The Coke Machine (4 page)

The increasing wealth of corporations led to an increase in their power. In their early days, corporations were chartered by states for specific purposes, with strict time limits, to prevent them from being “detrimental to, or not promotive of, the public good,” according to a ruling by Virginia’s top court in 1809. Some states even passed laws allowing them to revoke corporate charters whenever they deemed fit. That changed, however, in the mid-nineteenth century, when after increased lobbying at state capitals, some states began loosening their rules in an effort to attract more corporate dollars. Delaware and New Jersey led the pack, allowing corporations to exist in perpetuity for any purpose they desired, and codifying the concept of “limited liability,” which shielded share owners from responsibility for the actions a corporation performed in their name. Then the courts, most notably in a California case won by Southern Pacific Railroad in 1886, declared corporations to be virtual “persons” who could sue or own property in their own rights. And in 1880, the federal government struck down state laws requiring companies to abide by local health and labor laws in order to trade in other states, allowing companies to sell their products nationally for the first time. “Had Coca-Cola appeared twenty years sooner, it might have withered inside Georgia, forbidden to trade outside its state of manufacture,” writes social historian Humphrey McQueen. “Candler took over Coca-Cola just as the law assured capitalists of their right to spread geographically as well as financially.”

Before the Civil War, in fact, there were few “national” products. Groceries were mostly made locally and sold generically out of the proverbial cracker barrel. The need to keep 4 million soldiers fed and clean while they shot at each other up and down the East Coast changed that, leading to innovations in shipping and packaging that allowed products to travel great distances. At the same time, the Industrial Revolution lowered the cost of manufacturing goods, and urbanization led to new markets in city department stores. Finally, the power of corporations was made complete when states starting with Delaware and New Jersey enabled them for the first time to merge, acquire, and buy stock in other corporations. In the four years between 1898 and 1902, there was a massive bloodletting, with the number of American companies falling from 2,653 to 269.

The companies that succeeded in the great winnowing, says Harvard business historian Richard Tedlow, were those that shifted from producing a small amount of high-quality goods to producing a large amount of goods at a low profit margin. With its nickel-a-glass price tag, Coke was the quintessential example. Candler incorporated the Coca-Cola Company in Georgia in 1892, creating one thousand shares of stock (five hundred of which he kept for himself) in order to raise the necessary funds for expansion. In first promoting the drink, he shrewdly limited the company’s take of the profits, selling syrup wholesale at $1.50 a gallon, which retailers could then sell by the glass for $6.40 a gallon—ensuring them more than 400 percent profit.

Setting his margin low, however, meant that Candler had to rely on growth as a source of increasing profits. Coke employed legions of salesmen, usually off-season cotton farmers hired on a contract basis for the summer, who literally rode the rails to drum up business for Coke around the country. Known as “Coca-Cola Men,” they epitomized the cult of the traveling salesmen in the era before Willy Loman died. Despite the fact they made only $12.50 a week—a low wage even at the time—they relished their freedom and expense accounts, proudly proselytizing for the beverage with a near-religious devotion. By 1895—less than ten years after it was created—Coca-Cola was sold in all forty-four states in the Union, with Hawaii, Canada, Mexico, and Cuba soon to follow.

After Candler, no “Coca-Cola Man” was as passionate as his nephew Sam Dobbs. Starting out sleeping on a cot in the back of the factory, he went on to drum up clients all over Georgia and the Carolinas in the first two years of the Candler era. Called back to headquarters, he was put in charge of all salesmen in 1900, freeing Robinson to concentrate solely on advertising. Strict where Robinson was lenient, he exhorted his troops like a one-man pep squad as they expanded the drink around the country. By the turn of the century, Coke was metastasizing. In 1899, the company sold more than 250,000 gallons of syrup annually; by 1902, it surpassed 500,000 gallons; and by 1904, it was selling over a million, earning $1.5 million in sales. By this time, those sales were helped by one more factor that more than any other would lead to the dominance of Coca-Cola in the beverage industry: bottling.

