The Coke Machine (10 page)

B
y 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.

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 book
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).