5

Tono Balaguer/holbox/Shutterstock.com
COCA-COLA
This case was prepared by Charles W. L. Hill of the
School of Business, University of Washington, Seattle.

C5-1 INTRODUCTION governments had placed “sin taxes” on sugary drinks

in an effort to reduce their consumption. Coke’s core
brands were also being pressured by its perennial ri-
On May 1, 2017, James Quincey became CEO of val, Pepsi Cola, and by numerous boutique beverage
Coca-Cola (hereafter called Coke). The 52-year-old companies that had found it easier to bring new niche
British businessman had worked at Coke since 1996. products to market. Some of these newer brands
He had held leadership positions in Coke’s operations were using stevia, a natural, plant-based, zero-calorie
in Latin America and Europe before being made sweetener, as an alternative to the synthetic sweetener
COO in 2015. He lost no time in signaling that he aspartame that is widely used in diet CSD. The growth
would push for a major shift in Coke’s strategy. He of such alternatives may have played a role in a sharp
stated that the 130-year-old company must speed up decline in consumption of diet CSDs such as Diet
the development of products beyond soda to become Coke, which has seen its U.S. sales volume fall every
a “total beverage company,” and that the company year since 2006. Paralleling the fall in CSD consump-
“needs to be bigger than the core brand.” To do that, tion, in the United States consumption of bottled
he has said, the company must not be afraid to make water has grown dramatically from 13.2 gallons per
mistakes.1 capita in 2000 to 39.3 gallons per capita in 2016, when
Quincey became CEO at a challenging time for the rst time Americans consumed more bottled
for Coke. Consumption of carbonated soft drinks water than CSDs.
(CSD), which still accounted for 70% of Coke’s busi- Complicating matters, Coke was in the midst of
ness, had been declining. In 2000, Americans drank a major reorganization of its bottling network. In
53 gallons of CSDs per capita, up from 23 gallons 2010, Coke bought North American bottling op-
per capita in 1970. By 2016, consumption had fallen erations from its minority-owned bottler, Coca-Cola
back to 38.5 gallons per capita.2 Similar declines were Enterprises. It did the same with hundreds of bottlers
occurring elsewhere in the world. Sales of Coke’s core around the world. Now it was refranchising those
megabrand (which included Coke and all its vari- bottling plants under terms aimed at making the
ants) had fallen by 5% over the last three years in the asset-heavy bottling and distribution operations
United States and 1% worldwide. Overall, CSDs ac- more ef cient, while freeing Coke to focus on market-
counted for about 24% of all nonalcoholic beverage ing and product development.3
consumption in the United States in 2017, down from One of Quincey’s rst actions as CEO was to an-
around 37% in 2000. Sugary drinks were being at- nounce the company would eliminate 1,200 jobs at
tacked as a major source of obesity. In a possible har- its headquarters in Atlanta, reducing the number of
binger of things to come, several national and local corporate positions by 20%. The cuts were part of a

C-65
C-66 Case 5 Coca-Cola

plan to save $800 million by 2019. Quincey’s objective 250 licensed bottlers worldwide. Concentrates are
was to use about half of those cost savings to increase avoring ingredients and, depending on the prod-
investments in new products and marketing. His goal uct, sweeteners. Coke maintains ownership of the
was to raise Coke’s revenue and pro t growth to 4 to brands and formula, and is responsible for national
6% per year. That was a challenging target—Coke’s consumer brand marketing. The bottlers manufac-
net pro ts had peaked at $12 billion in 2010 and had ture, package, sell, and distribute the branded bever-
steadily fallen to $6.5 billion by 2016. ages to retailers and vending machine partners, who
then sell the products to end consumers. Bottlers are
also responsible for marketing and promotions within
C5-2 AN OVERVIEW OF their territory.
COKE’S BUSINESS4 Concentrate manufacturing involves relatively lit-
tle capital. According to some estimates, a concentrate
plant of suf cient scale to serve the entire United
Coke is the world’s largest beverage company, with States probably costs on the order of $100 million to
annual sales of $35 billion in 2017 (see Financial ex- construct. In 2017, Coke had 32 concentrate plants
hibits at the end of the case). In recent years, the non- around the world, 11 of which were in North America.
carbonated segments have been growing, accounting In the concentrate part of its business Coke enjoys
for 30% of volume in 2017, up from 20% in 2010. The gross margins of around 60%, with most of its re-
company is a global enterprise, selling its products in maining costs being in the form of product develop-
over 200 countries around the world. The company ment and marketing.
claims that beverages bearing trademarks owned or Historically, Coke has relied on a network of in-
licensed by Coke account for more than 1.9 billion of dependent bottling franchises to manufacture and
the roughly 60 billion servings of all beverages con- distribute its products, a system that the company
sumed around the world every day. believes served it well. The cost of an ef ciently scaled
The company owns or licenses more than 500 non- modern plant with multiple bottling lines and ware-
alcoholic beverages grouped into ve “category housing can reportedly reach $250 million.5 As of
clusters”: (1) sparkling (carbonated) soft drinks; 2010, Coke and Pepsi each had about 100 company-
(2) water, enhanced water, and sports drinks; (3) juice, owned and partner bottling plants in the United
dairy, and plant-based beverages; (4) tea and coffee; States. While Coke long relied upon independent bot-
and (5) energy drinks. Coke’s sparkling soft drinks tlers to manufacture and distribute its product, in the
(CSDs) account for 70% of volume. Coke owns four early 1980s it started to purchase bottlers. It spun
of the ve top-selling CSDs in the world. them off in 1986 into a minority owned subsidiary,
For CSD products like Coke, Diet Coke, Fanta Coca-Cola Enterprises, but started to acquire them
and Sprite, Coke manufactures syrup concentrates, again in 2010, only to reduce its exposure to the bot-
which are then sold to the company’s network of tling business once more after 2015. In 2015, Coke
more than 250 licensed bottlers worldwide. In re- had 63 company-owned bottling plants in North
cent years, the noncarbonated segments have been America. By 2017, this number has been reduced
growing, accounting for 30% of volume in 2017, to just 9.
up from 20% in 2010. The company is a global en- In 2015, 63% of Coke’s net operating revenues
terprise, selling its products in over 200 countries came from nished product operations (i.e. selling
around the world. The company claims that bever- bottled drinks) and 37% from concentrate opera-
ages bearing trademarks owned or licensed by Coke tions. In 2017, as a result of bottler spinoffs, 49% came
account for more than 1.9 billion of the roughly from nished product operations and 51% from con-
60 billion servings of all beverages consumed centrate operations. The reduction in ownership of
around the world every day. bottling had reduced the amount of physical assets
Coke manufactures syrup concentrates, which are on Coke’s balance sheet. As of December 31, 2017,
then sold to the company’s network of more than the carrying value of Coke’s property, plant, and
 Case 5 Coca-Cola C-67

