Coca-Cola

Transcript from https://podmenti.com/t/b7a1486fb47c8513

David, I cannot believe we're about to do a four hour podcast on
Syrup.
Sugar and water.
I mean, that's the entire business is just
syrup, sugar, and water combined.
And it's a three hundred billion dollar company.
Well, then you know what I'm gonna say to you in response to that. Do you wanna sell sugar water for the rest of your life? Or do you wanna come with me and change the world? Ooh, save it, David. Save it. Who got the truth?
Is it you, is it you, is it you
No.
Is it you, is it you, is it you?
Say it straight
Another story on the way
Welcome to the fall twenty twenty five season of Acquired, the podcast about great companies and the stories and playbooks behind them.
I'm Ben Gilbert.
I'm David Rosenthal.
And we are your hosts.
Charlie Munger has a famous thought experiment.
It's the eighteen eighties.
You want to build a company from scratch that eventually becomes worth two trillion dollars starting
With just two million.
So you're looking for a one million X return, or as Charlie puts it, a Lollapalooza outcome.
Of course he does. Very Charlie.
Very generally.
The constraint is it must be a non-alcoholic beverage business.
Okay.
And another constraint, it must throw off many billions of dollars in dividends along the way to your shareholders.
Okay. This sounds almost impossible.
But what ideas could you possibly dream up?
to give it your best shot.
Well, I think the first question I would have is
Whether I could include any now illegal drugs in my product.

That certainly helps.
So to build this giant valuable company, the first thing you need to know is you're not going to get there with something generic. So you have to build a brand that grows into a strong protected trademark.
And to reach that scale, it must be global, so it has to have a taste.
That's universal in all countries.
Now conveniently for you, all humans do require large amounts of water every day to live.
So it is a giant market. Yes. But you're not gonna fully replace water. It's just gonna be kind of a small fraction of the time.
So
Onto the beverage itself, you're gonna wanna optimize it to maximize the rewards of ingesting it.
As refreshing as possible in any climate.
Now
You're gonna wanna do a bunch of other stuff too. You wanna fill it with calories to give energy. You want the flavor, texture, and aroma that makes it pleasurable to consume.
And uh you should throw in some brain stimulants like caffeine and sugar.
That's sort of the ideal product mix. Among other things. Yeah. Now you don't want competitors to swoop in for a free ride on the market you just created.
So you should make sure your product, the real thing, is available everywhere.
Anytime someone asks for it.
At a very low price. So there's really not an opportunity for competitors to ever fill the vacuum.
There's never a reason for anyone to reach for anything other than your product.
Always.
Always, David. And since everyone is not thinking about beverages all the time, like you probably are as the proprietor of this business.
you're gonna wanna associate your beverage with all the things that they are thinking about.
The good life.
Family.
You're sports heroes.
Beautiful people.
Christmas.
I mean happiness generally, you are gonna wanna have a Pavlovian association between your drink and
And happiness.
And you're gonna want to spend huge amounts of money blanketing the entire world.
With this messaging.
Now to build something this valuable.
You also can't have a big expensive bottling and distribution operation.
So you're gonna need to figure out some clever way to get someone else's capital and employees for that while still maintaining the control.
that your brand requires.
I mean, ideally, it would be great if you could serve the entire world with just a few of your own production facilities.
That would be pretty great.
Yes.
And the last thing.
You must never
Under any circumstances.
change the formula or flavor.
Ooh We were doing great. We were doing great.
But you know, this might be why Coca Cola is not a two trillion dollar company today.
Well, we'll debate that at the end of the episode. Listeners, of course, this playbook is almost exactly what the Coca-Cola company
has done.
And they've done it.
Over the course of one hundred and forty years.
It has its roots all the way back in the Civil War. It grew up through the rise of the automobile, through the Great Depression, through two world wars. It seamlessly and shamelessly
integrated into the hippie culture of the seventies, and then of course
It had the epic cola wars of the eighties and
and onward. And David, I would say this episode, perhaps more than any other that we've covered
is about America.
Well
It's about America.
And then America.
Inserting itself.
Everywhere else in the rest of the world. Can't wait to dive into it.
Well, listeners, this episode was selected by you.
Last month, we asked our email subscribers to vote on what company we should cover next, and Coca-Cola was the overwhelming favorite. So thank you to all of you who participated.
You can join that email list at acquire.fm slash email to get in on the next round of voting.
And that same email list is getting a lot better.
We just did a big overhaul, so each monthly email will now have episode summaries.
Our big takeaways from the company after studying it, and exclusive photos from our research process.
So never miss an episode drop by signing up at acquire.fm slash email or clicking the link in the show notes.
So with that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.
David.
Where do we start our story? Well, Ben, as you so aptly set up there.
The story of the birthday.
Coca-Cola.
Starts arguably with the birth of America as we know it today.
In a newly
Reunified.
United States of America.
Following.
The civil war.
Mark Pendergrass in his great book for God, Country, and Coca-Cola.
That was a main source for this episode has a
Great quote.
He says,
Coca-Cola remains emblematic of the best and worst of America.
It is a microcosm of American history.
Coca-Cola grew up with the country, shaping and shaped by the times. The drink helped to alter not only consumption patterns but attitudes towards leisure, work, advertising, sex, family, life, and patriotism.
You know, just a few.
Small things.
So
If you remember
Back to our standard oil series a couple of years ago.
One of the biggest industries in post civil war America.
Was oil.

But it wasn't
The same kind of oil as standard oil.
It was snake oil. Oh good hook.
Yeah. Or as it came to be known after the war.
Patent medicines.
Before
This industry.
There were no
national brands in America or anywhere else.
There were railroads and there were like big
national industrial companies, but there weren't any national
consumer product companies. Everything was local. There weren't any CPG companies. There weren't any supermarkets. There weren't any
car companies, there weren't gas stations.
And there weren't advertising agencies
To go along.
With them.
Patent medicines were sort of like this.
seed crystal that created the modern American
Consumer
Business.
And what were patent medicines?
So
Going back again to our standard oil series.
John D Rockefeller's dad, if you remember.
Was a
Travelling.
Snake oil sales mills. Yeah. Yeah. In his days, back before the Civil War.
These were
medicines that promised like a cure to
All sorts of ailments.
Nausea.
Indigestion, headaches.
Cancer.
Tuberculosis.
Skull fractures.
Paralysis.
And impotence.
All based on zero research, zero studies. Zero science. Nothing.
The civil war.
Changed all that.
Not necessarily for the better.
So
After the war.
There were so many wounded soldiers in America that were in
Such chronic pain.
That the market for
Medicines like this from these
Snake oil salesman. Just
Exploded.
A huge, huge percentage of
Veterans.
From the civil war.
developed what is called army disease, quote unquote.
I e
They were addicted to morphine for the rest of their lives as a painkiller?
Which actually did work.
Yes, that actually did work. Very well. At killing pain.
And it wasn't just physical injuries from the war and the soldiers who fought in it.
The civil war ripped America apart.
I mean these guys and their families
Had just gone through this.
Devastating trauma. I mean there were so many deaths, so many wounded, it was
Families fighting against one another. It was truly arguably the worst moment in our nation's history.
Yeah. So naturally.
Whenever there's a uh big problem, American capitalism
Sees a big opportunity.
So some of these enterprise travelling
Snake oil salesman.
Started.
scaling up the medicines that they were making to meet all this
New demand.
And as they
scale up and they start to standardize the products that they are offering.
This industry comes to be known.
As patent.
Medicines.
Now most of these medicines were not actually patented.
But
As the producer of them, you wanted
customers and would be competitors to think.
That they were. That there was some sort of barrier to entry.
Yes.
So pretty quickly.
These newly scaling patent medicine guys.
Discovery.
that the best way to reinforce that message with consumers and to stimulate demand
was advertising.
Especially in newspapers. And this
Is the birth.
of the advertising industry in America.
Really? It's these patent medicines that start spending the first real
scale dollars in newspapers, which are also coming up and industrializing post civil war.
And building the
business model of the immediate industry as we know it today.
Because just like you were talking about in your great Charlie thought experiment from the intro,
What are these?
Patent medicines.
It's just commodity. It's like leaves and like nuts and water and stuff that go into these things. I mean extracts, data extracts. Right. Okay. It's super cheap.
Commodities.
That are
Very easy to obtain in great quantities.
Very easy to then
produce into your product and transform.
And then
pretty small relative to other products easy to transport around the country.
you do start to get some of these patent medicines that scale up and build early
National brands in this day.
Hm.
So you might think that all this is like
Ancient history.
A whole bunch.

That we still buy today.
Started as patent medicines.
Ludens cough drops.
Vicks Vapor Rub.
Vaseline.
Listery the mouthwatch.
All patent medicines.
Those are patent medicines that are still used for sort of a uh you know, health purpose today.
Plenty.
of products that we still use and consume today started as patent medicines, but are
No longer marketed as medicines.
Graham Crackers.
Started as a patent medicine. Really?
Grape nuts, the cereal.
Neither grape nor nuts.
Angostura bitters. You know the bitters that you get in like old fashioned and stuff? That was a patent medicine.
Okay, that makes sense.
That's squarely what I believe a patent medicine is. Yep.
And then
Couple things you might be familiar with.
Doctor Pepper.
Really? I didn't know Dr. Pepper was that old.
Yeah.
Doctor Pepper predates
Coca-Cola?
Hm.
And of course.
Coca-Cola.
Started.
Just the same way.
As a patent medicine.
Which brings us
to Dr. John Pemberton.
A Confederate war veteran.
Who had not only been stabbed, he had also been shot during the war.
And
Got army disease, just like all these other soldiers, and was addicted to morphine.
Four.
The rest of his life.
So after the war he moves to Atlanta.
And as part of his sort of entrepreneurial aspirations in this new patent medicine consumer economy.
And also to
probably solve his own problem.
He starts casting about for
other drugs that could cure him and others of army disease.
And that is how in the mid eighteen eighties
He learns about a new miracle drug.
Sweeping America.
Promising to cure all ills including army disease.
Cocaine.
Cocaine.
was really
really in in America.
In the eighteen eighties.
Perhaps foreshadowing a little bit the nineteen eighties in America, as we will uh get to later in the episode.
Except in the eighteen eighties, it's really legal.
And really broadly encouraged
Certainly there's no FDA or anything to make it illegal, but society's posture toward cocaine
Wasn't bad.
It was like caffeine today.
Right. They did not really discover the addictive nature of it or demonize the addictive nature of it yet.
Yeah.
Or the side effects, et cetera, et cetera.
So
Pretty quickly cocaine becomes the most popular
Patent medicine ingredient out there.
It's probably the only ingredient that actually did anything. Yeah. Yeah. Yeah.
And there is a product.
On the market, an imported
Product from France. You can't make this up.
Yeah.
quickly becomes the most popular delivery vehicle for cocaine.
A cocaine fortified wine from Bordeaux.
In France.
Called Vin Marioni.
Like the most extreme four loco you could ever dream of. Exactly. Exactly. Yes.
Yeah.
So
This sounds utterly ridiculous today, but
Let me read you the list.
Of public endorsers.
of Vin Mariani, the like testimonies in the Rolex parlance.
Thomas Edison.
Buffalo Bill Cody
United States president William McKinley

Que England
And not one.
But three.
Consecutive popes.
in the Vatican.
All swore by Vin Marioni. Feels like a thing I would be swearing by and endorsing too. I imagine once you start, it's the best thing ever.
So
Entrepreneurial Pemberton in Atlanta sees Vin Marion's success and is like, Hmm, well, I wonder if there's a way.
that I could copy and improve on that.
And the way he comes up

Is to add
Caffeine to the mix.
Why not? Yeah, why not? He decides that he's gonna get the caffeine.
From African cola nuts. K-O-L A Cola nuts. Which we should say is the first introduction of the word cola.
Period.
in the American lexicon.
Cola drinks were not a thing.
Yep, and it's very bitter. But the reason he chooses it
is it has an even greater
Caffeine concentration.
Than coffee beans. He really wants this product to work.
So Pemberton starts selling
Pemberton's French wine coca.
Which is still wine.
But it's now infused both
With coca leaves for the cocaine.
And colonuts.
For the caffeine.
And
It's a hit.
This could not have tasted good.
No.
I can't imagine what it tasted like.
President Ulysses S Grant?
Becomes a fan.
And Pemberton starts selling like
Thousands and thousands of bottles in and around Atlanta.
Which makes sense. People are drinking it for its drug like medicinal qualities, not that it's in any way refreshing.
Yeah.
Now
I say bottles.
Keep that in mind here.
bottling technology in the eighteen eighties.
Is not
What it is today.
Not very good at preserving
Liquids or foods.
Certainly not good at preserving carbonation.
However, because this is a wine.
At this point in time.
Wine has natural preservatives in it. So it's self stable. So you can sell bottles of wine. People have been selling bottles of wine for centuries at this point in time.
So then prohibition hits.
Party's over.
Yep.
Fall of eighteen eighty five, Atlanta.
I think might have been the first major city in America.
That institutes
Prohibition and becomes a dry town.
No alcohol.
So Pemberton's now like, Well shoot, I've got this hit product.
I need to scramble and come up with a soft version of a soft drink. Oh and this is the origin of soft drinks. They're not hard as in alcoholic drinks, they're soft.
There you go.
So he starts madly experimenting with all sorts of flavors and ingredients and
After six months or so in April of eighteen eighty six.
He nails.
A formula.
Yes. And so the question is how does he arrive at this formula?
The book I was reading, which is called Secret Formula.
It's a great book on the history of Coca Cola that had access to all the corporate archives.
really describes Pemberton in this phase.
as finding his capitalist streak.
as sort of realizing
Okay.
Take a step back.
Patent medicines are sold for
Seventy five cents, a dollar.
It serves a crowd people when they're looking to recover from some ailment, or really at this point, probably serve an addiction.
We're now twenty years from the civil war, so a new generation is coming up. Yes. Yeah, that doesn't have army disease.
Is there a product that I can make
That
People can afford any time they want.
That's not
a medicine that's just a refreshment and has all these other great properties using some of the ingredients that we've been using.
So he kinda comes up with this idea of a five cent again because
the ingredients cost so little, these extracts, it's a super high margin product.
A five cent thing that anybody can have just to have a little pick me up, a little treat.
When they're at the soda fountain. When they're sitting down in the social gathering space.
'Cause drugstores at that time were sort of the Starbucks of this time. It really was this gathering place to go and spend time.
And
So he says, I'm gonna serve this other market.
of any time refreshment.
And so he's playing around with these ingredients and he's got the cola seed that's got this natural caffeine in it.
Fun story in the original Coca Cola for the first
I don't know, a couple decades.
It actually had four times the amount of caffeine.
That
Coconut's today. So it's effectively an energy drink.
Even leaving the cocaine aside.
However, the cola seed is
It tastes really bitter.
It's absolutely horrible.
Which was not a big deal.
previously'cause he was mixing it with wine, people were drinking it for medicinal purposes, just kinda slugging it down, but he's trying to create a refreshing
Beverage here.
And so
I did not know.
that this was possible way back in eighteen eighty six.
But what he does is he uses synthetic caffeine.
Merc, the pharmaceutical company, had already been extracting
Pure caffeine from
Cola seeds.
So Pemberton just got a hold of Merc.
and bought a bunch of the powder. And so the first version of Coca Cola.
Is
A little tiny bit of the cola seed just kinda to say that it's in there. He's gonna call this thing Coca-Cola.
But the caffeine actually comes from a synthetic extract. Yeah, interesting. It's always been synthetic. Huh.
That's right. I didn't know that. That's amazing.
So it's a great
Excerpt from the book Secret Formula.
At last he stood on the verge of inventing Coca-Cola.
Down in the basement, Pemberton filled his forty gallon kettle with plain water.
which he then heated to a boil over an open fire.
Using a wooden paddle to stir the solution, he melted in sugar and caffeine.
Right, sugar because of the extreme bitterness of the colonut.
Yes.
And actually the
coca plant was also bitter, so sugar was to offset it. Yeah, yeah. Next he added caramel for coloring, giving the syrup its dark, distinctive port wine color.
To balance the sweetness of the sugar and give the syrup its tang, he added lime juice, citric acid, and phosphoric acid.
Then, as the basic blend cooled, Pemberton turned to the question of flavor.
Into the mix went vanilla extract, elixir of orange, and several pungent oils refined from various fruits, herbs, and trees.
Lemon, nutmeg, spice brush, coriander, and nearly.
The last ingredient
in perfumes distilled from a flow of the orange tree.
The most exotic was oil of Cassia, which
Also known as Chinese cinnamon.
Made from the bark of a tree found in the tropical regions of Asia.
And of course.
Pemberton added this brew to the fluid extract of coca leaves.
Exactly how much cocaine went into the inaugural batch of Doc Pemberton's new soft drink syrup is impossible to calculate more than a century later.
But with even a touch of the drug in combination with the sugar and caffeine, four times the amount in today's Coke made Pemberton's concoction quite a stimulating beverage. Yes. Yes, indeed. As best as I was able to read from a few different sources.
I think roughly once Coca Cola starts being produced in that first decade
Call it four or five glasses of Coca Cola would be about the equivalent of a line of cocaine today.
Okay, so it would take a lot of Coca-Cola.
If you're drinking that much of that formula.
You're having
the equivalent of sixteen Coke's worth of caffeine. It's an absolute crap ton of caffeine and sugar.
By that description
the cocaine probably would affect you less than the sugar and caffeine in the mix.
That's a good point.
Regardless.
You're gonna get hype when you drink this.
And this amount of cocaine really was only a part of the formula for those early first few years.
Yes.
But
It lends.
The first half of the name.
Which
Pemberton's business partner at the time, a guy named Frank Robinson.
Comes up.
With the simple.
Descriptive.
Perfect name for this new brew.
Coca Cola.
Which is funny because
It
Neither contains much
cola since the caffeine is actually an extract and it's just a tiny little drop from the cola seed.
And very soon.
they would strip out almost all the cocaine. And so you have a product that for the next hundred and forty years would be called Coca-Cola that contains
Really not very much coca and really not very much cola.
Yes. Indeed. So
They go about.
Getting the new product installed and distributed in
drugstore soda fountains around Atlanta. But Ben, you were saying a minute ago about oh, drugstores were this
Gathering place at the time.
Remember I said about bottling technology.
If you weren't selling alcohol, which had natural preservatives
The only way that you could
buy and consume a drink that
really wasn't like for milk or something. It was fresh. And so that's how soda fountains come to be installed in these drugstores. They're selling the patent medicines.
Many of which are liquids.
And that's also how carbonated water.
comes to the drug stores because mineral water, carbonated water is thought to be a health tonic.
And so it all mixes together and then over the years
These morph into
Social places. Thanks in large part to
Coca-Cola.
Makes total sense.
And I'm pretty sure what actually happens is Pemberton lets his formula
settle and it's kind of this thick syrupy thing, brings it down the street to the first drugstore, and that druggist, that proprietor, is the one who actually combines
that syrup with the carbonated water and makes the choice, which I think could have gone either way. Is it a still or a sparkling beverage?
to give it that champagne sparkle.
to create the Coca-Cola that would endure from there.
Well, thank goodness they do use the carbonated water.
Could you imagine Coke?
If it were still, uh that wouldn't be very good.
No, I well, it wouldn't be as successful. I mean, there was probably hundreds of things like Coke that were still that did not succeed.
So
Pretty quickly.
Coca Cola gets into market with these drugstores and soda fountains and
People love it. This is great. It's a dual benefit.
Product.
It has all the medicinal benefits of cocaine and caffeine, the cola that
They've been marketing.
And it's actually
Really enjoyable to drink and it tastes great.
So the next year in eighteen eighty seven
Frank Robinson, the business partner who also named the drink.
He also
introduces the script logo. Like he writes out the Coca-Cola script logo that we still use to this day.
This is unbelievable. I read that this guy was Pemberton's bookkeeper, and yet he's the one who came up with the name Coca-Cola and the Spencerian script.
The logo Coca Cola, which has been unchanged
Other than just tighten it up a little bit.
Since
He created it in eighteen eighty seven.
Yes.
It is true that he was his bookkeeper, but he was also his business partner. It was like It's like I'm your bookkeeper type thing. Yeah. Yeah. Exactly.
So
The two of them.
Come up with a pretty ingenious
advertising and distribution method because in the early days they don't yet have a ton of capital to start spending on
Advertisements like
All the other patent medicines out there.
They decide that they are going to offer
Tickets.
to consumers.
Redeemable at
They're local Atlanta Soda Fountains.
For free
Glasses of Coke.
And they
Start.
Mailing out.
These free Coke tickets or coupons, you might say.
to every address in the Atlanta City directory. And then they also give them to
traveling door to door salesmen to go hand out on their roots.
Salesmen that are selling a variety of different products
And
This is the very first manufacturer's coupon redeemable at a retailer. Yes.
There's an image on Wikipedia of one of these tickets from eighteen eighty eight that is the
Oldest
Known.
coupon used in America. And it is actually
Beautiful. It kinda looks like a dollar bill. We'll put a photo of it in the email. It's incredible.
This
becomes
Absolutely huge.
For Coca-Cola. And
Integral to its success.
Well yeah, it's a high gross margin
Product.
Where you can give out giant amounts where if you mail someone a little ticket that says you can come and redeem
a free drink that tastes good, that's full of sugar, caffeine, and cocaine. I'm pretty sure they're gonna buy more from you.
It's a high gross margin product. So you have lots of dollars to play with.
And on top of all this, this is kind of a new product category, this notion of a soft drink that's not a patent medicine that's
much cheaper than traditional patent medicines.
And so
You do actually need to do some category creation marketing.
Where you make people aware that this
Cool new thing exists.
Yep.
All of that is true.
And even more so
This couponing strategy.
Aligns incentives for
Everybody in the value chain.
In a way that had never been done before.
Consumers.
They love it.
They get free.
drinks of this great tasting beverage.
Yep. Drug stores and soda fountains, they super love it because now they're getting more foot traffic.
And then once consumers come back and start buying their second, third, fourth, you know, four hundredth drinks.
This is a highly profitable drink for them to sell. They have gross retail margins on this.
And then three.
The
Traveling salesman.
Who Pemberton and his associates are giving these tickets out to
Well, they love it too. This is like oh wow, now a great new free
benefit I can offer my customers. Why wouldn't I want to do this?
It's this incredible
Invention.
That
completely incentivizes
Rapid.
extreme growth in distribution of the product.
So
To further illustrate how awesome this is for the soda fountains.
Coke.
When they were selling.
gallons of syrup to the soda fountains.
They sold them
For about a dollar and thirty cents per gallon.
the soda fountains then
sold drin to customers at five cents a drink.
They're hundred and twenty eight drinks per gallon. They're making six dollars and forty cents.
Of revenue.
For a product that costs them a buck thirty to buy. Yeah. I'm not a retailer, but I'm pretty sure those are good margins. Pretty sweet deal if you can get it then, and pretty sweal to be McDonald's today offering my
Large coke with
A meal.
Yeah, man.
Pretty sweet deal indeed.
Okay.
So
All of this happens within the first year, year and a half of Coca Cola being on the market.
Pretty quickly.
Pemberton.
Who
wasn't really doing much anyway after inventing the drink, as we said, Frank Robinson named it, made the logo, is doing a lot of the distribution work.
Pemberton.
Becomes convinced that
That he's dying.
Which he generally was slowly over.
All these years.
Yes.
And he secretly
decides that he is going to sell off
The rights to the formula.
Without telling Robinson. Without telling Robinson, without really telling anybody.
This kicks off a whole mess.
Of
very questionably legitimate.
Transactions.
That results
Bye.
Mid eighteen eighty eight, early eighteen eighty nine.
in Frank Robinson discovering what's going on.
And seeking out
A wealthy Atlanta businessman named Asa Candler.
to come in and be his new partner.
to reunite all these various claims to ownership of
The formula and uh
company that they can then grow and scale and manifest its destiny across America and the world.
And Asa Canler
Is really
The person who creates
The bottom.
Coca-Cola company.
With Frank Robinson's help in eighteen ninety two.
Which he incorporates as the
Definitive.
Coca-Cola company.
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If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at Lagora.com/slash acquired.
And just tell him that Ben and David sent you.
All right, so David, this is the first
Professionally run.
version.
of the Coca-Cola company.
Yes.
But to give you a sense of just
How
Much of a hit.
This product becomes how quickly.
Even in the couple years.
before the professionalization and the founding of the Coca Cola Company.
In eighteen eighty seven, so the first year that cook the product is on the market.
Pemberton and Robinson sell six hundred gallons of Coca-Cola syrup to soda fountains.
Which equates to about seventy five thousand glass of Coke served.
Bye.
eighteen eighty nine, two years later, that has quadrupled to over two thousand gallons.
And by eighteen ninety, it's almost ten thousand.
Gallons.
What's that?
three years into the business with no professional management.
They grow the business ten X.
Without even really trying.
It's amazing. And in that next year, eighteen ninety one, when Asa Candler buys the last piece to fully own Coca-Cola.
He got an incredible deal.
Even with all that growth having already happened.
He only paid two thousand three hundred dollars for
To buy it all.
That is the base of the company that he builds.
And that's just buying
all the various rights and claims from the people that Pemberton sold it off to.
No capital needs to be invested in this business.
Ever unbelievable. It is a cash flow bonanza since like day one.
It's crazy.
So
In eighteen ninety two.
The first official year of operation of the Coca-Cola Company.
We have the books. We know
Just how profitable they were.
They spent just over twenty thousand dollars on ingredients and production costs.
And I think that includes all like operations and stuff too. There's only like three people working in the business here. So they spend just over ten thousand dollars on advertising.
Okay.
And with those costs.
They sell thirty five thousand three hundred and sixty gallons of syrup.
At an average price of a buck thirty a gallon. So that is
Forty six thousand dollars in revenue.
And twelve thousand dollars in profit.
Now
For reference.
The average household income in eighteen ninety two was about five hundred dollars.
There are three people working in this business, including Candler, the owner.
They made twelve thousand dollars in annual profit in the first year.
of the business. So they are
Crushing it.
So that's each person at the company, if they were paid equally, is making eight X the average household income.
They are uh
In a promising business.
And that's just for
The Coca Cola Company.
Remember
The soda fountains.
Are selling to consumers.
At six dollars and forty cents a gallon.
So the actual
gross revenue of Coca Cola in the marketplace in that first year.
is close to a quarter million dollars.
That's a quarter million dollars.
On what'd you say a little over twenty thousand dollars?
of ingredients in manufacturing.
Yes.
And then another ten thousand dollars in advertising.
So that's crazy. It's only a tenth.
of the uh ultimate sale price of the beverages is there in the costs of the ingredients, the manufacturing, and the advertising when you fully load it.
Yes.
So uh
There's a lot of margin to go around. So speaking of
advertising costs.
In the next few years.
They invest in
Heavily.
into advertising and of course the Coca-Cola company does still right up through to this day.
The advertising they were doing.
On the one hand, is very different than Coca Cola advertising today.
And specifically it's different in that
It's all purely
Intrinsic advertising. It's about the nature of the
Product itself.
Remember, they're still sort of positioning Coca Cola as this dual use
refreshing beverage, non alcoholic social drink, but also patent medicine.
So
Here's some of the early ad copy during this period.
Coca-Cola is the ideal brain tonic and sovereign remedy for headache and nervousness. It makes the sad, glad, and the weak strong. Yeah, it feels patent medicine y.
It feels bad medicine, not uh you know, a pause that is refreshing just yet.
But what Robinson and Canler
Doo doo that is very much still on brand for Coke today.
Is they are all about
Outdoor and point of sale signage.
And
Presence.
So they put the script Coca Cola logo.
Everywhere across Atlanta.
They make oil cloth signs, they paint murals on walls of buildings, they do billboards, they put it in street cars.
They print.
Posters for all the soda fountains to display.
Then they're like, why stop at posters? Let's make calendars, let's make cabinets, let's make serving trays, let's make glasses, let's make clocks.
All with the big Coca-Cola logo.
They would go on to paint twenty thousand murals on the signs of barns and walls across the countryside starting in eighteen ninety four.
Unbelievable.
Incredible.
what you're talking about, David, is this great use of all these extra margin dollars.
They would do all this for free for drug stores.
And they would say, Hey
Don't you wish you had like a big, bright, beautiful sign?
to bring customers into their store.
And Coca-Cola would design, pay for, fabricate
And deliver signs for drug stores that had the store name in big letters and Coca-Cola's name just as big. And they did this for thousands of drug stores across the South. And so you see all these great old pictures.
Oh, they're beautiful, yeah.
It almost looks like they're franchising Coca Cola rather than Coca-Cola just being a thing that's sold at the drugstores.
It's so
Beautiful because
Like you said, it seems like they're franchising Coca Cola with no capital investment.
And the drugstores freaking love it because they're making eighty percent retail margins on this Coca Cola. Of course they want it to be their number one product.
They want a big advertisement that says, We have Coke!
Yes.
So by eighteen ninety eight.
Coca Cola is distributing.
Over one million branded promotional items.
Per year.
This is before the year nineteen hundred. Yeah. Nuts.
They also start expanding geographically.
Because we talked about
syrup earlier. All the Coca-Cola company is doing here.
Is selling this concentrated syrup.
It's the drugstore soda fountains that are then mixing it with carbonated water and making it a drink.
The syrup is
Small, compact, it's shelf stable, it's easy to transport.
Combined with the couponing strategy
They've got this killer.
National.
Growth strategy.
So by eighteen ninety five
Coca Cola is being sold.
In at least one soda fountain.
In every single state and territory in the United States at this time.
Wild.
Wow.
Yeah, and if you look at old pictures of this time.
They had landed on what you were talking about, the intrinsic advertising, a slogan that most people will know delicious and refreshing.
that you see on all the old Coca-Cola memorabilia.
that's coming into view. They're not yet talking about the lifestyle you could have if you associate with Coke.
They're talking about quality and they're also talking about price. They're advertising as many places as they can.
Hey, this is five cents.
They also start for the first time working with celebrities and athletes.
in some of these advertisements that they're doing.
And of course, as you would expect.
In eighteen ninety five.
They trademark the Coca-Cola script for the first time. They are granted.
That
Unbelievably valuable.
Trademark.
Yes.
The delicious and refreshing slogan.
that actually evolves during these years. And it's Frank Robinson who
starts to lean more towards delicious and refreshing and the social benefits.
And away from the
Patent medicine brain tonic.
Slogans.
There's actually a great quote on this from him in For God Country and Coca Cola.
He said, We found that we were advertising to the few.
I. e. people who
Needed a brain tonic.
When we ought to advertise to the masses.
And so he starts dropping all this, oh, sovereign remedy for headaches and nervousness stuff, and then starts really emphasizing the
Drink Coca Cola, delicious, refreshing.
This is really important because he's hitting on like
Hey, Coca-Cola is for everyone.
It's not only for people who have something wrong with them that they need a medicine to fix. It's not a niche, it's not a demographic. It's for everybody.
Yeah.
And two, just instinctually he understood
Hey.
We don't want to associate our product with
negative things with problems.
Headaches, nervousness, those are problems. We want to associate our product only with
Positive things.
Delicious, refreshing, friendship, et cetera, et cetera.
Yeah.
Which is so funny. At this point, all the cocaine is not gone yet. We still have the
It's being marketed as this unabated good while at the same time the company's like we should
probably do our best to start moving away from cocaine because it doesn't actually seem to be the value proposition that people are here for.
Yes.
And the anti cocaine sentiment is coming.
Yeah.
Before they fix the cocaine issue, though,
Candler in eighteen ninety nine makes what is
Maybe simultaneously the best.
And the worst.
Business deal in history.
He gives away
The right
To bottle and sell Coca-Cola.
For free.
Yes, definitely one of the
Dumbest deals ever.
If you just look at it.
as it was in that moment.
but would be sort of Coca Cola's second great business model innovation after couponing.
So
In eighteen eighty nine, two guys from Chattanooga, Tennessee, named Benjamin Thomas and Joseph Whitehead.
Come to Candler with a proposal.
They want

