EVERY SPOKEN WORD
150 min read · 30,009 words- 0:00 – 0:41
Start
- BGBen Gilbert
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 $300 billion company.
- DRDavid Rosenthal
Well, Ben, you know what I'm gonna say to you in response to that.
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
Do you wanna sell sugar water for the rest of your life, or do you wanna come with me and change the world?
- BGBen Gilbert
Ooh. Save it, David. Save it.
- DRDavid Rosenthal
[laughs]
- SPSpeaker
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way. Who got the truth?
- 0:41 – 5:52
Intro
- BGBen Gilbert
Welcome to the Fall 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.
- DRDavid Rosenthal
I'm David Rosenthal.
- BGBen Gilbert
And we are your hosts. Charlie Munger has a famous thought experiment. It's the 1880s. You wanna build a company from scratch that eventually becomes worth $2 trillion, starting with just 2 million. So you're looking for a 1 million X return, or as Charlie puts it, a Lollapalooza outcome.
- DRDavid Rosenthal
Of course he does.
- BGBen Gilbert
Very Charlie. [laughs]
- DRDavid Rosenthal
Very Charlie.
- BGBen Gilbert
The constraint is it must be a non-alcoholic beverage business.
- DRDavid Rosenthal
Okay.
- BGBen Gilbert
And another constraint, it must throw off many billions of dollars in dividends along the way to your shareholders.
- DRDavid Rosenthal
[laughs] Okay.
- BGBen Gilbert
This sounds almost impossible, but what ideas could you possibly dream up to give it your best shot?
- DRDavid Rosenthal
Well, I think the first question I would have is whether I could include any now illegal drugs in my product. [laughs]
- BGBen Gilbert
[laughs] That certainly helps. So to build this giant valuable company, the first thing you need to know is you're not gonna 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. [laughs]
- DRDavid Rosenthal
[laughs] Yes.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Among other things, yeah.
- BGBen Gilbert
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.
- DRDavid Rosenthal
I see what you did there.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Always.
- BGBen Gilbert
Always, David.
- DRDavid Rosenthal
[laughs]
- BGBen Gilbert
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, your sports heroes, beautiful people, Christmas. I mean, happiness generally. You are gonna wanna have a Pavlovian association between your drink and happiness, and you're gonna wanna 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.
- DRDavid Rosenthal
That would be pretty great.
- BGBen Gilbert
Yes. And the last thing, you must never, under any circumstances, change the formula or flavor.
- DRDavid Rosenthal
Ooh. [laughs]
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
We were doing great there.
- BGBen Gilbert
We were doing great.
- DRDavid Rosenthal
But, you know, this might be why Coca-Cola is not a $2 trillion company today.
- 5:52 – 12:13
Patent Medicines & the Birth of an Industry
- DRDavid Rosenthal
[laughs] Well, Ben, as you so aptly set up there, the story of the birth of 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 Pendergrast, 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 years ago, one of the biggest industries in post-Civil War America was oil of a certain kind, but it wasn't the same kind of oil as Standard Oil. It was snake oil.
- BGBen Gilbert
[laughs] Ah, good hook.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
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.
- BGBen Gilbert
And what were patent medicines?
- DRDavid Rosenthal
So going back again to our Standard Oil series, John D. Rockefeller's dad, if you remember, was a traveling snake oil salesman.
- BGBen Gilbert
Snake oil salesman.
- DRDavid Rosenthal
[laughs] Yeah.
- BGBen Gilbert
Yeah. [laughs]
- DRDavid Rosenthal
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.
- BGBen Gilbert
All based on zero research, zero studies.
- DRDavid Rosenthal
Zero science, nothing. The Civil War changed all that, not necessarily for the better. [laughs] 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 salesmen 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.
- BGBen Gilbert
Which actually did work.
- DRDavid Rosenthal
Yes, that actually did work.
- BGBen Gilbert
Very well. [laughs]
- DRDavid Rosenthal
[laughs] 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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
So naturally, whenever there's a, uh, [laughs] big problem, American capitalism sees a big opportunity. So some of these enterprising traveling snake oil salesmen 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're 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.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
So pretty quickly, these newly scaling patent medicine guys discover 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.
- BGBen Gilbert
Really?
- DRDavid Rosenthal
It's these patent medicines that start spending the first real scale dollars in newspapers, which are also-
- BGBen Gilbert
Ah
- DRDavid Rosenthal
... coming up and industrializing post-Civil War and building the business model of the media industry as we know it today. Because [laughs] just like you were talking about in your great Charlie thought experiment from the intro, what are these patent medicines? It's just commodities. It's like leaves and, like, nuts and water and stuff that go into these things. I mean, it's back where-
- BGBen Gilbert
Extracts, David
- DRDavid Rosenthal
... extracts, right. Okay. [laughs] 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.
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
So you might think that all this is, like, ancient history. A whole bunch of products that we still buy today started as patent medicines. Luden's cough drops.
- BGBen Gilbert
Ah.
- 12:13 – 16:40
Dr. John Pemberton & the "Miracle Drug" Cocaine
- DRDavid Rosenthal
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 for 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-1880s, he learns about a new miracle drug sweeping America, promising to cure all ills, including army disease: cocaine. [laughs] Cocaine was really, really in, in America in the 1880s, perhaps foreshadowing a little bit the 1980s in America-
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
... as we will, uh, get to later in the episode.
- BGBen Gilbert
Except in the 1880s, 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.
- DRDavid Rosenthal
It was like caffeine today.
- BGBen Gilbert
Right. They did not really discover the addictive nature of it or demonize the addictive nature of it yet.
- DRDavid Rosenthal
Yep, or the side effects, et cetera, et cetera. So pretty quickly, cocaine becomes the most popular patent medicine ingredient out there.
- BGBen Gilbert
It's probably the only ingredient that actually did anything. [laughs]
- DRDavid Rosenthal
Yeah. Yeah, yeah. And there is a product on the market, an imported product from France, you can't make this up, that quickly becomes the most popular delivery vehicle for cocaine, a cocaine-fortified wine from Bordeaux in France called Vin Mariani.
