Meanwhile, we realized we had to convince Coca-Cola to lower concentrate prices, not an easy task.
Near the end of his life, Roberto Goizueta had announced to Wall Street that Coca-Cola had a new stream of revenue: the buying and selling of bottlers. We were buying bottlers, upgrading them, and selling them to investors for top dollar. For example, the East European bottlers we had invested in were sold to Coca-Cola Amatil, arguably for too much money but with a gain for the Coca-Cola Company. Wall Street loved it and in July 1998 Coke stock hit an all-time high of $88 per share. However, there was a problem: When a company such as Coca-Cola Amatil bought a bottler at top dollar, it would have to achieve a much higher profit margin to recoup its investment. That would require raising prices on its products. Raising prices temporarily helped Coca-Cola as well because it could then charge more for concentrate.
Eventually, though, that game comes to an end as bottlers can no longer raise prices without losing market share. And the game did come to an end, in Hungary and other Eastern European countries in late 1998.
In 2000, I flew to Atlanta with Andrew David, chairman of CCHBC, to meet with Douglas Daft who was the new CEO, following Doug Ivester’s short-lived tenure. I made a pitch for lowering concentrate prices for Hungary as a way to give the bottler a chance to get back on its feet. Jack Stahl, the company’s new president under Daft, at first balked at the request.
“The Coca-Cola Company is never, ever going to do that,” Jack said.
“Fine,” I said. “But you are going to have a bankrupt bottler on your hands.”
Daft, to his credit, realized the old model had been pushed too far and agreed to lower concentrate prices, which hurt profits, Coke’s stock price, and Daft’s career. Although it was largely a problem he inherited, he had the courage to do the right thing.
I promised Pamela that I would retire at age fifty-eight, and I could see clearly that the relationship with George David, board chairman of the new company, CCHBC, after his brother’s death, would be strained. So I announced that I would leave CCHBC at the end of 2001. I had done what I wanted to do: create a public company and consolidated a huge part of Europe. Also, CCHBC was in discussions at the time to purchase the Russian bottler from Coca-Cola. Irial Finan, my successor, closed the deal in 2002 for $100 million. A year earlier, I had walked away from negotiations when Coke’s bottom line price was $500 million. Today, the Russian bottler is probably worth $1 billion, making it the best deal I was ever involved in, and a bad one for the Coca-Cola Company.
Pamela and I had purchased a house in Barbados and now had all the pieces in place for retirement: winter in Barbados, summer in France, and spring in Atlanta where the azaleas are in bloom and the Masters Golf Tournament is nearby.
After leaving CCHBC, I dabbled in real estate development in Barbados and started a small investment company. I became the majority shareholder of a company called Elstat, which makes energy-saving thermostats for commercial coolers. These are now widely used in the Coca-Cola network and I had to place my shares of Elstat into a blind trust when I returned to Coke as Chairman and CEO. Of course, I tried to sharpen my golf game in retirement, and with the lower stress of day-to-day living lost fifteen pounds. And Pamela and I traveled, visiting such places as Tahiti, New Zealand, and, as always, Africa. Coca-Cola was rarely on my mind.
In August 2003, I got a call from a friend and former Coke bottler now working as a consultant. He had been among those sitting in the pew with us that unforgettable Sunday morning in Poland’s St. Brigid’s Church when we had celebrated the opening of the first Coke plant in Eastern Europe. “Neville, a number of us have got together and we’re going to start lobbying for Daft to go and for you to come back and run the Coca-Cola Company,” the consultant said. Earnings were down and Coca-Cola stock had dropped to less than half its 1998 peak. More important, morale was really bad. Daft, in a way, seemed to have lost interest in the job. He would say to people, “I’m just going to do whatever I can to get fired.” It would sound as if he were joking, but there was some truth in it. Doug was obviously exhausted.
I gave the consultant a Shermanesque response. “I’m not going to do it,” I told him. “I’m happily retired. My wife loves having me around. You’re going down a blind alley.” I added that he had no mandate from me to put my name forward.