Coca-Cola.
They're convinced.
That bottling technology has matured enough at this point.
That they can now
Bottle fully mixed.
Coca-Cola.
Beverages.
And not only will they
Not go bad.
It'll keep the carbonated fizz. It will still be delicious.
When opened and consumed at a later date.
And Kandler's like very anti-bottling, right? Yes. He is extremely skeptical. He's like, Yo, we've tried this before.
I really don't think the technology's there.
I'm not sure about this.
Thomas and Whitehead though, they're very persistent. They say, Well
Totally get that. Understand that.
What if we do it at no risk?
To you.
You let us buy Coca Cola syrup from you, same as all the soda fountains are doing.
We will bottle it.
And sell it at our own expense.
And if the product
Isn't up to your standards.
You can just pull our license and we'll stop selling it.
Canler thinks it over and he's like
That's a pretty good deal. I've got nothing to lose here. Why not?
I'll let you two young bucks have a go at this.
So in July of eighteen ninety nine.
The three of them
Sign a contract.
That includes the following terms.
For a token contract price of one dollar, which Candler
Never collects.
The Coca Cola company will sell
syrup to Thomas and Whitehead at a volume discount price.
Of one dollar per gallon. So even less than they are selling to the individual soda fountains out there,'cause
I think it's gonna be a higher volume business.
Thomas and Whitehead will have the exclusive
A signable right
To market and sell bottled Coca-Cola.
For five cents.
Per bottle, same price as at the
Soda fountains.
Across practically the entire United States.
But this five cents per bottle.
Operating a bottler is a tougher business than operating the soda fountain in this respect because there is one meaningful additional cost, the bott itself. Yeah. The bottle. You can see why Cambler was reluctant to get into this business.
Thomas and Whitehead must use
Only Coca-Cola syrup.
They can never use any substitutes or competitors as the syrup for the products that they are selling.
They cannot sell to soda fountains that channel.
Will remain directly sold by the Coca-Cola company?
And if they fail to supply enough product
To meet the demand.
For bottled Coke in the territories that they have rights over.
The contract.
Will be forfeit.
The Coca Cola company will provide all advertising needs.
For the product.
and maintain all control over
Advertising.
And that's it.
There is no term length on the contract. And um gosh, there's gotta be something in there about how that one dollar per gallon could change over time, right?
Nope.
No, there is not. So the Coca-Cola company
As long as
This spottler continues to satisfy the demand.
And doesn't violate any of the other terms.
is obligated to keep selling syrup at one dollar per gallon.
Yes.
to the bottler.
Yes. And the bottlers are obligated to keep selling bottles to the public.
At five cents retail cost.
Fascinating. So let it be written.
Obviously there are so many things wrong with this.
But also so many things right with this. This
Let's
The Coca Cola company
Enter.
And scale the bottle business.
completely
Capital and investment free.
They don't have to do anything besides
advertising, which they are already doing.
for their growing national business.
In fact, they're not doing any different advertising. They're just amortizing the cost of the same advertising against
one more touch point that they could have with the customer. They're still painting the same barns. They're still
Putting up the same signs.
Yep.
So Thomas and Whitehead go back.
Up to Chattanooga.
They set up
The Coca Cola Bottling Company.
And they start selling bottled Coke for the first time to
Groceries, stands, and saloons.
As they put it.
Obviously all three of those are pretty big markets.
For Coca-Cola.
Today.
Especially the you know, like groceries and stands, AK gas stations, convenience stores, et cetera, et cetera.
And at this point in history in nineteen hundred, the Coca-Cola company is still just twenty employees.
So they're about to get ridiculous leverage.
On.
Just a handful of people that work at the parent company. And that includes making the syrup.
It's a small head office.
High margin product, baby.
So pretty quickly, two things happen with uh young Thomas and Whitehead here.
One.
They didn't actually know each other very well before going into business together.
They end up getting into a fight.
And splitting into two separate companies.
Remember, the contract is assignable.
They can do whatever they want with it. So they split up.
the territory across America and they say, Great, we're gonna assign the rights we have in this contract with the Coca-Cola company to our two
Separate companies.
And then they both independently decide.
You know
Man, actually owning and operating
these bottling operations and
dealing with the capital investment of both setting up the production lines.
And then
Buying the bottles.
And recycling them and returning them and cleaning them, et cetera. It's a kind of low margin, very upfront capital intensive.
Thing.
To bottle Coca Cola.
And operationally very intensive too, of course.
We've realized we can just assign the rights that we have here. Well, why don't we keep assigning the rights? They start subcontracting out.
Little subterritories.
To other entrepreneurs and small bottling operations across
The country.
And so basically overnight
First dozens.
And then
Hundreds of
Of local
Coca-Cola bottling operations.
pop up in these entrepreneurial endeavors in basically every town and countryside across America.
that have no contractual relationship with the Coca-Cola company.
They have a relationship.
with this quote unquote parent bottler. Either Thomas or Whitehead. Yes.
So
Thomas and Whitehead's companies come to be known as the parent bottlers.
And then all the
Guys doing the actual work.
come to be known as the actual bottlers or the first line bottlers.
This is the ultimate rent seeker. I mean Thomas and Whitehead just have like a little toll booth.
set up in between the Coca-Cola company that owns the intellectual property and makes the syrup and markets it and the bottlers who are actually doing the work. And they're just clipping little coupons as the money flies by on the way.
Over to the bottlers and the Coca-Cola Company.
But hey, Candler and Robinson weren't gonna do this. So like
More power to'em.
Right.
That is the argument here is that there is economic value if from Thomas and White had an actually
spurring bottling to happen at all.
Yes. And
They need to go find the local bottlers and set up these entrepreneurs and teach them how to do it. Eventually they're doing nothing. But in the early days, they're not doing nothing.
That's true. Within ten years they managed to
find four hundred
proprietors of bottling operations, get them to stand it up. And by 1925, there was twelve hundred.
So it is a
Busy, busy twenty five years.
Finding all these.
Child modellers.
So
Basically this creates a
second wave of blitz scaling, if you will, for
The Coca-Cola company across America.
Because they'd already nationally expanded to soda fountains.
But soda fountains are only in
Towns.
Large enough to have a
Soda fountain.
What about all the rural areas of the countryside? Not to mention just the simple market expansion of letting people drink at home or wherever a restaurant's anywhere else.
Huge deal.
The net of this is that within a few years
Basically
Every single man, woman and child.
In the United States.
becomes intimately aware of and familiar with.
Coca-Cola.
And
The company doesn't have to lift a single finger to do it.
Yeah.
This reminds me a lot of our Visa episode where we were talking about the difference between
If your visa and you're scaling as a network of networks.
versus if you're Amex as a closed loop system. And we were talking about how Visa achieved tremendous scale relative to
There are
head office size, their employee headcount, and they did it in a very short period of time.
Coca Cola's sort of in the same thing here where
they can scale so fast because of the bottlers.
where they're not actually having to do all this work themselves.
I don't think Coca Cola is the ubiquitous international product.
that it is today where they just
created and then won the market.
Without this
bottler scale thing.
No, absolutely not.
If they
had taken the AMX approach.
And Kandler had decided, Ah, you know, we're gonna enter the bottling business ourselves and
We're gonna go market by market and invest the capital in the production lines and the bottles.
Absolutely no way.
would they have reached the critical scale that they did.
In the country and then internationally too. They use the same model to go around the world.
Yep.
And Coca Cola would start referring to this as the Coca Cola system.
I don't think we've ever studied a business before that has a system like this where
you can look at the Coca-Cola Company, which is ostensibly what we're doing on this episode, but actually to understand the scale and impact and reach of the product, you sort of have to look at the system holistically, the sum of the Coca-Cola Company and all the bottlers.
The crazy thing is this is still the system today.
Coca-Cola still doesn't bottle. I mean
We can talk about the exceptions to that, but in large part
And their desired end state
Is there's all these bottlers around the world.
That they just sell syrup too.
Yeah.
It's kinda like Microsoft and Intel in the PC.
Era except.
even more closely tied, it'd be like if
Microsoft had contracts with Intel where they got to stipulate
What the processes were gonna look like and what the machines were gonna look like.
It's funny, the thing that it made me think of was uh it's kinda like our Rolex episode where Rolex
You don't want to be in the authorized dealer business. It's operationally expensive, the training's hard, but you do want the control.
over the retail experience and Rolex manage to have their cake and eat it too, like we talk about that on that episode where
They can
Kind of say hey.
It's a privilege.
To be able to sell our watches, and so you're gonna make your store conform to our exact standard. Coca-Cola does the exact same thing with the bottlers, and they say
Hey, you have a license to print money. It's not as much money as we're gonna print, but you can print some money and you know it's gonna be a good business. More than some money.
the local Coca Cola bottlers usually become
The wealthiest family and
Any given town across America.
Very true. But just to
Make sure we're super clear.
Coca-Cola.
versus their bottlers. The Coca-Cola company has higher gross margins, much better returns on invested capital, requires less invested capital. They get to focus on just making syrup and marketing. They don't have to do any of the undifferentiated stuff. You'd much rather be Coca Cola than the bottlers, but it's a good business to be the bottler too.
Especially if you're a small town entrepreneur in you know turn of the century America, like
Hell yeah.
And if the Coca Cola company is gonna dictate terms to me and tell me exactly how red my truck needs to be and that it must say Coca Cola in this particular way and the bottles must come off exactly like this,
That is fine. I will agree to all of this because I know.
I'm gonna make money. Yes.
So
Once.
Things turbocharge with.
the bottlers and scaling across America.
A lot of imitators and copycats.
start popping up trying to
Make another cola drink.
Use the same model.
go to other bottlers or maybe other aspiring entrepreneurs who didn't get the Coca-Cola franchise might want to open a competitive franchise in their local town, et cetera, et cetera.
By the mid nineteen hundreds, there are
Hundreds.
There's a lot of things.
Africola.
Characola.
Carbo Cola.
Coca and Cola, Fig Cola, Caw Cola, King Cola, Standard Cola, on and on and on and on and on.
And by the way.
A cola, like what I'm holding up right now, David, this brown flavored fizzy drink wasn't a thing before Coca-Cola.
Coca-Cola
was insistent that
We aren't the Coca variant of Cola. Coca-Cola is one thing that means our formula, our secret formula, with this mystery merchandise 7X, which is the real crux of the formula.
And there's no other things that
Can be colas because
We created the concept of Coca Cola and we are N of one.
So
In nineteen oh five.
Congress passes.
The Federal Trademark Act.
In the United States.
And they federalize
trademark protection in the country. Previously it was just done state by state.
Which I think is probably how
Coca-Cola trademark the script logo.
Earlier than that, might have just been in Georgia.
Yeah.
Of course.
The Coca Cola Company is one of the first registrants for
Their trademark.
And they start using this new law to sue the crap out of all the competitors out there.
And really winning on these grounds that like cola isn't a category.
You can't be a something cola. It's not a general term. We own.
Coca-Cola as a lock up.
Yes. And they succeed. So
Over the next like fifteen, twenty years, by the mid twenties.
It's estimated that Coca Cola
Sue's and shuts down over seven
Thousand.
Copycat.
Cola brands. In a very, very busy legal department.
And this becomes the next critically important pillar of building Coke.
Only Coke.
is the real thing.
Coke is real.
Everything else.
Is an imitator.
It is a copycat. It should not exist.
Yep.
And there is a famous nineteen twenty case.
That went all the way to the Supreme Court.
There was a company called the Coke Company, K O K E.
That was insisting
Actually, it's worth an aside here to say
At this point in time, Coca Cola.
did not embrace the nickname Coke.
one because of the affiliation with the drug, and we should say by nineteen oh five,
Cocaine is pretty much entirely gone. There's no more
Coke in Coca-Cola.
Yeah, it's actually an amazing story. In nineteen oh three
They contract.
with a company called the Schaefer Alkaloid Works of Maywood, New Jersey.
That has developed a process to de cocainize coca leaves.
And this company, which still exists to today and is still the sole supplier of decocainized coca leaved Coca-Cola today.
is granted a federal exemption
By the US government from the DEA.
They're the only commercial entity in the United States.
That is allowed to import coca leaves.
Because they import it with cocaine in it still, right?
Yes, and then they have a process to take the cocaine out of the coca leaves.
They sell the decocainized coca leaves to Coca Cola.
And I'm pretty sure the way that this ended up happening was the Hoover administration said if federal agents are present on site and can supervise the destruction of the cocaine byproduct,
then you can do this on American soil. You can import the coca leaves, do this, create a giant pile of cocaine.
And then we will watch you destroy it. And that's still how they produce Coca Cola.
Yeah.
Which is also another piece of
Protecting
Coca-Cola.
Nobody else has access to coca leaves. You want that taste?
You ain't gonna get it.
'Cause the coca leaves, as much as the cocaine is gone, the coca leaf is still an important part of the formula.
So anyway, there's this nineteen twenty case.
Yeah.
Coke K O K E
is sort of tongue in cheek saying, What do you mean? You guys aren't saying you're Coke.
So certainly we can be Coke.
And the other point they were making is Coca Cola
You guys can't actually even use your trademark.
It's unprotectable since there's not really much coca in it.
And all the cocaine's been removed, so it's actually misleading.
False advertising. You're misleading the public by saying that you are Coca or Cola. You're not.
And the Supreme Court says uh uh
We are ruling in favor of Coca Cola.
It is a
phrase that has transcended being a descriptive name and it is now just a brand and the official ruling which is the stuff of legend contains this phrase.
Coca Cola.
means a single thing.
Coming from a single source.
and well known to the community.
And that is the new description of what the Coca-Cola
brand is and why it is a trademarkable thing that has nothing to do with coca or cola.
So
This is
The first thing.
Biggest.
front of the war that
Coca-Cola wages on the imitators through
The courts.
It goes to the Supreme Court. To the Supreme Court. Amazing.
The
Second
Most important.
front of the battle against the imitators.
Is the bottle.
So Coca Cola realizes
Hey, we're not actually in the bottling business ourselves.
But we have full control over it.
If we
Really want to drive home to consumers.
That Coca-Cola.
Is the real thing.
And have it be immediately identifiable.
What the real thing is.
We
Actually can force
Are bottlers.
to develop and invest in a proprietary bottle.
That'll become instantly visually known.
To all consumers in America.
And then around the world.
And this results in nineteen sixteen.
In the
Famous.
proprietary bottle that you all know today, the Ben you are drinking out of right now.
The contour bottle, as it is officially called,
Or as it is then known uh in the vernacular the May West bottle. Yes. Because its proportions look uh
Like the famous actress May West.
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Okay.
David.
So the bottle. The May West bottle. So in nineteen twelve, the Coca-Cola Bottling Company sent a note to all of its members
That
Coca-Cola Company has this great distinctive logo. It's highly protected in the courts.
We've got the trademark on it.
But
We don't have a way to protect
Our business.
as the bottlers.
So the proposal is that the members all join together to create a distinctip for the products.
And so in April of nineteen fifteen, trustees of Coca-Cola Bottling Association vote
to develop such a distinctive bottle.
Yes, and this is great.
At the
convention of the bottlers where I think they approved this.
The Coca Cola Company's head of legal, a guy named Howard Hirsch.
Who is
Doing all these lawsuits of the imitators across the country.
He
comes with the mission of trying to convince
These bottlers that we're going to do.
Spending this great capital expenditure is gonna be in their interest.
And this is what he says to them.
We are not building Coca-Cola alone for today.
We are building Coca-Cola forever.
And it is our hope that Coca-Cola will remain the national drink.
To the end of time.
The heads of your companies are doing everything in their power at considerable expense.
to bring about a bottom we can adopt and call our own child.
And when that bottle is adopted, I ask each and every member of this convention
To not consider the immediate expense that would be involved with changing your bottle, but to remember this, that in bringing about that bottle,
The parent companies
are bringing about an establishment of your own rights. It's exactly what you're saying, Ben. Wow. Isn't that amazing? What an orator. Help us help you.
Wow.
So they create this design brief and they send it around to ten different glass companies around the country.
That says
We want to develop a bottle so distinct
that you would recognize it by feel in the dark.
Or lying broken on the ground.
So simple.
Like what do you really want?
the product to be.
And so the root glass company of Terry Haute, Indiana.
designs the bottle that goes on to win the contest.
You all know what it looks like, the contour bottle.
Interestingly.
So it's got this sort of wide top and then sort of a as one of the books put it, a snatched waste, which is why they call it the May West bottle.
It's this
Georgia green color. That's right.
But hilariously, the first version of it was actually much more round.
Yeah, it was almost like a cartoon version of the bottle today. And you might wonder why this sort of like striated, striped, super round.
Pod
Something got lost in translation.
And
The bottle was designed
to look like the cocoa plant.
The cocoa pod that you smash open to get out cocoa beans.
This is a whole different thing called the Coca plant, not the cocoa plant. C O C A versus C O C O A. Yeah. I read about this too.
But
Ultimately, it satisfied the design brief. You definitely recognize it. It's super distinct. It's kind of beautiful with the sort of rounded
We'll put it in the email.
All based on a misinterpretation of what the plant actually is.
But very distinctive.
Ultimately, in nineteen fifteen, the patent for the contour bottle gets granted. Actually, not
referencing Coca Cola at all because they wanted the whole thing to be a surprise when it hits the market.
They would then this is some classic Coca-Cola lawyering.
get additional patents for iterations on the design.
that effectively renew the patent all the way from nineteen fifteen.
Until the final one expired in nineteen fifty one.
The company then went to the patent office and
And made the case that the bottle shape was so distinctive and so well known in 1951 that it should be granted trademark status, which they got.
It is highly unusual for packaging to be granted a trademark and their rationale was look, in nineteen forty nine, we conducted a study that showed that less than one percent of Americans
Could not identify
The bottom of Coke by shape alone.
It's an integral part of the product of the brief. Yes. There you go. Talk about a successful accomplishment of that creative brief.
That all those years later
Ninety nine percent of America could look at it and say, That's a Coke bottle.
Amazing.
So
By the next year, one year after.
Everybody
In the
Extended Coca-Cola family.
System.
is prospering.
And
Nobody more so than the Coca-Cola Company.
At the top.
Yes. And they had gotten a variety of monkeys off their back at this point. The cocaine is gone.
They've really started defending the trademark. They've got this bottling.
They had another issue where there was a federal regulator who thought caffeine was evil, so they appeased him by cutting the caffeine content down by two thirds.
Yep.
And by this point in time.
The Coca-Cola brand and what it stands for in the beverage. Delicious, refreshing. It's such a
Integral part of America.
That
Taking out the cocaine, cutting the caffeine by two thirds or by three quarters.
doesn't really impact things. The country is still hooked on Coca Cola. In fact, it probably helps. It probably helps, yes.
Makes it more of a wholesome beverage.
It makes it so you can consume a lot more Coca Cola.
Okay.
So nineteen sixteen.
Everybody's doing great. Nobody's doing better than the Coca Cola Company.
Asa Handler.
is a big man about town in Atlanta, probably the most important person in town.
So much so
that a group of other Atlanta citizens
Convince him to run for mayor.

