The CEO of Coca-Cola Co., M. Douglas Ivester, believes in digging into the details of all his company's far-flung operations. When an executive from Coca-Cola Femsa, Coke's biggest Mexican bottler, mentioned his country's tens of thousands of mom-and-pop retailers at a presentation last year, Ivester cut him short, saying: "So which are they--moms or pops?" John Santa Maria Otazua, Femsa's chief operating officer, stammered back: "I think it's more moms than pops, Doug, but I'm not sure."
This wasn't just a tough leader trying to throw a manager off balance. Ivester was dead serious, a fact that speaks volumes about the CEO--and the state of Coke's business around the globe. These days, some of the soft-drink maker's biggest investments aren't in markets dominated by giant retail chains where customers buy in bulk. They're in Brazil, Russia, and Indonesia, where the local economies have been ravaged and soda is sold a few ounces at a time. Many of the store owners in Mexico, Coke's second-biggest market, turned out to be single mothers and retirees who couldn't afford health insurance. Armed with that intelligence, Femsa was able to create an incentive program that rewards shopkeepers who sell enough Cokes with access to group insurance--a move that helped boost Coke's sales volume in Mexico 13% last year.
The emphasis on nitty-gritty details and creative solutions is vintage Ivester. And it's a sharp departure from the arm's-length, patrician style of his predecessor, the legendary Roberto C. Goizueta. Now, 18 months into his tenure, Ivester's style and substance are being tested in ways he never could have anticipated. Although he took over one of America's most admired companies after spending years preparing for the role, the soft-spoken ex-accountant is steering a company that faces a world of trouble.
TRICKLE. Over the past 12 months, Ivester has watched the global crisis leave the mighty Coke machine sputtering--its sales and profits battered by the turmoil abroad. In Brazil and Japan, two of Coke's biggest overseas markets, flattened consumer buying power left growth last year almost nonexistent. In Russia, where Coke has invested more than $700 million over the past eight years, the collapse of the economy has left the Coke system operating at 50% capacity.
Things are not much better back at home. At the very moment he can least afford it, Ivester is being forced to expend precious resources to fight off a reinvigorated PepsiCo Inc., which is aggressively trying to win back the market share it lost to Coke earlier this decade. Suddenly, Pepsi is fighting tooth and nail for every restaurant chain, every supermarket display, and every vending machine opportunity that comes up. That new sense of purpose has forced Coke to make much costlier concessions to retain its biggest customers. Unlike past skirmishes, this Cola War is shaping up to be a war of attrition, in which the market-share winner may turn out to be the earnings loser. "The gloves are off again," says consultant Stanley Makadok, a former Pepsi executive.
For Atlanta-based Coca-Cola, which rode the wave of global capitalism further than almost any other U.S. multinational, the recent turbulence strikes at the core of its being. After years of solid 15% or better annual earnings gains, Coke surprised Wall Street in the third quarter last year with weak results. That was followed by a fourth quarter in which earnings plunged 27% from 1997. For the year, Coke registered a 1% drop in operating income, to $4.97 billion on $18.8 billion in revenues--and is likely to be flat again this year. To a company that has long been considered one of America's premier growth stocks, that's akin to falling off a cliff.
Indeed, the reaction on Wall Street has been humbling. During Goizueta's 16-year reign, Coke shares rose a breathtaking 3,500%. But after the bad news began to pile up last summer, Coke's stock fell by nearly a third, from 88 to around 59 in early April. Some investors have questioned whether Coke's days of outsize returns are gone forever. "I think it's up to Coke to prove they can get back on the growth track," says Ned Riley, chief investment officer for BankBoston, who started paring back his Coke holdings last summer. Still, there are some who believe the worst may be over. Despite a dismal first quarter in which operating profits fell by 9%, Coke shares climbed in recent weeks to 66.
ON THE OFFENSE. So far, Ivester's response to his company's myriad problems has been remarkably consistent. Rather than pulling back as the going got rough, Ivester has repeatedly doubled his bets--spending lavishly in order to win an ever-bigger slice of the global market. Overseas, where Coke derives more than three-quarters of its profits and 71% of its growth, that has meant using the downturn as a chance to buy bottlers, distribution, and even rival brands cheap. In the U.S. it has meant spending whatever it takes to hold on to key customers or sign up new ones.