- BGBen Gilbert
It's like the most extreme Four Loko you could ever dream of.
- DRDavid Rosenthal
Exactly.
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
Exactly, yes. [laughs] So this sounds utterly ridiculous today, but let me read you the list of public endorsers of Vin Mariani, the, like, testimo-nees in the Rolex parlance. Thomas Edison, Buffalo Bill Cody, United States President William McKinley, [laughs] gets even better, Queen Victoria of England, and not one but three consecutive popes in the Vatican all swore [laughs] by Vin Mariani.
- BGBen Gilbert
Feels like a thing I would be swearing by and endorsing, too. I imagine once you start, it's the best thing ever. [laughs]
- DRDavid Rosenthal
So entrepreneurial Pemberton in Atlanta sees Vin Mariani'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 to improve upon it is to add caffeine to the mix.
- BGBen Gilbert
Why not?
- DRDavid Rosenthal
Yeah, why not?
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
He decides that he's gonna get the caffeine from African kola nuts, K-O-L-A, kola nuts.
- BGBen Gilbert
Which we should say is the first introduction of the word kola, period, in the American lexicon. Kola drinks were not a thing.
- DRDavid Rosenthal
Yep, and it's very bitter, but the reason he chooses it is it has an even greater caffeine concentration than coffee beans. [laughs] He really wants this product to work. So Pemberton starts selling Pemberton's French Wine Coca, which is still wine, but is now infused both with coca leaves for the cocaine and kola nuts for the caffeine, and it's a hit.
- BGBen Gilbert
This could not have tasted good.
- DRDavid Rosenthal
No, [laughs] 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.
- BGBen Gilbert
Which makes sense. People are drinking it for its drug-like medicinal qualities, not that it's in any way refreshing.
- DRDavid Rosenthal
Yep. Now, I say bottles. Keep that in mind here. Bottling technology in the 1880s 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.
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
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.
- 16:40 – 22:14
Creating the Secret Formula (1886)
- BGBen Gilbert
So then Prohibition hits. Party's over.
- DRDavid Rosenthal
Yep. Fall of 1885, Atlanta, I think, might've 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."
- BGBen Gilbert
Oh.
- DRDavid Rosenthal
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 1886, he nails a formula.
- BGBen Gilbert
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 75 cents, a dollar. It serves a crowd of people when they're looking to recover from some ailment, or really, at this point, probably serve an addiction."
- DRDavid Rosenthal
We're now 20 years from the Civil War, so a new generation is coming up-
- BGBen Gilbert
Yes
- DRDavid Rosenthal
... yeah, that doesn't have army disease.
- BGBen Gilbert
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 productA 5 cent thing that anybody can have just to have a little pick-me-up, a little treat when they're at the soda fountain-
- DRDavid Rosenthal
A little pick-me-up. [laughs]
- BGBen Gilbert
When they're sitting down in the social gathering space, 'cause drug stores 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 anytime refreshment." And so he's playing around with these ingredients, and he's got the kola seed that's got this natural caffeine in it. Fun story, in the original Coca-Cola, for the first, I don't know, couple decades, it actually had four times the amount of caffeine that Coke does today. So it was effectively an energy drink, even leaving the cocaine aside. However, the kola seed, 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 1886, but what he does is he uses synthetic caffeine. Merck, the pharmaceutical company, had already been extracting pure caffeine from kola seeds. So Pemberton just got ahold of Merck and bought a bunch of the powder. And so the first version of Coca-Cola is a little tiny bit of the kola 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.
- DRDavid Rosenthal
Yeah, interesting. It's always been synthetic, huh.
- BGBen Gilbert
That's right.
- DRDavid Rosenthal
I didn't know that. That's amazing.
- BGBen Gilbert
So there'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 40-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."
- DRDavid Rosenthal
Right, sugar 'cause of the extreme bitterness of the kola nut.
- BGBen Gilbert
Yes, and actually the coca plant was also bitter, so sugar was to offset it.
- DRDavid Rosenthal
Yeah, yeah. [laughs]
- BGBen Gilbert
"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 neroli, the last ingredient in perfumes distilled from a flower of the orange tree. The most exotic was oil of cassia, 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."
- DRDavid Rosenthal
[laughs] 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.
- BGBen Gilbert
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 16 Cokes 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.
- DRDavid Rosenthal
That's a good point. Regardless, you're gonna get hype [laughs] when you drink this.
- BGBen Gilbert
And this amount of cocaine really was only a part of the formula for those early first few years.
- DRDavid Rosenthal
Yes. But
- 22:14 – 30:38
Frank Robinson's Genius & the First Coupon
- DRDavid Rosenthal
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.
- BGBen Gilbert
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 kola seed, and very soon they would strip out almost all the cocaine. And so you have a product that for the next 140 years would be called Coca-Cola that contains really not very much coca and really not very much kola.
- DRDavid Rosenthal
Yes, indeed. [laughs] So they go about getting the new product installed and distributed in drugstore soda fountains around Atlanta. 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-
- BGBen Gilbert
Oh, it was fresh
- DRDavid Rosenthal
... water or milk or something 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 drugstores 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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Well, thank goodness they do use the carbonated water. Could you imagine Coke if it were still? Uh, that wouldn't be very good.
- BGBen Gilbert
No, it... Well, it wouldn't be as successful. I mean, there was probably hundreds of things like Coke that were still that did not succeed.
- DRDavid Rosenthal
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 1887, 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.
- BGBen Gilbert
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 tightening it up a little bit since he created it in 1887.
- DRDavid Rosenthal
Yes. It is true that he was his bookkeeper, but he was also his business partner. It was like-
- BGBen Gilbert
It's like I'm your bookkeeper type thing.
- DRDavid Rosenthal
Yeah. [laughs] 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 their 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. [laughs] And then they also give them to traveling door-to-door salesmen to go hand out on their routes, not Coca-Cola salesmen, but salesmen that are selling a variety of different products.
- BGBen Gilbert
And this is the very first manufacturer's coupon redeemable at a retailer.