equipment, net of depreciation, was $8,203 million, healthy pro t margin. In 1895, Frank Robinson, who
or 9% of total assets, down from $12,571 million, or had worked rst for Pemberton and then Candler, ob-
14%, of total assets in December 2015. served to Candler that by focusing on the medicinal
Although Coke relies upon bottlers for much of uses of Coke the company was limiting its market.
its distribution, in the United States it has long re- After all, he argued, not everyone got sick, but every-
served the right to sell its concentrate directly to one got thirsty. Robinson had been the person who
owners of soda fountains, which include restaurants, coined the name Coke, and was also responsible for
sports arenas, and convenience stores. Outside the the classic Coke logo with its recognizable Spencerian
United States bottlers are typically authorized to sell Script. After consulting with Candler, Robinson, who
to fountain owners and fountain wholesalers. was now in charge of Coke’s advertising, made a bril-
liant tactical move. He created simple ads that em-
phasized how refreshing Coke was. His goal was to
advertise to the masses, rather than the few. It worked:
C5-3 THE EARLY HISTORY Sales accelerated.
OF COKE6 In 1899, two lawyers from Tennessee, Benjamin
Thomas and Joseph Whitehead, came to see Candler
with a proposition: They wanted to bottle Coke. Can-
Coke was invented by an Atlanta pharmacist, John dler was skeptical; he thought the fountain business
Pemberton, in 1886. Pemberton, who had been was where the money was. Moreover, bottling was
wounded in the American Civil War and subsequently an imperfect technology with a reputation for poor
became addicted to morphine, was seeking a cure for seals and spoiled product. However, the lawyers were
his addiction. The product he concocted contained persuasive. Wouldn’t it be wonderful, one said, “if a
two main ingredients, coca (the basis for cocaine, fellow could put this stuff in a bottle and stop it up
which remained an ingredient of Coke until 1904) so the gas wouldn’t get away, and he could drink it
and kola, a tropical nut with a high concentration of whenever he wanted?” They also pointed out that a
caffeine, hence the name Coke. Pemberton produced company called Crown Cork and Seal had recently
a concentrate syrup, which he sold to drug stores with developed a crimped crown bottle cap with a much
soda fountains, who added carbonated water and sold tighter seal, solving the problem of spoiled product.
the refreshing drink as a medicinal tonic. Pemberton Convinced by their arguments, Candler signed the
claimed that the drink was a valuable brain tonic and 600-word contract the lawyers had prepared. It was a
a cure for all manner of nervous af ictions. It was momentous decision.
particularly valued as a hangover cure. In making Although the contract went through several it-
these claims, Pemberton was hardly unique. All sorts erations as Coke grew, the original bottling contract
of tonic drinks were being sold out of drugstores at with the two Tennessee lawyers proved to be a tem-
that time. Pemberton applied for, and was granted, a plate for bottler relations for the next 80 years. What
trademark patent for Coke in 1887. In 1888, an ailing in essence was a franchising contract bound the bot-
Pemberton sold the rights to Coke to one of his busi- tlers to use only Coke syrup, banning any imitation
ness partners, Asa Candler. Pemberton died shortly colas. The contract excluded the soda fountain busi-
afterwards. Candler went on to transform Coke into ness, which would remain solely under the purview
a national drink. of Coke. Bottlers were allowed to bottle noncola
Candler formally incorporated Coke in 1892. Rather carbonated beverages made by other companies,
than sell his drink directly to consumers, Candler con- although there were few of those in evidence at the
tinued to sell the concentrate to distributors and time the original contract was drafted. Each bottler
fountain owners. Like Pemberton before him, he kept was given an exclusive geographic territory. The con-
the formula of the concentrate secret to limit imita- tract speci ed that if the bottlers failed to supply the
tion, a tactic to which the company still adheres. The demand in the territory they embraced, the contract
concentrate was priced low, giving distributors a would be forfeit. The syrup concentrate was sold
C-68 Case 5 Coca-Cola

