Coca-Cola: The Complete History & Strategy (Audio)

David, I cannot believe we're about to do a 4-hour podcast on syrup, sugar, and water. I mean, that's the entire business: it's just syrup, sugar, and water combined. And it's a $300 billion company.

Well, Ben, you know what I'm going to say to you in response to that: Do you want to sell sugar water for the rest of your life, or do you want to come with me and change the world?

Ooh, save it, David. Save it.

Welcome to the fall 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

I'm David Rosenthal.

And we are your hosts.

Charlie Munger has a famous thought experiment. It's the 1880s. You want to build a company from scratch that eventually becomes worth $2 trillion, starting with just $2 million. So you're looking for a 1,000,000× return, or, as Charlie puts it, a Lollapalooza outcome.

Of course he does.

Very Charlie.

The constraint is that it must be a nonalcoholic beverage business.

Okay.

And another constraint: it must throw off many billions of dollars in dividends along the way to your shareholders.

Okay. This sounds almost impossible, but what ideas could you possibly dream up to give it your best shot?

Well, I think the first question I would have is whether I could include any now-illegal drugs in my product. That certainly helps. So, to build this giant, valuable company, the first thing you need to know is that you're not going to get there with something generic. 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 require large amounts of water every day to live. So it is a giant market.

Yes, but you're not going to fully replace water. It's just going to be a small fraction of the time. So, onto the beverage itself, you're going to want to optimize it to maximize the rewards of ingesting it, making it as refreshing as possible in any climate.

Now, you're going to want to do a bunch of other stuff, too. You want to fill it with calories to give energy. You want the flavor, texture, and aroma that make it pleasurable to consume. And you should throw in some brain stimulants like caffeine and sugar. That's sort of the ideal product mix.

Among other things. Yeah. 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.

I see what you did there.

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.

Always.

Always, David. And since everyone isn't thinking about beverages all the time, like you probably are as the proprietor of this business, you're going to want to 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 going to want to have a Pavlovian association between your drink and happiness, and you're going to want to spend huge amounts of money blanketing the entire world with this messaging.

That would be pretty great.

Yes. And the last thing: You must never, under any circumstances, change the formula or flavor.

We were doing great there.

We were doing great.

But you know, this might be why Coca-Cola is not a $2 trillion company today.

Well, we'll debate that at the end of the episode. Of course, this playbook is almost exactly what the Coca-Cola Company has done, and they've done it over the course of 140 years. It has its roots all the way back in the Civil War. It grew up through the rise of the automobile, through the Great Depression, through 2 world wars. It seamlessly and shamelessly integrated into the hippie culture of the 1970s, and then, of course, it had the epic cola wars of the 1980s and onward.

And David, I would say this episode, perhaps more than any other that we've covered, is about America.

Well, it's about America and then America inserting itself everywhere else in the rest of the world. Can't wait to dive into it.

Well, listeners, this episode was selected by you. Last month, we asked our email subscribers to vote on what company we should cover next, and Coca-Cola was the overwhelming favorite. So, thank you to all of you who participated. You can join that email list at acquired.fm/e to get in on the next round of voting. And that same email list is getting a lot better. We just did a big overhaul. So each monthly email will now have episode summaries, our big takeaways from the company after studying it, and exclusive photos from our research process. So never miss an episode drop by signing up at acquired.fm/e or clicking the link in the show notes. So with that, this show is not investment advice. David and I may have investments in the companies we discuss and this show is for informational and entertainment purposes only. David, where do we start our story?

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, which 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 toward 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 of 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.

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 big national industrial companies, but there weren't any national consumer product companies. 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.

And what were patent medicines?

So, going back again to our Standard Oil series, John D. Rockefeller's dad, if you remember, was a traveling snake-oil salesman.

Yeah. In those days, back before the Civil War, these were medicines that promised a cure to all sorts of ailments: nausea, indigestion, headaches, cancer, tuberculosis, skull fractures, paralysis, and impotence.

All based on zero research, zero studies.

Zero science, nothing. The Civil War changed all that—not necessarily for the better.

So after the war, there were so many wounded soldiers in America who were in such chronic pain that the market for medicines like this from these snake-oil salesmen just exploded. A huge percentage of veterans from the Civil War developed what was called “soldier's disease”—that is, they were addicted to morphine for the rest of their lives as a painkiller.

Which actually did work.

Yes, that actually did work—

Very well.

And it wasn't just physical injuries from the war and the soldiers who fought in it. The Civil War ripped America apart. These guys and their families had just gone through this devastating trauma. 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.

So naturally, whenever there's a 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 scaled up and started to standardize the products that they were offering, this industry came 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.

Really?

It's these patent medicines that started spending the first real-scale dollars in newspapers, which were also coming up and industrializing post-Civil War and building the business model of the media industry as we know it today. Because, 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, nuts, water, and stuff that go into these things. I mean, it's extracts, right? Okay.

They're super-cheap commodities that are very easy to obtain in great quantities, very easy to produce into your product and transform, and pretty small relative to other products, so they're 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.

So you might think that all this is ancient history.

A whole bunch of products that we still buy today started as patent medicines. Luden's cough drops, Vicks VapoRub, Vaseline, Listerine—the mouthwash—all patent medicines. Those are patent medicines that are still used for a sort of health purpose today.

Plenty of products that we still use and consume today started as patent medicines but are no longer marketed as medicines. Graham crackers started as a patent medicine.

Really?

Coca-Cola

Grape-Nuts—the cereal.

Neither grape nor nuts.

Coca-Cola

Angostura bitters—you know, the bitters that you get in Old-Fashioneds and stuff. That was a patent medicine.

Okay, that makes sense. That's squarely what I believe a patent medicine is.

Coca-Cola

Yep. And then a couple of things you might be familiar with: Dr Pepper. I didn't know Dr Pepper was that old.

Really?

Coca-Cola

Yeah, Dr Pepper predates Coca-Cola.

Huh?

Coca-Cola

And of course, Coca-Cola started just the same way as a patent medicine. Which brings us to Dr. John Pemberton, a Confederate Civil War veteran who had not only been stabbed but had also been shot during the war and got soldier's disease, just like all these other soldiers, and was addicted to morphine for the rest of his life.

After the war, he moved to Atlanta and, as part of his entrepreneurial aspirations in this new patent-medicine consumer economy—and also probably to solve his own problem—he started casting about for other drugs that could cure him and others of army disease. That is how, in the mid-1880s, he learned about a new miracle drug sweeping America and promising to cure all ills, including army disease: cocaine.

Cocaine was really, really in in America in the 1880s, perhaps foreshadowing a little bit the 1980s in America, as we will get to later in the episode. Except in the 1880s, it was really legal and really broadly encouraged. Certainly, there was no FDA or anything to make it illegal, but society's posture toward cocaine wasn't negative.

It was like caffeine today, right? They had not really discovered its addictive nature or demonized it yet.

Yep. Or the side effects, et cetera. So pretty quickly, cocaine became the most popular patent-medicine ingredient out there.

It's probably the only ingredient that actually did anything.

Yeah. And there was a product on the market, an imported product from France, that quickly became the most popular delivery vehicle for cocaine. It was a cocaine-fortified wine from Bordeaux in France called Vin Mariani. It was like the most extreme Four Loko you could ever dream of.

Exactly. Exactly.

Yes. So this sounds utterly ridiculous today, but let me read you the list of public endorsers of Vin Mariani—the testimonials in the Vin Mariani pamphlet. Thomas Edison, Buffalo Bill Cody, United States President William McKinley. It gets even better: Queen Victoria of England and not 1 but 3 consecutive popes in the Vatican all swore by Vin Mariani.

It feels like a thing I would be swearing by and endorsing, too. I imagine once you start, it's the best thing ever.

So entrepreneurial Pemberton in Atlanta saw Vin Mariani's success and thought, "I wonder if there's a way that I could copy and improve on that." The way he came up with to improve upon it was to add caffeine to the mix.

Why not?

Yeah, why not? He decided that he was going to get the caffeine from African kola nuts—K-O-L-A, kola nuts.

Which we should say is the first introduction of the word "cola" into the American lexicon. Cola drinks were not a thing.

Yep. And it's very bitter. But the reason he chose it was that it had an even greater caffeine concentration than coffee beans. He really wanted this product to work.

So Pemberton started selling Pemberton's French Wine Coca, which was still wine but was now infused both with coca leaves for the cocaine and kola nuts for the caffeine. And it was a hit.

This could not have tasted good.

No, I can't imagine what it tasted like. President Ulysses S. Grant became a fan, and Pemberton started selling thousands and thousands of bottles in and around Atlanta.

Which makes sense. People were drinking it for its drug-like medicinal qualities, not because it was in any way refreshing.

Yep. Now, I say bottles, so keep that in mind here. Bottling technology in the 1880s was not what it is today—not very good at preserving liquids or foods, and certainly not good at preserving carbonation. However, because this was wine at this point in time, wine had natural preservatives in it, so it was shelf-stable. You could sell bottles of wine. People had been selling bottles of wine for centuries at this point.

So then prohibition hits. Party's over.

Yep. In the fall of 1885, Atlanta might have been the first major city in America to institute prohibition and become a dry town—no alcohol. So Pemberton was now like, "Well, shoot. I've got this hit product. I need to scramble and come up with a soft version of a hard drink."

And this is the origin of soft drinks. They're not hard, as in alcoholic drinks. They're soft.

There you go. So he started madly experimenting with all sorts of flavors and ingredients, and after 6 months or so, in April 1886, he nailed a formula.

Yes. And so the question is, how does he arrive at this formula? The book I was reading, which is called "Secret Formula," 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 or $1. They serve a crowd of people when they're looking to recover from some ailment or, at this point, probably serve an addiction.

We're now 20 years from the Civil War, so a new generation is coming up.

Yes. Yeah, that doesn't have army disease. Is there a product that I can make that people can afford anytime 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 comes up with the idea of a 5-cent product because the ingredients cost so little. These extracts make it a super-high-margin product—a 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.

Pick-me-up, when they're sitting down in the social gathering space, because drugstores at that time were sort of the Starbucks of the era. They really were gathering places to go and spend time. So he says, "I'm going to serve this other market of anytime refreshment."