- DRDavid Rosenthal
Yes. There's an image on Wikipedia of one of these tickets from 1888 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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
Drugstores 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, 400th drinks, this is a highly profitable drink for them to sell. They have gross retail margins on this. And then three, the traveling salesmen 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 wanna 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 $1.30 per gallon. The soda fountains then sold drinks to customers at 5 cents a drink. There are 128 drinks per gallon. They're making $6.40 of revenue for a product that costs them a buck 30 to buy. [laughs] Yeah, I'm not a retailer, but I'm pretty sure-
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
... those are good margins. [laughs]
- BGBen Gilbert
Pretty sweet deal if you can get it then, and pretty sweet deal to be McDonald's today offering my large Coke with a meal.
- DRDavid Rosenthal
Yeah. Man. [laughs] 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 he's dying.
- BGBen Gilbert
Which he generally was slowly over all these years.
- DRDavid Rosenthal
Yes. And he secretly decides that he is going to sell off the rights to the formula.
- BGBen Gilbert
Without telling Robinson.
- DRDavid Rosenthal
Without telling Robinson, without really telling anybody. This kicks off a whole mess of very questionably legitimate transactions that results by mid-1888, early 1889, 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 the company that they can then grow and scale and manifest its destiny across America and the world. And Asa Candler is really the person who creates the modern Coca-Cola Company with Frank Robinson's help in 1892, which he incorporates as The definitiveCoca-Cola Company
- 30:38 – 39:49
Asa Candler & Building a National Brand (1890s)
- BGBen Gilbert
All right. So David, this is the first professionally run version of The Coca-Cola Company.
- DRDavid Rosenthal
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 1887, so the first year that Coke the product is on the market, Pemberton and Robinson sell 600 gallons of Coca-Cola syrup to soda fountains, which equates to about 75,000 glasses of Coke served. By 1889, two years later, that has quadrupled to over 2,000 gallons, and by 1890, it's almost 10,000 gallons. So what's that? Three years into the business with no professional management, they grow the business 10X without even really trying.
- BGBen Gilbert
It's amazing. And in that next year, 1891, 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 $2,300 to buy it all. That is the base of the company that he builds.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Unbelievable.
- DRDavid Rosenthal
It is a cash flow bonanza since like day one.
- BGBen Gilbert
It's crazy.
- DRDavid Rosenthal
So in 1892, 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 $20,000 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. [laughs]
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
They spend just over $10,000 on advertising.
- BGBen Gilbert
Okay.
- DRDavid Rosenthal
And with those costs, they sell 35,360 gallons of syrup at an average price of a buck 30 a gallon. So that is $46,000 in revenue and $12,000 in profit. Now, for reference, the average household income in 1892 was about $500. There are three people working in this business, including Candler, the owner. They made $12,000 in annual profit-
- BGBen Gilbert
Wow
- DRDavid Rosenthal
... in the first year of the business. So they are crushing it.
- BGBen Gilbert
So that's each person at the company, if they were paid equally, is making 8X the average household income.
- DRDavid Rosenthal
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 $6.40 a gallon, so the actual gross revenue of Coca-Cola in the marketplace in that first year is close to a quarter million dollars.
- BGBen Gilbert
That's a quarter million dollars on, what'd you say, a little over $20,000 of ingredients and manufacturing?
- DRDavid Rosenthal
Yes, and then another $10,000 in advertising.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yes. So, uh, there's a lot of margin to go around. So speaking of advertising costs, in the next few years, they invest 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." [laughs]
- BGBen Gilbert
Yeah, it feels patent medicine-y.
- DRDavid Rosenthal
It feels patent medicine. Not, uh, you know, a pause that is refreshing just yet. But what Robinson and Candler do do 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.
- BGBen Gilbert
They would go on to paint 20,000 murals on the signs of barns and walls across the countryside starting in 1894. Unbelievable.
- DRDavid Rosenthal
Incredible.
- BGBen Gilbert
What you're talking about, David, is this great use of all these extra margin dollars. They would do all this for free for drugstores, 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 drugstores that had the store name in big letters and Coca-Cola's name just as big, and they did this for thousands of drugstores across the South. And so you see all these great old pictures of these stores that effectively look like Coca-Cola stores.
- DRDavid Rosenthal
Oh, they're beautiful. Yeah.
- BGBen Gilbert
It almost looks like they're franchising Coca-Cola rather than Coca-Cola just being a thing that's sold at the drugstores.
- DRDavid Rosenthal
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 80% retail margins on this Coca-Cola. Of course, they want it to be their number one product.
- BGBen Gilbert
They want a big advertisement that says, "We have Coke."
- DRDavid Rosenthal
Yes. So by 1898-Coca-Cola is distributing over one million branded promotional items per year. This is before the year 1900. [laughs]
- 39:49 – 52:21
The $1 Bottling Deal: A Fortuitous Mistake
- DRDavid Rosenthal
Yep. Before they fix the cocaine issue though, Candler in 1899 makes what is maybe simultaneously the best and the worst business deal in history.
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
He gives away the right to bottle and sell Coca-Cola for free.
- BGBen Gilbert
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.
- DRDavid Rosenthal
So in 1889, two guys from Chattanooga, Tennessee named Benjamin Thomas and Joseph Whitehead come to Candler with a proposal. They want to bottle 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.
- BGBen Gilbert
And Candler's like very anti-bottling, right?
- DRDavid Rosenthal
Yes, he is extremely skeptical. [laughs] He's like, "Yeah, 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." Candler 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 1899, the three of them sign a contract that includes the following terms. For a token contract price of $1, which Candler never collects, the Coca-Cola Company will sell syrup to Thomas and Whitehead at a volume discount price of $1 per gallon, so even less than they are selling to the individual soda fountains out there, 'cause they think this is gonna be a higher volume business. Thomas and Whitehead will have the exclusive assignable right to market and sell bottled Coca-Cola for 5 cents per bottle, same price as at the soda fountains, across practically the entire United States.
- BGBen Gilbert
But this 5 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 bottle itself.
- DRDavid Rosenthal
Yeah, the bottle. [laughs] You can see why Candler 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. [laughs]
- BGBen Gilbert
And, um, gosh, there's gotta be something in there about how that $1 per gallon could change over time, right?