The behind-the-scenes movement to draft me did not abate, and I received other calls from people in the system. I gave them the same answer: “I am definitely not interested.” The following spring came the call from Don Keough. This time, it was serious.
Seven
AT THE HELM OF COCA-COLA
After Roberto Goizueta’s death, Coca-Cola began to falter. For so many years, the company had been blessed with two great leaders: Goizueta and Don Keough. However, Roberto had died and Don had retired. Doug Ivester, the company’s first leader in the post–Goizueta-Keough era, did not last long. He resigned as Chairman and CEO after slightly more than two years. Daft survived for more than four years, although frankly, he probably should have left earlier. I believe he stayed as long as he did, in part, because the board did not want to face the grim reality that two successive choices for the top job had failed to get the company back on track.
In all fairness, Roberto’s performance was not sustainable, particularly given the changes in the global economy. He pushed us all to the absolute limit. He would go to Wall Street and say, “We are going to be able to deliver 15 percent growth in earnings per share.” Those of us on the front lines thought that 11 or 12 percent were more realistic numbers and would attempt to tell Roberto as such. “Fine,” Roberto would reply. “Wall Street is expecting 15 percent.” A company and its executives can only do that for so long, particularly when world events go against you as they did in the second half of 1998.
Gary Fayard, Coke’s current chief financial officer who was then controller, remembers the year well. “In the first half of 1998, the company grew its volume 12 percent,” Gary recalled. “We had a huge analysts meeting in Atlanta in May. The analysts were asking when we were going to take our earnings and growth targets up. I’m sitting in the back of the Goizueta Auditorium reading the Financial Times and it says, ‘Asian Flu, Russia Devolving, Argentine Meltdown.’ The whole world is going to hell except the U.S. Yet our volume was still skyrocketing. We were hiring people left and right. The bottlers were building plants, borrowing money, just growing everywhere.”
It did not take long, however, for the economic turmoil to hit Coca-Cola’s bottom line.
“In the second half of 1998, our volume increase went from 12 percent to zero,” Gary remembered. “Overnight, the world stopped. Our business stopped. But you’ve hired so many people; the bottlers have so much debt from building plants and making acquisitions. The bottlers are in a very bad position. The company is bloated with overhead.”
Ivester had launched a project in 1999, later executed by Daft, named the Strategic Organizational Alignment, a code name for mass layoffs, which were unheard of at Coke, where a job had almost always meant a job for life. Coke fired more than five thousand people, deeply shaking the company.
“The layoffs killed us,” Gary recalled. “We lost momentum. We lost morale. That is where we really started losing our way.”
The company indeed needed to shed costs. Yet the firings were not implemented effectively. It was not a Strategic Organizational Alignment; it was a head-cutting exercise. Many of the heads that were cut were heads that had special skills and deep business knowledge. In some instances, the fired employees set up consultancies and provided their skills back to Coke at a higher cost. I had met with Daft in January 2000 at his request to outline the process I had used to establish CCHBC, the merger of Coca-Cola Beverages with Hellenic. While it was not a perfect process, it was based on first defining what work needed to be undertaken, thereby identifying where there was duplication and redundancy. Once a new organization structure was identified we only then filled the box
es. Where we had two or more people qualified for the same position, we used our evaluation process to select the right person. This meant a better, leaner structure and the placement and retention of the best people. Doug reacted favorably but never followed up. I wish he had for events as they unfolded may have been different.
When I took over as Chairman and CEO, there was still an atmosphere of fear and disaffection at Coca-Cola. Clearly, I had my work cut out for me. Yet, there was one immediate fire that I had to extinguish quickly on my first official day in office, June 1, 2004. It was so important that I was actually not in the office that day or even in Atlanta. I was in Chicago at the headquarters of Coke’s largest fountain client, McDonald’s.