Right. Sugar because of the extreme bitterness of the kola nut.

Yes. And actually, the coca plant was also bitter, so sugar was there to offset it.

Yeah. Yeah. 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, spicebush, 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 Dr. 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—4 times the amount in today's Coke—Pemberton's concoction made quite a stimulating beverage.

Yes. Yes, indeed. As best as I was able to tell from a few different sources, I think that, roughly, once Coca-Cola starts being produced in that first decade, 4 or 5 glasses of Coca-Cola would be about the equivalent of a line of cocaine today.

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.

That's a good point. Regardless, you're going to get hype when you drink this.

And this amount of cocaine really was only a part of the formula for those early few years.

Yes. But 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. It's funny because it neither contains much coca, since the cocaine is actually an extract, nor very much cola, since the caffeine is actually an extract and it's just a tiny little drop from the cola seed. And very soon they would strip out almost all the cocaine. 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 cola.

Yes, indeed. So they go about getting the new product installed and distributed in drugstore soda fountains around Atlanta. But Ben, you were saying a minute ago about how drugstores were this gathering place at the time. Remember I said something 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 water or milk or something was if it was fresh. And so that's how soda fountains come to be installed in these drugstores. They're selling patent medicines, many of which are liquids. That's also how carbonated water comes to the drugstores, because mineral water and carbonated water are thought to be health tonics. So it all mixes together, and over the years these morph into social places, thanks in large part to Coca-Cola.

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. He 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—of whether it's a still or a sparkling beverage, to give it that champagne sparkle and create the Coca-Cola that would endure from there.

Well, thank goodness they do use the carbonated water. Could you imagine Coke if it were still? That wouldn't be very good.

No. Well, it wouldn't be as successful. I mean, there were probably hundreds of things like Coke that were still that did not succeed. So pretty quickly, Coca-Cola gets into the market with these drugstores and soda fountains, and people love it. This is 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. It tastes great.

So the next year, in 1887, Frank Robinson, the business partner who also named the drink, introduced the script logo—the Coca-Cola script logo that we still use to this day.

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 logo, which has been unchanged, other than just tightening it up a little bit, since he created it in 1887.

Yes, it is true that he was his bookkeeper, but he was also his business partner.

It's like, “I'm your bookkeeper.”

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. They start mailing out these free Coke tickets, or coupons, you might say, to every address in the Atlanta city directory. And then they also give them to traveling door-to-door salesmen to hand out on their routes—not Coca-Cola salesmen, but salesmen who are selling a variety of different products.

And this is the very first manufacturer's coupon redeemable at a retailer. There's an image on Wikipedia of one of these tickets from 1888 that is the oldest known coupon used in America. It's actually beautiful. It kind of looks like a dollar bill. We'll put a photo of it in the email. It's incredible.

Well, yeah. It's a high-gross-margin product where you can give out giant amounts because, if you mail someone a little ticket that says they can come and redeem a free drink that tastes good and is full of sugar, caffeine, and cocaine, I'm pretty sure they're going to buy more from you. It's a high-gross-margin product. You have lots of dollars to play with. On top of all this, this is kind of a new product category: the notion of a soft drink that's not a patent medicine and that's much cheaper than traditional patent medicines. So you do actually need to do some category-creation marketing where you make people aware that this cool new thing exists. 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 love it. They get free drinks of this great-tasting beverage.

Yep. Drugstores and soda fountains super love it because now they're getting more foot traffic. And then, once consumers come back and start buying their second, third, fourth, or 400th drinks, this is a highly profitable drink for them to sell. They have gross retail margins on this. And, 3, the traveling salesmen that Pemberton and his associates are giving these tickets to love it, too. This is like, “Oh, wow, now a great new free benefit I can offer my customers. Why wouldn't I want to 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, when Coke was 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 $1.30 to buy. Yeah, I'm not a retailer, but I'm pretty sure those are good margins.

Pretty sweet deal if you can get it. And pretty sweet deal to be McDonald's today, offering my large Coke with a meal.

Yeah, man. 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, and was doing a lot of the distribution work—becomes convinced that he's dying.

Which he generally was, slowly, over all these years.

Yes. And he secretly decides that he is going to sell off the rights to the formula—

Without telling Robinson.

Without telling Robinson, without really telling anybody. This kicks off a whole mess of very questionably legitimate transactions that results, by mid-1888 or 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, reunite all these various claims to ownership of the formula, and create a company that they can then grow and scale and manifest its destiny across America and the world. Asa Candler is really the person who creates the modern Coca-Cola Company with Frank Robinson's help in 1892, incorporating it as the definitive Coca-Cola Company.

All right. So, David, this is the first professional version of the Coca-Cola Company?

Yes. But to give you a sense of just how much of a hit this product becomes, and how quickly, even in the couple of years before the professionalization and founding of the Coca-Cola Company in 1892: in 1887, 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, 2 years later, that has quadrupled to over 2,000 gallons. And by 1890, it's almost 10,000 gallons. So what's that? 3 years into the business, with no professional management, they grow the business 10 times without even really trying.

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.

And that's just buying all the various rights and claims from the people that Pemberton sold them off to. No capital needs to be invested in this business, ever.

Unbelievable.

It is a cash-flow bonanza since day 1.

It's crazy. 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 operations and stuff, too. There were only about 3 people working in the business. They spent just over $10,000 on advertising. With those costs, they sold 35,360 gallons of syrup at an average price of $1.30 per 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 3 people working in this business, including Candler, the owner. They made $12,000 in annual profit in the first year of the business. So they are crushing it.

So that's each person at the company, if they were paid equally, making 8 times the average household income.

They are 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.

That's a quarter million on, would you say, a little over $20,000 of ingredients and manufacturing?

Yes. And then another $10,000 in advertising.

So that's crazy. Only a tenth of the ultimate sale price of the beverages is in the costs of the ingredients, the manufacturing, and the advertising when you fully load it.

Yes. So there's a lot of margin to go around. 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 from 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 positioning Coca-Cola as this dual-use, refreshing beverage—a non-alcoholic social drink, but also a patent medicine. 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.” [laughter]

Yeah, it feels patent medicine-y.

It feels patent medicine. Not a pause that is refreshing just yet. But what Robinson and Candler do that is very much still on brand for Coke today is that 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 oilcloth signs. They paint murals on walls of buildings. They do billboards. They put it in streetcars. 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. They would go on to paint 20,000 murals on the sides of barns and walls across the countryside starting in 1894. [snorts] Unbelievable.

Incredible.

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 a big, bright, beautiful sign to bring customers into your store?” 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. So you see all these great old pictures of these stores that effectively look like Coca-Cola stores.

Oh, they're beautiful. Yeah.

It almost looks like they're franchising Coca-Cola rather than Coca-Cola just being a thing that's sold at the drugstores. 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.

They want a big advertisement that says, “We have Coke.”

Yes.

So, by 1898, Coca-Cola is distributing over 1 million branded promotional items per year. This is before the year 1900.

Yeah. Nuts.

They also start expanding geographically because we talked about syrup earlier. All the Coca-Cola Company is doing here is selling this concentrated syrup. It's the drugstore soda fountains that are then mixing it with carbonated water and making it a drink. The syrup is small, compact, shelf-stable, and easy to transport. Combined with the couponing strategy, they've got this killer national growth strategy.

So by 1895, Coca-Cola is being sold at least 1 soda fountain in every single state and territory in the United States at this time.

Wild. Wow. Yeah.

And if you look at old pictures of this time, they had landed on what you were talking about—the intrinsic advertising—a slogan that most people will know: “Delicious and refreshing,” which you see on all the old Coca-Cola memorabilia. That's coming into view. They're not yet talking about the lifestyle you could have if you associate with Coke. They're talking about quality, and they're also talking about price. They're advertising as many places as they can: “Hey, this is 5 cents.” They also start, for the first time, working with celebrities and athletes in some of these advertisements that they're doing. And of course, as you would expect, in 1895 they trademark the Coca-Cola script for the first time. They are granted that unbelievably valuable trademark.

Yes.

The “Delicious and refreshing” slogan actually evolves during these years. It's Frank Robinson who starts to lean more toward “delicious and refreshing” and the social benefits, and away from the patent medicine brain-tonic slogans. There's actually a great quote on this from him in For God, Country, and Coca-Cola. He said, “We found that we were advertising to the few, i.e., people who needed a brain tonic, when we ought to advertise to the masses.”

And so he starts dropping all this “sovereign remedy for headaches and nervousness” stuff and then starts really emphasizing “Drink Coca-Cola,” “delicious,” and “refreshing.” This is really important because he's hitting on, “Hey, Coca-Cola is for everyone. It's not only for people who have something wrong with them that they need a medicine to fix. It's not a niche. It's not a demographic. It's for everybody.”

Yeah. And, 2, just instinctively, he understood, “Hey, we don't want to associate our product with negative things, with problems.” Headaches and nervousness are problems. We want to associate our product only with positive things: delicious, refreshing, friendship, et cetera, et cetera.

Yep. Which is so funny. At this point, all the cocaine is not gone yet. We still have [laughter].

It's being marketed as this unalloyed good, while at the same time the company's like, “We should probably do our best to start moving away from cocaine because it doesn't actually seem to be the value proposition that people are here for.”

Yes.

And the anti-cocaine sentiment is coming.

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. [laughter] He gives away the right to bottle and sell Coca-Cola for free.

Yes. Definitely one of the dumbest deals ever if you just look at it as it was in that moment, but it would be sort of Coca-Cola's second great business-model innovation after couponing. So in 1899, 2 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, they'll keep the carbonated fizz. They will still be delicious when opened and consumed at a later date.

And Candler's very anti-bottling, right?

Yes. He is extremely skeptical. He's like, “We've tried this before. I really don't think the technology's there. I'm not sure about this.” Thomas and Whitehead, though, are very persistent. They say, “Well, we totally get 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 2 young bucks have a go at this.” So, in July of 1899, the 3 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 because I think this is going to 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.

But this 5 cents per bottle, operating a bottler is a tougher business than operating the soda fountain in this respect because there is 1 meaningful additional cost: the bottle itself.

Yeah, the bottle. [laughter]

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. [laughter]

And, gosh, there's got to be something in there about how that $1 per gallon could change over time, right?

