EVERY SPOKEN WORD
150 min read · 30,027 words- 0:00 – 12:28
Intro
- 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 three hundred billion dollar company.
- DRDavid Rosenthal
Well, Ben, you know what I'm gonna say to you in response to that. [upbeat music]
- BGBen Gilbert
[laughing]
- 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
[laughing]
- 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?
- 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 two trillion dollars, starting with just two million. So you're looking for a one million X return, or as Charlie puts it, a Lollapalooza outcome.
- DRDavid Rosenthal
[chuckles] Of course, he does.
- BGBen Gilbert
Very Charlie. [chuckles]
- 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
[chuckles] 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. [laughing]
- BGBen Gilbert
[laughing] 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. [laughing]
- DRDavid Rosenthal
[laughing] 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-
- DRDavid Rosenthal
Mm
- BGBen Gilbert
... someone asks for it.
- DRDavid Rosenthal
Now, 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.
- 12:28 – 30:19
John Pemberton and Coca-Cola
- DRDavid Rosenthal
Which brings 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
[laughing]
- DRDavid Rosenthal
... as we will, um, 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. [laughing]
- DRDavid Rosenthal
Exactly, exactly. Yes. [laughing] So this sounds utterly ridiculous today, but let me read you the list of public endorsers of Vin Mariani, the, like, testimonies 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 [laughing] 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? [laughing]
- BGBen Gilbert
[laughing]
- 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 "cola" period in the American lexicon. Cola 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. [laughing] 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
Mm
- 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.
- BGBen Gilbert
So then Prohibition hits. Party's over.
- DRDavid Rosenthal
Yep. Fall of 1885, Atlanta, I think, might have 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."
- 30:19 – 42:53
Asa Candler
- DRDavid Rosenthal
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 definitive Coca-Cola Company. But before we tell the story of the Coca-Cola Company, now is a great time to thank our presenting partner, J.P. Morgan Payments.
- BGBen Gilbert
Yes, who wants to wish all of you a happy holidays.
- DRDavid Rosenthal
Happy holidays!
- BGBen Gilbert
And to share some stats on how their infrastructure kicks off its holiday season. So last year, they processed over $53 billion during Thanksgiving week. That is insane scale. At one point on Black Friday last year, they were processing over 6,000 transactions per second, and that is actually 17% higher than the previous year.
- DRDavid Rosenthal
Wow! Yes, that is insane scale.
- BGBen Gilbert
On our history of credit cards a few years ago, we told the story of how in the early '90s, customers behind you in line used to get mad if you pulled out a credit card because it was actually slower than cash. It's hard to fathom today that payment processing was measured in seconds and in minutes, not in milliseconds like today.
- DRDavid Rosenthal
Oh, yeah. I won't even do any holiday shopping in person anymore. Like, it's just not worth the hassle. I do everything online.
- BGBen Gilbert
Well, that's where I was going. Our friends at J.P. Morgan told us that 50% of the top ten online transaction days now occur during the Black Friday to Cyber Monday period. But that means that the payment landscape has gotten enormously more complicated with all the different ways to pay. This is awesome for consumers like you, David, but it creates a ton of data for merchants that causes complexity, especially with holiday shopping. Enter J.P. Morgan Payments Commerce Solutions. They manage the complexity for you, and they've built a customer insights platform to turn payment data into actionable insights. You can make custom reports of things like revenue in different geographies each day, demographic shifts in your customers, benchmark against peers, or even purchase patterns for repeat customers.
- DRDavid Rosenthal
And this is huge for businesses during the holiday season because while I do my shopping online, J.P. Morgan actually found that the next generation of shoppers are going back to stores, which is wild. Over 55% of Gen Z's holiday spend is through omni-channel experiences, far surpassing other age groups.
- BGBen Gilbert
So listeners, if you're looking to do more with your payments data with invaluable customer insights and meet your customers where they are, visit jpmorgan.com/acquired to learn how Commerce Solutions can grow your business. 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 of 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 ten X 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. [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
So they spend just over $10,000 on advertising.
- BGBen Gilbert
Okay.
- DRDavid Rosenthal
And with those costs, they sell thirty-five thousand, three hundred and sixty gallons of syrup at an average price of a buck thirty 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 eight X 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." [laughing]
- BGBen Gilbert
Yeah, it feels patent medicine-y.