Ivester argues that the investments will allow Coke to emerge from this period stronger than ever. "My view is that in any crisis there's opportunity," he says. In effect, he is betting that the big investments made today will buy Coke market share and growth opportunities in the future. It's a risky bet. In the short term, the spending spree has added to the pressure on Coke's bottom line and hammered operating margins down from historical levels of 26% and better to 21% by the end of last year. Even at its current depressed stock price, Coke trades at a price-earnings ratio of 45--a number that will surely decline if Ivester's strategy falls short. Already, Wall Street is becoming more skittish. Salomon Smith Barney analyst Jennifer Solomon recently advised clients that "this may be the end of giving Coca-Cola the benefit of the doubt."
The barrage of bad news catches Coke at a ticklish time. Managing a downdraft is tough for anyone, but Ivester, 52, had barely moved into the corner office when the numbers began to fall apart last summer. On top of that, he follows one of the most successful and revered CEOs in corporate history. For all their mutual respect and long working relationship, the two men couldn't have been more different: Goizueta, the Cuban aristocrat, and Ivester, the first in his family to attend college. The cerebral Goizueta fancied himself the master strategist who ruled at one remove. His pupil, who puts in 14-hour days and stays in contact with managers worldwide through E-mail, voice mail, and alphanumeric pager, doesn't hesitate to get involved at street level, whether it's monitoring a minor acquisition in Peru or a bottler's complaint in South Africa.
RIGHT STUFF. If Ivester is nervous about the challenges he faces, he doesn't show it. The son of a textile-mill supervisor, he gave up the partner track at accountants Ernst & Whinney to join Coke's finance staff in 1979 and has since worked in nearly every corner of the Coke empire. Under Goizueta, he executed many of the tactics that have won Coke a 50% share of the worldwide soda market. In 1986, Ivester engineered the ingenious spin-off of Coke's bottling operations. As European chief later in the decade, he led the push into Eastern Europe by driving a trunkful of Coke into East Germany even as the Berlin Wall was falling. And as head of Coca-Cola USA from 1991 to 1994, he introduced a plastic version of Coke's contour bottle that helped lift Coke's U.S. market share two percentage points.
Inside the Coke camp, few question that Ivester has the right stuff to take Big Red back to its glory days. Coke's board has made it clear that Ivester has its undiluted confidence. "I can't think of anyone better suited to lead Coca-Cola through its current situation," says director Herbert A. Allen, president of Allen & Co. And Warren E. Buffett, a director and Coke's largest shareholder, with 200 million shares, or 8% of the company's stock, tells BUSINESS WEEK: "Doug is as good as they've ever had. If I owned the whole company, Doug Ivester would still be running it."
Even as the economic winds battering Coke reach gale force, Ivester has remained unflappable. In a pep talk to employees in February, Ivester was resolute that the business hadn't fundamentally changed, noting that Coke had weathered countless economic crises in its 113 years. "We're dealing with human thirst," Ivester tells employees in his gentle Georgia accent. "There's nothing about economic change that is going to change people's thirst."
Still, the global crisis has left many thirsty people in Asia, Russia, and Latin America unable to afford a Coke. In Brazil, its third-largest market, Coke has lost more than one-tenth of its 54% market share to low-cost local drinks produced by family-owned bottlers exempt from that country's punitive soft-drink taxes. And in Japan, Coke's fourth-largest market, sales have been flattened both by economic turmoil and an emboldened Pepsi, which last year signed up beverage giant Suntory as its new Japanese distributor.
In the short run, Ivester is doing whatever it takes to keep the syrup flowing. To make drinks more affordable, Coke has switched from plastic to refundable glass packaging and introduced cheaper 6.5-oz. bottles. It has scaled back ad campaigns in favor of in-store "instant win" promotions. In Poland, Coke bundled free candy bars with its half-liter bottles--one of several moves that have helped boost first-quarter sales there 17%. And costs are being cut, too: Coke's Indonesian officials, for instance, relinquished their downtown office space and moved into a bottling plant.
