Online Extra: Coke's Isdell: "I Intend To Lead"

The longtime exec who'll soon take the helm says the soft-drink maker is not as broken as people think

When Coca-Cola (KO ) CEO Douglas N. Daft announced last February that he would retire by yearend, it triggered one of the most highly publicized CEO searches in modern corporate history. And after being spurned by several high-profile chiefs from other companies, the board turned back to a Coke Classic: E. Neville Isdell, who had retired to the Caribbean in 2001 after 35 years in the Coke system, the last three spent managing one of Coke's largest European bottlers.

BusinessWeek Atlanta Bureau Chief Dean Foust recently sat down with Isdell to discuss the state of affairs at Coke. Here are edited excerpts of their conversation:

Q: This is a far different company today, with challenges ahead, than back in the glory days Coca-Cola enjoyed in the '80s and '90s.


Yeah, but [Coke is] not as broken as people think it is. If you look at the financial characteristics today, this is still a very strong, very sound company.The balance sheet is extremely strong. Over $5 billion in cash is being spilled every year.We're still very profitable. We've still got very good margins. We just don't have growth the way we used to have growth.

So much of the focus is on [the problems in] North America. You know, 80% of the business is outside [North America]. Eighty percent of the profitability is outside [North America], 70% of the volume, roughly.I would think, pretty rapidly, we'll have 90% of our earnings outside North America, because of the opportunities out there.And if you're looking for where the growth is, that's where the growth is.

I think China is the biggest single opportunity. India is a major opportunity. My view is that Brazil is positioned to, maybe for the first time, fulfill what everyone has been saying about it for the last 50 years. It's the next big economy of tomorrow. So it's not all broken, and there are lots of good examples.

Q: Some Coke watchers raise the question as to whether you'll need to diversify, the way Pepsi did when it moved into the snack business. Is diversification something you think Coke needs?


First of all, we talked about the economic characteristics of the system we're in, and I think replicating those is very difficult. And if we believe, as I do, that we can be a growth company again, then I think that's the right place to place your capital.

You ought to remember that when Pepsi diversified, they were diversifying because of the pressure from Coca-Cola in carbonated soft drinks [CSDs]. I mean, Frito-Lay goes back to the '70s when those opportunities may well have presented themselves. [Pepsi] bought a great business, and they've done a great job with it. But I don't see a need to diversify outside of the core, and I define the core as nonalcoholic beverages,not just CSDs.

Q: What's your sense of the relations with the bottlers? There's some questions about whether Coke and Coca-Cola Enterprises (CCE ) are completely on the same page.


Well, first of all let me say that, you know, I've spent more of my years as a bottler than I have on the company side, so I've been on both sides of the equation. Also, the first agreement that was struck between a bottler and Coca-Cola Co., in terms of rebalancing the economic model, was between [European bottler] CCHBC -- which I was heading -- and [then-Coke CEO] Doug Daft when he first came in. So, I understood where I was then, and Doug understood where he was, that the bottlers were not getting a decent return.

In a number of instances, that has been repaired. So, if you go to Mexico today, you look at Femsa's numbers, I think their [return on invested capital] is around 14% right now. Maybe it's 15%.So an awful lot of the pain has been taken out.

Q: I talked to some institutional investors, and one very vocal analyst -- Bill Pecoriello at Morgan Stanley -- said if the pie isn't growing fast enough for both Coke and the bottlers then maybe Coke should consider getting back into the bottling business by reacquiring CCE as a way to ensure growth. What's your view?


Well, that's Bill's view. Another group [of analysts] are saying that applying that much capital and not getting the sort of returns that we've been getting isn't a good idea either. So I think that's a debate I'm very happy for them to have. I'm not going to enter into that debate at this point in time.

Q: Is the innovation where you want to see it?


No, I don't think we're where we need to be with innovation at all. And clearly that's something we're going to have to accelerate.

Q: Why? What has been the impediment to innovation?


I think there are two things. I think that the system has found it very difficult to focus on CSDs and to focus on non-CSDs. And I think it's partly a mindset issue -- a mindset that says one is trading off the other. And there's no question that cannibalization always takes place. My judgment is if this cannibalization is taking place, I would rather be the one who's doing the cannibalizing. But that trade-off has been very difficult for some people to work with.

So I think we got trapped in being a CSD company. And even though there was a strategic intent to break out, I don't think the mold was broken intellectually with enough people.

Q: Some people who follow Coke feel that the board micromanaged Doug Daft, your predecessor. There are even stories going around of marketing staffers having to make presentations to [retired president and board member] Don Keough. Did you go into this job with any assurances from the board that they would give you more breathing room than Doug Daft got?


I came in and was very clear about what I had to do. One of the things that I have to do is, as CEO, I have to work for the board in an appropriate manner in terms of delivering the results and keeping them apprised -- all the board members. Equally I have another job, and that's called chairman. As chairman, my job is to lead the board. And I intend to lead the board.

Now let me take Don Keough, specifically. I've known Don for a long, long time. Don and I have not always agreed -- this is when I worked for him -- not always comfortably for me, maybe sometimes, but in the aggregate very comfortably, because one thing Don Keough does not like are people who are not willing to challenge him. He's got an immense knowledge of this business and to not tap into that would be rather shortsighted of me.

So, I will continue to listen to Don, but as far as I'm concerned, they pay me to lead the company and to run the company, and that's what I intend to do. There's only one leader, and that's me.

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