- 42:53 – 1:10:00
Bottling
- 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. [laughing] 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, and 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 one dollar, which Candler never collects, The Coca-Cola Company will sell syrup to Thomas and Whitehead at a volume discount price of one dollar 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 five cents per bottle, same price as at the soda fountains, across practically the entire United States.
- BGBen Gilbert
But this five 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. [laughing] 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. [laughing]
- BGBen Gilbert
And, um, gosh, there's gotta be something in there about how that one dollar per gallon could change over time, right?
- DRDavid Rosenthal
Nope. [laughing] 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 one dollar 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 five cents retail cost.
- BGBen Gilbert
Fascinating.
- DRDavid Rosenthal
[laughing]
- BGBen Gilbert
So let it be written.
- DRDavid Rosenthal
Obviously, there are so many things wrong with this- [laughing] ... but also so many things right with this. [laughing] 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 touch point 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- [laughing] ... 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 a 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.
- DRDavid Rosenthal
And operationally very intensive, too, of course. We've realized we can just assign the rights that we have here. [chuckles] Well, why don't we keep assigning the rights? [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
They start subcontracting out little sub-territories to other entrepreneurs and small bottling operations across the country. And so basically overnight, first dozens and then hundreds of local Coca-Cola bottling operations pop up in these entrepreneurial endeavors in basically every town and countryside across America.
- BGBen Gilbert
That have no contractual relationship with The Coca-Cola Company. They have a relationship with this, quote-unquote, "parent bottler".
- DRDavid Rosenthal
Either Thomas or Whitehead.
- BGBen Gilbert
Yes. [chuckles]
- DRDavid Rosenthal
So Thomas and Whitehead's companies come to be known as the parent bottlers, and then all the guys doing the actual work come to be known as the actual bottlers or the first line bottlers.
- BGBen Gilbert
This is the ultimate rent seeker. I mean, Thomas and Whitehead just have, like, a little toll booth set up in between [chuckles] The Coca-Cola Company that owns the intellectual property and makes the syrup and markets it, and the bottlers who are actually doing the work, and they're just clipping little coupons as the money flies by on the way over to the bottlers and The Coca-Cola Company.
- 1:10:00 – 1:37:54
Woodruff
- DRDavid Rosenthal
And then a couple years later, in 1919, a local banker named Ernest Woodruff puts together an investor syndicate and basically stages a takeover [chuckles] of the company and buys out the family members for twenty-five million dollars. 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 [laughing] 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, twenty-five million dollars 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. [chuckles]
- 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, and 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
[laughing]
- DRDavid Rosenthal
He's like, "What are you two guys doing? I- as far as I can tell, you're not doing anything." [laughing]
- BGBen Gilbert
[laughing]
- 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.
- DRDavid Rosenthal
And Robert is a star there. He's widely regarded as one of the most talented young executives in new, burgeoning corporate America here in the '20s. He's best friends with the Major League Baseball star, Ty Cobb. They go hunting together. He's like a man about town, and Standard Oil of New Jersey is trying to hire him as an heir apparent to come in and potentially be the next CEO of Standard Oil of New Jersey.
- BGBen Gilbert
And David, do you know what Standard Oil of New Jersey is today?
- DRDavid Rosenthal
Uh, SO, right?
- BGBen Gilbert
Exxon. It's ExxonMobil.
- DRDavid Rosenthal
Oh, Exxon, that's right, that's right. [chuckles]
- BGBen Gilbert
Yep.
- 1:37:54 – 1:48:29
Pepsi and the first real competitor
- DRDavid Rosenthal
Pepsi. [laughing]
- 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 [laughing]
- BGBen Gilbert
[laughing]
- 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
Mm
- 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 n- 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 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. [chuckles] 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. It's 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, w- 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, or are they not? We'll come back to that.
- BGBen Gilbert
Well, that's all subjective.
- 1:48:29 – 1:54:20
WW2
- 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 fifty-five 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" 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- [laughs]
- BGBen Gilbert
Oh, my God.
- DRDavid Rosenthal
-regardless of whether that bottler also serves civilian customers. [laughing] So for large portions of the US, yeah, they can still get full-sugar Coca-Cola during the war. [chuckles]
- 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 [chuckles] 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 and 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." [chuckles]
- 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.'" [chuckles] 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. [chuckles]
- 1:54:20 – 2:26:45
50s-60s: Television and McDonalds
- BGBen Gilbert
for life now. They're not switching brands.
