coke was able to go. That changed in the 1980s when Japanese scientists invented high-fructose corn syrup. Unlike sucrose—subject to the whims of international sugar markets—the new sweetener could be made here at home, where corn subsidies keep the prices at rock-bottom levels. “Cheap corn, transformed into high-fructose corn syrup,” wrote Michael Pollan in 2003, “is what allowed Coca-Cola to move from the svelte 8-ounce bottle of soda ubiquitous in the ’70s to the chubby 20-ounce bottle of today.” Coke rolled out a 50 percent high-fructose corn syrup (HFCS) version of its trademark beverage in 1980, delighted to discover that consumers couldn’t tell the difference. In 1985, it switched to a 100 percent HFCS version.

  The rock-bottom price of syrup now allowed Coke to grow exponentially—especially in fountain sales. Fast-food execs had long known that the way to drive profits was not to offer bigger hamburgers but to offer bigger sizes of the high-margin items such as french fries and soft drinks that went with them. It wasn’t until the late 1980s, however, that the concept of “supersizing” really caught on. By then, fast-food companies realized that they could make more money by bundling a burger, fries, and a Coke into a “value meal” and selling it at a discount. They offered further discounts on larger and larger sizes of fries and sodas—both of which could be more easily increased in size, and with a greater profit margin, than could a hamburger or fish sandwich.

  As Eric Schlosser describes in Fast Food Nation, in the 1990s a 21-ounce medium soda at McDonald’s sold for $1.29, while a 32-ounce large soda sold for only 20 cents more. But the cost for ingredients was only 3 cents more—for 17 cents of pure profit. Everyone won—the customer got exponentially more soda, the restaurant got more profit, and the company sold more syrup. And if that wasn’t enough, customers could request to “supersize” their drinks—a stomach-busting 64 ounces and 610 calories a pop. By 1996, supersizing accounted for a quarter of soft drink sales. (It was the same story at the 7-Eleven chain of convenience stores, which introduced the 32-ounce Big Gulp, the 44-ounce Super Gulp, the 52-ounce X-Treme Gulp, and finally the 64-ounce Double Gulp. The true champion, however, was “The Beast,” an 85-ounce refillable cup released by Arco service stations in 1998.)

  With two-thirds of the fountain sales market, Coca-Cola was the clear beneficiary of the new drive to push volume. And as consumers became more and more accustomed to larger sizes of soft drinks at fast-food restaurants and convenience stores, the company quietly retooled vending machines and supermarket displays to increase package sizes as well. In some ways, it was the consumers’ fault. In the skittish days after New Coke, the company engaged in more and more consumer testing, all of which pointed in one direction: “Bigger is better,” according to Hank Cardello, Coke’s director of marketing in the early 1980s, who has since broken with his industry roots to become a health advocate. “The mantra was bigger packages, bigger servings, and more of everything per container,” he writes in his 2009 book Stuffed.

  In 1994, Coke began introducing a new 20-ounce bottle, fashioned from polyethylene terephthalate (PET) plastic in Coke’s trademark “contour” shape—a variation on the old green-glass hobbleskirt bottle. It quickly replaced the 12-ounce can to become the standard serving size for Coke. The new container was a boon to the company—reversing years of discounts on multipack boxes of cans and allowing it to charge a premium price on the new, larger bottle. Along with the bigger sizes, Coke doubled down on Woodruff’s “arm’s reach of desire” strategy to put Coke anywhere and everywhere it could. “Our goal was to make Coca-Cola ubiquitous. At all times, at all places. . . . Coke Was It,” writes former brand manager Cardello. “My job was to keep the logo in your face, and present it in the most positive light. And I had access to a huge war chest with which to accomplish this.”

  In 1997, Coke’s annual report laid bare its strategy with striking candor, stating, “We’re putting ice-cold Coca-Cola Classic and our other brands within reach, wherever you look: at the supermarket, the video store, the soccer field, the gas station—everywhere.” A Coke marketing newsletter later distributed to fast-food restaurants encouraged them to push soft drinks for breakfast, recommending they put Coke on the breakfast board and introduce special Coca-Cola cups for “the most important meal of the day.”

  The big push to sell more volume worked. Annual soda consumption soared to 56.1 gallons—more than 600 cans—per person in 1998, up 30 percent from 1985, and two and a half times what it had been in 1970. And more and more soda drinkers were drinking Coke, which had reclaimed 45 percent of the market in the United States compared with Pepsi’s 30 percent. Naturally all of those soda sales sweetened Coke’s bottom line, leading to more than $4 billion in net income, and a whopping 3,500 percent increase in Coke’s stock price over Goizueta’s tenure—to a high point of $88 a share by 1998.

  Even as consumption grew, Coke knew that it couldn’t count on customers to drink that much Coke without a little nudge. Goizueta, more than anyone, realized how important advertising was to selling product. “We don’t know how to sell products based on performance,” he once said, shrugging. “Everything we sell, we sell on image.” When Goizueta took over in 1981, Coke’s annual spending on advertising in the United States was up to $200 million. Goizueta doubled it, to $400 million, by 1984. There it hovered throughout the next decade, until Sergio Zyman came back on board in 1993.