Which he does.
And he wins.
And becomes the mayor of Atlanta.
In nineteen sixteen.
And so he retires from Coca Cola and gives
His Coke shares.
To all of his children.
And then a couple of years later, in nineteen nineteen.
A local banker named Ernest Woodruff
Puts together an investor syndicate.
and basically stages a takeover of the company.
And buy is out.
The family members.
For twenty five million dollars.
This also effectively serves as the IPO of the company.
Because it's a
syndicate of investors and shares start trading hands and the company becomes publicly traded.
And uh certainly they didn't need to raise capital by going public. Right.
And it was a complicated little period'cause some of the kids did
wanna have this happen, other ones didn't want to have it happen. There's sort of family infighting.
But ultimately.
After a few years.
Ernest Woodruff and his syndicate of investors do own and control the company.
In fact
There was some clever financial engineering that had to happen
Two
by this company, like twenty five million dollars in nineteen nineteen is a huge amount of money.
And so as a result
This is actually the first time the secret formula for Coca-Cola gets written down.
It had been sort of this cool secret before.
But as collateral for the loan.
that Woodruff took out to complete this transaction.
They wrote down the formula and placed it in a vault at the guarantee bank of New York.
Mm. Cause that's where they got the capital from. And that's so they get to hold the formula as collateral.
Prior to this
It had always been verbal.
The system Asa Candler set up was insane.
So this is from the book Secret Formula about
Asa and his son Howard Candler.
Asa made his son memorize the contents of the various containers that were stored carefully in a locked room with their labels peeled or scratched off.
For days with his father standing watch over his shoulder.
Howard practiced making the ultra secret flavoring compound.
Merchandise number seven X.
Learning to recognize the pungent fruit and vegetable oils.
By sight.
smell, and remembering each was put on the shelf when it came in from the supplier, until he knew by heart
The proper amounts and the exact
Order.
in which to mix them.
This is crazy.
The way in which this giant mass produced thing
Is
Created
It's like only stored, I believe, in two people's head.
At any given time.
And they deliberately kept this a trade secret and didn't patent it.
Because if you patent something eventually it does become the
property of the public and anyone can use it to further innovate.
But Coca Cola has
Kept this secret all these years. Yeah. And it's still part of the lore at the company to this day that oh there's two people that know the formula and they can't travel together.
Well.
The formula is out there, like you can find it on the internet.
Really? The Coca Cola Company would maintain that is absolutely not true.
Well, the original formula is out I'm it's in the appendix of Forgot Country and Coca Cola.
Which I think they also maintain is not the right formula.
I mean, I would swear up and down too, but
Yes.
This is like the best example ever, though, of someone electing to use a trade secret instead of a patent and then
creating all this lore and secrecy and myth.
Around it, but for six years.
As collateral.
the first written version of the formula was
in the guarantee bank of New York vault.
So
Ernest when he takes over.
He's a banker.
He's an investor. This is like a crown jewel investment that he could
Get his hands on in Atlanta.
He doesn't
really have any interest in running it. So
The company plods along for a couple of years with the existing management team.
Ernest really doesn't like this perpetual contracting with the parent bombers. He's like, What are you two guys doing? I as far as I can tell, you're not doing anything. He tries to get rid of that. This leads to all sorts of lawsuits.
The parent bottlers when Ernest is frustrated.
Finally.
In nineteen twenty three.
He's had enough.
He decides that
He's gonna recruit a new company president to come in. This is just four years.
After he buys it.
And almost
Against
His will.
He has to consider
His son.
Robert.
As a candidate.
And Ernest barely approves of this wayward son.
Robert.
Who is this Robert Woodruff character?
He's the protagonist of this story.
I mean for all the John Pemberton lore and all the Asa Candler lore.
Coca-Cola.
As we know it today.
is Robert Woodruff's Coca-Cola.
The boss as he would come to be known.
Yes.
So
Robert
Is thirty three.
At this point in time, he has left Atlanta to seek his fortune away from his father's influence.
And he has become the vice president of the White Motor Company.
In Ohio, in Cleveland, Ohio.
Yep.
Which I
think was one of if not the largest
truck manufacturer in the US at the time.
Yeah.
And
Robert.
Is a star there.
He's widely regarded as one of the most
talented young executives in
New burgeoning corporate America here in the twenties.
He's best friends with the major league baseball star Ty Cobb. They go hunting together.
He's like a man about town.
And
Standard oil of New Jersey.
Is trying to hire him.
As an air parent to come in and
Potentially be the next CEO of Standard Oil of New Jersey.
And David, do you know?
what standard oil of New Jersey is today.
Uh SO, right?
Exxon. It's Exxon Mobile. Oh, Exxon. That's right. That's right. Yeah. I can never keep track of which breakup company became which
So yeah, there's an alternative future where instead of CEO of Coke
Barbara Woodjeff became CO of Exxon. Exxon, yeah.
And
Robert.
through his own devices, again almost against his father's will, had been an original investor in the syndicate that bought out Coke from.
The Candlers.
So
The board of Coke makes Ernest consider his son. Ernest finally says
All right, fine.
His first offer to Robert.
To come.
Be the new president of Coca Cola.
Is a salary less than half of what he's making at White Motor Company. Robert rejects that. They negotiate back and forth. And finally,
They reach a deal.
With Robert saying one condition that I absolutely must have is
Is you dad, you are out.
You are gonna fully exit the business.
Everything gets handed over to me.
And I am gonna have full control and run this company.
Ernest is frustrated enough, he says, Okay.
So in nineteen twenty three, Robert takes over as president
Of the Coca Cola.
company becoming the youngest president of any major corporation in America.
At that time.
He
would run the company for the next thirty two years as president.
And then control the company as chairman of the board for another thirty years after that until
His death in NT eighty five.
Wild.
So
One of the first moves that Robert makes when he comes in.
Is to become close
with the head adman

A firm in St. Louis called the Darcy Ad Agency.
And Coca-Cola's
Main
Creative account man there.
It's a guy named Archie Lee.
Le
had already created a hit slogan for Coca Cola in Christmas of nineteen twenty two with his Thirst Knows No Season campaign, which is you know a great
Phrase with a great ring to it.
But what's particularly good.
Because
Coke had a legacy of primarily being enjoyed in the summer.
Yeah, you drink it in the
Ha.
southern summers of Georgia. Yeah. So they're like wintertime is a big opportunity for us. And this was part of moving in on Christmas. More to come on Christmas in a sec.
And together.
Archie Lee
I'm Robert Woodruff.
Make
A pretty massive
Leap forward for Coca-Cola.
advertising.
And it's really the last critical piece of the brand.
They
Embrace.
Maybe I might even say
Create.
Lifestyle advertising.
This is everything that we talked about in the Rolex episode.
But that was much later when Rolex did that in the fifties and sixties.
This is in the
Nineteen twenties.
Coca-Cola is inventing
This idea.
That through advertising
We can associate our products
With feelings.
Oh yes.
This is the sort of opposite of the intrinsic advertising that we were talking about earlier. This is extrinsic advertising. Advertising that
really has nothing to do with the features of the product. It's about the life you will live if you associate with our brand.
Yes.
Coca-Cola isn't a
carbonated, sweetened soft drink with unique flavor manufactured by the Coca-Cola Company.
Coca-Cola is.
Happiness.
Coca-Cola is friendship. It's romance. It brings you closer with the people you love.
Coca Cola is summertime.
Coca Cola is holidays. Coca Cola is
Christmas.
And whether you are in America or not in America, Coca Cola.
is America.
Yes.
And boy, do the two of them just turn out some
Bangers.
So
Right.
Eliminates.
Basically
All verbiage from
Coca-Cola advertising.
Except for
One simple slogan.
So
This is radical. Think back to
Those original ad copies that we were reading a minute ago. So many words.
In this day and age in the twenties, there's so many words. Everything is so descriptive.
In nineteen twenty three, when Robert takes the helm of the company.
They come out with.
Coca-Cola
Always delightful.
Period.
Four words. That's the campaign.
The next year in nineteen twenty four.
They better.
Refresh yourself.
That's it. You don't need to say anything more. And that was
Simplified from
Archie Lee's original idea for the theme that year.
Pause and refresh yourself.
He would uh come back to that a couple years later.
In nineteen twenty nine.
With the Grand Slam.
Mother of them all.
The pause.
That refreshes.
Coca-Cola.
Which is so funny'cause I know this is the winner.
The pause that refreshes is the most successful campaign of this era.
I actually didn't hear about that at all.
until doing this research.
I associate
All these other campaigns.
Delicious refreshing.
Or
Always delightful.
But God did that take off.
I mean this idea that
In your life, you just need a pause.
And everybody experiences that problem of needing a pause, and we are the thing.
that you do during that pause.
Yeah, genius. But by today's standards of language, it's a little bit cluey, I think.
I think there was a element of the context of the time. That came out in nineteen twenty nine.
Same year as the stock market crash. And so all through the thirties of the depression, this idea that Coke
is a pause away from the harsh realities of your day to day existence in the depression.
A simple luxury that you can
take a pause and refresh with for only five cents.
when everything around you is, you know, going to shit.
I think it really resonated.
Yeah.
So the slogans are
Revolutionary.
Cutting out all the verbiage, all the descriptive language.
The other
Half of what
Archie Lee and Bob Woodruff do
With the brand.
Is the imagery.
So
Lee goes out and he contracts with
All these famous American artists and illustrators of the day
To create these like
American lifestyle tableau's for the
visu aspects of the cocads.
Yeah.
It should be like a Coca-Cola advertisement.
That's as
Idyllic as a Norman Rockwell painting, you might say. Yes because they actually go get Norman Rockwell.
Along with N C Wyatt and Haddon Sunbloom and like some of the greatest American artists of the day.
to create what you think of as the idyllic Americana family life.
It's all
coming out of the Coca-Cola Ad department.
And they're partnering with the
most looked up to athletes and celebrities, you know, these athletes promoting health that must be
part of why they're so great at athletics.
They have Cary Grant, Gene Harlow, just
Associating with wholesomeness in Americana.
Archie Lee would describe
the function of the imagery.
Yeah.
Says the idea in an illustration must hit the viewer like a shot.
It ought to force the exclamation from them. What a peach of an idea.
Not only that, but they must remember that it was Coca-Cola.
That was refreshing and good to drink in the image.
And so he and the Darcy agency come up with a list of commandments for the Coca-Cola account.
Some of them are.
Never split.
The trademark Coca-Cola.
On two lines.
Coca-Cola must always be together on one line.
The circular sign should always carry the phrase delicious and refreshing.
You should never refer to Coca Cola as it
Is not an impersonal pronoun, it is Coca Cola.
And you should never use Coca Cola in the personal sense, such as Coca Cola invites you to lunch.
Coca-Cola invites you to enjoy.
Coca-Cola is above that.
The other thing that happens in this era is billboards. By nineteen thirty, there are now twenty nine million cars on the road. So billboards sort of became this really valuable way to
promote the brand and lifestyle of Coca-Cola.
And Woodruff his lieutenants
would often go around saying that
What Woodruff wants to do is make Coca-Cola the most American thing in America. Well, speaking of the most American of things, how about the uh commercialization of Christmas?
And uh Santa Claus. Because in nineteen thirty one
Lee and Woodruff and the Coca-Cola crew.
Create
What I
Think
is unquestionably the greatest
lifestyle advertising.
success in human history.
Where they manage
To associate
Santa Claus.
With Coca Cola.
It's amazing and really bring the modern Santa Claus into existence, period.
They sort of standardized
the concept of Santa, the one that we see today
Is pretty much Coca-Cola Santa. Yes. Okay. So what happens?
Coke does not invent Santa as a you know common urban legend. Right. First let's bust that myth.
The concept of Santa Claus existed long before nineteen thirty one in Koch.
The uh
Famous Night Before Christmas poem was written in eighteen twenty three, so it's been around for a long time.
And of course there was Saint Nicholas goes back.
Many, many hundreds of years. And there was a very popular Santa, which was Thomas Nast's Santa.
who is this sort of shorter elf like Santa. We'll link to it in the email that is
On its way to becoming Santa, but is not the
Big, smiley, approachable, sort of red faced cheery deep.
Jolly Santa. Big fat dude. Yeah. Yeah. Yeah. I mean, that's the thing. You do you read the night before Christmas poem. Santa's an elf. He's little. Yes.
Or he was before Coca Cola.
So
Ninete one.
Coke commissions the artist hadn't sunbloom.
To create Christmas ad imagery for Coca-Cola.
Featuring.
Santa Claus.
And so this being a Coke ad, Sun Bloom is like
Well
And Coca Cola red. And then I'm going to make him as
Big as possible to get as much Coca-Cola red.
In
The picture.
So he creates
The first
of his Coca-Cola Santa
Campaigns.
That he would make for the next
Thirty three years until nineteen.
Sixty four.
And it debuts
At Christmas time in a full color
Advertisement.
In the Saturday evening post.
And people
Absolutely.
Love it.
You gotta remember this is nineteen thirty one. So this is before television.
And
Magazines had only just started
to be commonly printed in color.
So
Before this point in time,
You couldn't really
Yeah.
mass produced color images.
Oh.

So Santa didn't have a color. Like nobody really thought about what color.
Santa was. That's right,'cause sometimes Santa was red, sometimes Santa was green. Yep, blue, yellow.
The point is there was no standardization.
All of a sudden now, Coke's got this huge industrial
Imagery machine of
Not only advertisements in the Saturday Post, but
All the billboards and the signs and the point of sale merchandise, et cetera, et cetera, et cetera.
And they're just plastering America.
With this big, beautiful