Nope. No, there is not. 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.

Yes.

To the bottler.

Yes. And the bottlers are obligated to keep selling bottles to the public at 5 cents at retail.

Fascinating.

So, let it be written.

Obviously, there are so many things wrong with this, but also so many things right with this. This lets the Coca-Cola Company enter and scale the bottling business completely capital- and investment-free. They don’t have to do anything besides advertising, which they’re already doing for their growing national business.

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.

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 3 of those are pretty big markets for Coca-Cola today, especially groceries and stands—that is, gas stations, convenience stores, and so on.

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. It's a small head office. High-margin product, baby.

Yep.

So pretty quickly, 2 things happen with 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 2 separate companies. Remember, the contract is assignable. They can do whatever they want with it. So they split up the territory across America and say, “Great, we're going to assign the rights we have in this contract with the Coca-Cola Company to our 2 separate companies.” And then they both independently decide, you know, 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 is a kind of low-margin, capital-intensive thing to bottle Coca-Cola.

And operationally, it’s very intensive, too.

Of course, they realize they can just assign the rights that they have here. Why don’t we keep assigning the rights?

They start subcontracting out little subterritories to other entrepreneurs and small bottling operations across the country. Basically overnight, first dozens and then hundreds of local Coca-Cola bottling operations pop up in these entrepreneurial endeavors in basically every town and the countryside across America.

Those operations have no contractual relationship with the Coca-Cola Company. They have a relationship with this, quote-unquote, parent bottler.

That parent bottler is either Thomas or Whitehead.

Yes. Thomas and Whitehead’s companies come to be known as the parent bottlers, and the guys doing the actual work come to be known as the actual bottlers, or the first-line bottlers. This is the ultimate rent seeker. Thomas and Whitehead just have a little tollbooth set up between the Coca-Cola Company, which owns the intellectual property, makes the syrup, and markets it, and the bottlers, who are actually doing the work. They’re just clipping little coupons as the money flies by on the way over to the bottlers and the Coca-Cola Company.

But hey, Candler and Robinson weren’t going to do this. So, more power to them.

Right? That is the argument here: There is economic value from Thomas and Whitehead actually spurring bottling to happen at all.

Yes. And they need to go find the local bottlers, set up these entrepreneurs, and teach them how to do it. Eventually, they’re doing nothing, but in the early days, they’re not doing nothing.

That’s true. Within 10 years, they managed to find 400 proprietors of bottling operations and get them to stand them up. By 1925, there were 1,200. So, it was a busy 25 years finding all these child bottlers.

Basically, this creates a second wave of blitzscaling, if you will, for the Coca-Cola Company across America. They’d already nationally expanded to soda fountains, but soda fountains are only in towns large enough to have a soda fountain. What about all the rural areas of the countryside? Not to mention the simple market expansion of letting people drink at home, at restaurants, or anywhere else. It’s a huge deal. The net of this is that within a few years, basically every single man, woman, and child in the United States becomes intimately aware of and familiar with Coca-Cola, and the company doesn’t have to lift a single finger to do it.

Yep. This reminds me a lot of our Visa episode, where we were talking about the difference between Visa, scaling as a network of networks, and Amex, as a closed-loop system. We were talking about how Visa achieved tremendous scale relative to its head-office size and employee headcount, and did it in a very short period of time. Coca-Cola is sort of the same thing here: They can scale so fast because of the bottlers, because they’re not actually having to do all this work themselves. I don’t think Coca-Cola would be the ubiquitous international product that it is today if they had just created the product and then won the market without this bottler-scale model.

No, absolutely not. If they had taken the Amex approach and Candler had decided, “We’re going to enter the bottling business ourselves, go market by market, and invest the capital in the production lines and the bottles,” there’s absolutely no way they would have reached the critical scale that they did in the country, and then internationally, too. They use the same model to go around the world.

Yep. Coca-Cola would start referring to this as the Coca-Cola system. I don’t think we’ve ever studied a business before that has a system like this, where you can look at the Coca-Cola Company—which is ostensibly what we’re doing on this episode—but to understand the scale, impact, and reach of the product, you have to look at the system holistically: the sum of the Coca-Cola Company and all the bottlers.

The crazy thing is that this is still the system today. Coca-Cola still doesn’t bottle. We can talk about the exceptions to that, but in large part, the desired end state is that there are all these bottlers around the world that they just sell syrup to.

Yeah. It’s kind of like Microsoft and Intel in the PC era, except even more closely tied. It would be like if Microsoft had contracts with Intel where they got to stipulate what the processes were going to look like and what the machines were going to look like.

It’s funny. The thing that it made me think of was our Rolex episode, where Rolex doesn’t want to be in the authorized-dealer business. It’s operationally expensive, and the training is hard, but they do want control over the retail experience. Rolex managed to have its cake and eat it, too, as we talked about on that episode. They can say, “Hey, it’s a privilege to be able to sell our watches, so you’re going to make your store conform to our exact standard.” Coca-Cola does the exact same thing with the bottlers. They say, “Hey, you have a license to print money. It’s not as much money as we’re going to print, but you can print some money, and you know it’s going to be a good business.”

More than some money: The local Coca-Cola bottlers usually become the wealthiest family in any given town across America.

Very true. But just to make sure we’re super clear, compared with their bottlers, the Coca-Cola Company has higher gross margins, much better returns on invested capital, and requires less invested capital. They get to focus on just making syrup and marketing. They don’t have to do any of the undifferentiated stuff. You’d much rather be Coca-Cola than one of the bottlers, but it’s a good business to be the bottler, too.

Especially if you’re a small-town entrepreneur in turn-of-the-century America. Hell yeah. If the Coca-Cola Company is going to dictate terms to me and tell me exactly how red my truck needs to be, that it must say Coca-Cola in this particular way, and that the bottles must come off exactly like this, that is fine. I will agree to all of this because I know I’m going to make money.

Yes. 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 and use the same model. Other aspiring entrepreneurs who didn’t get the Coca-Cola franchise might want to open a competitive franchise in their local town.

By the mid-1900s, there are hundreds of Coca-Cola competitors out there: Afri-Cola, Char-Cola, Caro-Cola, Coca-Cola, Fig Cola, Koka-Nola, King Cola, Standard Cola, and on and on and on.

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 they weren’t the Coca variant of cola. Coca-Cola is one thing that means their formula, with this mystery ingredient, Merchandise 7X, which is the real crux of the formula. There are no other things that can be colas because they created the concept of Coca-Cola, and they are an N of 1.

So, in 1905, Congress passes the Federal Trademark Act in the United States, and they federalize trademark protection in the country. Previously, it was done state by state, which is probably how Coca-Cola trademarked the script logo earlier than that. It might have just been in Georgia.

Yep.

Of course, the Coca-Cola Company is one of the first registrants for its trademark, and they start using this new law to sue the crap out of all the competitors out there, really winning on the grounds that 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.

Yes.

And they succeed. So, over the next 15 or 20 years, by the mid-1920s, it’s estimated that Coca-Cola sues and shuts down over 7,000 copycat cola brands. [Laughter] It’s a very, very busy legal department.

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.

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 that was insisting—actually, it’s worth an aside here—that at this point in time, Coca-Cola did not embrace the nickname Coke. One reason was the affiliation with the drug. We should say that by 1905, cocaine is pretty much entirely gone. There’s no more coke in Coca-Cola.

Yeah, it’s actually an amazing story.

In 1903, they contract with a company called the Schaefer Alkaloid Works of Maywood, New Jersey, which has developed a process to decocainize coca leaves. This company, which still exists today and is still the sole supplier of decocainized coca leaves to Coca-Cola, is granted a federal exemption by the U.S. government from the DEA. They’re the only commercial entity in the United States that is allowed to import coca leaves.

Because they import it with cocaine in it still, right?

Yes. Then they have a process to take the cocaine out of the coca leaves. They sell the decocainized coca leaves to Coca-Cola. I’m pretty sure the way that this ended up happening was that 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.”

That’s still how they produce Coca-Cola.

Yeah, which is also another piece of protecting Coca-Cola. Nobody else has access to coca leaves. You want that taste, you ain’t going to get it.

Because 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 Koke 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.” The other point they were making is that Coca-Cola couldn’t actually even use its trademark. It was unprotectable, since there wasn’t really much coca in it and all the cocaine had been removed. So, it was actually misleading.

False advertising.

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.”

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.” 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.

This is the first, biggest front of the war that Coca-Cola wages on the imitators through the courts.

It goes to the Supreme Court.

To the Supreme Court. Amazing.

The second most important front of the battle against the imitators is the bottle. 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, we actually can force our bottlers to develop and invest in a proprietary bottle that will become instantly visually known to all consumers in America and then around the world.”

This results, in 1916, in the famous proprietary bottle that you all know today—the bottle, Ben, you are drinking out of right now—the Contour bottle, as it is officially called, or, as it was then known in the vernacular, the Mae West bottle.

Yes.

Because its proportions look like those of the famous actress Mae West.

Okay, David. So, the bottle—the Mae West bottle.

In 1912, the Coca-Cola Bottlers’ Association sent a note to all of its members: “The 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.”

The proposal was that the members all join together to create a distinctive package for the product. In April 1915, the trustees of the Coca-Cola Bottlers’ Association voted to develop such a distinctive bottle.

Yes.

At the convention of the bottlers, where I think they approved this, the Coca-Cola Company’s head of legal, a guy named Harold Hirsch, who was doing all these lawsuits against the imitators across the country, came with the mission of trying to convince these bottlers that spending this great capital expenditure was going to be in their interest.

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 not to consider the immediate expense that would be involved with changing your bottle, but to remember this: 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.

Wow.

Isn’t that amazing? What an orator.

Help us help you. Wow.

So, they create this design brief and send it around to 10 different glass companies around the country. It says, “We want to develop a bottle so distinct that you would recognize it by feel in the dark or lying broken on the ground.”

So simple. It’s like, what do you really want the product to be? The Root Glass Company of Terre Haute, Indiana, designs the bottle that goes on to win the contest. You all know what it looks like: the Contour bottle.

Interestingly, it’s got this wide top and then, as one of the books put it, a snatched waist, which is why they call it the Mae West bottle. It’s this Georgia green color.