  After the debacle with New Coke, everyone had assumed Zyman would be the fall guy. Coke’s marketing chief not only was one of the prime movers behind the fateful change to Coke’s formula, but was also abrasive and authoritarian, alienating many in Coke headquarters. His insistence on numbers with no excuses had earned him the title of “Aya-Cola” back in the 1980s, when he had famously killed the “Mean” Joe Greene ad, one of the most endearing and popular ads in Coke’s history, when it didn’t “move the needle” to sell more product. “The sole purpose of marketing is to get more people to buy more of your product, more often, for more money,” he would write later, in his 1999 b
ook The End of Marketing As We Know It.

  Whatever Zyman’s past mistakes, that philosophy made perfect sense to Goizueta, who hired Zyman back as chief marketing officer in 1993. Once back, Zyman pushed the concept of “spending to sell”; every marketing campaign, he announced, would be weighed against how much it increased sales of soft drinks—if it didn’t, then it would be cut. If it did, “we poured on more.” The domestic ad budget rose to $500 million in 1994, $600 million in 1996, and $700 million in 1997 (with $1.6 billion spent on advertising worldwide).

  And it wasn’t enough to get more people to drink Coke products—it was also important for those already drinking Coke to drink more of them. Company statistics showed that of the 64 ounces the average person drank in a day, Coke products accounted for just a miserable two of them. It was Zyman’s job to think of ways to get people to increase that number; after all, in his native Mexico, it was common for people to drink three or four cans a day. “These are the consumers you want,” he said. “And you want to make sure that you capture all of them.”

  Zyman came up with a new concept he called “dimensionalizing,” which he defined as giving people more reasons to drink beyond Coke’s “original selling proposition.” If a person had eight drinks a week because he was thirsty, then telling him to be sociable might drive that up to ten. “Then you have to create a new reason after 10,” said Zyman. In order to get a better handle on the various reasons to drink Coke, the company had 3,600 super-consumers—whom they called, without irony, “heavy users”—to keep diaries of all of the occasions when they drank, which the marketers called “need states.”

  The research was enormously successful, revealing 40,000 separate occasions when the test subjects might pop open a can. Zyman distilled them down to thirty-five different reasons to drink Coke, or “dimensions,” including: “Coke is part of my life. It understands me. Cool people drink it. People of all ages drink it. It has a bite and a distinctive taste. It comes in a contour bottle. It is modern, funny, emotional, simple, large, friendly, consistent, and everywhere.” Of course, such an approach to advertising raises the question: At what point are you anticipating customers’ needs and at what point are you creating them? Coke didn’t dwell on the question long. For each attribute, the marketers designed a different ad, rolling them all together in a new campaign under the slogan “Always Coca-Cola” (which had the delicious double entendre of harkening back to Coke’s heritage while encouraging consumers to drink it at every occasion).

  At the same time, Zyman shook up Madison Avenue by spreading work among different agencies, having them compete for Coke’s vast advertising war chest. Along with Apple and Nike, Coke even began to contract out to Hollywood powerhouse Creative Artists Agency, which created one of Coke’s most compelling symbols. During the 1993 Academy Awards presentation, TV viewers were introduced to a computer-generated family of polar bears watching the northern lights in a vast expanse of ice with nothing to break up the monotony but the familiar logo of Coca-Cola. The bear clan returned for the following holiday season, Coke’s most successful branding of Christmas since it introduced its Santa Claus ads in the 1930s.

  The polar bears were the perfect new branding agent in an era when branding was king. A few years after New Coke taught the Coca-Cola Company the value of its brand name, the rest of Wall Street learned the same lesson when Philip Morris cut the price of its Marlboro cigarettes by 20 percent to compete with generics flooding the market. Immediately Philip Morris’s stock dropped, along with Coca-Cola and many other brands, as the financial press rang a death knell for the brand.

  A few weeks after the incident, Goizueta called Wall Street analysts down to an emergency meeting in Atlanta. “We are getting a bum rap,” he whined. “It’s one thing when your stock drops 10 percent because of a mistake your company has made . . . but it’s something else . . . when it drops because of a business with totally different financial and social dynamics.” For the next four hours, he patiently explained why people might not pay for a Marlboro but they would pay for a Coke. And he was right. Coke’s stock righted itself in a few weeks.

  As Naomi Klein recounts in her book No Logo, the real lesson of “Marlboro Friday” was that companies needed to invest more money in branding, not less. The companies that succeeded after the recession of the early 1990s were those that wrapped consumers in their products, creating not just an association with their product but a complete lifestyle—think Starbucks, Disney, Apple, Calvin Klein, and Nike. “And then there were companies that had always understood that they were selling brands before product,” writes Klein, citing Coke at the top of her list. As Disney opened Disney Stores in malls across America, Coke followed suit on a smaller scale with Coca-Cola stores in New York and Las Vegas and the original World of Coca-Cola in Atlanta.