Santa.
Which is funny because Pepsi also did do some Santa illustrations
But
Coke kinda ran away with it and it became clear pretty early Coke is just gonna own Santa.
Yeah.
David, do you know who hadn't Sunblom?
Also created.
Or uh created the most famous illustration of
I don't, I should know.
There's two.
One is Quaker Oats.
The Quaker Oates Man. Oh yes, I did read that. Which interestingly is owned by Pepsi today.
Oh, we will get into Quaker Oates.
And the other is Aunt Jemima.
Aha, I did not know that.
As discussed on our Mars episode.
And this was really the nail in the coffin for coke being a summer drink.
I've heard that the most Coke is now sold.
during the holidays, which is amazing since it was a refreshing thing served. For the hot Atlanta summers, yeah.
Unbelievable.
They also during this time period get into partnerships.
Big giant landmark brand partnerships.
The first of which is
The Olympics.
Coca Cola was a sponsor of the nineteen twenty eight Olympics in Amsterdam.
Which makes them the longest running Olympic sponsor.
And at the LA twenty eight games.
That will make one hundred years.
of Coca-Cola partnering with the Olympics.
Yeah, I was gonna say the nineteen twenty eight games in Amsterdam
Were there any other sponsors? Like the Olympics probably weren't a commercial thing yet.
I think that's right.
I think it was really innovative.
Yeah, man, no Coca-Cola, no visa. Right. And this predates all the stuff that Coca-Cola did with the World's Fair and with World Cup and with all these other big sort of global brand stage events.
Mm, interesting.
The other big pillar in the ground that Woodruff puts in in these first 10 years is around standardization.
This is when he really throws his arms up and says, We're gonna stop changing the formula.
And my understanding is from that point on
And
Nineteen twenty ish all the way until nineteen eighty five.
There was
No changes to the Coca Cola formula. Woodruff's Coca Cola
Was
that sixty five year unchanged formula.
Oh geez, what happened in nineteen eighty five besides Robert Woodruff dying, which is directly related to what else happened in nineteen eighty five? We will get there.
But it's this notion of everything should be standardized. It should be the formula, it should be the marketing, it should be the packaging. They were already
in this ballpark, but it was his idea that wherever you are when you reach for a Coke, it should
feel the same, it should taste the same, it should have the same temperature. And so the spiritual thing that he does to sort of illustrate this is he goes
to the bank in New York and says we are
repaying the loan. We are taking our formula, the canonical one of one formula, and we are moving it to our bank, the trust company bank in Atlanta, which would become Sun Trust.
And it would sit there for the next eighty six years.
Mm. And is now in uh world of Coca Cola, right?
Yes.
And the reason it is there is
They made this whole big parade of we're taking it out of the bank and we're putting it in world of Coca-Cola.
Theme park, for lack of a better phrase. The Coca Cola version of Hershey Park.
Yes.
That is a vault that is very meant to be gazed upon.
Because when they did move it there about a decade and a half ago
They kinda realized
For a long time to many generations, we made a big deal of we have this secret formula.
And you need to know about it. We're gonna be really loud about it, but it's super secret, so you can't see it.
And that worked and it really lived in the public's consciousness.
And it had sort of fallen out.
It was an effort in twenty eleven.
to kind of shake the public and especially the younger generations and say we are Coca-Cola and we have the one secret formula and we want to bring it back to your attention that we have something that is super secret and worth protecting.
The other thing Woodruff does in these early years is he creates the company's first statistical department to do market research and to study the business and customers sort of quantitatively.
They realized that by this point
They've basically
saturated the market of every man, woman, child in America. Population growth is only going to get them
So far in terms of growth of the business.
So what they need to do.
is they need to find ways for existing
Coca-Cola drinkers.
To access and drink Coca-Cola.
More often.
Remember, what was Woodruff doing
Before he negotiated with his dad to come.
Coca-Cola.
He was
At the white.
motor company and he was being recruited.
By Standard Oil of New Jersey, he's like, Guys
We need to get Coca Cola into gas stations. So
He decrees that gas stations is the next major
Growth opportunity.
For the company.
We need to take that opportunity to put a coke in their hands.
So
The contract out
A design.
For a cooler.
'Cause if you're gonna keep cokes.
Ice cold at thirty four degrees.
In gas stations, they need to be in a cooler.
They get a company to manufacture it.
And they go.
Around the country.
And install thirty two thousand Coca-Cola coolers.
in gas stations around the country just in the first year.
And giant signs, right, that say Coca-Cola sold here. Or drink Coca-Cola or Coca-Cola always refreshing.
Yep.
In the gas stations.
This is the precursor to coin operated
vending machines, which they introduce in nineteen thirty seven, and Coke is the first
company to do that.
And someone told me in the research
That
The gas station owners absolutely loved this because A, the signs
Told people you can come get a Coke here, which was a value proposition for people. But B, just like we're talking about, there's so much margin to go around being the retailer.
Of soft drinks.
Especially at this time.
That
They were making more money on Coke than gas.
Yeah.
So of course you want this. The gas is a pure commodity. You're selling against other gas stations in the area. This is where you can actually make some real margin dollars.
Totally. You don't make money on the gas, you make money on the convenience store. Starting with Coke.
So
The other
big change in operations that
Robert brings to the company.
Is the relationship with the bottlers.
This is part of his standardization push.
A whole bunch of bottleries are great.
And a whole bunch are not. You know, there's twelve hundred independent businesses out there.
And so he goes around and at first he starts trying to like
bully and intimidate the
Shall we say less standardized.
bottlers into, you know, meeting his
Maniacal quality standards.
After a while he realizes, Wait a minute.
Why am I wasting my time?
trying to convince these small town entrepreneurs to do what I want. I'll just buy'em out.
And so
He changes course for the Coca Cola Company and says
I'm now willing to buy and own and operate bottlers. Oh not because I want to.
But as a way to like
for standardization and clean up.
Underperforming bottlers.
I'll buy him out.
fix them up and then I'll resell them to local entrepreneurs. I didn't realize that started that early.
Yeah, he started that in the twenties.
Mile.
He also realizes Wait a minute.
This
bottling franchising operation works pretty well here in America.
Pretty sure we can do it overseas too.
So during the twenties and thirties.
He goes to Europe, he goes to South America.
Starts.
Setting up.
international bottlers there.
Same model, local entrepreneurs, locally owned businesses.
With every incentive in the world to push.
Coca-Cola.
Yep.
Now
There is still that one term of the deal.
That was
We will always sell.
a gallon for a dollar.
That starts to become problematic with inflation.
You want the ability to
change the price at some point over several decades.
And so
It's pretty interesting to think about
the two sides of the coin.
of having to sell it.
Uh
One dollar.
in perpetuity.
The con is obviously
Well, inflation's gonna happen and so our margins are gonna get squeezed.
Where it's just gonna cost more and more and more to make Coca Cola.
the bet that they basically were making is
Well
Since we can't raise prices at all.
We need to scale.
To amoritize all of our fixed costs and get
greater and greater economies of scale on manufacturing.
And so it sort of forced them into this massive scale mentality that they were already sort of in. They wanted to be the one Coca-Cola for the world.
But
this really backed him into that strategy as you don't have another strategy.
your economies of scale in manufacturing need to outpace
inflation, so get going.
Yeah.
And
The flip side of it is it was also in the contract.
That the bottlers
Had to sell
to retailers at the enforced retail price of five cents a coat. Right.
And as we get into the depression, that becomes
A huge lever.
Against
Potential.
Competitors.
Mm, how's that?
Because all the other competitors who were at much smaller scale than Coke are
As the depression hits and inflation starts running rampant.
They need to raise their prices.
But here's Coke, which is
Arguably a superior product. It's certainly superior in that its brand recognition is
much wider than any competing cola.
And
Coke is cheaper. So it's this amazing leverage that they have over the market.
So between the
Trademark litigation.
The proprietary bottle.
And now the pricing power across the market.
Coke is just steamrolling.
All existing and potential.
competition out there. Which is so funny you say pricing power.
'Cause it's not more expensive. In fact, it's most often far less expensive than the competition.
Mm.
Yes, but I think the competition was having to hit the nickel price to try and compete with Coke and their margins because they were subscribed would be much, much, much worse. Yep. Coke can be profitable at way lower.
And consumer prices.
than the other subscale companies.
Yes.
It's like they actually have pricing power that they're not using.
Yes, they have latent pricing power.
It's like more strategic to them to not raise prices.
Yes.
So
Not good news for
Any competitors out there.
Basically all except for a small handful get steamrolled.
Except for one.
Pepsi.
Which amazingly started.
Way back when Coca-Cola started.
Yep.
Eighteen ninety four.
And for many years it was just
One of the other colas out there, you know, would be competitors. Actually, I had no idea about this till during the research.
Pepsi tried to sell itself.
to Coca-Cola, like sell its operations to Coca-Cola three separate times.
Over the years.
Three? I didn't know that.
Three times.
Wow.
And
Coca Cola, you know, the various owners over the years.
Turned it down.
Three times.
Amazing.
Until
The depression.
And that is what changes.
Pepsies.
Fortunes.
So
Coke, like we've just been saying, is selling for a nickel and it's
Super hard for anybody else to match it.
But they had
One
Weak spot.
That they didn't quite think through.
And it was actually
The proprietary
May West contour bottle.
It was six and a half ounces.
That's not a lot of drink in that bottle, especially by today's standards.
It's smaller than a mini can. I think the mini cans are seven and a half ounces today.
Let's see, I got one right here.
The mini can's very popular today.
That's been a shift.
Seven and a half. Yeah. It's crazy. The original bottles were smaller than this. Six and a half ounces. Very small.
So even though they were a nickel, you weren't getting a lot of
refreshment in that bottle.
In nineteen thirty four.
Pepsi.
And
Almost a last ditch effort to try and just do something to stay alive and
Save the company.
Tests.
Using recycled beer bottles.
Which are twelve ounce bottles to sell
Pepsi.
Also
For a nickel. And when you say save the company, just before you go on, this is not new to Pepsi.
The Pepsi
That
exist today.
is like four Pepsi later.
From the Pepsi that was started around the same time Coca Cola was. Coca Cola's been approximately one company all the way through. Pepsi's been bankrupt.
Two, three times and sold the new owners and completely
new company started with the word Pepsi in it, this has been a rocky road for them.
Yes.
But this
Is when it's fortune's turn.
So nineteen thirty four.
They start selling
Pepsi in twelve ounce recycled.
Beer bottles.
Now they still have the same
pricing pressure, you know, and margin pressure.
From Coke.
selling it a nickel. But it turns out if you look at the unit drivers of margins.
On beverages.
Oh, there's two expenses. There's sugar and there's the bottle, and then everything else is approximately free.
So the amount of liquid in the bottle
Like you said, Ben, is approximately free. Whether you're serving six ounces of liquid per bottle or twelve ounces of liquid per bottle, or later sixty four ounces of liquid per bottle.
Yeah. Not gonna impact your margins that much.
And hey, oh, by the way, there's a lot of existing twelve ounce beer bottles out there.
That we can buy up super cheap.
And put our Pepsi in.
Pepsi starts selling
Twelve ounce.
Bottles.
Also for a nickel.
Their cost structure just declined'cause they can get the recycled beer bottles.
didn't impact their margins by putting more liquid in there.
And now they've got a really compelling
consumer value proposition during the depression.
twice as much cola for the same price.
Yep.
And that is the first
Real.
punch that anyone's been able to land on Coca-Cola.
Yep.
This is
Textbook counter positioning.
Coca-Cola cannot respond.
Because
They and their bottlers have just invested all of this capital and all of this IP.
Into the six and a half.
ounce.
Contour bottle.
They can't react.
Yeah.
Genius.
Truly genius. I mean it was like back against the wall genius, but genius.
Now it doesn't do much for Pepsi's brand. They're very obviously saying like pick us because of quantity, not because we are the more delicious or better or more prestigious beverage.
And I think this decision, while it kept them alive.
Was
sort of a hangover that they would have for the next eighty years.
of this like yeah write as good. We're not
Yeah.
We're also here and you can get a lot of us for cheap.
Well are they the best flavor or are they not? Well we'll come back to that. Well that's all subjective. There's a discount promise to the brand.
Yes. Which in nineteen thirty four
It's kinda all that matters.
With consumers. Went over real well. Yeah.
So Coke can't fight them on the amount of liquid in the bottle'cause they're locked into the six and a half ounce. And they don't want to cheapen their brand.
So instead.
They pull out another uh, you know, arrow in their quiver to fire against competitors.
They sue Pepsi for
Trademark infringement.
Pepsi Cola. You can't use the word cola. We have trademarked.
The word call up.
So in this court process.
The president of Pepsi at the time, a guy named Walter Mack.
ends up discovering
Yeah.
Coca-Cola
had illegally
Bribed.
And intimidated.
another Cola competitor out there.
into shutting down.
They paid a bribe.
to the company owner.
To just shut down.
Rather than
Going through a litigation.
Mack.
brings this evidence to the court.
Where Coca Cola is suing Pepsi for trademark infringement.
Bob Woodruff immediately calls him up.
And request a meeting.
Bob comes up to New York, sits down with Mac.
And he's like
Hey.
This is all a big misunderstanding.
I don't know anything about this, but you know what?
Why don't we just
Settle.
All of this trademark stuff.
You can
Still use the word cola? Is that what he's offering him?
Yeah. The outcome of this is that Pepsi Cola
becomes
The only
co competitor that is allowed to use the word cola legally at this point in time.
Which
destroys any precedent of Coca-Cola protecting Cola. It means they are forever
giving up their argument in the courts.
that we own cola as a part of our trademark.
Woodriff.
Apparently, uh despite this conciliation.
hadn't learned his lesson and was still not above trying to bribe his competitors. He tries to bribe Mac by saying like
You know, do you really want to be running this Pepsi thing?
I'm still great buddies with the white motor folks.
I think you would make a great president of White Motors.
I would really love to recommend you for that job. Walter Mack's like
Absolutely not. I'm giving Pepsi thank you for settling the trademark litigation. And doesn't Coca Cola's general counsel quit over this too? Yes. Yes, that's right. I think the idea is like, come on, we gotta fight this. We we can't just like be giving up our trademarks.
Yes.
But Woodruff.
This is one of the few times where I feel like he
Put an idealistic
approach aside and said, We gotta be pragmatic here. We've got to settle with these guys.
So the result of this is that Pepsi becomes Coke's
First.
Real.
Legitimate.
Competitor.
And by August nineteen forty one, so it's that six, seven years later.
Cola's that are not
Coca-Cola.
have fourteen percent
Of the US soft drink market share.
The majority of which is
Pepsi.
Hm.
It's a major chick in the arm. It's basically a hundred percent.
Coke.
Before
This happened and Pepsi
Establishes
A pretty meaningful.
Foothold.
Yep.
So
You know, on the one hand.
This is a real uh
bad thing for the Coca Cola company.
They went from having
Essentially a monopoly on the market to
Letting a real legitimate competitor get established.
In the US.
But
A really, really good thing.
is also about to happen to the Coca Cola company.
That makes
The US market itself
One of many.
Shall we say.
And that
Is World War Two?
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Okay, David. World War Two. All right.
Gee, how did Coke end up
All over the world.
Hm.
So
Remember we said a minute ago that Woodruff had set up
international bottlers in the twenties and thirties, before World War Two.
But none of it was very big yet.
By the time America enters World War Two in nineteen forty one
Coke at this point has already been around for
Fifty five years.
And has already established itself as like a quintessential part of America.
So the military and the US government realize
Hey.
Coke may actually be one of America's
best weapons in this war. I mean
One
It's a symbol of home and something for the troops morale that they can keep fighting for abroad all across the world.
And two.
What greater symbol of American prosperity
to bring and plant seeds of all around the world.
than Coca Cola. It's our perfect, you know, cultural ambassador product here.
Yeah, whether the rest of the world looked at it that way, T V D, but I'm sure the US government looked at it as like a great ambassador of our values.
And however people around the world thought at the time
One way or another they ended up drinking Coca Cola.
Yeah.
So
First.
At the outset of the war.
The US introduces sugar rationing.
Coca Cola immediately lobbies the government for an exemption.
And they produce supporting evidence like this letter from a military supply officer.
Very few people have ever stopped to consider the great part that Coca Cola plays in the building and maintaining of morale among military personnel.
Frankly speaking,
We would be at a loss to find anything as satisfying and refreshing a beverage to replace Coca-Cola.
In our opinion, Coca Cola could be classified as one of the essential
Morale building products for the boys.
In the service.
Which is interesting'cause what Coke doesn't win is an exemption on the sugar rationing. What they do win is
they get to supply
Coca-Cola free of rations to the military.
And they just get to take a really broad lens on what to the military means.
I believe
The way it ends up
Coming down.
Is technically yes what you said, Ben.
But it applies to
Any bottler.
That serves
Retailers.
That are located near a military base. Regardless of whether that bottler also serves civilian customers. So for large portions of the US.
Yeah, they can still get full sugar Coca Cola during the war.
Wow.
None of
Coca-Cola's competitors, including Pepsi, get anything like this.
basically saying, Hey, you can't just say this supplier gets an exemption by name. You have to say like
Cola's do.
And the response back from the government was basically like, sorry, Coca-Cola is about as American as it gets, and that's what we need right now. And that's what our
Our boys are requesting.
Includ soon to be President Eisenhower. Oh yeah, he's a Coke man.
So
The military.
Under Eisenhower.
Grants.
Coca-Cola employees
Quote unquote.
Technical observer status.
Meaning that they can participate in the supply and infrastructure build out.

Just the same as military infrastructure people. This is unbelievable.
So as the American military is like
Advancing
In the global theater all around the world.
Coca-Cola is right there with them, setting up bottling plants and production lines.
To supply the troops.
And documenting the absolute crap out of it to use in their advertising.
Yes.
So
Robert Woodruff, nineteen forty one, comes right out and pledges
That
Anywhere where an American soldier is fighting the war.
they will be able to get a Coca-Cola.
And they'll be able to get that for five cents.
Yep.
Unbelievable quotes from
American G. I's during the war that are in For God Country and Coca-Cola.
There's two of them I picked out here.
One.
I always thought was a wonderful drink.
But on an island where few Americans have ever set foot, it is a godsend. I can truthfully say that I haven't seen smiles spread over a bunch of boys' faces as they did.
When they saw Coca-Cola in this God forsaken place.
Wow.
And then
If anyone were to ask us what we are fighting for.
We think half of us would answer the right to buy Coca Cola again. These are actual quotes from letters from American GIs during the war.
It's unbelievable.
And supply them they did nineteen forty one to nineteen forty five, sixty four portable bottling plants.
Were sent to Asia, Europe, and North Africa.
And the best estimates are that more than five billion bottles were distributed to troops during the war.
Wow, I saw an estimate that it was ten billion.
Wow.
Which, of course.
The US government loves
Just as much as it loved it during the war because
What better symbol of America to have
left behind in all these countries around the world in Coca Cola.
Yep. So Coca Cola internally.
Ends up.
Calling
The war effort.
Quote the greatest sampling program in the history of the world.
And they asked him
That the war effort
opened up markets abroad for Coca-Cola that otherwise would have taken twenty five years.
And untold millions of dollars of investment.
To open.
Wow.
To say it accelerated Koch's international roll out is like understatement of the century.
That's international, but then back home it really cemented Coke as
This is apple pie in a bottle.
all the servicemen coming home, Coke was the treat that you could get.
when you were at war, you better believe they're Coke drinkers for life now. They're not switching brands.
So after the war in nineteen fifty
A third of Koch's profits.
are already coming from abroad.
From all these that they got set up.
And
Time Magazine features
Coca-Cola
On the cover of Time magazine. Have you seen this? Oh, wasn't it the first product ever?
On the cover of the magazine.
It might I'm not sure about that, but have you seen what the image is? No.
It's a painting, like an oil painting.
Of an anthropomorphized
red Coca-Cola disc with arms and a face.
And it is
larger than the earth and it is sitting behind the earth.
Reaching around
And feeding the smiling earth a bottle of Coca-Cola. And the caption on the cover of Time Magazine says
World and friend. The implication being that Coca-Cola is a friend to the world. Wow.
Crazy, right?
So it's funny before World War Two
There was a presence for Coca-Cola.
In pre Nazi Germany.
Oh yes, I know what story you're about to tell.
As you can imagine, it became difficult to supply Nazi Germany with American Coca-Cola.
During the war.
Since those factories
German Coca-Cola.
Factories.
lost touch with the mothership and all the ingredients that they would need to source.
They found alternate ingredients.
And made kind of like a crappier knockoff drink.
That they could make
With the supplies they had.
Yep. That drink.
is Fanta.
Yep. Yeah.
Fanta, owned by Coca Cola, was the uh brain child of
Nazi Germany Coca-Cola bottling.
Entrepreneurs. Who lost access temporarily to the real thing.
And did that instead.
They would change the formula and they would launch it in the US later in nineteen sixty, but Fanta has its origins as we can't get real Coca Cola in Germany during World War Two, so this is what we're making.
Name and all. Fanta is the name they came up with.
Yeah.
Parts of history that uh most people don't know.
Don't you want a Fanta Fanta?
Yeah.
Ha ha ha.
The thing that happens post war just'cause we've planted this seed elsewhere to follow it through.
Nineteen forty five is the year that Coca-Cola officially embraces
Coke and trademark set.
And from here on out, they actually do start referring to it as Coke in the advertising.
Yep.
So
Coming out of the war.
Coca-Cola's
Business, at least.

the brand domestically has regained any of the ground that it lost to Pepsi during the depression.
Internationally, they've just
accelerated twenty five years worth of market development into four and uh
Basically like
part of US government policy during the Cold War to keep Coca-Cola flowing into countries around the world.
For
Pepsi.
Things are
Not as bright after the war. They didn't have
Any of the benefits.
The co cad.
And so once again they find themselves in a position of backs against the wall.
Need to do something different here.
So
Right at the end of the nineteen forties.
They poach
A Coca-Cola executive.
Namfred Steele.
He does the unthinkable.
For a Coke man.
He defects.
Yep.
Pepsi.
The inferior imitator.
That's how they refer to it in internal communications. They don't write Pepsi, they say the imitator.
The imitator.
So steel
had been an ad man at the Darcy agency.
And then he
Moved to Coke and joined Coke in house.
Basically as soon as he gets to Pepsi
Steele stages a coup and kicks out Walter Mack, who had been running Pepsi for like the last twenty years. He shoves him out and Steele becomes the new president of Pepsi.
He's a
Quite the Maverick, shall we say.
There are just some hilarious quotes from him about his uh management philosophy.
One example.
Quote The whole trick in hiring executives is
is to find a good man
And turn him into a prick. A good man will be able to stand the course, but if the guy was a prick to begin with, he'll crumble along the way. And then I don't care if the consumer wants carbonated sweat in a goatskin pouch.
If so, this side of the room go looking for goats and that side start running fiercely in place.
This is Alfred Steele.
Ha ha ha.
And
Not only does he
Turn around Pepsi's fortunes.
I think
Pepsi really becomes the more interesting company than Coke for
At least the next
Call it thirty, forty years here.
After World War Two.
Coke.
Has had this incredible
success on the back of the war.
But they're also pretty fat and happy.
They're not interested in rocking the boat.
Shall we say.
Steel clearly doesn't give a crap about tradition or history or
Anything. Nothing to lose.
So
Steel when it gets to Pepsi.
says all right.
We're gonna do
Three.
Radical things.
So
One.
This was started by Walter Mack.
before Steele got there, but he continues it.
We are going to market our product.
To black Americans.
Mm this was
Radical probably for
Any major consumer industry at the time.
We are going to hire an all black sales team that is gonna target black retail outlets for Pepsi.
We are going to run marketing campaigns specifically targeted at the black community with black celebrities.
Not only was this radical for
Any brand at the time.
It was especially radical for the soft drink industry'cause Coke was not doing
Anything close to this. In fact
Robert Woodruff was openly supporting segregationist politicians during this time.
So
This is a huge opportunity for Pepsi.
And Woodruff would later radically flip on that, right?
Yes.
Wasn't he a big part of with Mayor Hart's field of
desegregating a lot of stuff in Atlanta. I mean he
He eventually really came around, but during the forties, definitely not. This was
A big area for Pepsi to make inroads.
Hm.
There's also an element of geography here too. I mean
Coca-Cola is
Atlanta's biggest company is traditional southern company, whereas Pepsi's based in New York.
Okay, so that's one.
Two steel decides.
We're gonna start
Appealing to this early trend.
that I see happening in
Post war.
Nineteen fifties America.
Of
Diet fads.
We're gonna position Pepsi as the lighter drink versus Coca-Cola.
It will
Refresh without filling. Now, how much of this is actually true in terms of calories? Which is funny because I think it's actually even sweeter. May have even more sugar than coke does.
Well, this is back in the days before sugar is vilified.
I don't know. Sugar is okay. Fat is bad. Calories are bad.
But I mean the only calories
In
Soda come from
Um
Carbohydrate.
Macronutrient and specifically from
sugar and so there's a direct relationship between sugar and calories.
You're assuming that uh consumers back in the forties and fifties were thoughtful about such things. That's true.
That's a great point.
Yeah.
Regardless of any veracity to it.
They start directly trying to appeal to the light market.
And then third.
And
Maybe most importantly.
We are gonna wholeheartedly embrace
A revolutionary
New
Advertising medium and technology.
Television.
And we're gonna use it.
To target the youth.