That’s right.

But hilariously, the first version of it was actually much more round.

It was almost like a cartoon version of the bottle you know today. You might wonder why this sort of striated, striped, super-round, pod-like thing got lost in translation. The bottle was designed to look like the cacao plant. [Laughter] This is a whole different thing called the cacao plant, not the coca plant. Cacao versus coca.

Yeah, I read about this, too. But ultimately, it satisfied the design brief. You definitely recognize it. It’s super-distinct. It’s kind of beautiful with the sort of rounded shape.

Ultimately, in 1915, the patent for the Contour bottle gets granted, actually not referencing Coca-Cola at all, because they wanted the whole thing to be a surprise when it hit the market. They would then—this is some classic Coca-Cola lawyering—get additional patents for iterations on the design that effectively renewed the patent all the way from 1915 until the final one expired in 1951.

The company then went to the patent office and made the case that the bottle shape was so distinctive and so well known in 1951 that it should be granted trademark status, which they got. It is highly unusual for packaging to be granted a trademark. Their rationale was, “Look, in 1949, we conducted a study that showed that less than 1% of Americans could not identify the bottle of Coke by shape alone.”

It’s an integral part of the product, the brand. There you go.

Talk about a successful accomplishment of that creative brief. All those years later, 99% of America could look at it and say, “That’s a Coke bottle.” Amazing.

So, by the next year—1 year after—everybody in the extended Coca-Cola family system is prospering, and nobody more so than the Coca-Cola Company at the top. 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 2/3.

Yep. And by this point in time, the Coca-Cola brand and what it stands for—the beverage is delicious and refreshing—it’s such an integral part of America that taking out the cocaine and cutting the caffeine by 2/3 or by 3/4 doesn’t really impact things. The country is still hooked on Coca-Cola.

In fact, it probably helps.

It probably helps, yes. It makes it more of a wholesome beverage.

It makes it so you can consume a lot more Coca-Cola.

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, which he does. He wins and becomes the mayor of Atlanta in 1916.

He retires from Coca-Cola and gives his Coke shares to all of his children.

And then, a couple of 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, shares start trading hands, and the company becomes publicly traded. They certainly didn't need to raise capital by going public.

Right?

And it was a complicated little period because some of the kids did want to have this happen, while others didn't. 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. $25 million in 1919 is a huge amount of money. As a result, this is actually the first time the secret formula for Coca-Cola gets written down.

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 Trust Company of New York—

Because 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.

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 No. 7X, learning to recognize the pungent fruit and vegetable oils by sight and smell, and remembering where 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 only stored, I believe, in 2 people's heads at any given time. 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.

Yeah. And it's still part of the lore at the company to this day that there are 2 people who know the formula, and they can't travel together. Well, the formula is out there. You can find it on the internet.

Really? The Coca-Cola Company would maintain that is absolutely not true.

Well, the original formula is in the appendix of For God, Country, and Coca-Cola—

Which I think they also maintain is not the right formula.

I mean, I would swear up and down, too. But yes, this is the best example ever 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 6 years, as collateral, the first written version of the formula was in the Guaranty Trust Company of New York vault.

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 of years with the existing management team.

Ernest really doesn't like this perpetual-contract thing with the parent bottlers. He's like, “What are you 2 guys doing? I, as far as I can tell, you're not doing anything.” 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 going to recruit a new company president to come in.

This is just 4 years after he buys it. And almost against his will, he has to consider his son, Robert, as a candidate. Ernest barely approves of this wayward son, Robert. Who is this Robert Woodruff character? He's the protagonist of this story.

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.

The Boss, as he would come to be known. Yes.

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 Cleveland, Ohio.

Yep.

Which I think was one of, if not the largest, truck manufacturer in the US at the time.

Yep.

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 1920s. He's best friends with the Major League Baseball star Ty Cobb. They go hunting together. He's a man about town.

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. And David, do you know what Standard Oil of New Jersey is today?

Right?

Exxon. It's ExxonMobil.

Oh, Exxon. That's right. That's right.

I can never keep track of which breakup company became which. So, yeah, there's an alternative future where, instead of CEO of Coke, Robert Woodruff became CEO of Exxon.

Exxon. Yeah. And Robert, through his own devices, again almost against his father's will, had been an original investor in the syndicate that bought out Coke from the Candlers. The board of Coke makes Ernest consider his son. Ernest finally says, “All right, fine.”

His first offer to Robert to come be the new president of Coca-Cola is a salary less than half of what he's making at White Motor Company.

Robert rejects that. They negotiate back and forth, and finally they reach a deal, with Robert saying, “One condition that I absolutely must have is: You, Dad, are out. You are going to fully exit the business. Everything gets handed over to me, and I am going to have full control and run this company.”

Ernest is frustrated enough. He says, “Okay.” So, in 1923, Robert takes over as president of the Coca-Cola Company, becoming the youngest president of any major corporation in America at that time. He would run the company for the next 32 years as president and then control the company as chairman of the board for another 30 years after that, until his death in 1985. Wild.

So, one of the first moves that Robert makes when he comes in is to become close with the head adman at Coke's ad agency at the time, a firm in St. Louis called the D'Arcy Ad Agency. Coca-Cola's main creative account man, a guy named Archie Lee, had already created a hit slogan for Coca-Cola in Christmas of 1922 with his “Thirst Knows No Season” campaign, which is 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.

Yeah. You drink it in the hot southern summers of Georgia.

Yeah. So they're like, wintertime is a big opportunity for us. This was part of moving in on Christmas. More to come on Christmas in a second.

And together, Archie Lee and Robert Woodruff make a pretty massive leap forward for Coca-Cola advertising. 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 1950s and 1960s. This is in the 1920s. Coca-Cola is inventing this idea that, through advertising, we can associate our products with feelings.

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.

Yes. Coca-Cola isn't a carbonated, sweetened soft drink with a unique flavor manufactured by the Coca-Cola Company. Coca-Cola is happiness. Coca-Cola is friendship. It's romance. It brings you closer to the people you love.

And whether you are in America or not in America, Coca-Cola is America.

Yes. And boy, do the 2 of them just turn out some bangers. So Archie eliminates basically all verbiage from Coca-Cola advertising except for 1 simple slogan.

This is radical. Think back to those original ad copies that we were reading a minute ago.

So many words.

In this day and age, in the 1920s, there are 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. 4 words. That's the campaign.

The next year, in 1924, they do better: “Refresh yourself.”

That's it. You don't need to say anything more. And that was simplified from Archie Lee's original idea for the theme that year: “Pause and refresh yourself.” He would—

—come back to that a couple of years later, in 1929, with the grand slam, mother of them all: “The pause that refreshes.”

It's so funny because 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 and 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.

Yeah, genius.

But by today's standards of language, it's a little bit clunky.

I think there was an element of the context of the time that came out in 1929, the same year as the stock market crash. All through the 1930s, during 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 5 cents—I think it really resonated.

Yeah.

So, the slogans are revolutionary, cutting out all the verbiage and all the descriptive language. The other half of what Archie Lee and Bob Woodruff do with the brand is the imagery. Lee goes out and contracts with all these famous American artists and illustrators of the day to create these American lifestyle tableaux for the visual aspects of the Coke ads.

Yeah, it should be like a Coca-Cola advertisement that's as idyllic as a Norman Rockwell painting, you might say.

Yes, because they actually go get Norman Rockwell, [laughter] along with N. C. Wyeth and Haddon Sundblom and some of the greatest American artists of the day to create what you think of as idyllic Americana family life. It's all coming out of the Coca-Cola ad department, and they're partnering with the most looked-up-to athletes and celebrities. These athletes promote health. That must be part of why they're so great at athletics. They have Cary Grant and Jean Harlow, just associating with wholesomeness in Americana.

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 2 lines. Coca-Cola must always be together on 1 line.

The circular sign should always carry the phrase "delicious and refreshing." You should never refer to Coca-Cola as "it"; it is not an impersonal pronoun. It is Coca-Cola. And you should never use Coca-Cola in the personal sense, such as "Coca-Cola invites you to lunch" or "Coca-Cola invites you to enjoy." Coca-Cola is above that.

The other thing that happens in this era is billboards. By 1930, there are now 29 million cars on the road, so billboards became this really valuable way to promote the brand and lifestyle of Coca-Cola. Woodruff and his lieutenants would often go around saying that what Woodruff wants to do is make Coca-Cola the most American thing in America.

[laughter]

Well, speaking of the most American of things, how about the commercialization of Christmas and Santa Claus? Because in 1931, Lee, Woodruff, and the Coca-Cola crew create what I think is unquestionably the greatest lifestyle advertising success in human history, where they manage to associate Santa Claus with Coca-Cola.

It's amazing, and really brings the modern Santa Claus into existence, period. They sort of standardized the concept of Santa. The one that we see today is pretty much Coca-Cola's Santa.

Yes. Okay, so what happens? Coca-Cola does not invent Santa as a common urban legend.

Right. First, let's bust that myth.

The concept of Santa Claus existed long before 1931 in Coca-Cola. The famous poem "A Visit from St. Nicholas" was written in 1823, so it's been around for a long time. And, of course, there was St. Nicholas. It goes back many hundreds of years.

There was a very popular Santa who was Thomas Nast's Santa, this sort of shorter, elf-like Santa. We'll link to it in the email. It is on its way to becoming Santa, but it is not the big, smiley, approachable, red-faced, cheery, jolly Santa.

Big fat dude. Yeah.

Yeah. [laughter]

Yeah, that's the thing. You read the "A Visit from St. Nicholas" poem. Santa's an elf. He's little.

Yes. [laughter]

Or he was before Coca-Cola.

That's right, because sometimes Santa was red, sometimes Santa was green.

Yep. Blue, yellow. The point is, there was no standardization. All of a sudden, Coca-Cola has this huge industrial imagery machine of not only advertisements in the Saturday Evening Post, but all the billboards and the signs and the point-of-sale merchandise, and they're just plastering America with this big, beautiful, full-color version of Santa.

Which is funny because Pepsi also did some Santa illustrations, but Coke kind of ran away with it. It became clear pretty early that Coca-Cola was just going to own Santa.

Yep.

David, do you know who Haddon Sundblom also created—or created the most famous illustration of?