to the bottlers at a xed price. There was no provision Hirsch objected. Hirsch opposed registration of many
for modifying the price of the syrup should the cost colas at the U.S. Patent Of ce, nipping them in the
of the ingredients increase. Nor was there any speci- bud. It was Hirsch who pushed for the development
ed time limit to the contract. If the bottlers ful lled of Coke’s distinctive “Hobble skirt” bottle, a design
their end of the deal, the contract was in effect perma- that Coke patented, and he encouraged all bottlers to
nent. For their part, the bottlers agreed to be respon- rapidly adopt the unique design.
sible for advertising and promotion in their territory. By 1926, one reporter estimated that more than
The bottlers paid $1 for these rights and obligations. 7,000 copycat imitators had been buried under
As Candler saw it, there was little risk in the contract. Hirsch’s sustained legal assault. Hirsch was relent-
If the bottlers were successful, Coke would make a lot less. Adverse decisions were appealed all the way to
of money selling concentrate to them. If they were the Supreme Court if necessary. Writing for the ma-
not, the company had no money at risk, the bottlers jority in one famous case, Supreme Court Justice
having put up the capital to build their plants. Oliver Wendell Holmes noted that Coke “was a single
By 1904, there were over 120 bottlers, with bottlers thing coming from a single source, and well known to
in almost every state in the Union. By 1919, there were the community.” Hirsch virtually created American
1,200 Coke bottling plants across America, put- trademark law, ling an average of one case per week.
ting almost every town within reach of a bottler. Despite his efforts, Hirsch couldn’t shut down every
The number of franchisees peaked at 1,263 in 1928, rival. Among the handful of survivors was Pepsi Cola.
gradually consolidating over the next 50 years to In 1919, Asa Candler had sold Coke to a group
around 800. The distribution ef ciency of the bot- of investors. They took the company public the
tlers had been vastly increased by the development same year. By 1923, the son of one investor, Robert
of the automobile. Coke trucks were becoming a fa- Woodruff, became president of Coke. Only 33 at the
miliar sight on America’s rapidly expanding paved time, Woodruff would stay at the helm until 1954
road network. The bottlers blanketed their territories and remained on the board of directors until 1984.
with the Coke logo, placing advertising signs wher- It was Woodruff who articulated the vision that Coke
ever they could. As one bottler noted, the bottling should be “within arm’s reach of desire.” He identi-
agreement put Coke into the hands of thousands of ed the service station as a major new outlet, and
merchants in the suburbs and outlying districts of started an initiative that led to the development of
every city, in the stores of every country town and vil- Coke’s distinctive, red, open-top coolers, which were
lage, and in the homes of thousands of people where placed in service stations and stores all over the na-
it had not been possible to put Coke. As a result, “an tion. Coke was also one of the early adopters of the
enormous eld was opened up . . . and hundreds of vending machine. The rst Coke vending machines
thousands of people who had never before tasted or started to appear in the 1930s, although they had to
seen Coke were introduced to this product rst in bot- be attended by a clerk. Coin operated versions started
tles.” Along the way, the bottlers became the richest to arrive after World War II.
men in their communities. Woodruff was a stickler for product standard-
As the bottling network expanded at a rapid ization. He wanted Coke to taste the same, and be
clip, and Coke appeared everywhere, so did imita- packaged and advertised the same way, no matter
tors. Soon there were a multitude of them, many where it was sold. In 1924, he formed a standardiza-
with names that played off the Coke brand, such tion committee to ensure that bottlers adopted the
as Coca and Cola, Coca-Kola, Cola Coke, and Pepsi same packaging. The committee worked with bottlers
Cola. In 1905, Congress passed the Trademark Law. and fountain outlets to make sure that the taste was
Coke registered under a clause giving legal status to consistent.
any trademark that had been in continuous use since Under Woodruff’s leadership, Coke’s advertising
1895. Encouraged by the trademark’s secure status, evolved in the direction of lifestyle marketing. The
Coke’s top lawyer, Harold Hirsch, began to bring company had long shown a are for advertising. By
cases against the imitators. Hirsch sued any cola 1912, it was spending well over a million dollars a
drink that dared to use a script logo, a diamond label year on advertising. Coke was already probably the
like Coke, or red barrels. If the name was too similar, single best advertised product in the United States.
 Case 5 Coca-Cola C-69