Steve Heyer, Coke’s president who had been the only internal candidate for Chairman and CEO, had deeply offended McDonald’s by gloating over a new contract with Subway, insinuating that Subway got better terms. It wasn’t true, but it came across that way and we had reliable information that McDonald’s was holding discussions with Pepsi about selling some of their non-cola brands. If a single McDonald’s had dispensed a Pepsi product, that likely would have damaged my newly resurrected career. It would have been an unprecedented failure.
I met with Charlie Bell, the CEO of McDonald’s, and looking him straight in the eye, told him flatly, “I will fix the problem.” Bell understood what I meant: Heyer would soon be leaving the company. Meanwhile, we conducted a complete audit to make sure we weren’t overcharging McDonald’s, and ended up refunding some money in a few areas, although there were no major overcharges. I later bolstered the McDonald’s relationship further by changing management, naming Jerry Wilson to head the account. He did a superb job and was followed by Roberto’s son, Javier Goizueta. Javier had suffered somewhat from the fact that within the company, people had tended to view him as the former chairman’s son, overlooking his real talent as a manager. He ended up performing admirably and has ensured that the vital relationship with McDonald’s remains strong. You have to earn your relationship with your customers each and every day, and my visit that day to McDonald’s was intended to send that message. If you take a customer for granted, you do so at your own peril.
From Chicago I then flew to the West Coast to meet with Peter Ueberroth, a Coke board member and head of the audit committee, to seek his advice and counsel. Peter, who successfully ran the Los Angeles Olympics, headed the well-named Contrarian Group, which has helped many successful companies. Although I didn’t know Ueberroth well, I had watched him over the years when I presented to the Coke board and he was always one of those who asked tough, insightful questions. I had many difficult issues to face and throughout my tenure he was someone I trusted totally and was always able to turn to for sound analysis and advice, as of course was my mentor, Don Keough.
It is normal that the first one hundred days mark the clear enunciation of strategy and while I made a number of moves internally through major appointments, I declared that I would not speak to the media or the analysts during that period. I did not want to make declarations based on preconceived ideas I’d developed in Barbados as I watched events unfold, but wanted to learn more by traveling around the world visiting our operations and meeting with employees, customers, and other key individuals with whom the company had relationships.
I had decided that I was not going to immediately have a president. Frankly, I simply did not believe that there was anyone in the company at the time who was qualified for the job, which illustrates how badly flawed Coca-Cola’s succession management had been. It does no good to have a second in command unless that person has the potential to run the company. Daft had one vice chairman and two presidents during his tenure. Yet Coca-Cola still languished and the board, in hiring me out of retirement, was forced to reach outside the company for a new Chairman and CEO.
Some people advised me to get rid of Heyer right away and clearly I agreed he did not have the right skills to be president. I wanted to ease him out quietly. I thought that approach was better for the organization, and I also wanted to travel around the world for the first few months to get a feel for the pulse of the business. I needed someone at headquarters to maintain the status quo until I could fully understand what needed to be done. Heyer knew his days at Coke were numbered, and during my first week on the job he walked into my office and handed me a document which he said had been approved by Daft. The document stated that Heyer would receive $26 million in severance pay for leaving the company.
It was a shock to me and it was a shock to the Coke board of directors. Clearly, Daft had the authority to approve the contract, but you would think that given the order of magnitude, the board would have been told about it. Yet they hadn’t, which was a shock to all.
I consulted with board members Peter Ueberroth and Cathie Black, head of the Comp Committee and later chancellor of the New York City school system, to work our way through it. Heyer believed he had an ironclad commitment and we decided to meet it, as hard as that was to accept. The last thing we needed was another lawsuit on our hands.
I first met Heyer during my first retirement when as an international advisor to the company. I was asked to help Heyer with the customers in Europe with whom he did not have any relationships. We had a very good discussion in his office about what needed to be done and the key need to build trust at the highest level of the customer organization. I set up European visits on agreed dates only for Heyer to cancel them. I visited him again and we set new dates. They were also cancelled. Despite continuing efforts on my part, the visits never took place. I later became aware that suffering cancellations of appointments was not something that only I experienced. A former executive at Turner Broadcasting Inc., Heyer’s former employer, told me that he admired Steve as someone to have working for him, but that he would never have worked for Steve.