I don't. I should know.

There's 2. One is Quaker Oats—the Quaker Oats man.

Oh yes, I did read that.

Which, interestingly, is owned by Pepsi today.

Oh, we will get into Quaker Oats.

And the other is Aunt Jemima.

Aha, I did not know that.

As discussed on our Mars episode. This was really the nail in the coffin for Coke being a summer drink. I've heard that the most Coke is now sold during the holidays, which is amazing, since it was a refreshing thing served—

—for the hot Atlanta summers. Yeah.

Unbelievable. They also, during this time period, get into partnerships—big, giant landmark brand partnerships. The first of which is the Olympics. Coca-Cola was a sponsor of the 1928 Olympics in Amsterdam, which makes them the longest-running Olympic sponsor. At the LA28 Games, that will make 100 years of Coca-Cola partnering with the Olympics.

Yeah, I was going to say, the 1928 Games in Amsterdam—were there any other sponsors? The Olympics probably weren't a commercial thing yet.

I think that's right. I think it was really innovative.

Yeah, man. No Coca-Cola, no Visa. [laughter] Right. And this predates all the stuff that Coca-Cola did with the World's Fair and with the World Cup and with all these other big, global brand-stage events.

Interesting.

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 going to stop changing the formula." My understanding is, from that point on in 1920-ish all the way until 1985, there were no changes to the Coca-Cola formula. Woodruff's Coca-Cola was that 65-year unchanged formula.

Oh geez. What happened in 1985 besides Robert Woodruff dying, which is directly related to what else happened in 1985?

We will get there. But it's this notion that 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.

The spiritual thing that he does to 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.”

And is it now in World of Coca-Cola, right?

Yes. And the reason it is there is that 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.

The Coca-Cola version of Hersheypark.

Yes. That is a vault that is very much meant to be gazed upon because when they did move it there about a decade and a half ago, they realized that 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 going to be really loud about it, but it's super secret, so you can't see it." And that worked. It really lived in the public's consciousness, and it had sort of fallen out.

It was an effort in 2011 to shake the public, and especially the younger generations, and say, "We are Coca-Cola, and we have the 1 secret formula." We want to bring it back to your attention that we have something that is super secret and worth protecting.

The other thing Woodruff does in these early years is create the company's first statistical department to do market research and to study the business and customers quantitatively. They realized that by this point, they've basically saturated the market of every man, woman, and child in America. Population growth is only going to get them so far in terms of growth of the business.

So what they need to do is find ways for existing Coca-Cola drinkers to access and drink Coca-Cola more often. 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."

So he decrees that gas stations are the next major growth opportunity for the company. We need to take that opportunity to put a Coke in their hands. They contract out a design for a cooler because if you're going to 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.

And giant signs, right, that say “Coca-Cola sold here,” “Drink Coca-Cola,” or “Coca-Cola—always refreshing.”

Yep. In the gas stations. This is the precursor to coin-operated vending machines, which they introduced in 1937. Coke is the first company to do that. Someone told me in the research that the gas station owners absolutely loved this because, A, the signs told people they could come get a Coke there, 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.

Yep.

So, of course, you want this. 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.

Starting with Coke.

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. There are 1,200 independent businesses out there, and at first he starts trying to, shall we say, bully and intimidate the less standardized bottlers into meeting his maniacal quality standards.

Oh.

Not because I want to, but as a way to force standardization and clean up underperforming bottlers. I'll buy them out, fix them up, and then I'll resell them to local entrepreneurs.

I didn't realize that started that early.

Yeah, he started that in the 1920s.

Wow. 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 1920s and 1930s, he goes to Europe, he goes to South America, and starts setting up international bottlers there. Same model: local entrepreneurs, locally owned businesses with every incentive in the world to push Coca-Cola.

Yep.

Now, there is still that one term of the deal: we will always sell a gallon for a dollar. That starts to become problematic with inflation. You want the ability to change the price at some point over several decades. And so it's pretty interesting to think about the two sides of the coin of having to sell it at $1 in perpetuity.

The con is, obviously, inflation's going to happen, and so our margins are going to get squeezed, where it's just going to cost more and more and more to make Coca-Cola. The bet that they basically were making is, well, since we can't raise prices at all, we need to scale to amortize all of our fixed costs and get greater and greater economies of scale on manufacturing. And so it sort of forced them into this massive-scale mentality that they were already sort of in. They wanted to be the one Coca-Cola for the world, but this really backed them into that strategy, as you don't have another strategy. Your economies of scale in manufacturing need to outpace inflation. So get going.

Yep. And the flip side of it is, it was also in the contract that the bottlers had to sell to retailers at the enforced retail price of 5 cents a Coke.

Right?

And as we get into the Depression, that becomes a huge lever against potential competitors.

How's that? All the other competitors, who are at much smaller scale than Coke, need to raise their prices as the Depression hits and inflation starts running rampant. But here's Coke, which is arguably a superior product. It's certainly superior in that its brand recognition is much wider than any competing cola, and Coke is cheaper. So it's this amazing leverage that they have over the market. Between the trademark litigation, the proprietary bottle, and now the pricing power across the market, Coke is just steamrolling all existing and potential competition out there.

Which is so funny you say “pricing power” because it's not more expensive. In fact, it's most often far less expensive than the competition.

Yes. I think the competition was having to hit the nickel price to try and compete with Coke, and their margins, because they were subscale, would be much, much, much worse.

Yep. Coke can be profitable at way lower end-consumer prices than the other subscale companies.

Yes.

It's like they actually have pricing power that they're not using.

Yes. They have latent pricing power.

It's like it's more strategic to them to not raise prices.

Yes. So, not good news for any competitors out there. They basically all, except for a small handful, get steamrolled—except for one: Pepsi.

Which amazingly started way back when Coca-Cola started.

Yep. 1894. And for many years, it was just one of the other colas out there, one of the competitors. Actually, I had no idea about this until doing the research: Pepsi tried to sell itself to Coca-Cola—sell its operations to Coca-Cola—three separate times over the years.

Three? I didn't know that.

Three times.

Wow. And Coca-Cola, the various owners over the years, turned it down three times.

Amazing.

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 Mae West contour bottle. It was 6.5 ounces. That's not a lot of drink in that bottle, especially by today's standards. That's smaller than a mini can. I think the mini cans are 7.5 ounces today.

Let's see. I got one right here. The mini cans are very popular today. That's been a shift. 7.5 ounces. Yeah, it's crazy. The original bottles were smaller than this.

6.5 ounces. Very small. So even though they were a nickel, you weren't getting a lot of refreshment in that bottle.

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 4 Pepsis later from the Pepsi that was started around the same time Coca-Cola was. Coca-Cola's been approximately 1 company all the way through. Pepsi's been bankrupt 2 or 3 times, sold to new owners, and had a completely new company started with the word Pepsi in it. This has been a rocky road for them.

In 1934, Pepsi, in almost a last-ditch effort to try and do something to stay alive and save the company, tests using recycled beer bottles, which are 12-ounce bottles, to sell Pepsi, also for a nickel.

Yes. But this is when its fortunes turn. They still have the same pricing pressure and margin pressure from Coke selling at a nickel. They still have the same pricing pressure and margin pressure from Coke selling at a nickel. But it turns out, if you look at the unit drivers of margins on beverages—

Oh, there are 2 expenses: sugar and the bottle. Everything else is approximately free. So the amount of liquid in the bottle, like you said, Ben, is approximately free. Whether you're serving 6 ounces of liquid per bottle, 12 ounces of liquid per bottle, or later 64 ounces of liquid per bottle—yeah.

It's not going to impact your margins that much. And hey, by the way, there are 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 because they can get the recycled beer bottles. It 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.

Yep. And that is the first real punch that anyone's been able to land on Coca-Cola. This is textbook counterpositioning. Coca-Cola cannot respond because they and their bottlers have just invested all of this capital and all of this IP into the 6.5-ounce contour bottle. They can't react.

Yeah, it's genius.

Truly genius. I mean, it was back-against-the-wall genius, but genius.

Now, it doesn't do much for Pepsi's brand. They're very obviously saying, “Pick us because of quantity, not because we are the more delicious, 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: “Yeah, we're not as good. We're not the best flavor, but we're also here, and you can get a lot of us for cheap.”

Well, are they the best flavor? Are they not? We'll come back to that.

Well, that's all subjective. There's a discount promise to the brand.

Yes.

Went over real well. Yeah.

So Coke can't fight them on the amount of liquid in the bottle because they're locked into the 6.5-ounce contour bottle.

And they don't want to cheapen their brand.

So instead, they pull out another arrow in their quiver to fire against competitors. They sue Pepsi for trademark infringement: “Pepsi-Cola? You can't use the word ‘cola.’ We have trademarked the word ‘cola.’”

In this court process, the president of Pepsi at the time, a guy named Walter Mack, ends up discovering that Coca-Cola had illegally bribed and intimidated another cola competitor into shutting down. They paid a bribe to the company owner to just shut down rather than going through litigation.

Mack brings this evidence to the court where Coca-Cola is suing Pepsi for trademark infringement. Bob Woodruff immediately calls him up and requests a meeting. Bob comes up to New York, sits down with Mack, and says, “Hey, this is all a big misunderstanding. [laughter] You know, I’m a good Southern gentleman. I don’t know anything about this, but why don’t we just settle all of this trademark stuff?”

“You can still use the word cola.” Is that what he’s offering him?

Yeah. The outcome of this is that Pepsi-Cola becomes the only Coke competitor that is allowed to use the word cola legally at this point in time.

That destroys any precedent of Coca-Cola protecting cola. It means they are forever giving up their argument in the courts that they own cola as a part of their trademark.

Woodruff apparently, despite this conciliatory gesture, hadn’t learned his lesson and was still not above trying to bribe his competitors. He tries to bribe Mack by saying, “Do you really want to be running this Pepsi thing? I’m still great buddies with the White Motor folks. I think you would make a great president of White Motors. I would really love to recommend you for that job.”

Walter Mack says, “Absolutely not. I’m keeping Pepsi. Thank you for settling the trademark litigation.” [laughter]

And doesn’t Coca-Cola’s general counsel quit over this, too?

Yes. Yes, that’s right.