During 1913, Coke advertised on over 100 million North Africa, General Eisenhower requested enough
items, including thermometers, cardboard cutouts, bottling equipment to ll 20,000 bottles a day. In
metal signs, calendars, matchboxes, and baseball 1944, Army Chief of Staff George Marshall issued
cards. The Coke logo started to permeate every as- an order speci cally allowing commanders to requisi-
pect of American life. No matter where you were, you tion Coke plants by name, along with the company
could hardly avoid seeing the logo. Celebrities started personnel to install and operate them. This expansion
to promote it. The movies and Coke were made for set the stage for a boom in Coke’s international sales
each other. Buster Keaton drank it onscreen. Film after the war.
stars appeared in Coke ads and there were “Coke
girls,” who appeared in ads or on calendars clutch-
ing a bottle of Coke. As one critic noted, they were
the “bewitching sirens who lure us to Coke with their C5-4 THE POSTWAR
display of charms.”
Under Woodruff’s early years, the ad message PERIOD: PEPSI
that resonated was that Coke was always delightful
and could be enjoyed at work or at play. Copy was
STRIKES BACK7
kept to a minimum, while pictures conveyed the mes-
sage that active, contented, good-looking, successful Coke emerged from the second World War in a domi-
young men and women enjoyed the drink. By 1929, nant position domestically, and with the bene t of
the company had coined the phrase that Coke was a fast-growing international presence. The company
“The Pause that Refreshes,” a tagline that was used had 70% of the domestic market for colas, far ahead
in one form or another for the next three decades. of second-place Pepsi, which had 20%. Unlike many
Increasingly, Coke ads made an appeal to American other cola companies, Pepsi had managed to survive
nostalgia. images included the Coke Santa Claus, and despite three brushes with bankruptcy and Coke’s
Norman Rockwell ads with freckle-faced boys at the legal assault. Following a blizzard of lawsuits and
old shing hole, complete with a dog and a bottle of countersuits between the two companies, in 1941,
Coke. Through these means, Coke became tightly Robert Woodruff had signed a deal with Walter Mack,
woven into the fabric of American life. It became the Pepsi’s President, under which Coke agreed to
American drink. recognize Pepsi’s trademark in the United States.
Woodruff pushed Coke to establish foreign opera- Mack, an old friend of Woodruff, had been brought
tions. His early efforts in the 1920s met with limited in to run Pepsi by outside investors in 1938. The
success. However, America’s entry into the Second friendship may have in uenced Woodruff’s decision
World War after Pearl Harbor gave him a golden op- to make a deal. The agreement was drafted without
portunity to extend the company’s reach. As America the input or knowledge of Coke’s lawyers, who were
went to war, Woodruff proclaimed “We will see furious when they found out.
that every man in uniform gets a bottle of Coke for Pepsi’s survival through the Great Depression
ve cents, wherever he is and whatever the costs to owed much to its strategy of promoting a 12-ounce
our company.” Woodruff’s commitment yielded ben- bottled drink for the same nickel Coke got for
e ts for the company—Coke was exempted from the its 6½ ounce bottle, which made it a hit in blue-
wartime sugar rationing that bedeviled other soft- collar neighborhoods. Under Mack’s leadership,
drink companies (and nearly bankrupted Pepsi). Pepsi doubled down on this strategy. In 1939 the
Coke employees followed the military overseas, company started to promote Pepsi using a 30-second
establishing 64 bottling plants in the process on every radio jingle with a catchy tune that immediately caught
continent except Antarctica—largely at government on: “Pepsi-Cola hits the spot, twelve full ounces that’s
expense. Coke was apparently indispensable to the a lot, twice as much for a nickel too, Pepsi Cola is the
war effort. General Patton reputedly regarded Coke drink for you.” The jingle was the rst of its kind;
as a necessity, perhaps because he himself drank most radio ads at the time lasted 5 minutes were full
it constantly, and he made sure Coke transported of hard-sell verbiage. In 1941, the jingle was played
a bottling plant wherever he went. When he was in nearly 300,000 times on the airwaves.
C-70 Case 5 Coca-Cola

Mack also had a clever strategy for building out 100,000 miles a year and opening new Pepsi plants in
Pepsi’s network of franchised bottlers. He found that country after country. In 1957, they visited 20 foreign
the Coke bottler was always the wealthy bottler in countries, where the actress, always holding a Pepsi
each region, so he focused on well-run small bot- bottle, was greeted by ecstatic fans. After Steele died
tlers who had missed the Coke train, and tried to suddenly of a heart attack in 1959, Joan Crawford took
persuade them to hitch their wagon to Pepsi. Mack his place on the board. She continued as a brand am-
awarded larger territories to Pepsi bottlers than bassador for Pepsi and stayed on the board until 1973.
Coke, the former company having started building Steele’s overhaul was effective. Pepsi’s share of the
out its franchisee bottler network at a time when a US market increased from 21% to 35% in ve years.
territory was de ned by how far a horse drawn car- Pepsi also started to expand rapidly outside of the
riage could go. United States, reducing Coke’s worldwide market share
Under Mack’s leadership Pepsi started to claw lead from ve to one to three to one. Coke’s response
market share away from Coke. Woodruff’s lieutenants to this brash upstart was underwhelming. The company
tried to persuade him to match Pepsi’s offering with was accused of slumbering, of being self-satis ed with
larger Coke bottles, but he refused. One of those lieu- all its past progress, although to be fair, Coke was -
tenants was the brash vice president of marketing at nancially healthy and international sales were growing
Coke, Alfred Steele. In 1949, Steele left Coke for Pepsi; at a strong clip. Still, to some critics the company was
in 1950, he became president of the company. Steele’s starting to look old and fat. The same could be said for
vision for Pepsi was simple: “Beat Coke.” Steele re- some of the bottlers who were now managed by second
duced the sugar content of Pepsi and promoted the or third generation owners who took pro ts for granted.
drink as “the light refreshment which would refresh Pepsi continued to make headway against its rival
without lling.” He pushed into the vending machine in the 1960s and early 70s. In 1961, Donald Kendall
market, which Mack had seceded to Coke because a was appointed president of Pepsi. Kendall, who was to
12-ounce Pepsi bottle wouldn’t t in the standard ma- lead Pepsi for the next 25 years, continued on the tra-
chine. Steele created an 8-ounce bottle that did t. jectory set by Steele. In 1963, he presided over the Pepsi
He arranged for low- interest loans for the ma- Generation campaign, which targeted the “young and
chines, with payment to start 6 months after pur- the young at heart.” The 1960s was a time of social
chase. This allowed poorer bottlers to purchase the change led by the young. The campaign, which fea-
$1,000 machines on credit and pay for them out of tured young, energetic, healthy, beautiful people doing
pro ts. Steele also pushed bottlers to focus their exotic things, told consumers that Pepsi drinkers were
attention on the take-home market, and build distri- on the side of change. If you were a Pepsi drinker, you
bution in supermarkets, which were rapidly springing were young (or young at heart), and the future was on
up all over America, particularly in the suburbs. To your side. This was a stark contrast to the nostalgia
support the take-home market, Pepsi introduced a messages of the Normal Rockwell-era Coke ads and
26-ounce bottle. represented a sharp break from the “twice as much
Steele was a master at motivating Pepsi’s bottlers, for half the price” theme of prior Pepsi campaigns.
persuading franchisees to plow money back into their In 1964, Pepsi introduced Diet Pepsi, a zero-calorie
business and local advertising. You can “conserve your- variant of its core brand that catered to the changing
self into bankruptcy,” he told them, or “spend your dietary habits of the young Baby Boom generation.
way into prosperity.” Practicing what he preached, he Coke had introduced its own diet drink, Tab, the year
doubled Pepsi’s marketing budget, targeting 25 metro- before, but unlike Pepsi, Coke chose to not associate
politan areas for heavy spending. Steele also bought Tab with its core Coke brand.
out Pepsi bottlers who were failing to push the product From 1962 until 1980, Coke was led by Paul Aus-
hard enough and installed his own men. tin, rst as president and then as CEO. Austin had
In 1955, Steele became the fourth husband of the devoted much of his attention to growing Coke’s
iconic American actress Joan Crawford (it was his international operations, where the company had
third marriage). Crawford, who ironically had been done well. In the United States, Austin struggled to
a Coke girl in the 1930s, was no mere adornment. motivate Coke’s bottlers to adopt a more aggressive
She accompanied him on his travels, logging over posture towards Pepsi, and to bottle Coke’s growing
 Case 5 Coca-Cola C-71