But Ivester doesn't manage just for the short term. By investing in new capacity around the world, he's making a bet that the global economy recovers swiftly. On a recent swing through Brazil, he announced that despite the 40% devaluation of the real--or maybe because of it--Coke will boost its investment in Brazil by 10%, to $366 million, this year. In October, he vowed to plow more than $1 billion into Africa over the next three to five years, doubling Coke's investment there. And in China, where Coke volume grew 20% last year, Coke managers are taking the ultimate long-term view, putting together a 100-year plan at Ivester's request. "I think we'll look back and view the coming 10 years as one of the greatest periods of market-share gains in the company's history," says director Allen.
Ivester insists in some cases that prices now are just too low to pass up. Last summer, Coke offered $187 million to Britain's Inchcape PLC for four bottling plants in Russia. But as the economy continued to sour, Coke eventually got them in October for just $87 million. Still, critics such as Schroder & Co. analyst Caroline Levy, warn that it could be 15 years before Coke gets a return on its Russian investments. "Coke is overcapitalized relative to the growth rates of many emerging economies it operates in," she says. Coke Chief Financial Officer James E. Chesnut says investments in Russia will pay off much faster than analysts think.
Coke points to Mexico as an example of the strength of its long-term strategy. Mexican managers boosted market share in their country from 53% to 68% by investing in new plants during the peso crisis. Coke doesn't break out earnings by country but says the market is "very profitable" and that volume rose 13% last year.
BIGGER GULPS. Ivester isn't betting just on his ability to get more people around the world to drink more Coke. Having spent the past decade building a worldwide bottling system, he intends to use it to deliver any beverage that can find a big following. His boldest gambit yet is his $1.85 billion deal to acquire rights in 120 markets outside the U.S. to Canada Dry, Dr Pepper, and the rest of Cadbury Schweppes PLC's soft drinks and mixers--a deal that would give Coke two more percentage points of global market share, and probably more than that in time.
That's a big if. The deal is facing stiff resistance from regulators in such countries as Mexico and Australia, where Coke already has 65% market share. "Out of sheer stupidity, they're tying the rope around their own necks--it's like Microsoft," says Enrique Molina, chairman and CEO of Pepsi-Gemex, Pepsi's largest bottler in Mexico. Some analysts and rivals say the problem stems as much from Coke's intransigence as its size. In France, Coke's proposed takeover of the Orangina brand has been blocked by regulators for 16 months, though analysts believe Coke will make concessions and end the impasse soon. "Coca-Cola counted a lot on its size and reputation, and in fact, things didn't turn out the way they wanted," says one Paris analyst.
Back at home, where Coke derives one-fifth of its profits, it faces an entirely different order of problems. Consumers here already drink more soft drinks than in any other country outside of Mexico--45% of it from the Coca-Cola Co. Combine that with a reinvigorated Pepsi fighting for every scrap of market share, and Coke is left with less room to maneuver. Almost anywhere it turns it faces the prospect of having to sacrifice profitability to increase sales.
Far from shrinking from the challenges, Ivester has set a goal of increasing per capita U.S. consumption of all Coke products by 25% a year, to 500 eight-oz. servings. Yes, that does mean he thinks every American, on average, should be drinking close to two cups of Coke's products every day. To get there, he's looking for new ways and new places to sell a thirsty public a Coke--or a Coke product.
If Ivester has his way, consumers will soon find Coke's red-and-white machines everywhere from the local post office to the school cafeteria. Although they account for an estimated one-tenth of Coke's systemwide sales, vending machines carry rich margins, and Ivester thinks there's room for a lot more. A couple of years ago, he asked execs at Coca-Cola Consolidated--his second-largest U.S. bottler--to try an experiment. He wanted them to double the number of vending machines in Salisbury, N.C., a small city that had been budgeted for a modest 4% increase in capital spending. The result: Each machine generated a 30%-to-50% annual return. Coke Consolidated is now adding 25,000 new vending machines. "I'll spend capital all day long if it generates a return like that," says Consolidated CEO Frank Harrison III. Now, Coke is testing a hybrid gas pump/vending machine in Pennsylvania and is working on a similar stamp/beverage machines for post offices.
