As we worked through the checklist of legal problems that were, one by one, being resolved, I did manage to make time for family. Cara, who was then the volunteer director for the Atlanta Humane Society, convinced me one Christmas to dress as Santa Claus and to be photographed with dogs on my lap. Getting dogs to sit on your lap to have their photograph taken isn’t easy, yet it was a welcome respite from the pressures at Coke as well as enjoyable for the family. Only one person recognized that Santa was the CEO of Coke.
At the same time, I received regular visits in my office by a nurse to check my blood pressure, which was elevated from the stress. This was not something I told Pamela because it was, of course, what she feared when I took the job.
With the legal distractions fading, it was time to increase my focus on the business of selling soft drinks. In China we launched an accelerated plan to boost growth because we were losing to Pepsi. China remains a tough battle although Minute Maid Pulpy has greatly boosted our efforts.
One region of the world that rarely gave me any trouble was Latin America under the brilliant leadership of Pacho Reyes, who remains a close friend, and the many great bottlers, including Coca-Cola FEMSA. Just before I retired, Pacho, Pamela, and I traveled to Machu Picchu, the fifteenth-century Inca ruin in Peru, to celebrate five great years together. Without the consistent growth of volume and profits in Latin America, the turnaround of Coca-Cola would have been much more difficult, if not impossible.
I brought Muhtar back to the company in May 2005 as head of North Asia, Eurasia, and the Middle East, including Japan and China, moving Mary Minnick to head of marketing to replace Chuck Fruit who did a great job but was having health problems and, sadly, died just after I retired. Mary was a brilliant marketeer but was not a strong general manager. She was not aggressive enough in Japan, India, or China, I believed. Initially, she balked at the marketing job, believing it would be a demotion. I had a solution I had been considering for a long time as a way to break down some of the walls that slowed and often impeded bringing new brands and new ideas to the market. I offered to give her technical and strategic planning in addition to marketing, bringing her back into the Atlanta headquarters in a very powerful position, although I also allowed her to maintain an office in London, which was a defensible move given the creative ideas which emanated from Europe. It also met Mary’s personal needs and demonstrated the flexibility a company needs to retain top-class female executives. I chose Patrick Siewert, the former Kodak executive, to head the Southern Asia and Pacific Group including India and the Philippines, which proved to be a mistake. Patrick did not work out. I found him to be an inadequate manager. I did not listen to my own gut or some of the people around me, but relied on a professional evaluation system. That was a mistake.
Before hiring Muhtar, I contracted an outside law firm to compile a report on the insider trading controversy. It reinforced my belief that the incident was an honest mistake by Muhtar’s financial advisor. The Coca-Cola board was also comfortable with the report and with my decision. These were some of the most respected business leaders in the world, including Warren Buffet and Peter Ueberroth. It was not a patsy board, as you will see later in this chapter. They backed Muhtar, despite a smattering of press criticism. I must say, however, that there were executives even within my inner circle who questioned my decision. We just chose to disagree.
My vision for Muhtar at the time was for him to eventually become international president and then we would see, based on his performance, whether he would be a candidate to succeed me. He had to earn it. Muhtar had no assumptions of eventually becoming CEO. He would frequently say, “I will leave when Neville leaves.” He saw us as binary and in a way, we were. Mary Minnick was also seen as possible successor as were a few outside candidates we had identified.
Coca-Cola Enterprises, the company’s largest bottler, which had franchises in North America and Europe, was a particularly troublesome challenge.
CCE was a perennial underperformer and its leaders held a long-standing grudge against the Coca-Cola Company, which had created the company in 1986 by merging company-owned bottlers in North America with two other independent bottlers, the John T. Lupton franchises and BCI Holding Corporation’s plants. In 1991, CCE merged with Summerfield Johnson’s family-owned company, the Chattanooga-based Johnston Coca-Cola Bottling Group, Inc., one of Coke’s oldest bottlers. CCE later expanded into Europe as well.