I think the idea is, come on, we’ve got to fight this. We can’t just be giving up our trademarks.

Yes.

But Woodruff, this is one of the few times where I feel like he put an idealistic approach aside and said, “We’ve got to be pragmatic here. We’ve got to settle with these guys.”

So, the result of this is that Pepsi becomes Coke’s first real, legitimate competitor. By August 1941, so 6 or 7 years later, colas that are not Coca-Cola have 14% of the US soft drink market share, the majority of which is Pepsi. It’s a major shot in the arm. It was basically 100% Coke before this happened, and Pepsi establishes a pretty meaningful foothold.

Yep. So, on the one hand, this is a really bad thing for the Coca-Cola Company. They went from having essentially a monopoly on the market to letting a real, legitimate competitor get established in the US. But [laughter] a really, really good thing is also about to happen to the Coca-Cola Company that makes the US market itself one of many, shall we say, and that is World War II.

Okay, David. World War II.

All right.

Gee, how did Coke end up all over the world? Hmm.

So, remember we said a minute ago that Woodruff had set up international bottlers in the 1920s and 1930s before World War II, but none of it was very big yet. By the time America enters World War II in 1941, Coke has already been around for 55 years and has established itself as 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. One, it’s a symbol of home and something for the troops’ morale they can keep fighting for abroad, all across the world. Two, what greater symbol of American prosperity to bring and plant seeds of all around the world than Coca-Cola? It’s our perfect cultural ambassador product here.

Yeah. Whether the rest of the world looked at it that way at the time, TBD, but I’m sure the US government looked at it as a great ambassador of our values.

And however people around the world saw it at the time, one way or another, they ended up drinking Coca-Cola.

Yep.

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.”

Which is interesting because what Coke doesn’t win is an exemption on sugar rationing. What they do win is that they get to supply Coca-Cola free of rationing to the military, and they get to take a really broad lens on what “to the military” means. 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 located near a military base, regardless of whether that bottler also serves civilian customers. [laughter] So for large portions of the US, they can still get full-sugar Coca-Cola during the war.

Wow. None of Coca-Cola’s competitors, including Pepsi, get anything like this.

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 colas do.” And the response back from the government was basically, “Sorry, Coca-Cola is about as American as it gets. That’s what we need right now, and that’s what our boys are requesting, including General, soon-to-be President Eisenhower.”

Oh, yeah. He’s a Coke man.

So the military under Eisenhower grants Coca-Cola employees “technical observer” status, meaning that they can participate in the supply and infrastructure buildout of the military around the world just the same as military infrastructure people. This is unbelievable. As the American military is 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.

And documenting the absolute crap out of it to use in their advertising.

Yes. So, Robert Woodruff, in 1941, comes right out and pledges that anywhere 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 5 cents.

There are these unbelievable quotes from American GIs during the war that are in far-off countries and Coca-Cola. There are 2 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.”

Wow.

“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.

It’s unbelievable.

And supply them, they did. From 1941 to 1945, 64 portable bottling plants were sent to Asia, Europe, and North Africa. The best estimates are that more than 5 billion bottles were distributed to troops during the war.

Wow. I saw an estimate that it was 10 billion.

Wow, 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?

Yep.

So Coca-Cola internally ends up calling the war effort “the greatest sampling program in the history of the world.” They estimate that the war effort opened up markets abroad for Coca-Cola that otherwise would have taken 25 years and untold millions of dollars of investment to open.

Wow. To say it accelerated Coca-Cola’s international rollout is like the understatement of the century. That’s international. But then back home, it really cemented Coke as “apple pie in a bottle.” All the servicemen coming home, Coke was the treat that you could get when you were at war. You better believe they’re Coke drinkers for life now. They’re not switching brands.

So after the war, in 1950, a third of Coca-Cola’s profits are already coming from abroad, from all these markets that they got set up.

And Time magazine features Coca-Cola on the cover of Time magazine. Have you seen this?

Oh, wasn’t it the first product ever on the cover of the magazine?

It might have been. I’m not sure about that, but have you seen what the image is?

No.

It’s a painting, like an oil painting, of an anthropomorphized red Coca-Cola disc with arms and a face. It is larger than the Earth, sitting behind the Earth, reaching around and feeding the smiling Earth a bottle of Coca-Cola. [laughter] The caption on the cover of Time magazine says, “World and Friend.” [laughter] The implication is that Coca-Cola is a friend to the world.

Wow. Crazy, right?

So, it’s funny. Before World War II, there was a presence for Coca-Cola in pre-Nazi Germany.

Oh, yes. I know what story you’re about to tell.

As you can imagine, it became difficult to supply Nazi Germany with American Coca-Cola during the war. Since those German Coca-Cola factories lost touch with the mother ship and all the ingredients that they would need to source, they found [snorts] alternative ingredients and made a crappier knockoff drink that they could make with the supplies they had.

Yep.

That drink is Fanta.

Yep. [laughter] Yeah. Fanta, owned by Coca-Cola, was the brainchild of Nazi Germany Coca-Cola bottling entrepreneurs who lost access temporarily to the real thing and did that instead. They would change the formula and launch it in the US later, in 1960. Fanta has its origins in, “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.

Yeah. Parts of history that most people don’t know.

Don’t you want a Fanta Fanta? Yeah. [laughter]

The thing that happens postwar, just because we’ve planted this seed elsewhere to follow it through, is that 1945 is the year 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.

Yep.

Coming out of the war, Coca-Cola's business had never been better. Domestically, the brand 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 4 and are basically 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. Once again, they find themselves with their backs against the wall. They 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.

That's how they refer to it. In internal communications, they don't write “Pepsi.” They say “the imitator.”

The imitator. Steele had been an adman 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 the last 20 years. He shoves him out, and Steele becomes the new president of Pepsi.

He's quite the maverick, shall we say. There are some hilarious quotes from him about his management philosophy. One example: “The whole trick in hiring executives is to find a good man and turn him into a prick. 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.”

“And then I don't care if the consumer wants carbonated sweat in a goatskin pouch. If so, this side of the room goes looking for goats, and that side starts running fiercely in place.” This is Alfred Steele.

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 30 or 40 years 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 about tradition or history or anything.

Nothing to lose.

So, when Steele gets to Pepsi, he says, “All right, we're going to do 3 radical things.” 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.

This was radical probably for any major consumer industry at the time.

We are going to hire an all-Black sales team that is going to 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 because Coke was not doing anything close to this. In fact, Robert Woodruff was openly supporting segregationist politicians during this time. So, this was a huge opportunity for Pepsi.

And Woodruff would later radically flip on that, right? Wasn't he a big part, with Mayor Hartsfield, of desegregating a lot of stuff in Atlanta? I mean, he eventually really came around.

During the 1940s, definitely not.

This was a big area for Pepsi to make inroads.

There's also an element of geography here, too. Coca-Cola is Atlanta's biggest company and is a traditional Southern company, whereas Pepsi is based in New York.

Okay, so that's 1. Two, Steele decides we're going to start appealing to this early trend that I see happening in postwar 1950s America of diet fads. We're going to position Pepsi as the lighter drink versus Coca-Cola: “It will refresh without filling.”

How much of this is actually true in terms of calories?

Which is funny because I think it's actually even sweeter. It may have even more sugar than Coke does.

Well, this is back in the days before sugar was vilified. Sugar is okay. Fat is bad. Calories are bad.

But the only calories in soda come from the carbohydrate macronutrient, specifically from sugar. So, there's a direct relationship between sugar and calories.

You're assuming that consumers back in the 1940s and 1950s were thoughtful about such things.

That's true. It's a great point.

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 going to wholeheartedly embrace a revolutionary new advertising medium and technology—television—and we're going to use it to target the youth of America.

So, this is crazy. Pepsi discovers James Dean. You like the actor James Dean? Really? Yep. His very first acting job is in a 1949 or 1950 Pepsi commercial.

Wow. I had no idea.

This ultimately would morph into the Pepsi Generation ads later, and then “The Choice of a New Generation” and “Generation Next.” All the Pepsi marketing for the next 30, 40, 50 years is, “We are for the young people. We're for the next generation.” It all starts with television and Alfred Steele in the 1950s.

All 3 of these things work pretty fantastically well. In addition to that, Steele brings over generally better operational practices to Pepsi from Coke. He knows what a real professional operation is like. He brings standardization and tighter controls over the bottlers.

Because Pepsi had a similar bottling system—or, today, it still has a similar bottling system—where they have bottlers outside the company, right?

Yes, but Pepsi, at least until this point in time, never had anywhere near the same kind of operational excellence that you would call it today as Coca-Cola. Remember the 12-ounce bottles? They were using recycled beer bottles. They're putting Pepsi in beer bottles. That's what Steele's working with when he gets to Pepsi.

Fair.

On the back of this, Pepsi's US market share jumps pretty astronomically. It's in the low 20s in the early 1950s. By 1955, it's 35% of domestic market share in America.

Basically all of that is coming at the expense of Coke. Coke is still this beloved American brand, but with these 3 things that Steele is doing, he starts getting a significant amount of the market. Coke isn't targeting Black people. Coke hasn't embraced television yet, and diet hasn't even crossed their minds.

It's true. They're starting to be thought of a little bit—I mean, this would happen much more in the 1970s and 1980s—as the soda for your parents, not our soda. The cool new soda—

Not “The Choice of a New Generation.”

That's right.

By the mid-1950s, Woodruff back at Coke is finally like, “All right, got to respond. We need to make a radical move of our own.” He switches Coke's ad agency from D'Arcy—you know, R. T. Lee, the whole legacy of everything that they built from the 1920s and 1930s through the war—to McCann-Erickson.

The most premium ad agency in America.

Yep. And one of the first things—this is incredible—I found in the research that McCann does when it comes on board with the Coke account is that it starts conducting scientific market research. One of the first things they do is run a blind taste test between Coke and Pepsi.

No way. Coke runs this first internally?

Coke runs this first in the late 1950s—or McCann does for Coke. And guess what they find?

That people prefer Pepsi.

Consumers, when presented with the 2 drinks, Coke and Pepsi, in a blind taste test, prefer the taste of Pepsi by a statistically significant margin.

Wow.

I'm pretty sure Pepsi doesn't even know this yet.