- DRDavid Rosenthal
Nope. [laughs] No, there is not.
- BGBen Gilbert
So the Coca-Cola Company, as long as this bottler continues to satisfy the demand and doesn't violate any of the other terms, is obligated to keep selling syrup at $1 per gallon-
- DRDavid Rosenthal
Yes
- BGBen Gilbert
... to the bottler.
- DRDavid Rosenthal
Yes. And the bottlers are obligated to keep selling bottles to the public at 5 cents retail cost.
- BGBen Gilbert
Fascinating.
- DRDavid Rosenthal
[laughs]
- BGBen Gilbert
So let it be written.
- DRDavid Rosenthal
Obviously, there are so many things wrong with this.
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
But also so many things right with this. [laughs] This lets 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.
- BGBen Gilbert
In fact, they're not doing any different advertising. They're just amortizing the cost of the same advertising against one more touchpoint that they could have with the customer. They're still painting the same barns. They're still putting up the same signs.
- DRDavid Rosenthal
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, AKA-
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
... gas stations, convenience stores, et cetera, et cetera.
- BGBen Gilbert
And at this point in history, in 1900, the Coca-Cola Company is still just 20 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. This is small head office.
- DRDavid Rosenthal
High-margin product, baby.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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."
- BGBen Gilbert
It's a kinda low-margin, very upfront capital-intensive thing to bottle Coca-Cola.
- 52:21 – 1:03:24
Protecting the "Real Thing": Lawsuits & the Contour Bottle
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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 wanna open a competitive franchise in their local town, et cetera, et cetera. By the mid-1900s, there are hundreds of Coca-Cola competitors out there. There's Afri-Cola, Char-Cola, Carbo-Cola, Coca-End Cola, Fig Cola, Caw Cola, King Cola, Standard Cola, on and on and on and on and on.
- BGBen Gilbert
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.
- DRDavid Rosenthal
So in 1905, 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-
- BGBen Gilbert
Mm-hmm
- DRDavid Rosenthal
... which I think is probably how Coca-Cola trademarked the script logo earlier than that. Might've just been in Georgia.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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 lockup.
- DRDavid Rosenthal
Yes, and they succeed. So over the next, like, 15, 20 years, by the mid-'20s, it's estimated that Coca-Cola sues and shuts down over 7,000 copycat cola brands [laughs] 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.
- BGBen Gilbert
Yep, and there is a famous 1920 case that went all the way to the Supreme Court. There was a company called the Koke 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 1905, cocaine is pretty much entirely gone. There's no more Coke in Coca-Cola.
- DRDavid Rosenthal
Yeah. It's actually an amazing story. In 1903, they contract with a company called the Schaefer Alkaloid Works of Maywood, New Jersey, that has developed a process to decocainize coca leaves. And this company, which still exists to today and is still the sole supplier of decocainized coca leaves-
- BGBen Gilbert
No way
- DRDavid Rosenthal
... to 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.
- BGBen Gilbert
'Cause they import it with cocaine in it still, right?
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
'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 1920 case where 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."
- DRDavid Rosenthal
False advertising.
- BGBen Gilbert
"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.
- DRDavid Rosenthal
So this is the first biggest front of the war that Coca-Cola wages on the imitators through the courts.
- BGBen Gilbert
It goes to the Supreme Court.
- DRDavid Rosenthal
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 our 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 1916 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 Mae West bottle. [laughs]
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
Because its proportions look, uh, like the famous actress, Mae West.
- BGBen Gilbert
Okay. David, so the bottle.
- DRDavid Rosenthal
The Mae West bottle. [laughs]
- BGBen Gilbert
So in 1912, 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 distinctive package for the products. And so in April of 1915, trustees of Coca-Cola Bottling Association vote to develop such a distinctive bottle.
- DRDavid Rosenthal
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 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 bottle that 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, [laughs] 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. [laughs]
- 1:03:24 – 1:12:06
Robert Woodruff: The Boss Takes Over (1923)
- DRDavid Rosenthal
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.
- BGBen Gilbert
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 bottle thing. 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.
- DRDavid Rosenthal
Yep. And by this point in time, the Coca-Cola brand and what it stands for and the beverage, delicious, refreshing, it's such an 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.
- BGBen Gilbert
In fact, it probably helps.
- DRDavid Rosenthal
It probably helps, yes. Makes it more of a wholesome beverage.
- BGBen Gilbert
It makes it so you consume a lot more Coca-Cola.
- DRDavid Rosenthal
Okay. So 1916, everybody's doing great. Nobody's doing better than The Coca-Cola Company. Asa Candler 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, [laughs] which he does, and he wins and becomes the mayor of Atlanta in 1916. And so he retires from Coca-Cola and gives his Coke shares to all of his children. And then a couple years later, in 1919, a local banker named Ernest Woodruff puts together an investor syndicate and basically stages a takeover of the company and buys out the family members for $25 million. 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 [laughs] by going public.
- BGBen Gilbert
Right. And it was a complicated little period, 'cause some of the kids did wanna have this happen, other ones didn't wanna 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 to buy this company, like $25 million in 1919 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.
- DRDavid Rosenthal
Hmm.
- BGBen Gilbert
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 Guaranty Bank of New York.
- DRDavid Rosenthal
Hmm.
- BGBen Gilbert
'Cause that's where they got the capital from, and 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 7X, 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.
- DRDavid Rosenthal
Yeah. And it's still part of the lore of 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. [laughs]
- BGBen Gilbert
Really? The Coca-Cola Company would maintain that is absolutely not true.
- DRDavid Rosenthal
Well, the original formula is out. I mean, it's in the appendix of For God, Country and Coca-Cola.
- BGBen Gilbert
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 Guaranty Bank of New York vault.
- DRDavid Rosenthal
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 years with the existing management team. Ernest really doesn't like this perpetual contract thing with the parent bottlers.
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
He's like, "What are you two guys doing? I, as far as I can tell, you're not doing anything." [laughs]
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
He tries to get rid of that. This leads to all sorts of lawsuits. The parent bottlers win. Ernest is frustrated. Finally, in 1923, he's had enough. He decides that he's gonna recruit a new company president to come in.