 

 

 

Coke’s relationship
with its bottlers has been fraught with mutual conflict and benefit from the moment it began. In 1899, a Chattanooga lawyer named Benjamin Thomas saw a bottled pineapple drink in Cuba during the Spanish-American War; when he got home, he thought he’d try the same with Coke, which until then had been sold exclusively at fountains. He headed to Atlanta with some home-sealed bottles and a friend, Joseph Whitehead, in search of a contract. Candler, as the story goes, was unimpressed, but figured he had little to lose in giving the Chattanoogans a chance. With little thought, he granted them the rights for free, setting a fixed price of 92 cents per gallon for syrup for as long as they worked their territory.

The six-hundred-word contract would eventually revolutionize Coke’s distribution, establishing the franchise system of bottling that remains to this day around the globe. In theory, the bottlers take on all of the risk and responsibility, while the parent company provides the product and the two split the profit. In practice, however, the company and its franchisees have tussled constantly over the years, in both the United States and around the world, each one fighting to minimize its risk and maximize its control—to say nothing of the lion’s share of profit.

In the early days, at least, Coke and its bottlers existed harmoniously, in part because they had a common enemy against which to join forces. Hard-driving Sam Dobbs had been urging his uncle Asa to begin bottling for years—only to see a host of imitators crop up as soon as Coca-Cola bottling plants started roaring into operation. Some, like Chero-Cola, had been around as long as Coke. Others were fly-by-nighters capitalizing off king Coke’s success, sporting copycat names like Coke-Ola, Ko-Cola, and even Coca & Cola. “Unscrupulous pirates,” Candler fumed, “find it more profitable to imitate and substitute on the public than to honestly avail themselves of the profit and pleasure which is ever the reward of fair dealing and competition.”

Asa Candler was a firm adherent to the principles of the free market; nothing infuriated him so much as government regulation or taxation, at least whenever it infringed on the company’s right to make money. Taxes, he criticized in biblical terms, calling them “gourd vines in wheat fields” that strangled the ability for a business owner to make profit. Child labor he called “the most beautiful sight we see.” And as for unions, he did everything he could to discourage their formation, calling them “a political parasite sprung from the feculent accumulations of popular ignorance and fattened upon the purulent secretions of popular prejudice.”

When it came to imitators, however, he gave Dobbs free rein to bring the full force of government down on them to protect the business. Coke had the perfect cudgel in the recently passed 1905 Trademark Law, part of the nascent Progressive movement that had emerged in a backlash against the unbridled capitalism of the previous decade. By the turn of the twentieth century, the power of corporate interests had reached its peak, as muckraking journalists writing in the nation’s first magazines such as
Collier’s
and
McClure’s
increasingly exposed the political corruption and excesses of the robber barons in the railroad, coal, and meatpacking industries. The diatribes led to a political backlash resulting in increased regulation, breaking up monopolies and ensuring quality standards.

The new trademark law was originally passed as a way to protect consumers against deceptive marketing. Coke, however, was one of the first and most aggressive entities to use the law to defend its own rights to profit. Dobbs enlisted the company’s head lawyer, Harold Hirsch, to lead the charge against the “loathsome following,” his name for the bottlers who tried to steal Coke’s business. “I have spent my nights and my days thinking about Coca-Cola,” Hirsch once said, and he wasn’t kidding—eventually, he would amass a seven-hundred-page volume of case law that virtually created trademark law in the United States. Starting in 1909, he brought a case a week against other soft drink companies, arguing they had deliberately created their names to ape Coca-Cola.

It was a suit against one of Pemberton’s old partners that finally put the imitators to rest. Years earlier, Pemberton had sold some of the rights of Coca-Cola to his partner J. C. Mayfield, who had begun selling the formula around Atlanta under the name Koke. When he revived the drink two decades later, however, Hirsch brought suit, arguing in 1914 that “Coke” was in such common use as a stand-in for Coca-Cola, Mayfield could only be trying to piggyback on its success. Despite a promising beginning, Coke lost the case in District Court. The Court of Appeals was even harsher, accusing Coke, not Koke, of engaging in deceptive practices by saying it hadn’t contained cocaine when it once had, and did contain kola nut when it didn’t.