So this is crazy.
Pepsi?
discovers James Dean.
Like the actor, James Dean? Really.
Yep.
His very first acting job.
Is in a nineteen
Either forty nine or fifty.
Pepsi commercial.
Wow, I had no idea.
This ultimately would morph into like the Pepsi generation ads later and then the choice of a new generation, generation next. All the
Pepsi marketing for the next thirty, forty, fifty years of like
We are for the young people, we're for the next generation.
It all starts with T V and Alfred Steele.
In the nineteen fifties. Hm.
So
All three of these things work.
Pretty fantastically well. In addition to Steel also bringing over
Just generally better operational practices. Tipsi from Coke, he knows what
A real professional operation is like he brings standardization.
And tighter controls over the bottlers.
Pepsi had a similar
Or today even still has a similar bottling system, right? Where they have
bottlers outside the company.
Yes, but
Pepsi, at least until this point in time
Never had anywhere near the same kind of uh operational excellence you would call it today as Coca-Cola. I mean, remember back to the twelve ounce bottles.
They were using recycled beer bottles. They're putting in beer bottles. That's what Steele's working with here when it gets to Pepsi. So on the back of this
Pepsi's US market share.
Jumps.
Pretty astronomically. It's in the low twenties in the early nineteen fifties.
By nineteen fifty five, it's thirty five percent.
And basically
All of that is coming at the expense of Coke. I mean, Coke is still this beloved American brand.
But with these
three things that steel is doing. Like
He starts getting a significant amount of the market. I mean, Coke's not targeting black people.
Coke hasn't embraced television yet.
And
Coke hasn't even
Thought hasn't even crossed their minds about
Anything diet yet.
True. And they're starting to be thought of a little bit. I mean, this would happen much more in the seventies and eighties, but they're starting to be thought of a little bit as the soda for your parents.
Not our soda, the cool new soda.
Not the choice of a new generation band. That's right.
So by the mid fifties.
Woodruff back of Coke is finally like all right.
Gotta respond.
We need to make a radical move of our own.
He switches Coke's ad agency.
From Darcy.
You know, Archie Lee, the whole legacy of everything that they built from the
Twenties, thirties, through the war.
To McCann.
Erickson.
at agency in America.
Yep.
And one of the first things is incredible that I found in the research.
The McCann does when it comes on board.
With the Coke account.
is it starts conducting scientific market research.
And one of the first things they do.
Is they run?
A blind
Taste test.
Between Coke and Pepsi. No way. Coke runs this first.
Internally. Coke runs this first in the late nineteen fifties.
Or McCann does for Coke.
And guess what they find? That people prefer Pepsi? Consumers.
When presented
With the two drinks, Coke and Pepsi and a blind taste test.
A statistically significant number of people who
Prefer
The taste of Pepsi.
Wow. I'm pretty sure Pepsi doesn't even know this yet. So McCann comes in, they've just won the account.
They think this is oh, we found this like a really, really important thing. They come, they present it to Woodruff, they present the findings. And his response is
Do not
Every yeah.
share this with anyone.
And do not
Ever run this test.
Again Ah for Coke.
And
Bob Woodruff.
Would that that would have stayed.
the case. It's crazy that it really doesn't bite'em for thirty years.
Yeah, another well, twenty years after this.
For the moment, McCann does a bunch of things. One
right away they respond to Pepsi w in television.
They say, Hey, we gotta take TV way more seriously.
This is
Not just the future, this is the present. Is this uh things go bad or with coke?
Yep, they start doing.
T V campaigns, jingles, Coke starts sponsoring the Mickey Mouse Club show starting in nineteen fifty five.
Ultimately
What McCann
Decides.
They say
We need to unify
our marketing
collateral and messaging across
All of Coca Cola's channels.
We can't be having
different messaging and different imagery for TV
and for a point of sale and for newspapers and magazines or for our radio ads.
The idea is we need to have one Coca-Cola sight, sound, and cell.
It's all the same.
Integrated campaigns.
The first of which is the things go better with coke campaign in the early sixties. I see.
And then two
as we get into the back half of the fifties and the early sixties, we're now in the civil rights movement.
They convince Woodruff and the company like
Hey.
You can't ignore.
T.
Black America market.
you need to market to blackans, too. So they start running ads with prominent black athletes like Jesse Owens and Satchel Page.
And this is fun. Remember we learned from Jesse Cole in our Savannah Bananas conversation that
The Harlem Globe Trotters should have become the NBA. At this point in time, they were like the big basketball product in America. So yeah, Coke sponsors, the Globe Trotters.
And they had started a little bit before that with Willie Mays in nineteen fifty two, too.
And then the last thing McCann convinces Woodruff of is
Hey, we need to take this diet thing seriously. So in nineteen sixty two
They finally appeal to the diet market.
By launting.
Tab.
Which is their new diet drink product that they had considered naming
Diet Coke.
But
Bob Woodruff rejected it.
No, the given reason is supposedly he says if God had wanted Coca-Cola to have saccharin in it, he would have made it that way in the first place.
There is one Coke.
You don't want to mess with the one and only Coca Cola.
That is the stated reason.
I heard rumors in the research. I couldn't confirm this, but I heard rumors that
Apparently.
The Thomas Company.
I just wanted the
to parent bottler organizations. Remember back to the perpetual contract and the parent bottlers and all that.
Supposedly
They ended up with
the rights to have a ten cent royalty
Hm.
Beverage.
On any other
products that the Coca-Cola company launched that carried the Coca-Cola name. And supposedly that is actually the real reason why they didn't call tab.
Diet Coke.
Whatever the reason they launched Tab in nineteen sixty two. They want to dip their toe in the water. They're not willing to go all in yet.
They're not willing to lend the brand that's been built over the last eighty years.
Two
A fad diet product. Yes.
Exactly.
Meanwhile.
By that point in time, Pepsi had launched.
Diet Pepsi. And uh was doing quite well with that.
Also, I gotta listeners, we'll put a link in the show notes to this.
There is an astonishing
Add.
For tab.
Oh man, you said this to me this morning and I was like, I cannot believe this is for real.
The entire ad is a man sort of like leering down kind of creepily and
at this woman practicing tennis
In a tennis skirt.
And it's this jolly
Sort of.
Almost haunting jingle,
And the words are have a shape he can't forget.
Tab is a taste to remember for a shape he can't forget.
When you can't be with him, be in his mind.
Be a mind sticker.
Don't you want to have a good shape?
He wants you to have a good shape.
Why don't you keep your shape in shape?
It's great to have a good shape.
Enjoy tab and keep your shape in shape. The nineteen sixties. Yeah. But dude, they knew.
In the nineteen sixties, forty years before obesity sort of started becoming a conversation.
That full sugar sodas were not good for your shape.

Uh we'll leave it at that.
Yeah.
Yeah.
So you know.
They do enter the diet market.
But the diet market becomes
real and enduring from this point forward. Tab quickly becomes the best selling diet soda in America, I think in the world.
And stays that way.
all the way up until they release Diet Coke, which we'll talk about in a little bit.
Yeah.
Tab.

Uh recently killed, actually.
Yeah.
It was one of the brands that they sunset a couple of years ago.
Oh, did they only kill it in twenty twenty? I thought it was before then.
Yeah.
When they winnowed from like six hundred brands to two hundred in twenty twenty, that was one of the ones that caught the axe.
Interesting.
There's one more thing though that
Coca-Cola does in response to this insurgent Pepsi.
Challenge, shall we say, in the uh fifties and sixties.
McDonald's.
Yes.
I know you have the story on this one. Yeah. So this is actually something more that McDonald's does and less something that Coca-Cola does, but boy does it become important to Coca Cola fast.
To illustrate it, if we flash all the way forward to today,
There's a Coca Cola executive.
On the website.
whose entire job
is the McDonald's division of the Coca-Cola company.
There is no other division dedicated to a company.
Like this.
So what happens is
Ray Croc.
In nineteen fifty five, one of the first things he does when he gets the expansion rights is
to expand McDonald's is to look for a beverage supplier for this new Illinois location that he is opening.
And
He
calls up Coca Cola and does a handshake deal, meets in person and does a handshake deal with Wadi Pratt.
who ran Coke's fountain division.
And from that point forward, for like forty years.
They built this
deeply entrenched relationship.
purely on a handshake deal.
Wow. There's no contract, no term. No, and I'm sure there is today, but for a long time it was McDonald's isn't gonna bid it out like everyone else always does.
and they're gonna get like amazing preferential treatment.
And here's some of the preferentiment that they get.
Have you ever heard, David, that
Coke tastes better.
When you get it from McDonald's.
No
But I would believe it.
This is like a big thing. People like insist that I prefer to swing by McDonald's to get a Coke versus getting it somewhere else. And
If you press is it just that it's a fountain and you like fountain versus bottle, or and they're like, No, it's actually better at McDonald's.
It is better at McDonald's.
No way. Here are a variety of things that I've heard from somewhat credible sources and that show up in articles.
That
may contribute to the taste actually being better.
The thing that is definitely true is Coca-Cola ships the formula to McDonald's
in stainless steel tanks.
Instead of being delivered
In
Bags.
Normally it's bags wrapped in
cardboard and it's actually delivered through the bottlers. Even though the bottlers have nothing to do with it, they
are the delivery arm.
Oh yeah,'cause this is the fountain business. Yeah.
Coke doesn't actually
Deliver the syrups to all these restaurants.
the bottlers do it on behalf of them, even there's no there's no bottles involved. So Coka's quote unquote selling directly
When they sell syrup to
fountain owners. But the bottlers are doing the delivery. Yes.
With McDonald's is different. It comes in these stainless steel tanks.
McDonald's does some stuff, they pre-chill the water.
And they make sure that the hoses are chilled all the way up in the dispenser.
McDonald's apparently
actually has a different syrup to water ratio.
That accounts for ice melt.
They add a little bit more syrup than the standard recipe.
Which
Sounds like it would be heresy. Wow. And Coca Cola lets them do it. Cause Coca Cola wouldn't let anybody else change the mixture.
Yes.
They developed
custom straws that are a little bit wider.
to let a little bit more Coca-Cola hate the taste buds on your mouth.
And this is sort of just incidental, but
Because of the volume that's done.
at McDonald's of selling Coke products, the syrup's a little bit fresher.
'Syrup actually does kind of
get worse over time if you leave it in the back room.
Wow.
Well uh
It is a beautiful partnership for both sides, shall we say.
Here's something crazy. I think a lot of people associate McDonald's and Coca-Cola, both big American companies, both historically American, a lot of Americana in each.
Until listening to this episode, I didn't really think about the fact that Coke
has a sixty year head start.
on McDonald's in going global.
And so
I read in a couple places
that when McDonald's was opening
In new countries.
The employees would camp
In
Coca-Cola offices and use Coca Cola's relationships
To get a foothold in the
country when they were opening.
It's like this unofficial partnership that they have.
Well, it's good for both sides.
Yeah.
And lastly, Coke sales teams are prohibited from selling syrup to restaurants for less than McDonald's pays.
Even if it means they're gonna lose the business to Pepsi.
It is sort of this rule at Coca Cola that no one gets a lower price.
per unit volume than McDonald's.
Wow.
Big customer.
So back to the sixties. In nineteen sixty, a few other things happened.
The first twelve ounce aluminum cans are introduced of Coca-Cola in the United States.
They also buy Minute Made, right? Coca Cola buys Minute Made.
Yes.
a little uh precursor to what was to come four decades later with non-soda drinks, but this is sort of weirdly the only thing that they have other than soda.
Firm.
A long time.
Yeah.
Speaking of acquisitions.
In nineteen sixty five
Pepsi buys
The Frito Lay Company. Famous.
Where there's still one company today at PepsiCo.
Yeah.
Ben, you found out.
Coke had the chance to buy it, right? Yes they did.
made a giant mistake not buying it.
The company's headquarters, I think the original Lay company
is an Atlanta company.
So in many ways, Coca-Cola is sort of the preferred buyer.
And Coke turns it down.
Wow. The
Wild thing is today, if you look at the health of Pepsi's beverages business and their food business with Fried Olay products.
Free to lay is a much, much better business.
While the revenues are a little bit smaller than the Pepsi business by revenue.
Frito Lay generates twice as much profit.
inside the parent company, Pepsi Co.
That's a good one to own.
Yeah.
Big myth from Coke.
Yeah.
On the opposite end of the spectrum.
Toward the end of the sixties.
McCann
And Coke.
really start hitting
Their stride.
Ben, you mentioned in the intro about uh
Co opting the hippie and counterculture movement.
Oh yeah.
In nineteen sixty eight.
McCann and Coke.
Launch.
Their latest unified marketing campaign.
The real thing.
Which is
An enormous success.
And
At first.
Subtly tries to co op the uh you know, counterculture moment. It's it's real, the hippie things. I mean, it doesn't have high fructose corn syrup yet, so uh ostensibly it is the real thing.
If Coke is a real American thing, then it's the real thing.
This is capped off.
In nineteen seventy one.
By the series finale.
Of Mad Men. Yes. And Don Draper Greatest work. I it's so funny. Like I know this ad.
From Mad Men. Yes. Even though it's considered one of if not the greatest television commercial of all time. Yes. I didn't know anything about it until
The Madman series finale. So listeners, if you don't know The Hilltop Ad.
Yes.
The hilltop ad to the song I'd like to buy the world a Coke.
is fictionally created or alluded to be created by Don Draper in the finale of Mad Men, but of course.
is a real ad forty years before Mad Men came out.
It's so cool. Doing the research for this episode.
I always thought
that Mad Men was one of the greatest works of media ever created.
I have even more appreciation.
They set the whole thing up.
All the way back in
The first season.
Of show.
By introducing McCann Erickson. Like McCann Erickson
Comes in as a foil.
to Sterling Cooper in the beginning and then they're running throughout the whole series. I didn't realize that McCann Ericsson
The reason they're so big and the reason that it's such a big thing is
The Coke account.
Pretty amazing.
And then it all pays off in the hilltop ad.
I think it's given him a little bit too much credit. If you're gonna do a
A show about
advertising in this era, you kinda have to do McCann Ericsson. But I didn't realize the deep connection
between McCann and Coke and how like inequal that was.
And so now understanding this makes me appreciate this personality just even more. Like it's so great.
For sure.
So the story behind this ad is awesome. So Bill Backer at McCann Erickson, who was sort of the big partner of Coca Cola is there for the RT Lee of his day. Yes, for a long time.
said that he was on a flight that was grounded at an airport in Ireland.
And he noticed a diverse crowd of passengers and everyone's upset that this flight isn't happening.
and they're chatting and they're joking with each other.
And it's over bottles of Coca Cola.
And he's like, Man, Coca-Cola really brings people together across borders, across languages.
And he jots down on a napkin.
I'd like to buy the world a Coke.
And they conceptualize this ad and there's this whole great story of finding the songwriters and the musicians who performed it and all this stuff.
And they wanna film it at the cliffs of Dover in the UK.
They got the budget green lit from the head of advertising at Coca-Cola.
to do the most expensive ad of all time, a hundred thousand dollar budget.
How quaint.
And they're gonna film it over the course of three days.
And
They got there.
With the full cast.
Who were gonna stand on the hillside and sing. They wanted to have two hundred people uh from all countries around the world, and the point is that Coca-Cola brings
Everybody together. It's a hard cast to assemble because you need
people representing all these different
Ethnicities and nationalities.
And they have three straight days of rain.
I was gonna say, like cliffs of Dover, it rains a lot there. They burn through the entire budget.
And so they're like, Where are we gonna go? That it won't rain. Let's go to Rome. And so they get approval to go all the way up to two hundred and fifty thousand dollars.
It reigns in Rome.
No in the hills outside of Rome.
And so they actually have no usable footage from everything they shot because by the time they actually caught the actors.
They were also
covered in rain and looked like crap and no one looked happy.
And so it's this hilariously cobbled together thing where the third time's the charm
They have to go wander around Rome looking for new actors. They find a new leading lady, that woman that the commercial opens on. They actually have to film it in two separate locations. The hillside is different.
From the close ups.
But
They ultimately release it.
It becomes
absolutely beloved. It's the catchiest tune. I've had it in my head the entire time doing research.
They start getting calls at radio stations to play
The Coca-Cola Ad song.
So then the band goes and re records it as a real song to release on an album that has different lyrics than I'd like to buy the world of Coke.
And it turns out to become a best selling song also.
So great. The lyrics are just uh great. They're great. And it's so
Nineteen seventy one and Coca-Cola. It's the real thing.
I'd like to teach the world to sing in perfect harmony. I'd like to buy the world a coke and keep it company. That's the real thing, what the world wants today.
Is it the real thing?
And you're watching it and it does actually stir up emotions. You're like, This is really beautiful. Look at this. There's all these
people that are all here together. They're all getting along and
Then you realize
This is a giant corporation selling sugar water
And they managed to borrow the hippie movement to create one of the most successful commercials of all time.
It's bad bed. Unbelievable.
Dom Draper, baby.
Yeah.
Yeah. So great.
Well
So the end of the sixties and the early seventies
Going pretty well.
For Coca-Cola.
And then
In nineteen seventy five.
That deep
Dark.
Deeply embarrassing.
Secret.
that McCann had discovered twenty years earlier in nineteen fifty five, and Robert Woodruff
Had tried to bury
As far down as he possibly could.
Comes out.
The Pepsi challenge.
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All right, David.
The Pepsi challenge. I've been so
Stoked all episode just to get to this.
And to start it off. Are you about to do a Pepsi challenge?
I am gonna do a Pepsi challenge right here.
On air. Of course it's not really a challenge'cause I didn't hide the containers and I would administer it to myself, so it wouldn't work. What temperature are they though?'Cause I'm here that plays a big role.
It does, but they are the same temperature. I took both of them out of the fridge right after like World War Two or so, so
However long ago that was.
'Cause at warmer temperatures
The Coke people will insist that Pepsi has the edge because sweeter tastes better at warmer temperatures, but Coke
at that just above freezing perfect temperature.
Is you know, the best.
Well, let's see.
All right, that's the real thing.
seeing right now.
It's good.
Oh Pepsi. Oh it's got that lemony.

Yeah.
Mm
I think I'm with the majority on this one.
That Pepsi's better.
I think Pepsi tastes a little better.
Wow, David Rosenthal right here on the Coca-Cola episode.
Declaring that Pepsi is your pick.
Well over.
Coca Cola classic, but uh I'm mostly a diet coke guy these days, but
We'll get to that in a minute.
Which one could argue was formulated to better compete with Pepsi.
Indeed.
All right.
The Pepsi challenge.
So
Back.
In nineteen sixty seven.
A young
Wharton MBA graduate.
Joins.
Pepsi.
After a few years
Of working at IPG.
The big ad agency which
Owned and I believe still owns.
McKenna Erickson.
Parent company I'm again. Yep, they do.
Interpublic group.
Now Ben
I know you know.
who we're talking about here. But uh listeners, you all are in for a real fun surprise when we reveal
Who this person is in a minute.
So Pepsi, as we've
Disgust.
Up until
Alfred Steele.
Came in.
Had always been kind of a
See to the pants.
school of hard knocks management type company.
This person who joins, I think might have been the first MBA to join the company.
And he was one of the very few even like college graduates.
So he comes in.
As the
Director of New Product Development.
And the first
New product that he develops.
And hits the market isn't a new drink.
But rather anew.
Bottle.
A really
Really big bottle.
Sixty four ounces.
He realizes in doing market research that hey, supermarkets are becoming more and more of a thing. We're now in the late sixties, early seventies here.
There's a
Really?
Underserved.
part of the soft drink market.
Which is large families and parties for at home.
Consumption.
Buying a whole bunch of
pretty heavy breakable glass bottles and lugging'em home for your
large family or a party that you're throwing.
Or even cans, who wants to open a single can for each person around the dinner table?
Totally.
And again, remember we talked about
The
cost scaling element of soda
is not volume of soda. So it doesn't actually cost that much to uh
go from six and a half ounces to twelve ounces to
You know, a whole lot of ounces. This is why basically anyone is willing to sell you free refills on your fountain drink.
Yep.
So
He and Pepsi start working on a
Big bottle.
And they pretty quickly realize like oh
Glasses.
Not gonna work. It would be a really heavy bottle and really breakable as you're porting around this big bottle.
So they go to
DuPont.
Hmm, I had no idea.
And say, Hey.
Can you guys
Engineer us.
Something that would work here. And Dupont says, Oh well, actually
You have found us at the perfect point in time. We have a new type of plastic that we have engineered.
Polyethylene terapithylate.
Or P E T we think would be great.
For this application.
It's lightweight.
It's super strong.
It's really cheap to produce.
And
Here's the kicker for Pepsi.
We can send it.
Pre molded.
to all of your bottlers. And so rather than your bottlers having to set up
really expensive new production lines for these new bottles.
All they have to do is just inflate the molds with air and then fill'em up.
Have you ever seen him in Fleet?
It's like the coolest thing ever, watching a two liter bottle inflate.
The sixty four ounce or now
Two literally.
Bottle is born. Pepsi gets a
big jump on this against Coke. It takes Coke another three and a half years to come out with their own
Big party bottle.
So on the back of
This success for this young executive. And you talk to him, right? This person you're talking about? Oh yes. All these stories are firsthand. Okay.
So uh
On the back of this success, Don Kendall, the uh then CO of Pepsi is like
All right, good. You passed the test.
You're ready for your next big job.
And this is the first time that plastic is used, right, in soft drinks.
Oh yes, I missed the punchline there.
This is the first plastic bottle. That's crazy.
And
Good for Pepsi to log this win. Pretty bad for the world to start this single use plastics treadmill that we're all
Oh no. Like just to get that out of the way.
I I was looking up studies recently.
And the Coca Cola company is the number one polluter.
globally of
Crap in the ocean. Pepsi's very close behind. All the big drink companies.
Everyone is always saying we're trying to do a better job at this, we're trying to do a better job
creating recyclable stuff, using recyc but like
The world is full of a crap ton of single use plastics.
A hundred percent, man.
I
had not focused on this issue at all until doing the research.
I am going to
Only by
Can and
glass bottles going forward. Like there's no reason.
Not to buy cans and glass.
They're actually recyclable.
It's funny, I've like accidentally started doing that anyway, cause whenever I travel now, I use those um path water bottles that they sell in airports and you can just refill them.
I'm not like
going out of my way to be like, Oh my gosh, I need the metal over the plastic, but like it now it just feels weird to
Buy plastic bottles.
Now that I'm so much more attuned to microplastics, I'm also never gonna drink
fluid that was sitting in a plastic bottle for a long time after I opened it or like refill it. I used to refill plastic water bottles and now I'm like uh who knows what's degrading in my
Beverage. So
But yeah, this is the start of the plastification.
Yes.
So
Back to the timeline.
Don Kendall, the CEO, is like okay, you pass the test.
You are now gonna take over
All of marketing.
For Pepsi.
And I want you to figure out.
How we're gonna dethrone.
Coke.
So the executive takes over marketing, he's getting settled in, he's surveying the current state of things, and he notices
That the local Pepsi bottler
Down in Dallas, Texas.
It's doing something really interesting.
The local ad agency for the bottler there is.
had accidentally discovered
The secret.
The Coke and McCann.
Has known for twenty years.
The consumers prefer
Pepsi to Coke. And the way they figure it out
Is that
They're doing research.
For seven eleven.
In Dallas. No way.
And seven eleven is selling a generic cola.
At the time.
And they run a taste test with both Coke and Pepsi as the controls.
For the seven eleven generic cola. And so this local agency happens to also be the agency of the Pepsi bottler.
In Dallas
And so they go to the Pepsi bottle and they're like
Hey.
Guess what we discovered? Wow. So locally in the Dallas market.
They start running these commercials there.
Of people taking
The quote unquote.
Pepsi challenge. They roll up to a supermarket in Dallas. They plunk down a card table and they have Coke and Pepsi behind like a cardboard screen.
Then they give the consumers a glass. They say, Which do you prefer? And
A statistically significant number of people.
Say Pepsi.
And they did this at malls all across America. They then really expanded this.
Well.
We'll get to that. Now yeah. At first this is just the local Dallas bottler that's doing it.
It's a huge success.
Pepsi's market share in Dallas.
Jumps by fourteen percent.
Thanks to these ads. Like it really
really resonates with consumers. Hm.
So the new VP of marketing sees this and he's like
Oh oh okay, we we gotta blow this out.
But
We're not gonna do
What Coke would do.
We're not gonna turn this into like a
Big corporate one site, one sound, one cell national campaign.
We gotta keep this grassroots.
We gotta go market by market. This is working so well in Dallas because it's grassroots, because it's real people who are living in Dallas.
Taking this challenge.
And
The technology
That can enable this has just come out.
V CRs have come out and
early home video camcorders.
Are just starting to hit the market.
Mm so he says, Okay, here's what we're gonna do.
We're gonna go by
A ton of home video camcorders. Oh, that's awesome. And card tables. We're gonna distribute them to all of Pepsi's local bottlers.
All around the country.
We're gonna inform them about this Pepsi challenge and we're gonna say, Go run your own versions.
Of the Pepsi challenge. Oh wow.
Film them with the camcorders of real people.
In your markets.
Taking the Pepsi challenge.
And put them on local television. Like local ad spots on local TV channels.
And this is like
Maybe the most successful grassroots marketing campaign in history. I didn't even realize it was grassroots. I mean, everyone knows the Pepsi Challenge is almost like a descriptive way to describe a form of marketing. Like do you remember when Microsoft did Bing It On? It was like, Oh, I see the Pepsi Challenge for search.
I had no idea until Talkado have been doing the research.
This was all shot with Cam Corters. We'll link to YouTube footage of these old videos.
It's all just
Malls and supermarkets and beaches and fire stations.
Around the country.
And it's then local ads running on local TVs.
Incredible.
Which is funny, being our age, David.
I knew what the Pepsi challenge was, but of course I've never actually seen it. Right. I hadn't seen it either. And it's funny to now actually go w watch it and see how that meets my expectations of what I thought it was gonna be.
Yes, same as you. I had the same expectations of oh this must have been like a
BBDO national campaign, you know, blah blah blah.
Total opposite.
This is
Probably.
the first quote unquote reality
television commercial that's ever produced. Like nobody was doing this back in the day.
So it just hits all these local markets around the country.
Like a bomb. And Coke is so
Poorly set up to react to this.
their whole marketing and ad strategy with McCann.
They're all national. One site, one sound, you know, one cell.
They're not set up to go buy
local TV ad slots.
It's good counter positioning.
But the punchline of the whole thing is
It wouldn't have worked if it wasn't true, but it was true that
People did prefer the taste of Pepsi.
And I think it also wouldn't have worked.
If it had
been a big national, you know, sort of corporate rollout. Because people wouldn't have believed that it's true.
I think it's really critical that it was real people that were
doing the Pepsi challenge instead of actors. Yes. Oh absolutely.
Agree.
And I think it was also important, it's happening in my community. Right.
So
They blow this out like all across the country.
In nineteen seventy seven
Pepsi outspends Coke.
in advertising for the first time.
in history. And
Pepsi actually.
Passes Coke.
In market share.

