Shaking Up the Coke Bottle

Chairman Douglas Daft has been trying to energize the soda maker's bureaucratic culture--with mixed results

For a company as notoriously secretive as Coca-Cola, it was an extraordinary event: Last December, Chairman and CEO Douglas N. Daft invited some 50 Wall Street analysts and journalists to Atlanta for a rare peek behind the cola curtain. Having challenged Coke's chemists and marketers to think boldly, Daft flung open Coke's doors to display a dazzling array of prototype beverages and innovations--everything from energy drinks that let consumers control the amount of concentrate with a built-in pump to radio-controlled vending machines that let consumers buy drinks with a special key chain instead of coins.

Coming on the heels of a wrenching first year for Daft--which saw him ax 20% of Coke's 29,000 employees and reassign or sack 30 of his 32 top managers--the event seemed to be Daft's way of showing that the dirty work was done and the beleaguered soda giant was back. Known for both his charm and his temper, Daft compared Coca-Cola Co. to a prodigal son returning to its roots. "I cry a little bit," he said. "We're back to where we need to be."

But as he approaches his second anniversary at the helm, Daft is finding that turning around the beverage giant is harder than he might have expected. Many of the cutting-edge drinks and other innovations Daft unveiled that day a year ago still sit in Coke's labs. And Daft's own attempts at being bold sometimes have backfired. Last November, Coke's board publicly vetoed his deal to acquire Quaker Oats Co. and its Gatorade drink; archrival PepsiCo Inc. bought it instead. And in September, Daft himself pulled the plug on a joint snack-and-juice venture he had initiated with Procter & Gamble Co. amid criticism that the terms favored P&G. Meanwhile, Coke's vaunted marketing team, which had been kept on a short leash during the reign of former CEO M. Douglas Ivester, has struggled to regain its voice. Coke's bottlers complain that the extra $300 million Daft spent on marketing this year--a "one-time" shot to help reinvigorate its core brands--was wasted on ineffective ads. "To spend that amount of money and not have it work, that's absurd," grouses one bottler. "That was a big loss."

Even Daft has lowered his sights. After promising a skeptical Wall Street early last year that he could deliver the 15%-or-better gains in earnings per share that Coke achieved during the globalization boom of the 1980s, Daft lowered his goal for EPS growth last April to 11% to 12%--and may miss that target this year. J.P. Morgan Securities Inc. senior analyst John Faucher expects Coke's operating income this year to rise just 5%, to $5.4 billion, on flat revenues of $20.1 billion.

Part of the problem is that Coke's U.S. volume sales growth has slowed to an average of 3.9% a year since 1995, while PepsiCo has logged 4.5%-a-year growth because it has been more aggressive in moving into noncarbonated beverages--a faster-growing sector than traditional soda. As a result, Coke's stock, now at less than 50, is 25% below its level on the day in December, 1999, when the 58-year-old Australia native was named to succeed Ivester. PepsiCo, by contrast, has seen its stock rise 38% during the same period. Wall Street gives Daft high marks for undoing Ivester's mistakes, but not for finding a new formula for growth. "At the least, Daft has stopped the bleeding," notes Faucher. "But are things moving ahead as fast as they should? No."

BRAND POWER. Coke executives maintain that they're making more progress than the numbers show. Chief Financial Officer Gary Fayard argues that if you take out the $300 million spent on extra marketing, and adjust for currency swings, Coke would record a 12% rise in operating income this year. And they point to a bevy of initiatives that are starting to pay off. Thanks to strong gains by Coke's Dasani bottled water and its new Minute Maid Lemonade drink, the soda maker is finally making headway in the noncarbonated sector. And after a seven-year stretch in which Coke made few changes to its flagship Coke and Diet Coke brands, the company is rolling out several new spin-offs--including a lemon-flavored Diet Coke and eight-ounce Coke cans that fit neatly in a woman's purse. "We're gaining momentum and traction," says Daft. "The second-year execution of the strategy is exactly where we hoped it would be."

Despite vetoing the Quaker deal, Coke directors maintain that Daft has done a good job under the circumstances. "He's taken a difficult situation in what was a good company and done a very good job," says director Herbert A. Allen. And at least some investors are betting that Coke, given its brand power, will come back. "The moves he's making are in the right direction," says Tim Drake, senior equity analyst for Banc One Investment Advisers, which owns 7.8 million Coke shares. "It hasn't shown up in the earnings yet, but I think they're going to break out of where they've been."

In his former job as head of Coke's highly profitable Asian operations, Daft made his name building a lucrative coffee and tea business in Japan and for being quick to exploit new beverage trends. But so far, he hasn't been able to transfer that magic to the rest of Coke's sprawling empire. While Coke's Asian business remains robust, its Latin American operations are being hammered by the economic problems in countries such as Brazil and Mexico, as well as by the financial woes of its local bottlers. And, frustrated by the slow pace of change in Europe, Daft replaced his Europe chief, Charles S. Frenette, in July with Asia chief A.R.C. "Sandy" Allan. Back at home, some bottlers say the Coke mother ship is just as sluggish as ever: While they believe the new lemon-flavored Diet Coke will be a winner, they complain that the product was at least five months late--and missed the critical summer season. Coke's Americas chief, Jeffrey Dunn, says he delayed the launch to rejigger the taste, but is confident he made the right call. "The product we had in March would not have done as well as this product."

Retailers and rivals say they aren't yet impressed by Coke's innovations beyond its extensions of existing brands. Some retailers note that while Coke and Diet Coke continue to be mainstays, Coke still must develop breakthrough products for the all-important teen market to match PepsiCo's Mountain Dew and its SoBe line of nutrient-enhanced drinks. "Coke, Diet Coke, Sprite, that's all I need from them because that's the only value they bring," shrugs the buyer for one East Coast chain.

CHAIRMAN. Daft may be just as frustrated with the pace of change within the Coke bureaucracy as anyone else. Insiders say Daft was livid after his negotiators failed to complete a deal in October, 2000, to acquire new-age beverage maker South Beach Beverage Co. SoBe's owners became so upset by Coke's nickel-and-dime demands that they walked out and quickly cut a deal with Pepsi. (Daft counters that it was Coke that walked. "We didn't see the value," he says.) So the next month, when Daft discovered in a meeting with AOL Time Warner Inc. Chief Executive Gerald M. Levin that Coke was vying with Pepsi for marketing rights to Harry Potter films, Daft left nothing to chance: He didn't leave until Levin agreed to a three-year deal with Coke.

Daft couldn't be more different from his predecessor. While Ivester was a strictly by-the-numbers manager who showed little emotion, Daft can be both charming and volatile. While head of Asia, he once threw a chair across a meeting room. And insiders say his enthusiasm sometimes gets the better of him. They complain that he eagerly signs off on an initiative one day, then gives his blessing to a conflicting idea from a different manager the next. "Daft likes to make decisions," says one Coke manager. "The problem is, he likes to make them every five minutes."

He seems to understand the importance of advertising better than Ivester, who distrusted Madison Avenue, though Daft's efforts have yet to yield results. A series of ads a year ago featuring a wheelchair-bound grandmother and two feuding high school girls triggered a backlash among bottlers and consumers. And Daft says he axed a top exec at Coke's German operations for running TV spots aimed at the radical youth movement. Daft acknowledges that "no revolution is easy." Still, he'd better show some progress with this one--before investors run out of patience.

By Dean Foust in Atlanta, with Gerry Khermouch in New York

— With assistance by Gerry Khermouch

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