WATER, WATER. But not all of Coke's U.S. marketing expenditures are likely to be that lucrative. With Pepsi upping the ante, Coke must pay more to keep its most important fountain contracts. Consider the heated bidding over the 10,000-store chain of Burger King Corp., which recently came up for renewal. Burger King pays Coke about $220 million a year for 40 million gallons of soda syrup, according to people close to the deal. Under the old contract, they say, Coke gave back about $25 million of that in rebates to the food chain. After Pepsi pitched Burger King for the business, Coke ended up winning, but only by doubling its rebate. Says consultant Tom Pirko, president of Bevmark Inc.: "That has to do a real number on Coke's margins." Worse, the Burger King rebates will likely jack up the price for many of Coke's remaining contracts.
Increasingly, Coke is also having to pay top dollar to sign smaller, less traditional deals. In April, a Coke bottler agreed to pay $28.5 million over ten years for sales rights across a single Michigan school district, twice what Pepsi offered. Coke thinks the hefty fee, which works out to an annual $28 per student, will pay off, since soda loyalties are often established in the teen years. Meanwhile, in the supermarket aisles, where margins are a paltry 3%, Coke's attempts to raise prices have hurt sales.
Still, with the average American already swilling more than 800 servings of soda a year, skeptics wonder how much growth can be wrung out of the U.S. The flagship brands, Coke Classic and Diet Coke, are still growing roughly 4% a year, but they may be approaching the limit. In recent years, consumers' appetite for colas overall has flattened--and diet has actually lost ground to bottled water. That's why Coke has added a host of new products in the U.S.--from other soft drinks, such as citrus-flavored Surge, to juices, teas, and now water.
Yet even as he moves to capture a larger share of those side markets, Ivester emphatically rejects the notion that Coke has hit a permanent plateau in the U.S. He says that pundits have predicted the passing of colas ever since the 1930s. During lunch in his executive dining room, Ivester jumps up and quickly returns with a color-coded U.S. map comparing consumption per capita for each city or region with that of another country. The per-person consumption of Coke in Lubbock, Tex., for instance, is no higher than in Chile; Knoxville, Tenn., the same as Mexico. And consumers in Phoenix and Los Angeles--two of the lowest in soft-drink consumption--drink no more Coke than people in Hungary. "Why am I so optimistic about the future? Look at this map," he says.
Ivester insists that his strategy includes nothing that his mentor, Goizueta, wouldn't have done. But although Ivester may have held to his original vow of "no left turns, no right turns" after Goizueta's death from cancer in late 1997, there have been some subtle changes in the Coke culture and style.
"DOWN TO EARTH." While Goizueta kept constant watch on Coke's stock and the analysts who followed it--sometimes critiquing their reports with handwritten notes--Ivester pours his energies instead into Coke's customers, no matter how small. J.L. "Sonny" Williams, president of Minyard Food Stores in Coppell, Tex., still recalls how Ivester sent a red wagon after the birth of his first child last year, and then took time during a recent stop in the Lone Star State to chat over barbecue and tour one of Minyard's 85 stores. "It was nice to see a CEO who was so down to earth," recalls Williams, who says he's never met anyone from Pepsi headquarters. Says Ivester: "If you focus on the customers, the business will prosper, and if the business prospers, the stock will eventually be priced right."
Ivester has also begun the delicate task of shifting Coke's corporate culture, which had developed a reputation in some quarters for arrogance and stodginess. To speed the decision-making process, Ivester has cut several layers out of Coke's organizational hierarchy. Under Goizueta he began scrapping Coke's grueling December planning marathons with managers in favor of real-time budgeting--giving his field generals more freedom to respond to any opportunities that may arise. And he has tried to soften Coke's old "tough-love" style of management. "Many employees today did not grow up with authoritarian fathers, did not grow up in traditional households," Ivester says. "You've got to transition to a modern style of motivating people."
As a part of that strategic effort, Ivester has encouraged more of his troops to think boldly, to take more risk--even encouraging one manager who schemed up an idea to use a laser to beam Coke's trademark off the moon to "go for it." ("It actually would have worked," assures the manager, Steve Koonin. "But the FAA was worried about the risk of us slicing airplanes in half.")
In the end, Ivester's biggest obstacle may be Coke's tremendous size and success. The bigger Coke gets, the harder it is to reproduce the earnings record set by Goizueta--and demanded by Wall Street. The bets Ivester has placed around the globe have added to Coke's immediate pain. But if he's right, the current crisis will not turn out to be the end of an era--simply the pause that refreshes.