Many in the CCE ranks believed Coke bested CCE in the negotiations, overcharging them for the company-owned bottling franchises and leaving CCE with a crippling debt. There had been, of course, a willing buyer and a willing seller and more important, these were perpetual franchises—not subject to periodic renewal by Coke and therefore legitimately priced at a premium. So it didn’t make much sense to me for CCE to complain later about the transaction. Still, the resentment lingered and remained a strong factor in the often tense relationship between Coke and CCE.
There was some arrogance at CCE. In my early days with the company, the U.S. bottlers were the gold standard. They were the source of new ideas and it was to the U.S. where bottlers from other countries would travel to learn. By the time I became CEO in 2004, it had become embarrassing to bring visitors through the U.S. marketplace. The execution was very poor. Some of the private-label colas actually had better packaging than CCE. Yet executives at CCE believed they were still the best. In fact, bottlers in Brazil, France, Spain, South Africa, and other countries were the new gold standard.
I met privately with the CCE board chair, Lowry Kline, in February 2005 and flatly told him that John Alm, the company CEO, did not have my confidence. Lowry then allowed me to meet with nonexecutive board members. It was a tough meeting, with the CCE board members still maintaining the view that many of their problems were due to overpayment to Coke for the bottlers. They had been convinced that most of their problems were caused by the Coca-Cola Company. At this point, I was able to tell them about the $400 million in new marketing money—$150 million of that dedicated to North America, which placated them somewhat. Then I raised the issue of management. I told them that while it was not my role to choose the management of a public company, I was entitled, as the franchisor, to a view about the quality of the management. I laid out a strong case as to why Alm should not be running the business. The board disagreed and word soon leaked to Alm about the meeting. It did not help the already strained relationship with CCE. One of the problems with huge bottling franchises like CCE is that while they make sense economically, they sometimes lose sight of the interdependencies of the system, particularly when they are publicly held companies like CCE. Yet by the end of 2005, Alm was out and a new CEO, John Brock, was in.
That did not, however, solve our problems with CCE. Brock launched a series of retail price increases, trying to boost the company’s profit margins, but in doing so, eroded Coke market share, thus reducing our concentrate sales. We had no choice but to raise concentrate prices. It was a bitter, tit-for-tat exchange.
Hoping to find a solution for the deep-seated problems in North America, I presented to CCE’s board in the spring of 2006 a plan called “Project Diesel.” CCE in the U.S. would merge with the remaining independent bottlers in order to lower costs and increase profit. We had calculated that we could pay a real premium for the independent bottlers and easily recoup the investment by increasing the scale and efficiency of the bottling operations. The CCE board flatly rejected the idea, an outgrowth of the lack of trust they had for Coca-Cola. When the news leaked, the proposal caused a lot of dissatisfaction with the independent bottlers who thought we were favoring CCE and worried about the price they would receive in the acquisition. Don Knauss, who had been appointed head of Coca-Cola USA, had put an enormous amount of time into this effort and when Clorox offered him the job of Chairman and CEO, he moved on.
It was then time, I believed, to bite the bullet and make a full-fledged move to buy CCE. I went around to Coke board members, including Warren Buf
fet, to sell them on the plan. The logic was something the board members found difficult to disagree with. It made economic sense to buy CCE. The devil, however, was in the details.
This would be a takeover. CCE stock at the time was around $18.50 per share. We thought we could make a bid at $23. Yet our bid would be open-ended. Hedge funds and other investors could launch a bidding war, driving up the CCE stock price far beyond what we thought we should pay. In a normal acquisition, we could have just walked away if the bidding got out of hand. That was not an option in this case for two reasons: We would have completely lost credibility if we walked away, and in the eyes of CCE we would have appeared incredibly weak. Also, another bidder might have acquired the company, leaving us potentially with a far more difficult partner than CCE. The board recognized this and I backed down. In my view, I had failed. Yet I softened the ground for an acquisition and in 2010, after I retired, Coke did acquire the North American business of CCE. This time, CCE approached Coke. No longer was it a takeover, and this time the deal worked. I didn’t do the deal, but I believe I started the process that led to the deal.