Market.
So Coke still has a
overall market share lead in the country.
Because of the fountain business and like McDonald's?
Right.
Pepsi basically never was able to break into the fountain business in the volumes that even today go kinda ran away with the
restaurants serving soft drinks out of fountains business.
So it's interesting, in the late seventies, Pepsi does try to break in.
They buy Taco Bell and Pizza Hut and KFC and then install Pepsi.
But yeah, it never approaches Coke.
Which actually kinda backfires'cause then Coke uses it to counter cell and they start going around to everyone else that is considering Coke or Pepsi and saying
Pepsi owns these restaurants that are competing with you. Why do you want to give them more profit dollars? And so then Coke is able to win sales on that, which is
I think is part of why Pepsi then spun that all out as yum brands, but
Also just kinda'cause I think it was a drag on their business.
Yep.
So
On the back of this.
Huge.
Nationally known.
Obviously.
Success.
With the Pepsi challenge.
The young marketing executive starts to become, you know.
Pretty known in the business community.
And David, we should say who it is now.
His name.
Is John Scully.
Yep.
And for some of you, that will mean a lot.
And for most of you, that will mean a lot in about thirty seconds.
John.
Starts getting a bunch of
CEO.
Offers.
Coming in from recruiters.
on the back of his success. And you know, he loves Pepsi.
He's built his career there.
But finally, in nineteen eighty three,

That he can't refuse.
Steve Jobs.
Comes.
To pitch him.
And says
Do you want to sell sugar water for the rest of your life?
Or do you want to come with me?
And change the world?
And it goes with Steve.
And joins.
Apple Computer as CEO in nineteen eighty three.
Yeah.
And finish the story, David. What would then happen?
After John became CEO of Apple.
Well
I think the narrative that a lot of people know we'll have to save this for our Apple episode someday is
Things did not go well.
Steve Jobs got kicked out of the company.
Apple floundered, jobs had to come back.
Scully actually grew Apple's revenue from
Under one billion when he joined to almost eight billion when he left.
Ah.
Well Tim Cook before Tim Cook. And then there would be two more CEOs, I think, before jobs came back. Yeah.
Kilemilio and uh Michael Spindler.
That's right.
But yeah.
John is
Awesome, by the way. He's
Eighty seven years old.
He's a huge acquired fan. He's listened to
Every single episode that we've done. Also thank you to Arvin Navaratna, I'm friend of the show, for introducing us. That was a fun email to get of like
Wait, John Scully listens to Acquired?
Yeah. So cool. He's currently on the board of
Three different companies that he's helped start over the last couple of years.
And
He's responsible for the Pepsi challenge.
So
Obviously uh
Coke eventually after years and years of
Bleeding.
Thanks to the Pepsi Challenge.
decides that they need to
Respond.
And the response
ends up happening a full decade later.
The the response comes in nineteen eighty five and the Pepsi challenge was in seventy five and
Pepsi had already been taking share.
from Coke starting in like nineteen seventy.
Meaningful.
Chunks.
Yeah.

So slow to respond.
Well,
In addition to
Just plain getting their ass kicked.
They have another problem.
So Woodruff
Is still the ultimate
Decision maker.
And chairman of the board, but
He's
Getting pretty old at this point in time.
He's already in his eighties, approaching his nineties. He has strong opinions about what Coca Cola is and isn't.
But there's also
Another
management problem at Coca-Cola.
Which is that the CEO, Paul Austin
Has gotten Alzheimer's.
And
Stays in the CEO position.
And so Coke.
For the back half of the seventies.
It's just paralyzed. Like
Basically
No decisions can get through between Woodruff being set in his ways
And
It's hard for him to
C
Read.
Here.
I mean is it hard to communicate with in addition with having strong opinions and control of the company.
Yeah.
And then you have a CEO suffering from Alzheimer's.
And Woodruff probably doesn't recognize what's happening.
That's a real mess.
Yeah.
All of this finally resolves
in May of nineteen eighty.
When the board
Appoints a young
Chemical engineer.
Named Roberto Gosueta.
As CEO.
So Goswana
was a Cuban immigrant.
who had worked his way up to become head of technical research at age thirty five, and he was one of the mythical
Two people who knew the secret formula.
Mm.
That's right,'cause he was a chemical engineer. I mean he was on the
product formulation side of things.
Yep.
And he had just had a huge
When
within the company.
When he replaced sugar in the US with high fructose corn syrup, he's the one who brought corn syrup in. So starting in nineteen eighty
He got fifty percent, and then by nineteen eighty four
they were replaced it a hundred percent. But basically because sugar kept getting more expensive and farm subsidies for corn kept making high fructose corn syrup less expensive.
it became like, well, as long as customers are willing to do it and it doesn't seem to be worse for people's health, economically, it became a no brainer to do it.
Yep.
So
He's a real
Dark horse candidate to be CEO.
The person who everybody thinks is gonna get the job.
Is Don Keo.
The famous longtime president and COO
Coca-Cola.
And so what Roberto does when he becomes CEO is he says
Done.
You are my partner in crime. We are gonna run this company as a team.
You'll be my president and COO.
You are great externally.
I'm great with the product and in strategy internally.
We're gonna be uh
Dynamic duo here.
And ultimately Gosweta got it because he was Woodruff's protege.
I would say go sweeta
At least as it comes across in the book Secret Formula, did a very good job of sort of managing up.
and making sure that Woodra felt taken care of and informed.
I could see that. Yeah. So they go on to have a great run.
One of the early things they do
is they buy Columbia Pictures, the movie studio. Which I always thought
This was
Stupid. Like whenever you hear stories of
Oh, at then at one point in the
Coked out nineteen eighties, where everyone was doing crazy stuff. Coke even went and bought the
Columbia Pictures. A movie studio.
But financially.
It actually was great for them.
Even though no business is as good as Coca Cola's core business. Everything pales in comparison, unless it's Visa or a software company or something like that.
Well,
Not only
Was it financially
Pretty good for them.
When they ultimately sold the business to Sony a few years later.
It leads to a lot of really good stuff for Coca Cola.
Because
This is how
They get to know.
Herb Allen Jr.
And Allen and company.
Who was one of the principal shareholders.
of Columbia Pictures before
Coke bought it.
And so he ends up joining the board of Coca Cola after the transaction.
And actually this relationship continues.
right through to this day, Herbal and the Third, who in the early two thousands took over for
Harbor.
running Allen and company.
It's still on the board of Coca Cola.
Amazing.
So this is how
Coca-Cola executives start going to
Sun Valley.
Where?
Don Keo.
Reconnects.
From his old
Neighbor.
From his
early young professional days when he was working.
In his first
Job.
In Omaha, Nebraska. This is insane. Living
On Farnum Street.
In Omaha.
Where he was neighbors.
With Warren Buffett.
Warren Buffett
is like this real life
Forest Gump.
I mean the number of things that he invested in that would
become these unbelievable bonanza investments, like greatest of all time investments.
Oh was a guy who lived in my street.
Oh, was the woman that ran the furniture store in my town growing up. Uh like it it happens over and over and over again. Are you kidding me? Don Keo was Warren Buffett's old neighbor?
Don't know.
first job out of college, he worked for I believe a
Coffee company.
That ended up getting acquired by Coca-Cola and that's how he came into Coca-Cola. But yeah, he was just living in Omaha.
On Farnum Street.
crazy. And so this is how the Berkshire
Coca-Cola relationship starts.
Well
So
Warren.
At this point in time.
As we covered on our Berkshire series.
Is a Pepsi guy.
He's part of the new generation. He took the Pepsi challenge.
Kyo
Converts him
To Coke by telling him about this new product that they're gonna launch.
Cherry Coke.
Because Buffett loved cherry syrup in his Pepsi. And so he converts Warren into
To a Coke guy before Warren ever invests a dollar in the Coca-Cola company. And Warren reportedly drinks five cherry cokes a day.
Yeah. He is perhaps single handedly uh supporting his investment these days. Later on
At Sun Valley.
Bill Gates.
Let it slip.
On a panel.
With
Warren.
And Roberto and Don Keo.
That Warren has always told Bill
that Coca-Cola could be run by a ham sandwich. While Roberto is sitting right there. Yeah, Roberto gets very offended and apparently never talks to
Bill Gates.
Again.
Now
Given what's about to happen here.
It's actually highly debatable whether Roberto was a ham sandwich or not. My opinion has always been that
Coca Cola is the type of business that can be run. But maybe let's
save this for the quintessence. Like we should finish the episode deciding if if that is true about the Coca-Cola company or not.
Yes.
Well
Roberto
is about to become responsible.
For both
The company's greatest success.
Since Coca Cola
And it's worst disaster of all time.
Yes.
Okay.
So first
The success.
Of course we're talking about the most successful
Diet drink.
in the history of humankind.
Basically the only soda that I drink today.
Diet Coke. You're a Diet Coke man, not a Coke Zero man. I'm a Diet Coke guy. Yeah. I know Coke Zero was sort of marketed as the
Diet Coke for men, but uh
Uh
Like that Coke?
And not just for men, but also the one that's closer to the original Coca-Cola formula. Diet Coke is sort of meant to be its own thing.
Yeah. They did those great ads of the taste infringement ads. Do you remember those? Oh, I don't remember'em.
Oh yeah, yeah, when Coke Zero launched, they did all this series of ads of Coca-Cola lawyers going around suing Coke Zero for taste infringement. Great premise. Great sort of uh self reflective uh advertising from Coca Cola there.
So Diet Coke is fascinating because
They did start work on it.
earlier in the seventies. It didn't come out till nineteen eighty two.
But
They're kind of in the lab tinkering with the flavor because the Pepsi challenge
has basically thrown down the contlet that
Americans prefer the taste of Pepsi. And they're starting to play with this idea of like
Okay.
Obviously we're not gonna replace Coke.
But like
Is there a way that we can make something that does compete with Pepsi that tastes a little bit more like Pepsi that tastes
uh lighter or sweeter or
They're in the lab. They're working on it.
And eventually they do
Land on this formula.
That they think is great.
And it's artificially sweet, as you're talking about.
It is a huge risk.
In two ways to release Diet Coke.
One
Is because
Of everything we talked about earlier.
You gotta be really careful with the Coca Cola.
brand.
It's the sacred cow.
But two.
Tab is currently in nineteen eighty-two the best selling diet drink in the world.
So why would you release another diet drink
that risks dethroning the one that you have that is the clear winner.
And the answer is
You need a win.
A you need to win. B
It is so clear that diet is going to be a gigantic market and that's the way the world is going. And we're just holding ourselves back from competing with our best foot forward by not using our big brand.
Yep.
They're uh
Was one other reason.
Why they finally decided in the late seventies.
To start work on Diet Coke. Mm.
In nineteen seventy five.
The Coca Cola Company.
Acquired.
The Thomas Company.
Oh so to the extent
The Thomas Company and the parent bottlers.
If it is true that they had a right to a ten cent royalty on other Coca-Cola drinks.
That is no longer a problem.
Fascinating.
So David, do you know about how they announced diet? Oh, I was gonna ask you the same thing. I thought I was gonna get you.
Of course I do. I'd be surprised if any listeners know
But
listeners, you are gonna delight in learning this with us.
They announced
Diet Coke in the summer of nineteen eighty two.
In July of nineteen eighty two. The same month.
That's right.
Forty three years before?
Forty three years before us.
A very
Special location in the acquired
Cinematic universe.
Radio City Music Hall.
That's right.
Diet Coke was announced.
On stage.
With the Rockets performing
to celebrate the new beverage.
That's right.
To say it works.
is quite the understatement.
By the end of nineteen eighty three, the first full year on the market.
Diet Coke is the number one
Diet drink.
In America.
And
Unlike tab, which
clearly from that commercial that you talked about earlier was exclusively marketed to women.
Thirty percent.

Even
In the early days.
Are men.
Mm.
By nineteen eighty four.
Diet Coke becomes the third best selling soft drink in America, period.

And
Diet Coke.
cost significantly less.
For Coke to produce because it doesn't have sugar. Yeah. You know what's not as expensive?
Artificial sweeteners.
Yes.
So
Diet Coke is go sweater is like
Huge, huge.
Grand slam win.
And the way they market it is not apologetic.
The campaign is just for the taste of it.
They are full on marketing.
That this tastes great.
And it also happens to have no calories.
This is
Coca-Cola.
Playing offense. Win win works.
Incredibly well.
You can have your Coke and drink it too. That's right.

And then Gosweta decides to play.
Defense.
Yeah.
With new Coke. So
Despite all the success of Diet Coke.
And it was.
A huge success.
Even
In nineteen
Eighty two, eighty three, eighty four.
Tennish years.
Into the Pepsi challenge.
It's still.
Kicking Coca-Cola's ass.
Coke.
In nineteen eighty two brought in Bill Cosby.
As their
Main celebrity endorser. That's right.
And um
We'll also link to these in the show notes.
The spots that they have him do in eighty two, eighty three, eighty four are
Are directly addressing the Pepsi challenge.
It's unbelievable.
Coca Cola is a singular N of One product. Coca Cola does not exist in a universe with other competitors. And here's Bill Cosby
directly talking about
Pepsi.
And the challenge It's the worst thing that Coca Cola could possibly do.
They were in bad shape.
Are bleeding.
And Pepsi, of course, didn't
Typical Pepsi fashion says.
Oh.
You just signed Bill Cosby and you're talking about the Pepsi challenge in your spots.
We're gonna sign Michael Jackson. Just brutal. Obviously.
Both of those men.
the world would later find out or uh
Deeply problematic, but um
At the time.
I think
They had among if not the highest

Celebrity
in the world, uh key rating being
percentage of people surveyed who are familiar with the person and think highly of them.
Hm.
Yeah.
But from the time that
Pepsi launched the Pepsi challenge in nineteen seventy five until the new Coke disaster in nineteen eighty five.
The share of Pepsi grew every single year in America, while the share of Coca Cola declined every single year.
And so the question is if you're Coca Cola, what do you do here?
Yep.
What they decided to do
Was
After ninety nine years.
With the same formula.
carefully building a brand around that logo, the taste, the secret formula.
And
Defining this

Stupidity struck.

And
Yes, we can't downplay how stupid this really was.
But somewhat in their defense.
If you're going
To introduce a new taste.
to try and counter the Pepsi taste, which you believe is the reason why you're losing market share.
It has to be a full replacement.
There actually is no logical path.
to adding a new flavor.
So a bunch of people are like, Well, why didn't they just release Coke two or something like that?
Remember, Coke is a singular product.
There cannot be
Two Cokes. It would destroy the brand. I mean, this destroys the brand too, but I don't know, David. There's Coke Zero, there's Diet Coke, there's Well now there is, but it you gotta put yourself in the mindset back then.
The
Other than
more practical problem was
If they introduced
a secondary flavor and kept
original Coke on the market.
They would bifurcate the base.
And Pepsi would become number one.
So they were paranoid about that, though oh, we're pretty sure
If we have
Multiple Cokes on the market.
Wha w the the base, like it's just pure bragging rights.
Coca-Cola cared a lot.
Coca-Cola, it's number one. Pepsi's the imitator. How could they ever stand to let Pepsi become number one?
So what did they actually do?
There's a lot of people that probably aren't
terribly with New Coke and what actually happened.
So Christmas of nineteen eighty four.
The executive team
Makes the decision.
They're gonna do it.
They're gonna replace
The original Coca-Cola formula.
With new
Coke.
And they've all tasted it.
As has two hundred thousand people.
Yep.
They've done tons of taste tests.
Not only
Does it be
Pepsi?
In taste tests, it beats original Coke.
People prefer the taste of new Coke.
Robert Woodruff is still alive.
At this point. He's ninety five years old.
So they're like
Alright.
Before we do this.
Somebody's gotta go have a conversation.
With Robert.
And tell'em what we're doing.
And uh Roberto, this one is on you. So
New Year's Day.
Nineteen eighty five.
Roberto.
Goes to see Robert Woodruff.
At his home.
Robert can barely hear, barely speak.
And according to Roberto, who is the only other person present in the room with him, it's just the two of them in the room.
Woodruff.
Gives his blessing.
To change.
The formula.
However.
The very next morning.
Woodruff stops eating.
He's hospitalized a few days later.
And he ends up
Passing away.
On March seventh.
Nineteen eighty five.
One month.
Before the new Coke.
Announcement.
So poetic.
The formula was never changed while Robert was alive.
Nope.
No, it was not.
So
Six weeks later.
Friday.
April nineteenth.
Coca Cola sends out a press invitation.
for the quote most significant development in the company's nearly one hundred year history.
That they are going to be a very important thing.
To hold.
The following Tuesday.
Well.
News of what is about to happen.
Leaks.
Over the weekend.
And Pepsi.
Takes out a full page ad in newspapers across the country.
On Monday morning.
With the announcement reading
The other guy just blinked.
After eighty seven years of going at it eyeball to eyeball.
The other guy just
Blinked.
And they gave all their employees the day off to celebrate. Yep.