portfolio of noncolas, which included Tab, Fanta, Encouraged by what was occurring in Dallas, other
Fresca, and Sprite. Both companies also had to deal Pepsi bottlers soon adopted the challenge. Coke’s re-
with the Federal Trade Commission (FTC), which sponse was to cut prices and to run ads that questioned
in 1972 alleged that the exclusive territories awarded the validity of The Pepsi Challenge. Pepsi matched
to Coke and Pepsi bottlers, by giving bottlers a Coke’s price cuts with cuts of its own, starting a price
territorial monopoly, violated the Sherman Antitrust war that depressed returns for both concentrate com-
Act. Coke and Pepsi fought back, lobbying Congress panies and their bottlers. Meanwhile, in Atlanta Coke’s
for speci c legislation to exempt them from prosecution. technical people ran their own version of the Pepsi
These efforts were rewarded with the passage of the challenge. To their consternation, they found that con-
Soft Drink Interbrand Competition Act in 1980. This sumers preferred Pepsi to Coke by a 58-42 split. By the
Act maintained that interbrand competition between end of the decade, Pepsi had edged passed Coke in su-
Pepsi and Coke was so strong that this particular permarket sales in the United States, although thanks
market could be exempt from the Sherman Act. to its strong position in fountain and vending machine
sales, Coke remained the overall market leader. In
1980, Pepsi raised the stakes yet again when it rolled
out the Pepsi challenge nationally. By this point, retail
C5-5 THE PEPSI price discounting was becoming the norm, and con-
sumers were coming to expect it.
CHALLENGE AND The pressure of the “Cola Wars” pushed Coke to
ITS AFTERMATH8 revise its archaic bottling contract, which had xed the
price for concentrate and did not allow for increased
costs with the exception of sugar. After contentious
While Pepsi continued to grind out market share negotiations, in 1979, Coke and its bottlers agreed that
gains from Coke in the United States, the larger com- the cost of the concentrate could be raised to match in-
pany remained focused on overseas expansion. This creases in sugar prices and the cost of other ingredients
seemed to make sense. Per capita consumption of as measured by the Consumer Price Index.
carbonated beverages was much lower outside of the In 1980, Roberto Goizueta was appointed presi-
United States while the American market looked sat- dent of Coke, and in 1981 he became CEO and
urated. However, Pepsi was about to wake Coke out chairman. The replacement of Paul Austin was over-
of its complacency by ring the opening shots in what due. As early as 1975, some of his associated started
would come to be known as the “Cola Wars”. to notice that Austin was developing memory prob-
Ground zero for this new round of rivalry be- lems. By 1978, it was clear to those around him that
tween the two soft drink companies was Dallas, where something was wrong. Initially people put his mem-
Pepsi’s market share was a miserable 4%. In an ory lapses and increasing irritability down to Austin’s
attempt to x things, the local brand manager hired penchant for alcohol, but he was in fact develop-
the Dallas-based Stanford Advertising Agency. Its ing Alzheimer’s. Goizueta, a Cuban American, had
proprietor, Bob Stanford, had discovered that Pepsi risen through the ranks at Coke. The chain-smoking
beat Coke in a blind taste test while promoting a Goizueta had a reputation for being highly intelligent,
7-Eleven generic cola. He suggested that Pepsi try dedicated to Coke, with a good grasp of the business
out a blind taste test. “The Pepsi Challenge” was rst and an eye for detail. Although he had an affable
rolled out in Dallas in 1975. Backed by TV ads which manner, he could also be ruthless, holding people to
showed longtime Coke drinkers astonished that they account, but he also rewarded good results and was
preferred Pepsi to Coke, the campaign had a dramatic open to points of view other than his own.
impact. Pepsi’s market share in Dallas doubled. The Goizueta moved fast to awaken Coke from its
local Coke bottler responded by cutting prices and slumber. In 1980, he oversaw the replacement of cane
launching an advertising blitz mocking the challenge. sugar in the United States with high-fructose corn
Pepsi matched the price cuts and continued to pro- syrup (HFCS), a less expensive sweetener. The price of
mote the Pepsi Challenge. Within two years Pepsi’s cane sugar in the United States was higher than else-
share in Dallas had increased to 14%. where in the world due to sugar quotas that limited
C-72 Case 5 Coca-Cola