I also explored other possible acquisitions. The moral of the following story is that personal prejudice and business strategy sometimes get confused. It all started when we held a meeting of Coke’s top management in Barbados. We played golf with Gary Player, a South African and one of the best golfers of all time who has long been a close friend of Coca-Cola. Over lunch and dinner, we noticed that Gary ate no meat or dairy products. He is a vegan and told us how it had stopped the progression of his arthritis. A few months later, Pamela decided to become a vegan and much to her surprise, I joined her. It caused a great flurry at Coca-Cola. Now I had to have vegan food everywhere I went around the world. I found the vegan diet to be very good for me. I lost weight and my cholesterol dropped. One key component of the vegan diet is soy milk and I began looking around for companies that had a strong market presence in soy products. We considered several of them and had informal discussions with Coke board members during a meeting at Pebble Beach, California, but they didn’t like the deal. They thought the price was too high and were worried that it would distract us from our core business. Muhtar was also opposed to the acquisition, one example of honest disagreement between the two of us.
I’m not sure they would have voted against me, but I decided not to push the issue. In retrospect, the board was right. The stock of one of the companies has subsequently plunged, reflecting a serious downturn in its profitability.
The Coca-Cola board was strongly supportive of me but did exercise strong and appropriate oversight. An analyst once asked me what I was going to do about my strong board. I replied, “I therefore assume you would want me to have a weak one.” There was no reply. I worked well with almost all the board members, including Buffett, Ueberroth, former U.S. Senator Sam Nunn of Georgia, Herbert Allen, and Jim Robinson. Yet I had a chilled relationship with Bob Nardelli, CEO of Home Depot. In March 2005, the Compensation Committee was reviewing bonuses for 2006. Normally, the committee approved bonuses for the top fifty executives, and management decided the remainder. Bob had called me and asked for the full bonus list and I agreed. It included a list of one thousand bonuses, all within plan but also based on a level of discretion based on individual performance. Bob came to the meeting with the big bonus list well thumbed and marked with yellow highlighter. He then asked why two junior awards differed, to which I replied, “I have no idea. I delegate those kinds of decisions and they are according to plan.” Two very different management styles had clashed. While I prefer my own model, both are effective in their own way and under certain circumstances, Bob’s works best in the short term. Bob is very detail oriented, very bright, and extremely hard working but he and I were on different wavelengths and just never hit it off. Bob, to his credit, realized this and left the board in 2005. Another board member, J. Pedro Reinhard, former chief financial officer of Dow Chemical, ran afoul of that company’s board for allegedly plotting a leveraged buyout of Dow without authorization from the board and without telling the CEO. I discovered that he never supported my strategy, although he never raised any issues directly during board meetings. When he left Dow, he had to formally resign from the Coke board since he no longer had the same position as when he was named a director. When a director changes jobs, the Coke board usually allows them to remain as a director. However, this time I persuaded the board not to renew Pedro’s appointment.
As we pushed to regenerate sales and profit, I tried to instill in Coca-Cola the spirit of frugality that many bottlers, out of necessity, had long possessed. Coca-Cola, with its traditional high profit margins, had never been forced to “chase pennies down the hallway.” We always did things Rolls-Royce style. One of the most disturbing examples was a $3 million party in Johannesburg, featuring the rapper Snoop Dogg, after South Africa was awarded an internal prize, the Woodruff Cup, for superior performance. I wanted to change that mindset, starting with my own office where the company had been scheduled to spend $1 million for renovations. I stopped that. We did recarpet but scrounged furniture from other offices instead of buying new. I also eliminated expensive wines in the corporate aircraft. These were small things, but small things that delivered messages.