Which by the way, this couldn't have been sequenced any worse because
Pepsi does that. Pepsi starts giving interviews to everyone they can in the press before the announcement actually happens. And so the press all comes in. No one's tried it yet.
So the executives can't even get their message out about it.
Because everyone's just pre loaded with like
How bad are you losing that this is the case?
Does it taste like Pepsi? Cause Pepsi sort of seeded, hey, you should ask him, like, is it meant to copy Pepsi? And
The message that the Koch executives have
Is that they're trying not to say too much. They're trying not to describe the flavor. They're trying not to compare it to Pepsi. So they're up there.
Just looking like complete idiots.
with no answers that are substantive while everyone is just attacking them.
It is a
Unmitigated disaster. So
At one point the questioning gets so tough.
That Don Keo says quote.
There's a lot of things I'd rather be doing than being here right now.
This is at a press conference. At a new product launch. Launching the biggest product in the company's history.
And then the final question of the day.
A reporter asks whether
Assuming
This new Coke thing is a success.
If diet coke will also be
Reformulated.
And Roberto responds.
No.
А дом that this is a success.
It is a success.
The two crazy quotes to double down on that
Gosueta says, some choose to call this the boldest single marketing move in the history of the packaged goods business.
We simply call it the surest move ever made.
Then.
Don Keo follows up, I've never been as confident about a decision as I am about the one we're announcing today.
Wow.
This is so bad. Which I don't think either of those things are true.
That can't be true.
No.
Just based on how timid they were in the messaging.
So it turns out
That in all the research that they conducted for new Coke
All two hundred thousand people.
That they did the taste test with.
They never
Asked them.
how they would feel if this new beverage replaced
The old
Coca-Cola.
And Gosweta's response to this in later years is you can't ask a question like that because people don't know. Like you can't get real data on emotional questions like that. You can only actually test
do you like this taste better or not? And so like
Sure, you can run that experiment, but ultimately how much faith are you gonna put in the
Data.
They would have learned something if they'd asked that question.
Yeah.
So the company immediately starts getting thousands of
of letters and phone calls every single day.
One of my favorites is a letter.
That reads
My dearest Coke.
You have betrayed me.
We went out.
Just last week.
As we had so often, and when we kissed, I knew our love affair was over.
I remember walks across campus with you discussing life and love and all that matters.
I remember the southern summer nights we shared with breezes leaving beads of water hanging delicately from your body.
But last week.
I tasted betrayal on your lips. You had the smooth, seductive, sweet taste.
Of a lie.
You have become corrupted by money.
Denying your ideals. Oh man. Or this story
In Marietta, Georgia a woman assaulted a Coke delivery man with her umbrella as he tried to stock a supermarket shelf with new Coke. You bastard, she screamed, you ruined it. It tastes like shit.
And I think they just didn't realize that what they were taking away was people's childhood. Yes.
They're taking away America. It's not about what tastes better. It's what they were used to, and it's what they had built an entire lifestyle brand around believing that America meant to people.
Yes.
So
For a couple of months from April to July
They stick with it.
Well, because here's the craziest thing is they were prepared for a vocal minority to be very mad.
So you're sort of in denial about all the feedback at first. You're like, Yep, this is just what we thought.
And then like
you get a couple months in and you're like, wait.
This isn't ending. Yeah.
Does everyone hate this?
Yes, the answer is yes.
So I thought this lasted a year or two and I asked
Family members, I asked people who were like, Yeah, I think that was like a two or three year period.
There was seventy nine days of
Between when they released new Coke.
And when Coca Cola Classic.
made its return.
Yeah.
So
when they finally decide they gotta bring it back, there's a question of
What do they call it?
And what do they do?
With
New Coke.
And
Coke and their lawyers ultimately decide.
That if they keep new Coke on the market.
As the official coke.
And they call
The old Coke.
Coca-Cola classic.
They can make an argument.
To all the bottlers.
The Coca Cola classic is a new drink.
Really? Yeah. This is part of why they
Bring it back in this way.'Cause there was an opportunity to like r renegotiate.
Hey actually the
Rights that you own are to new coke.
And then more advantageous deal that we're gonna cut.
Is a classic, yeah.
Interesting.
Uh so on july tenth, nineteen eighty five, they announced that old Coke is coming back as Coca Cola Classic.
And new Coke will remain on the market.
And in the press conference, Don Keo says some critics will say
The Coca-Cola made a marketing mistake. Some cynic
We'll say that we planned the whole thing.
The truth is we are not that dumb and we are not.
That's smart.
Yeah.
I don't know. It all seems pretty dumb to me. The crazy thing is they thought when they introduced Coca-Cola Classic that that would be the product for the diehards, for this vocal minority.
that was really upset about it.
And in practice, what happened is everyone went back to Coca-Cola Classic and nobody stay on New Coke. I mean, it's market share.
was three percent.
Yeah, it plummeted.
And I think this completely surprised the executives of Coca-Cola who were like it's better.
We were gonna make small quantities of this Coca-Cola classic just to appease the people who need it, but
It's crazy. People just went back to the worst tasting one.
So there's a
Delicious, one might say, coda to this whole thing. Well wait, we didn't say the best part of how this ends.
Within a year
Coca-Cola classic
Surged past the heights of where Coca-Cola was before the whole debacle started. So the whole thing worked as an accidental publicity stunt.
No advertising campaign could have ever gotten people to pay this much attention to Coke.
In many ways.
This actually did
save Coca-Cola. After this, they started building back share.
What's the song? Um, You don't know what you got till it's gone. This made people realize, Oh my God, I do love Coca Cola.
Yes, you're right. That is the most important takeaway from this.
This is what finally
Stop the Pepsi challenge. Is Pepsi one
And then
After Pepsi winning and Coke losing.
Coke was able to come back. But yes, they had to literally kill Coca Cola in order to resurrect from the ashes and survive the Pepsi challenge.
The little fun trivia is, David, do you know what new Coke became after
They removed the name New Coke, but left the product on the market.
Oh
No, I don't.
They renamed it.
Coke two.
Mm-hmm.
And it was not fuldened until two thousand and two.
Wow.
That's how long they stuck with it. Yep.
So I don't know who the Coke Two fans were, but it was available for you at some point for a while. Somebody
Has hoarded.
A whole stash of Coke too somewhere. It's in some bunker somewhere.

All right, so the delicious thing. Please. Remember
I set up the Warren Buffett ham sandwich thing and I think this whole episode is probably where he decides
Jesus, Coca-Cola could be run by a ham sandwich. Would have been better off.
But actually not, right? This whole thing was so stupid that it was actually amazing.
What's the Bernard Arnaud quote, even when he loses, he wins. Yes.
So after this whole
New Coke disaster.
Coca Cola Company's stock is in the dumps.
Who comes in?
But Warren.
Buffett. Perfect. Bricks or Hathaway.
And buys
A roughly one point three billion dollar
Equity stake.
in the company over the next few years and joins
The Coca-Cola board.
Turns out
To be uh
Well a debatable investment.
He owns about nine point five percent of Coca Cola today.
Yep, Berkshire owns about nine point five percent of Coca-Cola today.
That stake is worth about twenty eight billion dollars.
Which is uh
twenty two, twenty three X gross return on the one point three billion dollar investment.
Over the course of forty years.
Which equates to only just over about a eight percent IRR.
But
Coca Cola stock.
kicks off these days about a billion dollars a year in dividends to Berkshire.
So in total
Berkshire has received about twelve billion dollars in Coca-Cola dividends.
So a forty billion dollar total return.
on one point three billion.
Invested.
Good, but again, this is over forty years, so
That only bumps it up to about a ten percent.
I R R
on the investment. Which I imagine he would have been better buying Berkshire Hathaway stock. He would have been better off
Buying the S P five hundred.
Over that same.
Time period.
That's brutal.
Including dividends over that same time period, the S P five hundred is up.
About eleven percent.
Annually.
So
The famous
Bricks or Hathaway Coca Cola investment.
Today
is actually underperforming the market.
Crazy, right?
When I did some math on this, my first glance at it was this has been an unbelievable investment, because even though the equity value is
You know, it's gone up.
Would you say twenty something X, but over a long period of time. It's been fine. Twenty two, twenty three, yep. The dividend yield is insane. They get
eight hundred million to a billion out every year and their principal was one point three billion.
That's like sixty to eighty percent dividend yield on their original investment. I'd love to park.
a dollar somewhere so that I could pull out
sixty, seventy, eighty cents every single year on that dollar. That's amazing.
But when you frame it the way you did. But forty years is a long time.
Right.
Over a long period of time, you better have insane multiples to justify locking capital up for 40 years.
Yeah.
And you know, the thing about the S P five hundred, right, is it's a rotating set. Right. That's not really fair. And over the last few years, of course, the tech companies have rotated in and yeah, the returns from
You know, the magnificent seven over the last ten years dwarf anything else.
But I'm sure buying Berkshire in nineteen eighty eight to nineteen ninety four, which was the stretch that he bought Coca Cola and holding it to today, it would have been a far better investment than buying Coca Cola stock.
And that is a fair comparison, unlike an index, which has companies that rotate in and out.
Yep.
By the way, this is the fault.
of Coca-Cola over the last twenty years.
It had a ridiculous run right after Warren invested.
We'll cover it at the very end of the episode, but revenue and earnings growth over the last
twenty years on a
annualized basis has not been great.
Yeah.
Well, speaking of the
good initial few years of the run there.
There's one more fruit, shall we say, to be harvested.
of the Columbia Pictures.
acquisition.
Echoes out of Enkyo.
Did you know that's the same.
In the early eighties.
the relationship with CAA.
Yes, and super agent.
Michael.
Ovit's past acquired guest.
Indeed.
Part of the acquired cinematic universe.
So
Coca-Cola
sells Columbia to Sony.
Ovit's and CAA.
our official advisors on the deal.
That's right, when ovits try to take it from a talent agency and movie packaging into also doing investment banking.
Yes.
And on the back of
That success expanding CAA into investment banking.
Ovitz is like
Why stop there?
Why don't we expand
Become an ad agency.
And to add agency land too. So he comes back, Tiko's at a
And Key.
And says hey.
I want to pitch you guys.
on taking over as your ad agency from McCann Erickson. Which is crazy. This is Coca-Cola.
But
Ovitz's pitch is pretty good. He's like, Hey
McCann Erickson
has been great for you guys. And of course, you know, there's the hilltop ad and the real thing and everything over the past set of years.
But hey, this one site, one sound, one cell thing.
Is not gonna work in the
New media.
landscape. I mean, look at how badly you got your butt kicked by the Pepsi challenge in grassroots marketing.
What you need
Are different messages.
That are gonna resonate.
on different mediums. You know, we've got the cable network landscape these days. We've got ESPN, we've got sitcoms, we've got kids' shows, we've got all this different media. It's not just the whole family watching I Love Lucy anymore.
You need a whole new approach.
for the new media landscape. And so you shouldn't have just one television ad.
You should have a whole suite of different television ads for different audiences in different times of the year.
And there should be a democratic approach to this where it's not just one creative director at one agency.
You want the best ideas that can come from anywhere.
And we have
all the talent relationships with all these different writers, directors, actors.
You just give us a creative brief. We'll come back with
Thirty great ideas for you from thirty different sources.
So he pitched Coke.
That CAA
Can make forty
Adds a year for them.
For the same cost that McCann Erickson is making seven.
And they can all stay unified under the new Coke slogan.
Oh.
Always Coca-Cola.
So in nineteen ninety two
CAA.
wins the business.
Dethrones McCann Ericsson.
And among the
Many ads.
That they create for Coke.
Is it new?
Christmas.
Coca-Cola motif.
Not featuring Santa Claus.
But instead
The polar bears. Yep. Ovitz makes the polar bears. Amazing. Wow.
Yeah, I mean he didn't make the polar bears, but Ovitz found the talent through the CAA network to make the polar bears.
So
I think this is basically
The climax of our story.
New Coke, what happens afterwards, the polar bears, these beloved ads.
The rest of the nineties and two thousands
There's a lot of company building that happens.
But
It's just not that romantic of a story.
as much as Coca Cola's first century was.
Well,
The thing
That really started to happen.
in the nineties and then accelerated in the two thousands.
Is the beverage market
Just moved away.
From colas.
And towards a whole variety of other drinks.
The first battle ground for this
It's sports drinks.
And Gatorade. Yep. So in the eighties
Gatorade.
really came on the scene.
And establish the market.
For sports drinks and Gatorade was part of Quaker Outs.
That's right. I forgot Quicker Oates ended up owning it.
Yeah, way back in the day.
So
Coca-Cola in response to Gatorade's success.
Launches Power Aid.
In nineteen eighty eight, Power Eight is
Uh home grown product at Coca-Cola.
It never achieves anywhere near the same success as Gatorade. I think it maxes out market share in like the teens and low twenties.
Finally.
In the year two thousand.
This is crazy.
The then CEO of Coca Cola, Gosetta, had tragically died of lung cancer in nineteen ninety seven.
In two thousand.
The CEO of Coke
Announces publicly.
A sixteen billion dollar deal.
To acquire
Quaker Oates and Gatorade.
This would have been a great deal for the company.
Whoa.
Yeah.
That didn't happen.
So he announced it without board approval
The board rejected after the public announcement.
The deal falls through and
And the next year.
Pepsi ends up swooping in.
buying Quaker Oates and Gatorade. And Gatorade is like a
Home run for Pepsi ever since.
I had no idea wow.
Wild, right? It's total echoes of the Friday.
Disaster.
Co
Could have owned free delays.
And Gatorade.
Wow.
Yeah.
And
That is a little illustration of the
CEO at the time.
There have been five CEOs since Gosweta, nineteen ninety eight onward.
And the first three only lasted three to four years each.
very different than the Woodruff dynasty in the long run that Gosweta had also.
Yeah.
The thing that is extremely clear
that David you touched on is they had to diversify into what they call a total beverage company.
really prompted by this backlash against soft drinks. The world sort of lost interest in
first full sugar colas and then colas.
And
the thing that was kind of driving it, not really in the nineties, but in the two thousands and certainly the twenty tens.
Obesity.
It was clear that America was only going in one direction and sugar and processed foods coupled with the sedentary lifestyle that a lot of Americans live is a giant culprit.
Of obesity.
And so Coke's sort of trapped figuring out.
What to do about this.
The American Heart Association comes out and says the recommended daily limit of sugar
For men is thirty six grams and women is twenty five grams.
Per day.
That's the recommended limit per day. A twelve ounce can of Coca Cola
contains thirty nine grams of sugar.
Yeah.
Thirty nine grams.
So you've got this sort of hard problem where
Coca-Cola itself, just that one product, that one product line.
is this unbelievable
Business.
Super high margin.
Low capital investment.
brand is built and established all over the world like
It's hard to want to invest to anything else when that's your current business.
And at the same time
They need to.
It's existential. This product is probably gonna only go downhill from here. Maybe it's got a few more years, maybe another decade of success, but 50 years from now, will this be your cash cow? No. And so how do you start diversifying
without admitting that your current main product, that is the company's namesake
Is bad for you.
It's just
Bad for you.
Yep.
Tough spot to be in.
not an enviable position to be in. And you can sort of see how that
churn CEOs pretty quickly.
Now the interesting thing though, back to Pepsi.
They've managed this at least from a
business standpoint.
Pretty well over the past set of decades. You know, first with Fried Olay, then with Quaker Oates and Gatorade.
Then in the bottled water market.
So Pepsi launches Aquafina, Coke launches Disani.
Yeah, they were pretty late to the game in waters. I mean I think the story of the last
twenty five years is
they sit there in a privileged position and look around and wait and see. And then when something really starts happening, then they go become active in it.
And they just have to sort of hope that all the assets they have, including the Coke distribution system, makes it okay that they're not first to market on some of these things.
But I don't know, sometimes it's really cost'em.
And the biggest most interesting one is monster energy.
Do you know the story behind Monster Energy?
Well I know what happened, but I don't know.
the story. I mean they started acquiring and investing in
A lot of other
Beverage companies.
Through the two thousands.
There was oddwala, there was vitamin water, there was fuse.
And then I know Monster comes along.
Yeah.
So Monster started
Do you remember Hansen's juice?
Yes.
That is monster.
Oh, I think I vaguely did know this. This is a wild story. I don't have the entire story because this is the Coke episode, not the monster episode, but at some point the Hansen leadership realized that they did want to get into energy drinks, but their current brand was not going to be effective in doing so. And so they came up with this really crazy brand that felt dark and dangerous to counterposition the cleaner aesthetic of
Red Bull.
And ends up going great.
Better than they ever could have imagined.
So
There were various times early in the transition from Hansen's natural to Monster where Coke could have bought it.
But
It was subscale and then there were sort of lulls and growth and it was sort of false starts in it becoming the big giant thing that it became.
And also energy drinks as a category, people weren't sure how durable it was.
You know, is this really gonna be the thing that it became or is it fad?
So in twenty twelve, Monster reached out to potential buyers, including Coca-Cola and Pepsi, but Coke decided against pursuing it because the price was high.
Monsters market cap was eleven billion dollars at the time.
Oh.
And what is Monster's market cap today?
Seventy billion dollars.
Yeah.
I'd say these energy drinks are uh
Not a fad.
Yeah.
So what ended up actually happening much later on, Coca-Cola was like, ah, crap, we should have done that. They do sign a deal with them. So it was a pretty interesting deal.
Coke decided we're gonna walk away from being in the energy drink business. So as a part of this deal, we're gonna do a business swap.
Where Coke gives
It's
Energy drink brands, Nas, Full Throttle, Burn, Mother, and Relentless to Monster.
Monster transfers its non-energy business, including the original Hansen's Natural Sodas. Amazing. Over to Coca-Cola.
Coca-Cola becomes Monster's preferred global distribution partner and Monster becomes Coca-Cola's exclusive.
Energy drink.
Play.
And Coca-Cola gets a
twenty percent stake in the company, right?
Well yeah, but Coke had to buy it.
So Coke had the privilege of investing in Monster.
In twenty fifteen.
Coke puts in over two billion dollars.
At least they're getting on the train.
So Coke's the largest shareholder now.
in Monster Energy.
And you know, that deal looks pretty good. That two ish billion that they put in
is worth almost twelve billion dollars today. So
Nice investment, but gosh.
If you're the global total beverage company, what has the trend been of the last
fifteen years in beverages. I bet they sure wish they owned Monster. Yeah.
It is funny though, like I'm talking out of both sides of my mouth here.
If you think that Coca-Cola is bad for you.
Wait till you see the energy. So it's not just the obesity thing. There's a trend into energy drinks that has nothing to do with health.
Yeah. It's interesting if the energy drinks are
Almost a callback to the original uh like patent medicine of cool. It's like yeah, this is really bad for you.
But you're going in eyes wide open to that. Yes.
That's exactly right.
It is serving a function for you.
Yeah.
The other funny thing that happens is Coca-Cola buys glassaux, which makes vitamin water and smart water.
in sort of yet another
Oh, we should also be in water play.
They pay about four billion dollars for that.
The founder then goes on to leave Coca-Cola and starts body armor.
A sports drink that I think is coconut water based, a little bit more sugary.
turns around, sells that back to Coca-Cola for five billion dollars.
For a startup, body armor did great.
Gatorade still has
sixty percent plus of the market share.
Of sports drinks.
Doesn't make a dent in
Pepsi Co's number one position in sports drinks.
Yeah.
If you're gonna look at Coca Cola as a total beverage company and say, what beverages have really been killing it the last twenty years,
that you've managed to bet correctly on or incubate in house? And the answer
Is diet coke?
And Coke Zero.
Yep.
Coke Zero.
Two thousand five. Taste infringement.
For a few years it was growing it.
10% a year, which is really fast considering it launched like 20 years ago and it was already very large.
Yeah, it is sort of ironic that the last
twenty years have been about a
Metamorphosis into a total beverage company.
And it's
Coca-Cola?
Diet Coke and Coke Zero that are leading the way.
Yes.
So that was a lot of stuff that happened in the two thousands. The twenty tens, they did acquire more brands. They continue to grow the total beverage company's portfolio.
They did a whole bunch of stuff that we're not gonna spend too much time on in this episode.
rehabbing their bottler operations, bringing a lot of it back in house.
making sure the quality and the efficiency was up to where they wanted to have it and then spinning it back out. And so a lot of these bottlers came on balance sheet, then went back off balance sheet to new owners. They encouraged consolidation among their bottlers. They finally got rid of the last little element

And so the story for people who follow Coke as a company or a stock.
is a lot around
How good of a job are they doing restructuring all the bottlers? And it seems like they're they're mostly through this whole refranchising thing that they're doing.
So that brings us to the business today.
Yeah.
And the business.
Today.
The biggest piece
is a part of the story that we basically haven't talked about since World War Two.
Is international.
Coke is a global company.
Yeah. Most of the revenue and profits do not come
From the United States.
Even though all the storylines that we've been talking about.
Are the United States.
But I think when people look at the Coca Cola that they're holding, they think about the United States.
Right.
Maybe that's not true. Maybe I'm I live here and so I'm ethnocentric about that, but I'd be curious
If Coke feels like America.
to you if you're a listener and you don't live here.
Yeah.
You know, the other part of it is
Coca-Cola did set up.
The bottlers as independent locally owned entrepreneurial businesses in all the countries that they went into. Produces a lot of profits locally.
Yep.
So
Yeah.
It is a local business wherever it is.
All right, so let's walk through that. Here's Coca Cola by the numbers today.
So first of all
Brands.
For a long time, the thought was just build the total beverage company and more brands is better. So let's just keep going.
They got over five hundred.
Around twenty twenty they did a big slimming and went down to about two hundred. And ones that they got rid of were tab,
Zico, Adwala.
Honesty Vault.
Those are probably some of the ones you know that they got rid of.
They do have thirty brands that do over a billion dollars in revenue.
Kind of crazy that
It's a house of brands that has that many
billion dollar brands. 15 of them were created organically, like Fanta and Sprite that we didn't talk about in this episode.
That's right. Ah, we didn't talk about it. Do you know
The history.
behind spray.
Do you know what Sprite really is?
No, not really.
So Sprite.
As we all
Know it.
Today.
Is not Sprite.
Sprite.
Is Fanta Clear Lemon.
From Germany. Really? Yep. That they brought over to America and rebranded it as Sprite.
No way!
And they stole the name from um they had a character named Sprite Boy
Who was a part of the Coca-Cola Santa Claus universe.
Yep, that's right.
All right, those are two of the fifteen that were created organically in house. Three of them they bought that were already doing over a billion in acquisition, and then the remaining twelve of the thirty billion dollar brands that they have.
were small and Coke grew them to over a billion in revenue.
underneath their umbrella. So think Minute Made, Fair Life and Vitamin Water.
And just to share some of the other brands they do own. Power aid, Minute Made, Dasani.
Vitamin water.
Coke Zero.
Schweps.
Ah Smartwater C L, which is another water brand.
And Crystal, which is yet a third water brand.
They recently bought Topo Chico.
They're actually playing around in alcoholic beverages a little bit with Topo Chico.
With a hard seltzer. I think they're also doing a Jack and Coke.
And uh Sprite.
That is uh
alcoholic. So they're starting to dip their toe into that a little bit.
Mm. Fanta clear lemon, alcoholic. All right. Has a real ring to it. Fresca.
Body armor.
Fair life and core power.
The dairy products.
And uh
Fuse tea.
And
Here's one that is a little bit of a head scratcher.
Coaster coffee.
Yes.
Quite a few billion dollars a couple of years ago, right?
And it's
Uh physical retail.
It's a coffee house in the UK. Yeah, it's like a Starbucks competitor.
Yeah.
So that's interesting that they operate a coffee house.
By the way, speaking of coffee, someone told me that the relationship with McDonald's runs so deep.
That Coca-Cola sources
The coffee beans.
Four McDonald's.
Wow.
And if it's actually the sole source of McDonald's.
That is a giant number of coffee beans.
Well it's interesting with both the cost of coffee and the
McDonald's coffee.
I'm pretty sure we talked about with Howard on our Starbucks episode the
Starbucks Pepsi partnership with Frapuccino, right? That's right. The Pepsi was the bottler.
That made the CPG version of the Frappuccino.
Yep, huge success for both companies.
Yeah.
So those are the thirty billion dollar brands that they have.
Coca-Cola.
serves two point two billion servings of their beverages to the world every day.
Wild.
That is uh what, like a quarter of the world's population?
If everybody were having just one. Isn't that crazy?
Definitely not evenly spread. Yes. There are a lot of power users of Coke products out there. Yes. But Coca-Cola's estimate is that there are sixty five billion servings.
of beverages consumed every day. Does that include water or no? Yeah. The the human race takes sixty five billion drinks a day.
Of something.
So what's that? I guess that's eight drinks.
Per day.
Yes.
So, you know, by that calculation, they got a lot long way to go. Huge market ahead of them, even if they stayed just in beverages.
There you go.
They have two hundred
bottling partners around the world with nine hundred and fifty unique facilities.
Pretty awesome that they don't have to own
The vast majority of that.
from a revenue perspective, this is what you were starting to get into and how is the revenue breakdown.
The Coca-Cola company itself does forty seven billion dollars in revenue.
And how much is North America versus rest of the world?
Forty percent of revenue is in the US and sixty percent is international.
Mm.
That's actually bigger than I would have thought in the US.
Yeah.
Still very meaningful.
I bet for the Cora Cola products, it's less than forty percent in the US.
Yeah.
I bet that's totally right.
Okay, so
The
Interesting thing is if you start to look at employees, so revenue, forty seven billion dollars at Coca Cola company out of a hundred and seventy five billion dollars in total revenue by the system. And this is as reported by Coca Cola in their proxy statement.
There are seventy thousand employees of Coca Cola.
But again, if you look at the system
There are seven hundred thousand employees.
So let's look at those last two numbers together, because that's a 10x difference in employee count.
A full forty seven.
Of the hundred and seventy five billion dollars in revenue goes to the Coca-Cola company, 27% of the revenue with just 10%.