- BGBen Gilbert
This is just four years after he buys it.
- DRDavid Rosenthal
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?
- BGBen Gilbert
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.
- DRDavid Rosenthal
The Boss, as he would come to be known.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
So Robert is 33 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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
Which I think was one of, if not the largest truck manufacturer in the US at the time.
- BGBen Gilbert
Yep.
- 1:12:06 – 1:23:58
Creating Lifestyle Advertising & Santa Claus
- DRDavid Rosenthal
So one of the first moves that Robert makes when he comes in is to become close with the head ad man at Coke's ad agency at the time, a firm in St. Louis called the D'Arcy Ad Agency. And Coca-Cola's main creative account man there is a guy named Archie Lee. Lee had already created a hit slogan for Coca-Cola in Christmas of 1922 with his Thirst Knows No Season campaign, which is, you know, a great phrase with a great ring to it, but was particularly good because Coke had a legacy of primarily being enjoyed in the summer.
- BGBen Gilbert
Yeah, you drink it in the hot Southern summers of Georgia.
- DRDavid Rosenthal
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 and 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 '50s and '60s. This is in the 1920s. Coca-Cola is inventing this idea that through advertising we can associate our products with feelings.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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. [laughs] Coca-Cola is summertime. Coca-Cola is holidays. Coca-Cola is Christmas.
- BGBen Gilbert
And whether you are in America or not in America, Coca-Cola is America.
- DRDavid Rosenthal
Yes. And boy, do the two of them just turn out some bangers. So Archie 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.
- BGBen Gilbert
So many words.
- DRDavid Rosenthal
In this day and age in the '20s, there's so many words. Everything is so descriptive. In 1923, 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 1924, they do better. "Refresh yourself."
- BGBen Gilbert
Mm.
- DRDavid Rosenthal
That's it. You don't need to say anything more. [laughs] And that was simplified from Archie Lee's original idea for the theme that year, "Pause and refresh yourself." He would, uh-
- BGBen Gilbert
Mm
- DRDavid Rosenthal
... come back to that a couple years later in 1929 with the grand slam mother of them all, "The pause that refreshes," Coca-Cola.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yep. Genius.
- BGBen Gilbert
But by today's standards of language, it's a little bit kludgy, I think.
- DRDavid Rosenthal
I think there was a element of the context of the time. That came out in 1929, same year as the stock market crash.
- BGBen Gilbert
Mm.
- DRDavid Rosenthal
And so all through the '30s 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.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
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 tableaus for the visual aspects of the Coke ads.
- BGBen Gilbert
Yeah. It should be like a Coca-Cola advertisement that's as-
- DRDavid Rosenthal
Idyllic as a Norman Rockwell painting, you might say.
- BGBen Gilbert
Yes. Yes.
- DRDavid Rosenthal
Because they actually go get Norman Rockwell.
- BGBen Gilbert
Norman Rockwell.
- DRDavid Rosenthal
[laughs] Along with N.C. Wyeth and Haddon Sundblom 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.
- BGBen Gilbert
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, Jean Harlow, just associating with wholesomeness and Americana.
- DRDavid Rosenthal
Archie Lee would describe the function of the imagery aspect of the campaigns. He 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 D'Arcy 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.
- BGBen Gilbert
Mm.
- 1:23:58 – 1:32:39
Standardization, Gas Stations & Early Global Growth
- BGBen Gilbert
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, in 1920-ish all the way until 1985, there was no changes to the Coca-Cola formula. Woodruff's Coca-Cola was that 65-year [laughs] unchanged formula.
- DRDavid Rosenthal
Oh, geez. What happened in 1985, besides Robert Woodruff dying, which is directly related to what else happened in 1985?
- BGBen Gilbert
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 SunTrust, and it would sit there for the next 86 years.
- DRDavid Rosenthal
Hmm, and is now in, uh, World of Coca-Cola, right?
- BGBen Gilbert
Yes, and the reason it is there, 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.
- DRDavid Rosenthal
The Coca-Cola version of Hershey Park.
- BGBen Gilbert
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 2011 to kinda shake the public, and especially the younger generations, and say, "We are Coca-Cola, and we have the one secret formula, and we wanna bring it back to your attention that we have something that is super secret and worth protecting."
- DRDavid Rosenthal
The other thing Woodruff does in these early years is he creates the company's first statistical department to do market research-
- BGBen Gilbert
Hmm
- DRDavid Rosenthal
... and to study the business and customers sorta quantitatively. They realized that by this point they've basically saturated the market of every man, woman, child in America. Population growth is only gonna 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.
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
Now, remember, what was Woodruff doing before he negotiated with his dad to come to 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." [laughs]
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
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 they contract out a design for a cooler, 'cause if you're gonna keep Cokes ice cold at 34 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 32,000 Coca-Cola coolers in gas stations around the country just in the first year.
- BGBen Gilbert
And giant signs, right, that say, "Coca-Cola sold here," or "Drink Coca-Cola," or "Coca-Cola, always refreshing."
- DRDavid Rosenthal
Yep, in the gas stations. This is the precursor to coin-operated vending machines, which-
- BGBen Gilbert
Ah
- DRDavid Rosenthal
... they introduce in 1937, and Coke is the first company to do that.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Totally. You don't make money on the gas. You make money on the convenience store. [laughs]
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
Starting with Coke, though. 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 bottlers are great, and a whole bunch are not. You know, there's 1,200 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 them out." And so he changes course for The Coca-Cola Company and says, "I'm now willing to buy and own and operate bottlers-
- BGBen Gilbert
Oh
- DRDavid Rosenthal
... not because I want to, but as a way to, like, force standardization and clean up underperforming bottlers. I'll buy them out, fix them up, and then I'll resell them to local entrepreneurs."
- BGBen Gilbert
I didn't realize that started that early.
- DRDavid Rosenthal
Yeah, he started that in the '20s.
- BGBen Gilbert
Wow.