In March 2005, Klaus Maurers, the German bottler with whom I had developed a close friendship, came to see me. We had a long, detailed discussion of how we could accomplish a one-bottler strategy. This time, we got it done. Finally, the consolidation of the German bottler system which I had begun in the mid-1980s was complete. Sometimes, change demands extreme patience.
Bottler consolidation has been a common story throughout my career, but bringing it about in Japan has been extremely difficult.
Japan is a very important market for Coca-Cola. It is one of the most profitable in the world, primarily because of the sale of coffee in cans. The one million Coca-Cola vending machines are specially designed to dispense hot drinks in winter and cold in summer.
It’s a really delicate trick to hold a really hot can between two fingers and sip it without burning your lips but the Japanese have mastered it.
There is a plethora of innovative brands in Japan; even the most successful are only successful for a year. It’s an extremely competitive market and it takes a completely different mind-set to operate in Japan.
One of the most difficult bottler consolidation challenges involved the bottler in Tokyo owned by the Takanashi family. After years of negotiation, the family decided to sell a 34 percent stake to Coca-Cola in 2007 when I was CEO and Chairman. During final negotiations, which I attended, the family members asked to meet again the next day. That evening, they went to the grave of their father and “consulted” with him. The next morning, they signed the agreement.
Slowly, with all the key pieces of our strategy in place, we began to see strong and steady spikes in sales, profits, and dividends. The stock topped $65, further bolstering morale for employees who owned Coca-Cola stock and had stock options, which now would actually be worth something. The financial crisis of 2008 set us back, but only temporarily, and as I write this the stock price has rebounded.
As profitability increased, friction between the bottlers and North Avenue began to fizzle. It’s like a marriage. When a marriage is going badly, the partners fight over the tiniest of issues. You can find fault even with how your spouse parks the car. When a marriage is going well, you might find the spouse’s car-parking technique quite amusing, and tease them lovingly about it.
Coca-Cola in the late 1990s had “lost its way” Muhtar recalled. The bottlers and Coke were fighting over a shrinking profit base, and a fading belief in the power of the brand. “We became arrogant,” Muhtar continued. “We lost touch with the details of what makes this business work well. Neville and I were able to bring back the belief that Coca-Cola is great, and that we can grow again. When you believe that, when you have a growth model, no one quibbles over trying to split something that is shrinking.”
There was time now, and money, to look beyond profit, to some of the “Ps” in the manifesto such as “planet” and “partnership.”
In 2006, we agreed, along with other beverage companies, to halt sales of full-caloried beverages in U.S. public schools, an initiative launched by the American Heart Association and former president Bill Clinton.
First, an editorial comment. I believe it’s unfair to single out the beverage industry for diabetes and obesity. When I think back on my childhood in Africa, and the five-mile bike rides each way to school and my lifelong participation in sports, I can’t help but believe that computers, video games, television, and the lack of physical exercise might be more responsible than soft drinks for overweight schoolchildren.
That said, the beverage industry had pushed too far in the schools, actually putting soda machines not only in high schools but in middle schools as well. When children are in school, their parents have no control over what they are consuming. So in that respect, soda machines in schools might have interfered with a responsible parent’s efforts to manage their child’s diet.
So Coca-Cola and our competitors were open to Clinton’s idea to address this issue as part of a voluntary program. Don Knauss, as head of Coca-Cola USA at the time and with whom I worked well, presented me with a draft of the agreement, but it didn’t make sense to me. It called for the withdrawal of all soft drinks, even diet soda. Clearly, without sugar and calories, diet soda doesn’t contribute to diabetes or obesity. At the same time, schools were going to allow sports drinks and juice drinks, both with a full-sugar content, to remain along with snack machines. Yet we would have to stop selling products with zero calories?
“The problem is aspartame,” the artificial sweetener, I was told. I refused to buy that argument. “This is about calories,” I said, adding that there was absolutely no evidence of any health risk from aspartame. Even though the rest of the industry had approved the agreement, I told Don, “I’m not going to sign off on it.” Don agreed to revisit the issue.
Inside Coca-Cola Page 18