Heyer left August 31, for a job as CEO of Starwood Hotels and Resorts. A true measure of the man is that one of the first things he did was to give Pepsi a five-year contract with Starwood, even though an internal Starwood review team recommended renewal of Coke’s contract. Happily, the business is now back with Coca-Cola, demonstrating that this was pettiness on behalf of Steve. In many ways, it defined the man. His tenure at Starwood was short-lived.
I immediately began the search for a new chief corporate counsel. Deval Patrick had previously submitted his resignation to Daft. The Boston Globe reported that Patrick had resigned after Daft reneged on a promise to approve an independent investigation into allegations that Coca-Cola hired right-wing death squads to terrorize union organizers in Colombia.
Deval had a change of heart when I was named CEO, telling me he would consider staying, but I told him there was too much water under the bridge. He and another top executive were absolutely at war with each other. Deval clearly had other ambitions and had remained a resident of Boston, commuting every week to Atlanta. We were able to work out his departure amicably. He remained until the end of the year, which meant I had time to find a successor. I believe that once a person has made a decision to leave it’s rare that a change of mind proves to be successful. Part of a psychological contract has been broken and when it is in the public domain, relationships are already redefined.
Only two years after leaving Coke, Deval was elected Governor of Massachusetts.
We began the search for a new corporate counsel, seriously interviewing Eric Holder, the current U.S. attorney general, until he withdrew from consideration. We eventually chose Geoffrey Kelly, an Australian and very able company insider. Meanwhile, Daft had promised Sandy Allan, who was in charge of Europe, that he would also head North America, working out of his office in London and commuting to the U.S. That did not make sense to me nor to the Coke board and I nixed it, though Sandy was disgruntled after learning that he would not be in charge of nearly half the world. Sandy and I went all the way back to South Africa. He was the executive who refused to meet with me when he ran the independent National Beverages after Coke divested fro
m South Africa. As group president, I had moved him to the Middle East, describing him to his face as “a bull in a china shop, but generally a good bull.” He didn’t like the description, but that is what he’s like. Yet even though he broke a lot of china, I viewed him as a good executive for tough situations with his depth of company knowledge and strong work ethic.
I chose Cynthia McCague as Coke’s new human resources director. Cynthia, who had been my HR director at CCHBC, was well-known and well-respected within the company and provided as smooth a transition in her new job as any executive could hope for given the momentous task I handed her.
Marketing, I have always believed, is the soul of the Coca-Cola Company. We had the world’s most popular brand and yet with all the distractions of the previous few years, were losing our marketing edge. When I arrived, some of the television commercials were, in my opinion, atrocious. One particularly poor one featured a basketball player with a Coca-Cola stashed under his armpit; not a very appealing image. In the week before I became CEO, I attended the launch of C2, an ill-conceived midcalorie cola. It was strategically a weak proposition and the execution even weaker. Marketing of the new product was in the hands of people who had no “feel” for the brand. Within three weeks of becoming CEO, I named Chuck Fruit, who originally joined Coke from Anheuser Busch, as chief marketing officer to replace Dan Palumbo. Chuck righted the ship but sadly, ill health caused him to retire early. I also brought in Irial Finan, my successor at CCHBC, to head a newly formed Bottler Investment Group to oversee the company’s wide range of ownership interests in bottlers worldwide, from Shanghai to Brazil. Some of these bottlers reported to group presidents, others to the Coca-Cola executive in charge of that country. Under the new structure, they would report to Irial and Irial would report directly to me. A body of opinion within the company was that we should divest of all our bottling interests. Implicit in that belief was that the Coca-Cola Company lacked the skills to competently run nuts-and-bolts, low-margin bottling companies. I, of course, had been running bottlers on and off for my entire career. Also, I believed divesting would reinforce the bottler’s view that the company did not understand their business or care about it. The bottlers wanted leadership from the Coca-Cola Company, but as I reasserted it clashes arose over rights.
Inside Coca-Cola Page 15