foreign supply. In June 1980, he announced a plan to in the United States by decade’s end. The introduc-
refranchise bottling operations in the United States. tion of Diet Coke paved the way for other drinks that
In the 1970s, Coke still had as many as 800 bottlers used the Coke name, including Caffeine Free Coke
in the United States. Many smaller bottlers lacked the (introduced in 1983) and Cherry Coke (introduced
capital resources to invest in new lines, new packaging, in 1985). Pepsi also introduced new carbonated bever-
and aggressive sales and promotion activities. Under ages, and both companies introduced a range of dif-
Goizueta, the company would actively promote con- ferent packaging and sizes.
solidation among its bottlers, sometimes buying an While Coke seemed to be gaining vigor under
interim equity position while looking for new owners. Goizueta, one problem remained: Its agship brand
This culminated in 1986, when Coke purchased a con- was still struggling in the United States against Pepsi.
trolling interest in two large bottlers who had come on Goizueta had a solution for this too—New Coke, a
the market for $2.4 billion. Together with bottlers Coke reformulation of its classic brand. New Coke hit the
already owned, this gave the company control of over market in 1985. Introducing the product at a press
one-third of U.S. bottling operations. conference for 700 journalists in February, Goizueta
The problem with buying bottlers was that they explained that the new avor had been discovered as
added multiple physical assets to Coke’s balance sheet a result of experimentation on Diet Coke. Coke Presi-
and took the company into the low-margin, capital- dent Donald Keough claimed that the new formulae
intensive bottling business. Coke’s solution, rst sug- beat old Coke 55–44 in 190,000 blind taste tests, and
gested by the CFO Douglas Ivester, was to spin off the that its margin increased to 61–39 when both drinks
acquired bottlers into a subsidiary in which it took a were identi ed. The journalists weren’t buying the
49% stake, guaranteeing control over the operation, story. One asked, “Did you change the formula in
which pushed the capital intensity off Coke’s balance response to the Pepsi challenge?” “Oh gosh no,” re-
sheet. The bottling subsidiary, known as Coca-Cola plied Goizueta, “the Pepsi challenge, when did that
Enterprises (CCE), continued to acquire smaller bot- happen?” Meanwhile, Pepsi claimed that New Coke
tlers after the spin-off, becoming the world’s biggest mimicked Pepsi’s taste.
bottler. Coke also continued to purchase smaller bot- Despite the negative publicity, Goizueta and his
tlers and sell them to CCE. Coke referred to CCE as lieutenants were con dent that New Coke would
an “anchor bottler.” Ivester served as chairman of win out. What they didn’t anticipate was the back-
CCE’s board, while continuing as CFO at Coke. CCE lash from longtime Coke consumers. The company
consolidated territories, introduced new automated was besieged by letters, 40,000 of them by June,
bottling lines, and over time pushed new Coke prod- complaining of the taste. As one letter writer put
ucts through its distribution system. By 2009, CCE it, “Changing Coke is like breaking the American
was responsible for three-quarters of Coke’s North dream, like not selling hot dogs at a ballgame.” An-
American bottle and can volume. At the same time, other noted “I do not drink alcoholic beverages, I do
because it retained effective control over CCE, Coke not smoke. I don’t chase other women; my only vice
was able to sell concentrate to CCE at a relatively high has been Coke. Now you have taken that pleasure
price and in uence CCE’s strategy. This strategy was from me.”
so successful for Coke that over the next two decades Three months after the introduction of New Coke,
the company sought to replicate it outside of the Goizueta relented and stated that Coke would reintro-
United States, encouraging bottlers in a country or re- duce its old formula, selling it side by side with New
gion to merge in order to achieve economies of scale, Coke as “Coke Classic.” Three months later, Coke an-
and then taking a minority equity position in many nounced that it would treat Coke Classic as its agship
of them so that it could exercise a degree of control. brand, and New Coke started to disappear from store
Goizueta also drove Coke to develop a better diet shelves. It had been a disaster—or had it? As Donald
drink to respond to the success of Diet Pepsi and Keough stated later, the experience taught Coke’s
leverage off its agship Coke brand. The result was management a useful lesson: Its customers still valued
Diet Coke. Introduced in 1982, the product surpassed the original product. Despite everything, the brand
all the company’s expectations outselling Diet Pepsi was alive and well in America. Indeed, while it cost
and becoming the third best-selling carbonated drink Coke $4 million to research and develop New Coke,
 Case 5 Coca-Cola C-73