- DRDavid Rosenthal
So after the war, in 1950, a third of Coke's profits are already coming from abroad, from all these-
- BGBen Gilbert
Whoa!
- DRDavid Rosenthal
-bottlers that they got set up. And Time Magazine features Coca-Cola on the cover of Time Magazine. Have you seen this?
- BGBen Gilbert
Oh, wasn't it the first product ever on the cover of the magazine?
- DRDavid Rosenthal
It might've been. I'm not sure about that, but have you seen what the image is?
- BGBen Gilbert
No.
- DRDavid Rosenthal
It's a painting, like an oil painting, of an anthropomorphized red Coca-Cola disc-
- BGBen Gilbert
Yeah
- DRDavid Rosenthal
... with arms and a face, and it is larger than the Earth, and it is sitting behind the Earth, reaching around and feeding the smiling Earth a bottle of Coca-Cola. [laughing]
- BGBen Gilbert
Oh, my God!
- DRDavid Rosenthal
And the caption on the cover of Time Magazine says, "World and friend." [laughing] The implication being that Coca-Cola is a friend to the world.
- BGBen Gilbert
Wow.
- DRDavid Rosenthal
Crazy, right?
- BGBen Gilbert
So it's funny, before World War II, there was a presence for Coca-Cola in pre-Nazi Germany.
- DRDavid Rosenthal
Oh, yes! I know what story you're about to tell.
- BGBen Gilbert
As you can imagine, it became difficult to supply [chuckles] Nazi Germany with American Coca-Cola during the war. Since those factories, German Coca-Cola factories, lost touch with the mothership and all the ingredients that they would need to source, they found alternate ingredients and made kinda like a crappier knockoff drink that they could make with the supplies they had.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
That drink is Fanta.
- DRDavid Rosenthal
Yep. [laughing] Yeah, Fanta, owned by Coca-Cola, was the, uh, brainchild of-... Nazi Germany Coca-Cola bottling entrepreneurs. [chuckles]
- BGBen Gilbert
Who lost access temporarily to the real thing and did that instead. They would change the formula, and they would launch it in the US later in 1960, but Fanta has its origins as, "We can't get real Coca-Cola in Germany during World War II, so this is what we're making." Name and all, Fanta is the name they came up with.
- DRDavid Rosenthal
Yeah, parts of history that, uh, most people don't know.
- BGBen Gilbert
Don't you want a Fanta Fanta?
- DRDavid Rosenthal
Yeah. [laughing]
- BGBen Gilbert
The thing that happens post-war, just 'cause we've planted this seed elsewhere, to follow it through, 1945 is the year that Coca-Cola officially embraces Coke and trademarks it, and from here on out, they actually do start referring to it as Coke in the advertising.
- 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 [chuckles] 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. [laughing] 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. [chuckles] 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." [chuckles] 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-
- BGBen Gilbert
Oh, my God
- DRDavid Rosenthal
... running fiercely in place." [laughing] This is Alfred Steele. [laughing] 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-
- 2:26:45 – 2:43:54
Cola Wars
- 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
[laughing]
- 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. [slurping] 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
[inhaling] Hmm. [exhaling] 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
Mm.
- 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.
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
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 have 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. [laughing] 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." [laughing]
- 2:43:54 – 3:18:49
Roberto Goizuetta
- 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
Mm! 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 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- the 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. [chuckles]
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
So they go on to have a great run. One of the early things they do is they buy Columbia Pictures- [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... the movie studio. [laughing]
- BGBen Gilbert
Which I always thought this was stupid. Like, whenever you hear stories of, oh, 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
Mm
- 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
- DRDavid Rosenthal
... living on Farnham Street in Omaha, where he was neighbors with Warren Buffett.
- BGBen Gilbert
Warren Buffett is like this real-life Forrest Gump. I mean, the number of things that he invested in that would become these unbelievable bonanza investments, like greatest-of-all-time investments, "Oh, it was a guy who lived on my street. Oh, it was the woman that ran the furniture store in my town growing up."
- DRDavid Rosenthal
[laughing]
- BGBen Gilbert
Uh, like, it happens over and over and over again. Are you kidding me? Don Keough was Warren Buffett's old neighbor?
- DRDavid Rosenthal
Don's first job out of college, he worked for, I believe, a coffee company-
- BGBen Gilbert
Ah
- DRDavid Rosenthal
... that ended up getting acquired by Coca-Cola, and that's how he came into-
- BGBen Gilbert
Wow
Episode duration: 4:04:27
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