I mean the Coca-Cola company gets a tremendous amount of leverage out of the bottling system.
This is just employees. This doesn't even think about the margin profile. This doesn't think about return on invested capital, which again is all much better.
If you're the Coca Cola company versus if you're the bottlers.
Yeah.
And then there's the
Fountain.
customers, the retail partners, the McDonalds of the world.
Definitely Coca-Cola is a better return on investing capital.
Standpoint then.
Running restaurants.
The Coca-Cola company just needs to sell syrup.
and spend marketing dollars to sell the dream.
It's a beautiful position to be in.
Yes, it is.
Earnings on that forty seven billion dollars, they generate ten point six billion dollars of net income.
The net income margins tend to average around twenty three percent.
Gross margins.
average about 60%. Historically, it was as high as 70%. So almost as good as a software business, but not quite.
But
For a physical goods business, it's kind of unbelievable that they have sixty percent gross margins.
Then when you look at the revenue mix on products
This kind of gets to like w what is the company today?
Sixty-nine percent of revenue comes from sparkling soft drinks.
So as much as they are in water and milk and tea and juice and sports drinks,
The bulk of this business is selling soda.
Forty percent of all volume.
is trademark Coca-Cola.
which is just Coke Diet Coke Coke Zero and the like caffeine free and flavored variants, forty seven percent
Yeah.
Is
The Coke family.
Wow.
So I I kinda continue to maintain this mentality of
They keep trying to get into other stuff.
But then they're always a little bit like
Geez, I know we should be getting into this other stuff.
But it's not as good as our original thing.
It's not as good of a business. It's not as unique of a brand.
And I also think they're kinda like
limping in to a lot of these other categories. They're not making a giant early bet.
Yeah.
That
become the next big beverage fad. They're trying to watch and see how it plays out and then jump in. Yeah. Whether it's sports drinks or energy drinks.
Exactly.
Market cap is three hundred billion dollars, so
Huge company.
Not by
Mag seven tech standards, but
Massive, very valuable company.
You'll note, David, they did not achieve Charlie Munger's thought experiment of two trillion dollars because
And they are very unlikely to get there by the 150th birthday in 2036, which is the time frame that Charlie used.
Indeed.
Growth is only
three or four percent a year. If you look since nineteen ninety eight.
in the post Goswe years, it averages out to about three to four percent growth. So
I think fair to say anemic.
when you're describing their growth in recent years.
Yeah.
I think that's why we focus the bulk of the episode on the pre nineteen ninety eight.
Coca-Cola.
that's really where they built this unbelievable thing that frankly
Saturated the world.
Yeah.
this incredible business with all these innovations and sort of pillars of what became
One of if not the greatest.
Brand in American history.
But yeah, as we said, back starting at the
Pepsi Challenge days.
I think there's a strong argument that Pepsi was the more interesting company.
And over the last fifty years, soft drinks as a category have just gotten a lot more competitive. The stat that I saw was back in nineteen forty eight.
Coca-Cola said that they had sixty percent market share of US soft drinks.
Sixty percent in post World War Two
America.
In soft drinks today they have twenty one percent.
Pepsi has ten percent.
And I think there's a lot of things in soft drinks. So if you just look at carbonated, Coca-Cola does have 47% market share, and Pepsi has 19%.
But in soft drinks, I mean the category has just gotten a lot more competitive and Coke has lost share.
Yeah.
All right, shall we move into analysis?
Yes, let's do it.
All right. So
Instead of playbook this time.
Yeah.
I had just something kind of funny written down for
Playbook, which is this company really only does two things, manufacture syrup out of some unique intellectual property that they own, and spend money on marketing.
Correct.
I think the more interesting playbook this time is a brief review of why Coca-Cola worked.
Yes.
Line.
Let's do it.
Well.
First.
You were talking about it a minute ago with the uh sixty four billion daily
Thirst quenching occasions around the globe.
Nice market to get to play in.
Yeah.
They just didn't.
A giant market.
Everybody in the world gets thirsty.
And everybody in the world
likes to have some variety in what they drink besides just water.
Yep.
Full stop.
Full stop.
And in that category, they built something that for many years, the better part of a century.
People felt was N of one.
Yes. They were the original.
They were the real thing.
And it took a long time for that to get eroded. And honestly, if I'm looking at sodas.
It's still the real thing.
It's just that there's a lot of other things too.
And that's due to both a
multi decade hundred year plus
investment in building the brand.
And some of the greatest brand marketing.
Of all time.
Yeah.
Three.
World War Two
And having a
unbelievably paved path for them to expand globally, and then also kind of shut the door behind them on global expansion.
Yep.
And I really do think continuing the
Second party
locally entrepreneurially owned.
franchise bottling system internationally.
was a huge contributor to that.
Yeah, so much of Coke's success. I mean, I keep going back to that moment earlier.
where bottlers enable them to scale so much faster.
than not having bottlers. And even if you look at all the beautiful business dynamics of you don't have to deal with that lower margin stuff. You don't have to deal with the high headcount stuff, the high complexity stuff, the high overhead, the lower returns on invested capital, even if it's just
About speed to market. Yes.
They got to blanket America and then blanket the world.
very quickly before anyone else. With a thing that
People pick a supplier once, whether the restaurant's picking the supplier or people are picking their favorite
Beverage.
They pick it and then it's over.
And they sort of
had this unbelievably fast way to saturate
in something that was a race. It turned out soft drinks.
were a category that was a race and who's gonna get to global scale first.
Yes.
And
It was all figured out by accident.
Because of the worst business deal in history. As Steve Jobs always says, you can only connect the dots looking backwards. That's right. The one dollar contract. Of course, it is a highly addictive substance that is also super enjoyable to drink.
And triggers every reward center you have.
Not nearly as much as when it had cocaine in it, but plenty of reward centers.
from the uh bubbles, the sugar, the caffeine.
the cold refreshment, everything about it.
I've been fired up to in this episode.
The extrinsic marketing capability of associating with everything good in your life, with happiness, with Christmas, with your family, with your favorite athletes.
It's just amazing lifestyle marketing.
Yep.
And then lastly.
I will say
New Coke.
Yeah.
Taught us to love again.
I mean it made us fall back in love with Coca-Cola.
I think Coca Cola would be worse off today if they didn't go through the new Coke moment, which is crazy to say, but
I guess we don't have the counterfactual, but
If you just look at the data on the resurgents in Coke afterwards.
you couldn't have come up with a better marketing stunt.
Totally agree. I disagree with both sides of the Don Keyo statement that we weren't that dumb and we weren't that smart. They absolutely were that dumb and they absolutely were that smart. Yep. Yep.
I've got two more.
That I would add?
Great.
One.
I think Pepsi was great for Coke. I think neither Pepsi nor Coke
would be what they are
Today or be
As great.
a product and company as they are today if it weren't for the other one. Definitely. I mean
The Pepsi challenge is what made Pepsi.
Because there was a challenge to Coke.
And then all of Coke's response.
They made each other better.
Yeah.
And then the last one I would add
Is that
Other than
Software
And
Technology products.
This is the first real physical product I think we've ever studied on acquired.
Where
You can have both.
A low selling price.
And high margins.
Oh, that's interesting. And
That's super important when it's also a game of
scale and global scale.
Because it
Let's you
sell this affordable luxury or pause that refreshes to
Everybody in the world.
More or less everybody in the world can afford a Coca-Cola.
And also
The Coca Cola company makes great margins.
On those selling prices.
It's a lot of volume.
And that's
Incredibly cheap ingredients. That's the other Yes That's our why Coke worked.
That's our tableau of why Coke works so well.
Yes.
All right. Powers.
For new listeners to the show, and there are many of you, thank you so much to all of you who share the Trader Joe's episode with
Friends and family we saw.
Tens of thousands of new listeners.
Come and join us. So welcome to the party. This section, power, is gleefully ripped from a book called Seven Powers by our friend Hamilton Helmer.
And
In it he examines
What of these seven possible powers is it that enables a business to achieve persistent differential returns, or put another way, to become more profitable than their nearest competitor and do so on a durable, sustainable basis? And the seven are counter positioning, scale economies, switching costs.
Network economies.
Process power.
Branding.
and cornered resource.
Well, it definitely wasn't counter positioning because Coke
Is the real thing.
Was the first.
Pepsi, master of counter positioning. Coke is the incumbent.
Yeah.
Coco's mostly getting counter positioned. Yes.
So this is a business of scale economies. Everything about this business is scale economies. The amount that they can amoritize their advertising over.
It's just an amortization scale economies business.
Period. They can manufacture and distribute
things cheaper than you can to way more people than you can and good luck catching up. And like
They're gonna have another hundred years in'em.
because of that advantage that they've built up.
Yep.
All of the things. Yep. And perhaps the most important might be the first thing you said of amortizing there.
advertising spend over the life of the company. They can afford to just pour
massive, massive, massive sums into marketing. This is why it was such a big deal when in the seventies with the Pepsi Challenge, Pepsi started outspending
Coke in marketing.
If you were really astutely paying attention to the dynamic, that should have tipped you off of like
Oh, Coke is in.
big trouble relative to Pepsi. Like if Pepsi can afford now
to make the investment to spend the same or more in marketing dollars.
They're gonna catch up.
All right, so while we're there, let's do branding.
'Cause I think this is so interesting. Normally brand power is measured by
The amount
If you provide someone with two identical things, how much more are they willing to pay you and that delta, you know, the Tiffany over the generic
piece of jewelry is how you quantify their brand power.
Coke.
Doesn't sell things.
in general that are more expensive.
Pricing power isn't really a thing that's exercised in this industry, if it exists at all.
Coke clearly
has branding power.
But rather than taking price
they keep price low
And use their latent
Brand power in other ways.
Yeah.
I mean, the funny thing is when they sell a Coke, they're selling a billboard. And so there's this flywheel element too, where they want to sell as much Coke as possible, not just to keep their manufacturing costs
low'cause it's a economy's a scale thing.
But also because one more Coca-Cola floating around in the world just reinforces
the brand.
Yeah.
I would say.
Not that I disagree with anything you're saying. This just reinforces for me
This business is all about scale economies.
It's all the pursuit of scale.
I think this is the best interplay we've ever seen between branding power.
And
scale economies where the way that they've built a lot of the brand that they have is through their scale economies and they sort of go back and forth.
Yeah.
I'll tell you.
You can't measure
their brand power.
through how much more expensive it is than Pepsi, because that doesn't exist.
You can sure measure it though.
with the outcry against
New Coke.
Yes.
That was a uh one time experiment that most brands never run. With good reason. Switchs? I don't think I have any real switching costs. Sometimes I do have to drink a diet.
Pepsi or a Pepsi Max and like it's fine.
It's not my preferred drink, but it's fine.
Yeah.
Network economies none.
No.
Process power.
Maybe, but it's hard to discern from the outside.
And then the last one, cornered resource.
Okay, what's your opinion?
Of course, it's the formula.
You really think yes.
But I'll tell you, it's not the formula itself.
It is
All of the meaning.
Imbued.
into the formula that is actually a part of their branding power.
Yeah.
But if Pepsi said we broke into the vault and we got the Coca-Cola formula and we're releasing something called
Pepsi C and that is identical to Coke.
Something would go with it.
There would be some amount of value transferred from Coke to Pepsi. Okay. Yeah, some.
The public
gives meaning to the formula, even if
you can synthetically create.
Something that tastes exactly the same as Coca Cola.
Yeah.
Okay, so I'm gonna take the exact opposite position on this argument. I know you've been texting me all week that you think that the whole secret formula thing is a red herring.
Yeah.
I think there is
Today, absolutely no value to the formula. There's a not just a thought exercise. There's an actual conversation in the appendix of Forgot Country and Coca-Cola.
Mark Pendergast in his research.
Found
John Pemberton's original formula.
From eighteen eighty six for Coca Cola.
He found it and he took it to his contacts at the Coca Cola Company and said
I've got it. What do you guys think
And they said
Well.
Okay.
You publish it, let's say somebody gets a hold of this formula, what are they gonna do with it? Make a drink. Okay, great.
How are you gonna distribute it? Okay, well, but let's say you can figure out distribution. Well, what are you gonna call it?
You gonna call it Coca Cola? Well, we'll of course we'll sue you for that.
How are you gonna brand it? How are you gonna invest in marketing? Basically, how are you gonna get the scale economies to do what we do?
And
The answer is
You're not going to. And to your point about Pepsi, Pepsi's got a better formula. Well, Pepsi has a better formula one, but there actually was a case.
Somebody, a former Coca-Cola employee.
Stole the formula.
and tried to sell it to Pepsi. This actually happened.
And Pepsi turned them into the FBI.
What is Pepsi gonna do with the formula? Pepsi's not gonna s market
The Coca Cola formula. These are big multinational corporations.
Yep.
You know, if anything, what you've convinced me of is that the bottlers are actually a cornered resource.
Mm those bottlers have great distribution and they're not bottling for anyone else.
Yep, great point. Coke.
handed them a license to print money and
They're doing it.
Yep.
I actually am very curious. Can you switch teams as a bottler? Probably not.
I guess it's
Probably legal, but I bet nobody does.
Yeah.
Fascinating.
All right.
Quintessence.
So listeners, this is something we added earlier this year where we really try to
come up with something to land the plane. What is our takeaway from the episode? And you know, we already laid out why did Coca-Cola work. So this is just
David and my opportunity to kind of come up with a quippy sentence or or three that is the thing that's on our mind as we're leaving the episode.
But first
David, we have to come back to the question.
Could Coca-Cola
be run by a ham sandwich.
Mm-hmm.
I think
After studying all this history.
I have to agree with Warren.
Whoa, really? And Bill.
I think it could be. Now
There have been great
Incredible CEOs in Coca Cola's history.
Candler, Woodruff.

All of them.
Have added on
To what the Coca-Cola company is, I think.
But if you took
Just Coca-Cola.
Yeah, a ham sandwich could run it. And in fact, it's proven
By the new Coke.
Divacle.
Alright, so I disagree. I think
There were definitely periods in history, yes, but in 1985, no. I mean, Coke had been losing share to Pepsi for 15 straight years. They did actually need active management to do something. And sort of the same thing with the obesity crisis in the two thousands. I mean
Coke effectively bumped up against the edge of
the market of humans that it could possibly expand to, and they did actually need a different company strategy. Now whether that has been executed well is a different
thing. I mean it's only grown three, four percent over
Whatever the last twenty seven years.
So if the criteria is run a high growth
successful great place to put money versus all the other places you could put money company
No, they haven't succeeded in doing that, but
I mean you do have to do something.
rather than just be flat to anemic growth or decline.
Those are very fair points. Points taken.
I would still pose the question to you.
What is the
single biggest revenue driver.
Within the Coca Cola Company today. Trademark Coca Cola. The real thing, baby.
Yeah.
Okay, but on to quintessence.
I have two.
Okay.
One is
It's a system, not a company.
Yeah.
That's new for us. I know franchises exist, but this is sort of a different
Thing.
And I'm interested in studying more sort of
systems where it's multiple companies interrelated.
And two is if you really boil it down.
The Coca-Cola Company in a nutshell.
It is figuring out how to incentivize partners.
To sell your product.
And everyone is incentivized. The
Bottlers are massively incentivized. The retailers, there's great margin there for you.
The
Soda fountain operators the restaurant.
The
Billboard owners.
We didn't talk about this, but in the Great Depression, when no one was buying billboard space.
The billboard
owners didn't want empty blank sad billboards, so for free they put Coca-Cola ads up on it.
They were the preferred thing to a white wall.
I mean, I think it's a good thing
Just everyone in the entire ecosystem.
is incentivized to sell Coca-Cola.
on behalf of the Coca-Cola company.
And that
Is durable.
Yes. Robert Woodruff had a mantra.
an official motto within the company.
During his reign as company boss.
Yeah.
Everyone who has anything to do with Coca-Cola.
should make money. And there you go.
That is a great quintessence.
Yeah.
Mine that I would add.
Repetition works.
Mm. We've studied a lot of brands on Acquire. It's become a
core part of what we do, especially with the luxury industry.
But
In the luxury industry
They're always looking for the new spin.
Um
changing and there are elements of repetition, our mes is always our mes, but it's always whimsical. It's always something new. Pierre Alexi always has a new theme every year.
With Coke, it's
A story of
A hundred and fifty years of
Always delicious.
Always refreshing.
And yes, they change it up, but it's the same core thing. It's a core human need.
You want something delicious and refreshing, no matter who you are or when you are.
Yep.
That's my quintessence. Great.
All right. Well, cheers. It's a sugar water company, David.
They make
A drink of sugar water that's not good for you and they built one of the most incredible brands of all time.
But it's always delicious and always refreshing, but it's not good for us, it's not good for the planet.
And it's
Delicious and refreshing.
Are you trying to tell me that I could sell sugar water for the rest of my life?
Or I could come with you and change the world.
I promise no world changing. But I do have some trivia.
Great.
A thing we didn't cover on the episode.
In addition to rising to the Supreme Court and generals soon to be presidents
you know, helping the success of the company. In nineteen eighty
The government

To federal antitrust law that exempt the soft drink industry. So Coke and Pepsi could actually grant exclusive territories to their bottlers, which you might have been wondering, how do you get this local monopoly? Oh yeah, how is this legal? It's like I get to serve all of New York and all of New Jersey or whatever. Yeah, they actually have a federal exemption from antitrust law.
To be able to grant.
Monopolies. Wow.
Trivia number two.
The Hartsfield Jackson
Airport.
in Atlanta.
Yep. Huge airport for anyone who's ever been there.
That land.
was once owned by the Coca-Cola company.
Same actually with the Atlanta Zoo.
I mean the Coca Cola company does a lot of international business, so uh
They need a big airport there.
Yes.
Very true.
And here's my last fun piece of trivia. Around nineteen thirty, when they were really freaked out about
whether or not they'd have the ability to import the coca leaves to the United States to do the refining here.
They actually leased a secret
cocaine refining facility in Peru? Yes, in Peru.
They spun the factory up, it was working, the employee manufactured Coca-Cola there, and the extracted cocaine that came off as a byproduct was
They had a big amount of it and they were trying to be a good
employee to the company and
Earn some money with it. So they sold forty-two pounds of cocaine to a narcotics broker in Paris, and the sale proceeds went in the Coca-Cola bank account. And so there's this crazy period where Coca-Cola's freaking out like
We gotta hide this. This is not good. So this employee wasn't trying to like steal cocaine and sell it on the black market and make money.
He's trying to be a good employee and increase profits for the company.
That's right.
And the Hoover administration would eventually grant that exception so they could refine the coca leaves here in the US, but uh that was just before.
Wow.
I have
One piece of trivia. Do you know what other
very large American company.
Coca-Cola.
Helped
put into business and was their primary and I think sole customer for the first few years of their life.
No.
Monsanto.
Really?
So Monsanto started
As a saccharine.
Manufacturer and Coca-Cola was their first major customer and bought their entire
Saccarin supply. Was Tab
Sacchin sweetened?
No, this is way before. I think it was just that Coca-Cola was probably experimenting with saccharin. I don't know that they actually used it, which is odd, but yeah, this is right around the turn of the century, early nineteen hundreds. Coca-Cola
was Monsanto's very first customer.
Trying to create some mind stickers out there.
Yeah.
Oh.
All right. Carts?
All right.
Carvalho.
Great.
Oh boy. Well on that um
Theme I guess of
Diets.
I
Recently redid my home gym.
And
I got a new
Piece of
Workout gear.
That I'm really enjoying. Have you ever heard
Of a ski erg.
Oh yeah.
This thing is great.
I am neither a skier nor a rower, but it is a vertical rowing machine made by Concept Two, which is the main uh like rowing erg machine manufacturer, but it's vertical. It's attached to your wall. Uh it takes up no space and
the movement that you do is like cross country skiing. You reach above you, you grab the handles and then you pull down like your cross country skiing.
It's great because my primary form of exercise these days is running.
And on my off days I've been looking for like, okay, I want another thing I can do that's not
My lower body.
So it's looking at a rowing machine, but like it takes up a lot of space. I don't have a lot of space down in my gym.
I went with the skier. I'm very happy with it.
I'm with you for multiple days, uh ahead of the Super Bowl, so I'll have to give it a shot when I'm staying at your house.
And then
One more bonus carve out in my ongoing video gaming saga with my older daughter.
I downloaded Smash Brothers Ultimate.
to her switch. And so we've been playing that.
She really
likes to be a princess, of course.
And to quote unquote fight the bunny.
She calls Pikachu the bunny. So she's always like I want to fight the bunny. Pikachu is bouncy.
He kinda looks like a bunny.

Awesome.
I've got three.
Friend of the show.
Claude.
for reading leases. Oh nice. I just signed a lease on Acquired North
moving out of the the basement and uh getting a studio next year.
And big news.
it didn't warrant real lawyers looking at it. And so I gave it a pass and I I asked Claude, is there anything that's wrong in here? And it flagged a few things for me that I found quite helpful.
So I don't know if anyone's told you this yet, but I think AI is the future and it was quite helpful for me. Do you want to sell sugar water for the rest of your life or do you wanna That's right.
Two is my current favorite running shoes are the Nike Vomero Plus, which seems to be the replacement for my previous favorite, the Invincible Line.
So big fan of the uh
Vomero Plus. And then the music I'm digging right now is
An artist called Hermanos Gutierrez.
My good friend Andy Sparks recently stayed at my house and put this on while we were hanging out one morning, and it is uh fantastic chill music. So I highly recommend it.
Excellent.
Well, with that, we've got some thank yous for folks who helped us with this episode. So first as always to Arvin Navarotnam at Worldly Partners for his great write up on Coca-Cola, which is linked in the show notes. And actually Arvind was very close with Charlie Munger when he was alive.
And so uh he is the one who brought up that thought experiment that I did not know about, or I guess remember from the first time I read poor Charlie's almanac.
Yeah. When you brought it up I remembered it, but I had completely forgotten.
Same.
to Bill Combs, who is the past president of the Coca-Cola Collectors Club.
the largest collector's club in the world, but it's great. I talked to Bill and he had all this amazing old Coca-Cola memorabilia on the wall behind him.
drugstore signs and stuff.
to Simeon Siegel from Guggenheim Partners, a retail and consumer brands analyst who helped me think through the nuances of how brand power shows up in financials.
And of course, to all the other Pass Coca-Cola folks who spent time with us helping to make sure that we got the story right.
Yes. And
One more big thank you from my end.
To John Skully.
Steward of
The Pepsi Challenge. Thank you.
So much, John, for uh
Giving us those.
Wonderful stories.
If you like this episode, go check out our episodes on Berkshire Hathaway, Standard Oil, Rolex, or Trader Joe's.
And as we head into the holiday season, feel free to share this with anyone who wants to understand
the origin behind the modern Santa Claus.
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