the original Coke formulation garnered far more strategy of purchasing and then spinning off bottlers.
than $4 million in free publicity. The classic formula- The critics pointed out that Coke had pushed its debt
tion surged back to regain its position as the premier from bottler acquisitions onto CCE, and moreover
American soft drink. Coke had snatched an unlikely had extracted high pro ts from CCE by raising con-
victory from the jaws of defeat. The “ asco” had centrate prices, leaving the anchor bottler to survive
cemented the importance of the Coke brand in the on razor-thin margins. Without CCE, they argued,
American psyche. Coke’s pro ts would have been much lower.
Meanwhile, Pepsi had been vertically integrating By this time Coke had other problems to worry
forward into the fountain business, an area where about. The 1997 Asian economic crisis was followed
Coke had long held a lead. Pepsi acquired Pizza by a slowdown in Coke’s international business. This
Hut, Taco Bell, and then, in 1985, Kentucky Fried was compounded by a strong U.S. dollar, which
Chicken. Coke turned this strategy against Pepsi, compressed Coke’s international pro ts when trans-
telling other fast-food chains that Pepsi was now lated back into dollars. Moreover, there were grow-
their rival. Wendy’s and Domino’s Pizza were among ing concerns about the health impact carbonated
those that switched to serving Coke. By 1995, Coke sodas. Caffeine, high-fructose corn syrup, sugar,
had over 60% of sales of high-margin concentrate and arti cial sweeteners all came under re. Sodas
to restaurants, convenience stores, and food-service were blamed for obesity and diabetes, both of which
companies, while Pepsi’s share was under 25%. In were increasing in the United States and elsewhere.
1997, Pepsi announced that it would spin off its res- Consumption of carbonated sodas nally seemed to
taurant business, a move it hoped would revitalize its have peaked. Demand for bottled water, fruit drinks,
agging fountain sales.9 specialty beverages, and sports drinks were all growing,
taking share away from Coke’s traditional market.
Coke’s response was to accelerate its diversi -
cation into noncarbonated beverages. In 1999, the
C5-6 THE END OF AN company launched its own brand of bottled water,
Dasani. Pepsi had been in the bottled water business
ERA AND THE NEW since 1994 with its Aqua na brand. Coke also pur-
MILLENNIUM chased established beverage brands that could take
advantage of Coke’s marketing savvy and distribu-
tion systems. Notable acquisitions included Odwalla
By 1997, Goizueta has been CEO for 16 years. Inc (maker of fresh fruit and vegetable juices), Planet
Under his leadership, Coke had transformed itself Java (coffee drinks), Mad River Traders (New Age
from a slumbering giant with an inef cient bottler teas, juices, lemonades, and sodas), and Energy
network and poor focus that was losing market share Brands (makers of VitaminWater). Pepsi too, made
to Pepsi into an ef cient marketing machine. Coke several acquisitions, including Quaker Oats (makers
increased its domestic market share of carbonated of the bestselling sports drink Gatorade) and SoBe
beverages from 35 to 44%. Worldwide Coke’s mar- (teas, fruit juices, and enhanced beverages).
ket share had grown from 35 to 50%. By this point, By 2006, Coke was dealing with another problem—
80% of Coke’s business was outside of the United the company’s relationship with its bottlers was com-
States. The company’s market value had surged from ing under strain again. One trigger was a request
$4.3 billion to $145 billion. If not vanquished, Pepsi from Wal-Mart that Coke deliver its Powerade sports
had been beaten back down into second place. And drink directly to Wal-Mart distribution centers.10 Until
then, at the peak of his success, Goizueta was diag- that point, individual bottlers had always delivered
nosed with lung cancer. Six weeks later he was dead. to Wal-Mart stores and stocked the shelves them-
His replacement was Douglas Ivester, the nancial selves to make sure their products were well dis-
wiz who was the brains behind Coke’s purchase and played. Worried that Wal-Mart would develop its
spin-off of the company’s bottlers in 1986. Ironically, own brand of sports drink if Coke did not agree,
Ivester ascended to the CEO position just as inves- the company acquiesced, asking CCE to deliver di-
tors and journalists were starting to question Coke’s rectly to Wal-Mart distribution centers. Fifty-six
C-74 Case 5 Coca-Cola