So, McCann comes in, they've just won the account, and they think this is a really important thing. They present it to Woodruff. They present the findings, and his response is, “Do not ever share this with anyone, and do not ever run this test again.”

For Coke and Bob Woodruff, if only that had stayed the case.

It's crazy that it really doesn't bite him for 30 years.

Yeah, another 20 years after this. For the moment, McCann does a bunch of things. One, right away they respond to Pepsi on television. They say, “Hey, we've got to take TV way more seriously. This is not just the future. This is the present.”

Is this “Things Go Better with Coke”?

Yep. They start doing TV campaigns and jingles. Coke starts sponsoring The Mickey Mouse Club show starting in 1955.

Ultimately, what McCann decides is, “We need to unify our marketing collateral and messaging across all of Coca-Cola's channels. We can't be having different messaging and different imagery for TV, point of sale, newspapers and magazines, or our radio ads.” The idea is we need to have one Coca-Cola sight, sound, and sell. It's all the same integrated campaigns. The first of those is the “Things Go Better with Coke” campaign in the early 1960s.

I see.

And two, as we get into the back half of the 1950s and the early 1960s, we're now in the civil rights movement. They convince Woodruff and the company, “Hey, you can't ignore the Black American market. You need to market to Black Americans, too.” So, they start running ads with prominent Black athletes like Jesse Owens and Satchel Paige.

This is fun. Remember, we learned from Jesse Cole in our Savannah Bananas conversation that the Harlem Globetrotters should have become the NBA. At this point in time, they were the big basketball product in America.

So, yeah, Coke sponsors the Harlem Globetrotters.

And they had started a little bit before that with Willie Mays in 1952, too. And then the last thing McCann-Erickson convinces Woodruff of is, “Hey, we need to take this diet thing seriously.”

So, in 1962, they finally appealed to the diet market by launching Tab, which is their new diet drink product that they had considered naming Diet Coke, but Bob Woodruff rejected it. Now, the given reason is supposedly that he said, “If God had wanted Coca-Cola to have saccharine in it, he would have made it that way in the first place.”

There is one Coke. You don’t want to mess with the one and only Coca-Cola.

That is the stated reason. I heard rumors in the research—I couldn’t confirm this—but I heard rumors that apparently the Thomas Company, which is one of the 2 parent bottler organizations—remember, back to the perpetual contract and the parent bottlers and all that—supposedly ended up with the rights to have a 10-cent royalty per beverage on any other products that the Coca-Cola Company launched that carried the Coca-Cola name.

And supposedly, that is actually the real reason why they didn’t call Tab Diet Coke. Whatever the reason, they launched Tab in 1962.

They want to dip their toe in the water. They’re not willing to go all in yet. They’re not willing to lend the brand that’s been built over the last 80 years to a fad diet product.

Yes, exactly. Meanwhile, by that point in time, Pepsi had launched Diet Pepsi and was doing quite well with that.

There is an astonishing ad for Tab.

Oh, man. You sent this to me this morning, and I was like, “I cannot believe this is for real.” The entire ad is a man leering down, kind of creepily, at this woman practicing tennis in a tennis skirt, and it’s this jolly, almost haunting jingle. The words are: “Have a shape he can’t forget. Tab is a taste to remember for a shape he can’t forget. When you can’t be with him, be in his mind. Be a mind sticker. Don’t you want to have a good shape? He wants you to have a good shape. Why don’t you keep your shape in shape? It’s great to have a good shape. Enjoy Tab and keep your shape in shape.”

The 1960s.

Yeah. But, dude, they knew in the 1960s, 40 years before obesity started becoming a conversation, that full-sugar sodas were not good for your shape.

We’ll leave it at that.

Yes. So, they do enter the diet market, but the diet market becomes real and enduring from this point forward. Tab quickly becomes the best-selling diet soda in America, I think in the world, and stays that way all the way up until they release Diet Coke, which we’ll talk about in a little bit.

Yep.

Tab was recently killed, actually. It was one of the brands that they sunset a couple of years ago.

Oh, did they only kill it in 2020? I thought it was before then.

Yeah. When they winnowed from about 600 brands to 200 in 2020, that was one of the ones that caught the ax.

Interesting. There’s 1 more thing, though, that Coca-Cola does in response to this insurgent Pepsi challenge, shall we say, in the ’50s and ’60s: McDonald’s.

Yes.

I know you have the story on this one.

Yeah. So, this is actually something more that McDonald’s does and less something that Coca-Cola does. But boy, does it become important to Coca-Cola fast.

To illustrate it, if we flash all the way forward to today, there’s a Coca-Cola executive on the website whose entire job is the McDonald’s division of the Coca-Cola Company. There is no other division dedicated to a company like this.

So, what happens is Ray Kroc, in 1955, gets the expansion rights to expand McDonald’s. One of the first things he does is look for a beverage supplier for this new Illinois location that he is opening. He calls up Coca-Cola, meets in person, and does a handshake deal with Wadi Pratt, who ran Coca-Cola’s fountain division. From that point forward, for about 40 years, they built this deeply entrenched relationship purely on a handshake deal.

Wow. There’s no contract, no term.

No. And I’m sure there is today, but for a long time, it was: McDonald’s isn’t going to bid it out like everyone else always does, and they’re going to get amazing preferential treatment.

And here’s some of the preferential treatment that they get. Have you ever heard, Ben, that Coke tastes better when you get it from McDonald’s?

No, but I would believe it. This is a big thing. People insist that I prefer to swing by McDonald’s to get a Coke versus getting it somewhere else. And if you press, it’s just that it’s a fountain and you like fountain versus bottle, and they’re like, “No, it’s actually better at McDonald’s.” It is better at McDonald’s.

No way. Here are a variety of things that I’ve heard from somewhat credible sources and that show up in articles that may contribute to the taste actually being better.

The thing that is definitely true is Coca-Cola ships the syrup to McDonald’s in stainless-steel tanks instead of being delivered in bags. Normally, it’s bags wrapped in cardboard, and it’s actually delivered through the bottlers, even though the bottlers have nothing to do with it. They are the delivery arm.

Oh, yeah, because this is the fountain business.

Yeah. Coke doesn’t actually deliver the syrups to all these restaurants. The bottlers do it on behalf of Coca-Cola. Even there, though, there are no bottles involved. So, Coke is “selling directly” when they sell syrup to fountain owners.

But the bottlers are doing the delivery.

Yes. With McDonald’s, it’s different. It comes in these stainless-steel tanks. McDonald’s does some things: They pre-chill the water, and they make sure that the hoses are chilled all the way up into the dispenser. McDonald’s apparently has a different syrup-to-water ratio that accounts for ice melt. They add a little bit more syrup than the standard recipe, which sounds like it would be heresy.

Wow. And Coca-Cola lets them do it because Coca-Cola wouldn’t let anybody else change the mixture.

Yes. They developed custom straws that are a little bit wider to let a little bit more Coca-Cola hit the taste buds in your mouth. And this is incidental, but because of the volume that’s done at McDonald’s from selling Coke products, the syrup is a little bit fresher because the syrup does get worse over time if you leave it in the back room.

Wow. Well, it is a beautiful partnership for both sides, shall we say.

Here’s something crazy. I think a lot of people associate McDonald’s and Coca-Cola—both big American companies, both historically American, with a lot of Americana in each. Until listening to this episode, I didn’t really think about the fact that Coke has a 60-year head start on McDonald’s in going global.

And so, I read in a couple of places that when McDonald’s was opening in new countries, the employees would camp in Coca-Cola offices and use Coca-Cola’s relationships to get a foothold in the country when they were opening. It’s this unofficial partnership that they have.

Well, it’s good for both sides.

Yeah. And lastly, Coke sales teams are prohibited from selling syrup to restaurants for less than McDonald’s pays, even if it means they’re going to lose the business to Pepsi. It is sort of this rule at Coca-Cola that no one gets a lower price per unit volume than McDonald’s.

Wow. Big customer.

So, back to the ’60s. In 1960, a few other things happen. The first 12-ounce aluminum cans of Coca-Cola are introduced in the United States.

They also buy Minute Maid, right? Coca-Cola buys Minute Maid.

Yes, a little precursor to what was to come 4 decades later with non-soda drinks, but this is weirdly the only thing that they have other than soda for a long time.

Speaking of acquisitions, in 1965, Pepsi buys the Frito-Lay Company.

Famously, they’re still 1 company today at PepsiCo.

Yep. Ben, you found out Coke had the chance to buy it, right?

Yes, they did. They made a giant mistake not buying it. The company’s headquarters—I think the original Lay company is an Atlanta company—so, in many ways, Coca-Cola is sort of the preferred buyer. And Coke turns it down.

Wow. The wild thing is, today, if you look at the health of Pepsi’s beverages business and their food business with Frito-Lay products, Frito-Lay is a much, much better business. While the revenues are a little bit smaller than the Pepsi business by revenue, Frito-Lay generates twice as much profit inside the parent company, PepsiCo. That’s a good one to own.

Yeah. Big miss from Coke.

Yeah. On the opposite end of the spectrum, toward the end of the ’60s, McCann-Erickson and Coca-Cola really start hitting their stride. Ben, you mentioned in the intro about co-opting the hippie and counterculture movement.

Oh, yeah.

In 1968, McCann-Erickson launched their latest unified marketing campaign, “It’s the Real Thing,” which was an enormous success. At first, it subtly tried to co-opt the counterculture moment. It’s real. The hippies love things.

I mean, it doesn’t have high-fructose corn syrup yet, so ostensibly, it is the real thing.

If Coke is a real American thing, then it’s the real thing. This is capped off in 1971 by the series finale of Mad Men.

Yes.

And Don Draper did it, too.

Greatest work. It’s so funny. I know this ad from Mad Men.

Yes.

Even though it’s considered one of, if not the greatest television commercial of all time, I didn’t know anything about it until the Mad Men series finale.

Yes.

So, listeners, if you don't know, the Hilltop ad.

The Hilltop ad.

Yes. The Hilltop ad, to the song “I’d Like to Buy the World a Coke,” is fictionally created, or alluded to as being created, by Don Draper in the finale of Mad Men. But, of course, it’s a real ad from 40 years before Mad Men came out.

