Business | Features
Coke gets real
Neville Isdell forged his reputation within Coca-Cola as head of the company's Philippine operation in the 1980s.
- By Andrew Ward, Financial Times
- Published: 00:00 September 29, 2005
Neville Isdell forged his reputation within Coca-Cola as head of the company's Philippine operation in the 1980s.
When he arrived, Coke had about 30 per cent of the market and was dwarfed by the rival PepsiCo. The Irishman signalled his intentions by turning up to a company sales rally dressed in battle fatigues and hurling a bottle of Pepsi against a wall. By the time he left the country five years later, Coke had more than doubled its market share, leaving Pepsi in its wake.
It is stories such as this that persuaded Coke's directors to call Isdell out of retirement last year to become chairman and chief executive, more than two years after his final assignment heading a European bottler. His surprise appointment came at one of the most difficult moments in the company's 119-year history.
Sales of Coke's flagship cola are declining across much of the developed world as consumers fret about obesity, yet the company has been slower than Pepsi to diversify into healthier products. Years of heavy job cuts, underinvestment and shaky management have further depressed morale.
Isdell was not the board's first choice to replace the retiring Douglas Daft. The directors turned to him only after a series of high-profile external candidates, including Jim Kilts of Gillette and Carlos Gutierrez of Kellogg's, turned down the position. Many investors, keen for an injection of fresh blood, were disappointed by his appointment.
But just over a year after he swapped retirement in Barbados and France for a 25th-floor office in Coke's North Avenue headquarters in Atlanta, there is growing confidence that Isdell was the right man for the job. The 61-year-old has been praised for restoring discipline and direction to the company.
Senior management has been reshaped, investment increased, new products launched and disruptive regulatory disputes with US and European authorities settled. Three consecutive quarters of better-than-expected earnings have added to the cautious optimism.
"If you listen to the noises coming out of North Avenue, people are starting to take pride in the Coca-Cola company again," says Michael Bellas, president of Beverage Marketing, an industry consultancy. Nobody, least of all Isdell, is declaring the recovery complete. He never misses an opportunity to remind Wall Street that it will be years before Coke returns to full health. Many sceptics still doubt that the company will ever recapture its former glory.
Most observers date Coke's problems back to the death in 1997 of Roberto Goizueta, arguably the company's most successful chief executive. During the preceding 17 years, the charismatic Cuban immigrant delivered double-digit annual earnings growth and increased market capitalisation from $4 billion to $150 billion (Dh14.68 billion to Dh550.5 billion). Since his death, the shares have lost a third of their value and growth has shrivelled to the low single digits.
The slump has been largely blamed on Goizueta's two successors, Douglas Ivester and then Daft. Both men's short and turbulent tenures were blighted by fiascos and failures. There were botched takeovers, disastrous product launches, contamination scares, regulatory disputes, a race discrimination scandal and constant feuding between factions within the management and boardroom. However, the real roots of Coke's troubles arguably stretch back to Goizueta and his single-minded devotion to cola. He believed that nothing could beat the low-cost, high-margin business of producing syrupy concentrate for bottlers to turn into the world's favourite drink.
While Pepsi built a powerful portfolio of non-carbonated products that would eventually boast Gatorade sports drink and Tropicana juice, Coke remained doggedly focused on cola. The company has since recognised its error and ploughed resources into brands such as Powerade sports drink, Minute Maid juice and various bottled water brands. But each of those products trails its Pepsi competitor. Carbonated soft drinks still account for at least 80 per cent of Coke's sales.
An array of smaller, niche beverage producers, such as Red Bull, the Austrian energy drink, have further chipped away at Coke's sales as consumers are confronted with an ever wider choice of products. "The magic has leaked out of the Coca-Cola brand," says Tom Pirko, president of BevMark, a consultancy. "How do you recreate that magnetism for a whole new generation that has much less loyalty to big, monolithic brands like Coke? That's a very hard and expensive task."
Isdell believes the company's plight is not as bad as it is perceived. Coke remains the world's most valuable brand at $67.5 billion (Dh247.72 billion), ahead of Microsoft, according to the Interbrand consultancy; its finances are as robust as ever, with net profits of $4.8 billion and sales of $21.9 billion in 2004; and, perhaps most impressive, the average human consumed 75 servings of its products last year, up from 49 in 1994. "This is not a business in crisis," says Isdell in an interview.
One of his first steps as chief executive was to lower the company's growth targets by a third, after years of over-promising and underachieving. "That was part of the problem I inherited trying to meet numbers that could not be met over the near term," he says. The revised projections called for annual income growth of 6 8 per cent and volume growth of 3 4 per cent.
Another of Isdell's gripes is the failure of many US observers to see beyond the company's struggling domestic business. About 80 per cent of profits and 70 per cent of volume comes from outside the US. By contrast, Pepsi conducts only a third of its business away from home. Coke's strongest growth is in developing markets such as China, Russia, India, Brazil and Turkey. "That's where the opportunity is," he says. "The issue is that we are not satisfied with the growth in two large areas of the business: the US and western Europe."
One of Isdell's first acts as chief executive was to commit an additional $400 million a year to marketing and innovation. This represented an acknowledgment that under-investment in brands and product development was among the main causes of Coke's troubles. "The company believed that all it had to do was churn out the product and people would buy it," says Pirko.
Coke has pitted advertising agencies from around the globe against each other in the search for new "iconic" campaigns to revive the flagship brand and reconnect with consumers. Mary Minnick, renowned as one of Coke's most aggressive and fiercely intelligent executives, was promoted from head of Asian operations to a powerful new role overseeing the marketing and innovation push. One of her priorities is to increase the exchange of creative ideas among the 200 countries in which the company operates.
In March, more than 100 Coke managers converged on Buenos Aires, Argentina, with samples of the 400 brands that Coke produces around the world, ranging from a fizzy Spanish herbal drink to canned green tea from Japan. "We held our own trade fair," says Isdell. "We told all our regional managers: you've got to take three ideas away from here and we want to see them in the business plans for 2006."
Coke's most diverse, innovative and profitable market is Japan, where the biggest brand is not cola but canned coffee. "If you're looking for a total beverage business we've got one in Japan [but] we have not been able to transfer that successfully to other parts of the world," says Isdell. "For the first time we've had all the key marketing folks from the US actually go to Japan and look at what's happening."
However, while the Buenos Aires meeting was designed to stimulate innovation in the long term, Coke's most urgent priority is stemming t
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