- DRDavid Rosenthal
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 '20s and '30s, 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. [laughs]
- 1:32:39 – 1:41:11
Pepsi: The First Real Competitor Emerges
- DRDavid Rosenthal
Yes. So not good news for any competitors out there, and they basically all except for a small handful get steamrolled, except for one, Pepsi. [laughs]
- BGBen Gilbert
Which amazingly started way back when Coca-Cola started.
- DRDavid Rosenthal
Yep, 1894. 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 doing the research, Pepsi tried to sell itself to Coca-Cola, like sell its operations to Coca-Cola, three separate times over the years.
- BGBen Gilbert
Three? I didn't know that.
- DRDavid Rosenthal
Three times.
- BGBen Gilbert
Wow.
- DRDavid Rosenthal
And Coca-Cola, you know, the various owners over the years turned it down three times.
- BGBen Gilbert
Amazing.
- DRDavid Rosenthal
Until the Depression, and that is what changes Pepsi's 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?
- BGBen Gilbert
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.
- DRDavid Rosenthal
Six and a half ounces. Very small. So even though they were a nickel, you weren't getting a lot of refreshment [laughs]
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
... in that bottle. In 1934, Pepsi, in 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 12-ounce bottles-
- BGBen Gilbert
Hmm
- DRDavid Rosenthal
... to sell Pepsi also for a nickel.
- BGBen Gilbert
And when you say save the company, just before you go on, this is not new to Pepsi. The Pepsi that exists today is like four Pepsis 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 to new owners, and completely new companies started with the word Pepsi in it. This has been a rocky road for them.
- DRDavid Rosenthal
Yes. But this is when its fortunes turn. So in 1934, they start selling Pepsi in 12-ounce recycled beer bottles. Now, they still have the same pricing pressure, you know, and margin pressure from Coke selling at a nickel, but it turns out if you look at the unit drivers of margins on beverages-
- BGBen Gilbert
Oh, there's two expenses. There's sugar and there's the bottle, and then everything else is approximately free
- DRDavid Rosenthal
So the amount of liquid in the bottle, like you said, Ben, is approximately free, [laughs] whether you're serving six ounces of liquid per bottle or 12 ounces of liquid per bottle, or later 64 ounces of liquid per bottle.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
Not gonna impact your margins that much. And hey, oh, by the way, there's a lot of existing 12-ounce beer bottles out there that we can buy up super cheap and put our Pepsi in. Pepsi starts selling 12-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.
- BGBen Gilbert
Yep, and that is the first real punch that anyone's been able to land on Coca-Cola.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yeah. Genius.
- DRDavid Rosenthal
Truly genius. I mean, it was like back against the wall genius, but genius.
- BGBen Gilbert
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 80 years of this, like, "Yeah, we're not as good. We're not-
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... the best flavor, but, like, we're also here, and you can get a lot of us for cheap."
- DRDavid Rosenthal
Oh, well, are they the best flavor? Are they not? We'll come back to that.
- BGBen Gilbert
Well, that's all subjective.
- 1:41:11 – 1:49:25
World War II: The Greatest Sampling Program in History
- BGBen Gilbert
Okay, David. World War II.
- DRDavid Rosenthal
All right.
- BGBen Gilbert
Gee, how did Coke end up all over the world? Hmm.
- DRDavid Rosenthal
So remember we said a minute ago that Woodruff had set up international bottlers in the '20s and '30s before World War II, but none of it was very big yet. By the time America enters World War II in 1941, Coke at this point has already been around for 55 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 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.
- BGBen Gilbert
Yeah, whether the rest of the world looked at it that way, TBD, but I'm sure the US government looked at it as, like, a great ambassador of our values.
- DRDavid Rosenthal
And however people around the world saw it at the time, one way or another, they ended up drinking Coca-Cola.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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."
- BGBen Gilbert
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 it means.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Oh my God.
- DRDavid Rosenthal
Regardless of whether that bottler also serves civilian customers. [laughs] So for large portions of the US, yeah, they can still get full sugar Coca-Cola during the war.
- BGBen Gilbert
Wow.
- DRDavid Rosenthal
None of Coca-Cola's competitors, including Pepsi, get anything like this.
- BGBen Gilbert
This was a big legal battle. Pepsi was basically saying, "Hey, you can't just say this supplier gets an exemption by name. You have to say, like, colas 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," including General soon to be President Eisenhower.
- DRDavid Rosenthal
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 of the military around the world 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.
- BGBen Gilbert
And documenting the absolute crap out of it to use in their advertising.
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
So Robert Woodruff, 1941, 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.
- DRDavid Rosenthal
Yep. There are these just unbelievable quotes from American GIs 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 Coca-Cola 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 godforsaken place."
- BGBen Gilbert
Wow.
- DRDavid Rosenthal
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.
- BGBen Gilbert
It's unbelievable. And supply them they did. 1941 to 1945, 64 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.
- DRDavid Rosenthal
Wow. I saw an estimate that it was 10 billion.
- BGBen Gilbert
Wow.
- DRDavid Rosenthal
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 than Coca-Cola?
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
So Coca-Cola internally ends up calling the war effort, quote, "The greatest sampling program in the history of the world," and they estimate that the war effort opened up markets abroad for Coca-Cola that otherwise would've taken 25 years and untold millions of dollars of investment to open.
- BGBen Gilbert
Wow.
- DRDavid Rosenthal
To say it accelerated Coke's international rollout is, like, understatement of the century.
- 1:49:25 – 2:16:10
The Cola Wars Begin & the McDonald's Partnership (1950s)
- DRDavid Rosenthal
Yep. So coming out of the war, Coca-Cola's business at least had never been better.The brand domestically has regained any of the ground that it lost to Pepsi during the Depression. Internationally, they've just accelerated 25 years' worth of market development into four [laughs] and are 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 that Coke had, 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 1940s, they poach a Coca-Cola executive named Alfred Steele. He does the unthinkable for a Coke man. He defects to Pepsi, the inferior imitator.
- BGBen Gilbert
That's how they refer to it in internal communications. They don't write Pepsi. They say the imitator.