smaller Coke bottlers, fearing that the practice might Coke would make its money by selling concentrate to
spread to other drinks, sued Coke and CCE, claiming the bottlers. The agreements were typically structured
the agreement violated the distribution contract with to last 10 years, and were renewable for successive
bottlers that gave them the right to deliver directly 10-year terms. They could be terminated by Coke if
to stores within their own exclusive territories. In re- the bottler did not live up to core performance require-
sponse, Coke tried to buy back the distribution rights ments under the contract. As with the old agreements,
for Powerade from the bottlers, but the price was re- the company retained the right to manufacture and sell
portedly too high. Ultimately, the suit was settled out fountain syrups to authorized fountain wholesalers
of court, with the bottlers agreeing to allow for the and some fountain retailers.13
delivery of Powerade to Wal-Mart warehouses but The refranchising process, completed at the
also receiving some of the pro ts. end of 2017, involved 60 transactions transferring
There were also disagreements between Coke and 350 distribution centers, 51 production facilities,
CCE, which at the time was still 36% owned by Coke. 55,000-plus employees, and over 1.3 billion physical
CCE was dissatis ed with sales of Coke’s Golden cases of volume.  At the end of this process in late
Leaf bottled tea products and decided to carry non- 2017, Coke was left with 70 independent bottlers in
Coke products instead. Coke thought that CCE’s ex- the United States, 10 of which were very large, had
ecution was very poor, and pressured CCE’s board territories that covered cover multiple states, and
to remove the company’s CEO, John Alm, which it accounted for the bulk of Coke’s U.S. volume. The
did in 2005. But the new CEO of CCE, John Brock, smaller bottlers were for the most part older bottlers
continued to irritate Coke by raising prices for Coke who had remained independent through Coke’s two
products, which eroded Coke’s market share. Coke re- forays into the bottling business. Some of them still
sponded by raising concentrate prices. operated under their original franchising agreement,
The tensions between Coke and its bottlers sim- which granted rights in perpetuity for trademark
mered for a few more years. Then, in early 2010, Coke Coke or other cola avored beverages. The company
announced that it would acquire the North American claimed that the refranchising better served the chang-
territories of CCE for $12.4 billion.11 The acquired ing customer and consumer landscape in the United
territories accounted for about 80% of Coke’s North States and created a more aligned, agile, and ef cient
American business. The deal came just months after network of bottlers.14
Pepsi had announced a similar deal to purchase its Outside of the United States, Coke has also
two largest bottlers. In explaining its rationale, Coke pushed for bottler consolidation.15 For example, in
executives noted that the goal was to close some bot- 2013, three Coke bottlers in Europe agreed to merge
tling plants, modernize others, and create a national across 13 countries as part of a push by the company
manufacturing footprint that would allow it to more to cut costs and speed up new product introduction
rapidly introduce new products to satisfy consumers against the background of slowing sales of legacy
with rapidly changing tastes. Under the old structure, products. Bottlers outside of the United States have
every time Coke wanted to introduce a new product, long operated under contracts of a stated duration
it had to negotiate with its bottlers. The new structure that are subject to termination if the bottler doesn’t
was also aimed at helping Coke negotiate directly perform, or if other speci ed events occur.
with big retailers.12
Following the acquisition, Coke created a new,
company-owned bottling business, Coca-Cola Refresh-
ments (CCR). In 2013, CCR started “refranchising” its C5-7 LOOKING
U.S. territories, parceling out distribution rights and
selling its bottling plants to trusted partners under a new
FORWARD
franchising agreement known as the Comprehensive
Beverage Agreement. The agreement gives the bottlers With the bottler refranchising complete, the pressure
exclusive territories, requires them to take major Coke is on new CEO James Quincey to craft a strategy
products, and commits them to the production, mar- for pro tably growing Coke’s sales going forward.
keting, and distribution of those products. As before, His emerging strategy seems to center on product
 Case 5 Coca-Cola C-75

innovation.16 Most notably, he has directed Coke’s a line of whey shakes was introduced into Brazil, a
global subsidiaries to launch more local avors and sesame-and walnut drink in China, and a salty lemon
reduce time to market. In the rst year of this ini- tonic in France. This surge of local innovation rep-
tiative, the company launched 500 new drinks—a resented a break from established practice, which
record, and an increase of 25% over the prior year. largely consisted of foreign subsidiaries rolling out
The company’s Indian subsidiary came up with a drinks rst developed for Americans. Quincey knew
chunky mango juice, a spicy, cumin- avored soda, that some of these new offerings would fall at, but
and a gritty guava drink. In Japan, recent launches he also believed that some would turn out to not only
include a laxative Sprite and the company’s rst be successful locally but would also grow to become
alcoholic drink, a carbonated lemonade beverage. regional or global drinks. Would he turn out to be
The Russian subsidiary launched Sprite Cucumber; correct? Only time would tell.

NOTES
1
J. Maloney, “Coke’s New CEO Citizen Coke, W. W. Norton & Coke,” Market Watch, February 25,
James Quincey to Staff: Make Company, 2015; M. Pendergrast, 2010; M. Esterl and P. Ziobro,
Mistakes,” The Wall Street Journal, For God, Country and Coke, “New Coke: Bottlers Are Back,”
May 9, 2017. Basic Books, 2013; and J. Hamblin, The Wall Street Journal, April 16,
2
“Americans Are Now Drink- “Why We Took the Cocaine Out 2013.
ing More Bottled Water than of Soda,” The Atlantic, January 31, 12
Timberwolf Equity Research,
Soda,” Reuters, March 10, 2017. 2013. “The Coke System: How It Works,”
3
R. Grantham, “New CEO’s 7
Primary sources for this sec- Seeking Alpha, October 1, 2015.
Challenge: Make Things Go Better tion include F. Allen, Secret For- 13
The Coke Company, 2018
with Coke,” Seattle Times, May 6, mula, Open Road, 1994; B. Elmore, 10K Form.
2017. Citizen Coke, W. W. Norton & Com- 14
J. Moye, “Coke completes
4
Primary sources for this sec- pany, 2015; and M. Pendergrast, decade long effort to return own-
tion are the Coke Company An- For God, Country and Coke, Basic ership of bottling operations to
nual 10K reports for 2016, 2017, Books, 2013. local partners,” The Coke Company,
and 2018. 8
Ibid. November 8, 2017.
5
O. Pulsinelli, “Coke Bottler 9
G. Colling, “Pepsico to Spin 15
M. Esterl, “The Coke Bottlers
to Build $250 Million Production, Off Its Fast Food Business, The Con rm Merger,” Wall Street Jour-
Distribution Facility in Houston,” New York Times, January 24, 1997. nal, August 6, 2015.
Houston Business Journal, June 7, 10
M. Warner, “Coke Bottlers 16
E. Bellman and J. Maloney,
2018. Challenge Wal-Mart Deliveries,” “Coke Launched 500 Drinks Last
6
Sources for this section in- New York Times, March 3, 2006. Year. Most taste Nothing Like
clude F. Allen, Secret Formula, 11
W. Spain, “Bottler Acquisition Coke,” The Wall Street Journal,
Open Road, 1994; B. Elmore, Could Be a Risky Proposition for August 23, 2018.