At the darkest hour, however, the United States Supreme Court came to Coke’s rescue. In a December 1920 ruling that Coke executives love to quote to this day, judicial lion Oliver Wendell Holmes, Jr., essentially declared that whatever its past practices, Coca-Cola had transcended its own name to become “a single thing coming from a single source, and well known to the community. It hardly would be too much to say that the drink characterizes the name as much the name the drink.” In other words, Coke was so popular that no one in his right mind would consider its name as merely describing its two main ingredients. Therefore, any beverage with a similar name was merely riding Coke’s coattails. In one fell swoop, the U.S. government had ensured Coke’s right to exist, clearing the field of virtually anyone who would oppose it.

 

 

 

Dobbs’s aggressive strategy
of taking on all comers had paid off, setting the stage for the continued rapid growth of the company. Sales of the drink by 1920 were now in the tens of millions of gallons, leading to more than $4 million in annual net profit. As the money poured in, Candler bought up skyscrapers in Kansas City, Baltimore, and New York, each of which he inevitably named the Candler Building. Meanwhile, as Dobbs amassed power, Robinson’s star waned. In a tiff over advertising, Candler sided with his nephew, making him head of advertising and sales, as well as his de facto successor. As the company grew bigger and more successful, however, there was one person who remained unsatisfied, even appalled, by the growth—Asa G. Candler.

The strict Methodist upbringing that made Candler frugal and austere also made him feel guilty about the obscene profits he made from such an ephemeral product, and envy his brothers Warren, a Methodist bishop, and John, a state judge. Asa had always run in two modes—manic and depressed—and finally as the decade turned, depression got the best of him. He fretted about his legacy and his four sons, who were almost universally disappointing to him. (The most entertaining of the lot, Asa Jr., eventually became an eccentric drunk, who kept a menagerie of zoo animals in his mansion and created a minor scandal when his baboon scaled a fence and ate $60 out of a woman’s purse.) The only one of his sons who showed any promise was Howard, who followed him into the company. But while Howard showed aptitude in the technical side of the soda business, he lacked his father’s vision and management skill.

Candler’s disappointments came to a head in 1913, when he suffered a nervous breakdown and took a prolonged tour of Europe to “steady his nerves.” As much as anything, the cause of his breakdown was financial. Over the years, Candler had treated Coca-Cola as his personal piggybank, intertwining his finances with the company’s. Progressive changes in tax laws in 1913, however, prevented businesses from holding on to large cash reserves, requiring that they distribute dividends to shareholders instead. Candler bitterly resented parting with any of it. Fine with allowing the government to protect his profits against would-be competitors, he wasn’t about to let Uncle Sam tell him how he had to distribute those same profits to investors.

After this “forced liquidation,” wrote his son Howard, “he was ready to quit trying to make money and entirely willing to relinquish to others the task of conducting the affairs of the corporation.” At the same time, he tossed out vast sums to philanthropic causes, assuaging his conscience, increasing his stature in Atlanta, and earning a healthy tax write-off in the bargain. In 1914, he made a contribution of $1 million to Emory University, where his brother Warren Candler was president, the first of an eventual $8 million in largesse. The same year, he earned the undying affection of Georgians when he mortgaged his own fortune to shore up the price of cotton in the wake of a market crash during World War I.

By 1916, he was ready to give up his company, but not his legacy, shocking his board by slighting his natural successor, Dobbs, and making Howard president instead. A year later, he gave away nearly all his stock to his wife and children as a Christmas present. As Asa Candler left Coke, he turned wholeheartedly to public service, running for mayor of Atlanta and winning a two-year term from 1917 to 1919. If voters hoped he would use his personal fortune to relieve the city’s debts, though, they were disappointed. Instead, his administration proposed raising water rates, which would fall disproportionately on the poor, and urged rich citizens to voluntarily overvalue their property to pay more taxes (few did).

In fact, Candler was deeply ambivalent about the power of altruism—happy to give his money away for the greater good when he was in control of who received it, but resentful of sharing the spoils of capitalism with those he felt hadn’t built the system. Meanwhile, the company foundered in his absence. Howard was a lackluster president, struggling to keep Coca-Cola afloat during the sugar rationing of World War I. Meanwhile, in 1919, in the wake of Candler’s slight, Dobbs became head of the Atlanta Chamber of Commerce, where he got to meet many members of the city’s business elite. Just as Robinson had persuaded Candler to buy up the company decades earlier, Dobbs would persuade one of them, Trust Company president Ernest Woodruff, to take over the company now.