- DRDavid Rosenthal
The imitator. So Steele had been an ad man at the D'Arcy 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 20 years. [laughs] He shoves him out, and Steele becomes the new president of Pepsi. He's, uh, 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 to find a good man and turn him into a prick. [laughs] 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." [laughs] 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."
- BGBen Gilbert
Oh my God.
- DRDavid Rosenthal
[laughs] This is Alfred Steele. [laughs] 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 30, 40 years here-
- BGBen Gilbert
Hmm
- DRDavid Rosenthal
... after World War II. 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. Steele clearly doesn't give a crap [laughs] about tradition or history or anything.
- BGBen Gilbert
Nothing to lose.
- DRDavid Rosenthal
So Steele, when he 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."
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
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.
- BGBen Gilbert
And Woodruff would later radically flip on that, right?
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
Wasn't he a big part of, with Mayor Hartsfield of desegregating a lot of stuff in Atlanta? I mean, he, he eventually really came around, but-
- DRDavid Rosenthal
During the '40s, definitely not. [laughs]
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
This was a big area for Pepsi to make inroads.
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
There's also an element of geography here, too. I mean, Coca-Cola is Atlanta's biggest company, this traditional Southern company, whereas Pepsi's based in New York. Okay, so that's one. Two, Steele decides, "We're gonna start appealing to this early trend that I see happening in post-war 1950s America of diet fads. We're gonna position Pepsi as the lighter drink versus Coca-Cola. It will refresh without filling." [laughs] Now, how much of this is actually true in terms of calories-
- BGBen Gilbert
Which is funny, 'cause I think it's actually even sweeter. May have even more sugar than Coke does. [laughs]
- DRDavid Rosenthal
Well, this is back in the days before sugar is vilified. You know-
- BGBen Gilbert
Hmm
- DRDavid Rosenthal
... sugar is okay. Fat is bad. Calories are bad.
- BGBen Gilbert
But I mean, the only calories in soda come from the carbohydrate macronutrient, and specifically from sugar, and so there's a direct relationship between sugar and calories.
- DRDavid Rosenthal
[laughs] You're assuming that, uh, consumers back in the '40s and '50s were-
- BGBen Gilbert
That's true
- DRDavid Rosenthal
... thoughtful about such things.
- BGBen Gilbert
That's true. That's a great point.
- DRDavid Rosenthal
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 of America." So this is crazy. Pepsi discovers James Dean. You know, like the actor James Dean?
- BGBen Gilbert
Really?
- 2:16:10 – 2:32:03
The Pepsi Challenge (1975)
- DRDavid Rosenthal
and then in 1975, that deep, dark, deeply embarrassing secret that McCann had discovered 20 years earlier in 1955 and Robert Woodruff had tried to bury as far down as he possibly could comes out, the Pepsi Challenge.
- BGBen Gilbert
All right, David, the Pepsi Challenge.
- DRDavid Rosenthal
I've been so stoked all episode just to get to this, and to start it off-
- BGBen Gilbert
Are you about to do a Pepsi Challenge?
- DRDavid Rosenthal
I am gonna do a Pepsi Challenge right here-
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
Uh, what temperature are they, though? 'Cause I hear that plays a big role.
- DRDavid Rosenthal
It does, but they are the same temperature. I took both of them out of the fridge right after, like, World War II or so, so however long ago that was.
- BGBen Gilbert
'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.
- DRDavid Rosenthal
Well, let's see.
- BGBen Gilbert
All right, that's the real thing I'm seeing right now.
- DRDavid Rosenthal
All right, the real thing. It's good. Oh, Pepsi. Oh, and it's... Oh, it's got that lemony little zest to it.
- BGBen Gilbert
Pepsi's a little, little lemony, a little sweeter.
- DRDavid Rosenthal
Hmm. I think I'm with the majority on this one.
- BGBen Gilbert
That Pepsi's better?
- DRDavid Rosenthal
I think Pepsi tastes a little better.
- BGBen Gilbert
Wow, David Rosenthal right here on the Coca-Cola episode declaring that Pepsi is your pick.
- DRDavid Rosenthal
Well, over Coca-Cola Classic, but, uh-
- BGBen Gilbert
Hmm
- DRDavid Rosenthal
... I'm mostly a Diet Coke guy these days, but we'll get to that in a minute.
- BGBen Gilbert
Which one could argue was formulated to better compete with Pepsi.
- DRDavid Rosenthal
Indeed. All right, the Pepsi Challenge. So back in 1967, 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, McCann Erickson, parent company of McCann.
- BGBen Gilbert
Yep, they do. Interpublic Group.
- DRDavid Rosenthal
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 discussed, up until Alfred Steele came in, had always been kind of a seat-of-the-pants, school of hard knocks management type company. This person who joins I think might've 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 a new bottle, a really, really big bottle, 64 ounces. He realizes in doing market research that, hey, supermarkets are becoming more and more of a thing. We're now in the late '60s, early '70s 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 them home for your large family or a party that you're throwing-
- BGBen Gilbert
Or even cans. Who wants to open a single can for each person around the dinner table?
- DRDavid Rosenthal
Totally, and again, remember how we talked about the cost scaling element of soda is not volume of soda. [laughs] So it doesn't actually cost that much to, uh, go from six and a half ounces to 12 ounces to, you know, a whole lot of ounces.
- BGBen Gilbert
This is why basically anyone is willing to sell you free refills on your fountain drink.
- DRDavid Rosenthal
Yep. So he and Pepsi start working on a big bottle, and they pretty quickly realize like, "Oh, glass is not gonna work here." [laughs]
- BGBen Gilbert
[laughs]
- 2:32:03 – 2:59:06
New Coke: The Worst Marketing Blunder Ever (1985)
- DRDavid Rosenthal
Coke eventually, after years and years of bleeding thanks to the Pepsi Challenge, decides that they need toRespond
- BGBen Gilbert
And the response ends up happening a full decade later. The, the response comes in 1985, and the Pepsi Challenge was in '75, and Pepsi had already been taking share from Coke starting in like 1970, meaningful chunks.
- DRDavid Rosenthal
Yep. So why is Coke so slow to respond to the Pepsi Challenge? Well, in addition to just plain getting their ass kicked, [laughs] 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 80s, approaching his 90s.