  The man responsible for of Coke’s new success, however, didn’t live to see it for very long. In 1997, Goizueta was one of the wealthiest people in America—personally worth more than a billion dollars—and because most of his wealth was tied up in stock, he was able to avoid paying virtually any personal income tax. But just at his moment of greatest triumph, he discovered he had lung cancer. Within a year, he was dead.

  Goizueta’s sudden departure was a blow to the company’s image on Wall Street, as well as a threat to its ties to the all-important beverage analysts that could keep pushing Coke’s stock price into the stratosphere. Though no one knew it, Goizueta’s death would coincide with a dramatic turnaround in the fortunes of the company. At the time, however, it seemed like the executive he left in charge would pick up his mantle without missing a beat.

  Douglas Ivester was, if anything, more relentless about Coke’s need to grow. Joining Coke as an accountant in 1979, he constantly had an eye on the bottom line. “From his earliest moments at the company, he saw Coke’s business as a numbers game—one he could win,” writes New York Times business reporter Constance Hays in her book The Real Thing: Truth and Power at the Coca-Cola Company. As Hays describes, it was Ivester who pushed through the greatest revolution in Coke’s structure, ensuring unlimited growth in its stock, at the same time finally getting the bottlers under control.

  Starting in the early 1980s, the company began buying up any bottlers that were for sale, spinning them off into a new company called Coca-Cola Enterprises. The Coca-Cola Company made sure to own 49 percent of outstanding shares of the new company, giving it control without any of the risk or liability. No longer bound by Thomas and Whitehead’s original contract, Ivester and company forced the new bottling company to accept a new contract that allowed the price of syrup to fluctuate at whim.

  Over the next decade, the Coca-Cola Company replicated the Coca-Cola Enterprises model with bottlers in other countries as well—creating less than a dozen “anchor bottlers” all over the world, including the San Miguel Group in the Philippines, T.C.C. Beverages Ltd. in Canada, Panamerican Beverages (later Coca-Cola FEMSA) in Latin America, and Coca-Cola Amatil in Australia. Meanwhile, the tremendous debt accumulated from buying these bottlers was rolled right off Coke’s books, onto the balance sheets of the bottlers.

  The new arrangement, called by Ivester “the 49 percent solution,” was enthusiastically embraced by Goizueta, who called it “a new era in American capitalism.” When the dust had cleared, however, it looked more like a scheme from the parent company to cook its books. By owning a controlling interest in its bottlers, Coke could ensure that it hit its earning targets throughout the ’80s and early ’90s. Whenever the company didn’t grow in sales, it could still force bottlers to buy syrup, ensuring profits for the parent company; how they sold that syrup was the bottlers’ problem.

  Not that parent Coke was about to let its bottlers go under, of course. If it appeared that a bottler wasn’t going to make ends meet, the company would give rebates at the end of the year in the form of “marketing support” so they made just enough profit. Even as the anchor bottlers were under constant pressure to sell as many so
ft drinks as they could to eke out a minimum profit, they were also free to take on enormous amounts of debt—at one point, Coca-Cola Enterprises’ debt was half its annual revenues—since lenders rightly assumed that the parent company would never let its franchises fail.

  The system worked beautifully through the late ’80s and early ’90s to drive stock price and soft drinks sales. When Goizueta suddenly died, it was only natural that Ivester should take control. Where Goizueta was charming inside and outside the company, however, Ivester had a reputation for being a cold numbers-cruncher—an “iceman” in the eyes of fellow employees. Employees were all but forbidden to talk about their work outside of Coke headquarters, and some even suspected their phones were tapped.

  But Ivester was ambitious. Where Woodruff saw putting Coke “within an arm’s reach of desire,” Ivester waxed on about a “360-degree landscape of Coke,” the red-and-white swoosh in every direction a customer looked. “What I always wonder is, Why not?” he said in a speech to the National Soft Drink Association. “Why can’t we keep this up? Just look around! The world has more people, in more countries, with more access to communication and more desire for a higher standard of living and quality products than ever before.” In his mind, Ivester lumped a higher “standard of living” with consuming more sweet sugary Coke, the ultimate international status symbol—shades of Candler putting Coke bottles into the hands of the fashionable set in turn-of-the-century ads.

  In one notorious speech to employees, Ivester cued the background noise of howling wolves, comparing the Coke company to a wolf among sheep and all but howling along. In truth, though, Pepsi was on the ropes by the mid-1990s, its market share stagnating. Coke showed no quarter, forcing food distributors to refuse to carry Pepsi if they wanted to keep their accounts for Coke. Convenience stores, meanwhile, had to agree to increasingly restrictive advertising agreements if they wanted to stock Coke in their store—agreeing not to hang signs for other products, or committing 70, 80, or even 100 percent of the available shelf space for soft drinks to Coke. (Eventually, Royal Crown Cola sued in Texas for violations of antitrust laws, earning a $15.6 million verdict.)