- BGBen Gilbert
He has strong opinions about what Coca-Cola is and isn't.
- DRDavid Rosenthal
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 '70s, is just paralyzed. Like, basically no decisions can get through between Woodruff being set in his ways-
- BGBen Gilbert
And it's hard for him to see, read, hear. I mean, he's hard to communicate with, in addition with having strong opinions and control of the company.
- DRDavid Rosenthal
Yep. And then you have a CEO suffering from Alzheimer's, and Woodruff probably doesn't recognize what's happening. It's a real mess.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
All of this finally resolves in May of 1980 when the board appoints a young chemical engineer named Roberto Goizueta as CEO. So Goizueta was a Cuban immigrant who had worked his way up to become head of technical research at age 35, and he was one of the mythical two people who knew the secret formula.
- BGBen Gilbert
Hmm. That's right, 'cause he was a chemical engineer. I mean, he was on the product formulation side of things.
- DRDavid Rosenthal
Yep. And he had just had a huge win within the company when he replaced sugar in the US with high-fructose corn syrup. He's the one-
- BGBen Gilbert
Yeah
- DRDavid Rosenthal
... who brought corn syrup in.
- BGBen Gilbert
So starting in 1980, he got 50%, and then by 1984, they r- replaced it 100%. 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.
- DRDavid Rosenthal
Yep. So he's a real dark horse candidate to be CEO. The person who everybody thinks is gonna get the job is Don Keough, the famous longtime president and COO of Coca-Cola. And so what Roberto does when he becomes CEO is he says, "Don, 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 a dynamic duo here."
- BGBen Gilbert
And ultimately, Goizueta got it because he was Woodruff's protege. I would say Goizueta, 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 Woodruff felt taken care of and informed.
- DRDavid Rosenthal
I could see that.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
[laughs] So they go on to have a great run. One of the early things they do is they buy Columbia Pictures-
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
... the movie studio. [laughs]
- BGBen Gilbert
Which I always thought this was stupid. Like, whenever you hear stories of, oh, at, and at one point in the coked-out 1980s where everyone was doing crazy stuff, Coke even went and bought Columbia Pictures.
- DRDavid Rosenthal
A movie studio.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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 & 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. Herb Allen III, who in the early 2000s took over for Herb Jr. running Allen & Company, is still on the board of Coca-Cola.
- BGBen Gilbert
Amazing.
- DRDavid Rosenthal
So this is how Coca-Cola executives start going to Sun Valley.
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
Where Don Keough reconnects from his old neighbor from his early young professional days when he was working in his first job in Omaha, Nebraska-
- BGBen Gilbert
This is insane
- 2:59:06 – 3:27:56
Buffett's Investment & the "Total Beverage Company"
- DRDavid Rosenthal
the delicious coda to this whole thing.
- BGBen Gilbert
Please.
- DRDavid Rosenthal
Remember how 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." [laughs]
- BGBen Gilbert
Would've been better off. But actually not, right? This whole thing was so stupid that it was actually amazing.
- DRDavid Rosenthal
What's the Bernard Arnault quote? "Even when he loses, he wins"? [laughs]
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
So after this whole new Coke disaster, Coca-Cola Company's stock is in the dumps. And who comes in but Warren Buffett.
- BGBen Gilbert
Perfect.
- DRDavid Rosenthal
Berkshire Hathaway, and buys a roughly $1.3 billion equity stake in the company over the next few years and joins the Coca-Cola board. Turns out to be a, well, a debatable investment.
- BGBen Gilbert
He owns about 9.5% of Coca-Cola today.
- DRDavid Rosenthal
Yep. Berkshire owns about 9.5% of Coca-Cola today. That stake is worth about $28 billion, which is a 22, 23 x gross return on the $1.3 billion investment over the course of 40 years, which equates to only just over about a 8% 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 $12 billion in Coca-Cola dividends, so a $40 billion total return on 1.3 billion invested. Good, but again, this is over 40 years, so that only bumps it up to about a 10% IRR on the investment.
- BGBen Gilbert
Which I imagine he would've been better buying Berkshire Hathaway stock.
- DRDavid Rosenthal
He would've been better off buying the S&P 500 over that same time period.
- BGBen Gilbert
That's brutal.
- DRDavid Rosenthal
Including dividends over that same time period, the S&P 500 is up about 11% annually. So the famous Berkshire Hathaway Coca-Cola investment today is actually underperforming the market. Crazy, right?
- BGBen Gilbert
When I did some math on this, my first glance at it was, this has been an unbelievable investment, 'cause even though the equity value is, you know, it's gone up, what'd you say, 20 something x, but over a long period of time, it's been fine.
- DRDavid Rosenthal
22, 23. Yep.
- BGBen Gilbert
The dividend yield is insane. They get 800 million to a billion out every year, and their principal was 1.3 billion. That's like 60 to 80% dividend yield on [laughs] their original investment. I'd love to park a dollar somewhere so that I could pull out 60, 70, 80 cents every single year on that dollar. That's amazing. But when you frame it the way you did-
- DRDavid Rosenthal
But 40 years is a long time.
- BGBen Gilbert
Right. Over a long period of time, you better have insane multiples to justify locking capital up for 40 years.
- DRDavid Rosenthal
Yep. And you know, the thing about the S&P 500, right, is it's a rotating set.
- BGBen Gilbert
Right. That's not really fair.
- DRDavid Rosenthal
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 10 years dwarf anything else.
- BGBen Gilbert
But I'm sure buying Berkshire in 1988 to 1994, which was the stretch that he bought Coca-Cola, and holding it to today, it would've 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.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
By the way, this is the fault of Coca-Cola over the last 20 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 20 years on a annualized basis has not been great.
- DRDavid Rosenthal
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 that Goizueta and Keough did in the early '80s.
- BGBen Gilbert
The relationship with CAA.
- DRDavid Rosenthal
Yes, and super agent Michael Ovitz.
- BGBen Gilbert
Past Acquired guest.
Episode duration: 3:53:32
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Transcript of episode OdP-4tZo0jw