It’s so cool. Doing the research for this episode, I always thought that Mad Men was one of the greatest works of media ever created. I have even more appreciation for it now. They set the whole thing up all the way back in the first season of the show by introducing McCann-Erickson. McCann-Erickson comes in as the foil to Sterling Cooper in the beginning, and then they’re running throughout the whole series. I didn’t realize that McCann-Erickson, the reason they’re so big and the reason that it’s such a big thing, is the Coke account.

Pretty amazing.

And then it all pays off in the Hilltop ad.

I think it’s given him a little bit too much credit. If you’re going to do a show about advertising in this era, you kind of have to do McCann-Erickson.

But I didn’t realize the deep connection between McCann-Erickson and Coke and how integral that was. Now understanding this makes me appreciate the series finale even more. It’s so great.

For sure. So the story behind this ad is awesome. Bill Backer at McCann-Erickson was sort of the big partner of Coca-Cola’s there.

The Archie Lee of his day.

Yes. For a long time, he said that he was on a flight that was grounded at an airport in Ireland. He noticed a diverse crowd of passengers, and everyone was upset that the flight wasn’t happening. They were chatting and joking with each other over bottles of Coca-Cola, and he thought, “Coca-Cola really brings people together across borders, across languages.” He jotted down on a napkin, “I’d like to buy the world a Coke.”

They conceptualized this ad, and there’s this whole great story of finding the songwriters and the musicians who performed it and all this stuff. They wanted to film it at the Cliffs of Dover in the UK. They got the budget greenlit from the head of advertising at Coca-Cola to do the most expensive ad of all time: a $100,000 budget.

How quaint.

They were going to film it over the course of 3 days, and they got there with the full cast who were going to stand on the hillside and sing.

They wanted to have 200 people from all countries around the world. The point is that Coca-Cola brings everybody together.

It’s a hard cast to assemble because you need people representing all these different ethnicities and nationalities. They had 3 straight days of rain.

I was going to say, the Cliffs of Dover—it rains a lot there.

They burned through the entire budget, so they were like, “Where are we going to go that it won’t rain? Let’s go to Rome.” They got approval to go all the way up to $250,000. It rained in Rome.

No.

In the hills outside of Rome. They actually had no usable footage from everything they shot because by the time they caught the actors, they were also covered in rain and looked terrible, and no one looked happy.

It’s this hilariously cobbled-together thing where the third time’s the charm. They had to wander around Rome looking for new actors. They found a new leading lady, the woman that the commercial opens on. They actually had to film it in 2 separate locations. The hillside is different from the close-ups, but they ultimately released it.

It became absolutely beloved. It’s the catchiest tune. I’ve had it in my head the entire time doing research. They started getting calls at radio stations to play the Coca-Cola ad song. So then the band went and re-recorded it as a real song, “I’d Like to Teach the World to Sing (In Perfect Harmony),” to release on an album with different lyrics from “I’d Like to Buy the World a Coke.” It turned out to become a bestselling song as well.

So great. The lyrics are just great. They’re great, and it’s so 1971 and Coca-Cola.

It’s the real thing.

Yep. “I’d like to teach the world to sing in perfect harmony. I’d like to buy the world a Coke and keep it company.” That’s the real thing. “What the world wants today is the real thing.”

You’re watching it, and it does actually stir up emotions. You’re like, “This is really beautiful. Look at this. There are all these people who are all here together. They’re all getting along.” Then you realize this is a giant corporation selling sugar water, and they managed to borrow the hippie movement to create one of the most successful commercials of all time.

Oh my God. It’s Mad Men.

Unbelievable.

Don Draper, baby.

Yeah.

So great. Well, the end of the ’60s and the early ’70s were going pretty well for Coca-Cola. Then, in 1975, that deep, dark, deeply embarrassing secret that McCann-Erickson 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.

All right, David. The Pepsi Challenge.

I’ve been so stoked all episode just to get to this. To start it off—

Are you about to do a Pepsi Challenge?

I am going to do a Pepsi Challenge right here on air. Of course, it’s not really a challenge because I didn’t hide the containers, and I would administer it to myself, so it wouldn’t work.

What temperature are they, though? Because I hear that plays a big role.

It does, but they’re the same temperature. I took both of them out of the fridge right after World War II or so, however long ago that was.

Because 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 the best.

Well, let’s see.

All right, that’s the real thing. Let’s see right now.

All right, the real thing. It’s good. Oh, Pepsi. It’s got that lemony little zest to it.

Pepsi’s a little lemony, a little sweeter.

I think I’m with the majority on this one.

That Pepsi is better.

I think Pepsi tastes a little better. Wow. Ben Gilbert, right here on the Coca-Cola episode, declaring that Pepsi is your pick.

Well, over Coca-Cola Classic. I’m mostly a Diet Coke guy these days, but we’ll get to that in a minute.

Which one could argue was formulated to better compete with Pepsi.

Indeed. All right, the Pepsi Challenge. Back in 1967, a young Wharton MBA graduate joined Pepsi after a few years of working at IPG, the big ad agency that owned, and I believe still owns, McCann Erickson, the parent company of McCann.

Yep, they do. Interpublic Group.

Now, David, I know you know who we’re talking about here, but listeners, you’re all 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 joined might have been the first MBA to join the company, and he was one of the very few even college graduates. He came in as the director of new product development, and the first new product that he developed and got to market wasn’t a new drink but rather a new bottle—a really big bottle, 64 ounces.

He realized in doing market research that supermarkets were becoming more and more of a thing. We’re now in the late ’60s and early ’70s, and there’s a really underserved part of the soft drink market: 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—

Or even cans. Who wants to open a single can for each person around the dinner table?

Totally. Again, remember we talked about how the cost-scaling element of soda is not the volume of soda. It doesn’t actually cost that much to go from 6 ounces to 12 ounces to a whole lot of ounces.

This is why basically anyone is willing to sell you free refills on your fountain drink.

Yep. So he and Pepsi started working on a big bottle, and they pretty quickly realized, “Glass is not going to work.” It would be a really heavy bottle and really breakable as you’re carrying around this big bottle. So they went to DuPont.

I had no idea.

They said, “Hey, can you guys engineer us something that would work here?” DuPont said, “Actually, you have found us at the perfect point in time. We have a new type of plastic that we have engineered—polyethylene terephthalate, or PET—that we think would be great for this application. It’s lightweight, it’s super strong, it’s really cheap to produce, and here’s the kicker for Pepsi: We can send it pre-molded to all of your bottlers. Rather than your bottlers having to set up really expensive new production lines for these new bottles, all they have to do is inflate the molds with air and then fill them up.”

Have you ever seen one inflate? It’s the coolest thing ever, watching a 2-liter bottle inflate.

The 64-ounce, or now 2-liter, bottle is born. Pepsi got a big jump on this against Coke. It took Coke another 3½ years to come out with its own big party bottle.

So, on the back of this success for this young executive, Don Kendall, the then-CEO of Pepsi, was like, “All right, kid. You passed the test. You’re ready for your next big job.”

And you talked to him, right? This person you're talking about?

Oh yes. All these stories are firsthand.

Okay.

And this is the first time that plastic is used, right, in soft drinks?

This is the first plastic bottle.

That's crazy. And good for Pepsi to log this win. Pretty bad for the world to start this single-use-plastics treadmill that we're all on now. Just to get that out of the way, I was looking up studies recently, and the Coca-Cola Company is the number-one polluter globally of crap in the ocean. Pepsi is very close behind, along with all the big drink companies.

Everyone is always saying, “We're trying to do a better job at this. We're trying to do a better job creating recyclable stuff.” But the world is full of a crap ton of single-use plastics. One hundred percent, man. I had not focused on this issue at all until doing the research. I am going to only buy cans and glass bottles going forward. There's no reason not to buy cans and glass. They're actually recyclable.

It's funny. I've accidentally started doing that anyway, because whenever I travel now, I use those Pathwater bottles that they sell in airports, and you can just refill them. I'm not going out of my way to be like, “Oh my gosh, I need the metal over the plastic,” but it now feels weird to buy plastic bottles that I'm so much more attuned to microplastics.

I'm also never going to drink fluid that was sitting in a plastic bottle for a long time after I opened it, or refill it. I used to refill plastic water bottles, and now I'm like, who knows what's degrading in my beverage? But, yeah, this is the start of the plastification.

Yes. So, back to the timeline. Don Kendall, the CEO, is like, “Okay, you passed the test. You are now going to take over all of marketing for Pepsi, and I want you to figure out how we're going to dethrone Coke.”

So, the executive takes over marketing. He's getting settled in, surveying the current state of things, and he notices that the local Pepsi bottler down in Dallas, Texas, is doing something really interesting. The local ad agency for the bottler there had accidentally discovered the secret that Coke and McCann had known for 20 years: consumers prefer Pepsi to Coke.

The way they figured it out is that they were doing research for 7-Eleven in Dallas. 7-Eleven was selling a generic cola at the time, and they ran a taste test with both Coke and Pepsi as the controls for the 7-Eleven generic cola.

No way. And so this local agency happened to also be the agency of the Pepsi bottler in Dallas. They went to the Pepsi bottler and said, “Hey, guess what we discovered?”

Wow. So locally, in the Dallas market, they start running these commercials of people taking the Pepsi Challenge. They roll up to a supermarket in Dallas, plunk down a card table, and have Coke and Pepsi behind a cardboard screen. They give consumers a glass and say, “Which do you prefer?” A statistically significant number of people say Pepsi.

They did this at malls all across America. They then really expanded this.

Well, we'll get to that now. Yeah. At first, this is just the local Dallas bottler that's doing it. It's a huge success. Pepsi's market share in Dallas jumps by 14% thanks to these ads. It really, really resonates with consumers.

So, the new VP of marketing sees this and says, “Okay, we've got to blow this out, but we're not going to do what Coke would do. We're not going to turn this into a big corporate, one-sight, one-sound, one-sell national campaign. We've got to keep this grassroots. We've got to go market by market.”

This is working so well in Dallas because it's grassroots, because it's real people who are living in Dallas taking this challenge. And the technology that can enable this has just come out. VCRs have come out, and early home video camcorders are just starting to hit the market.

So he says, “Okay, here's what we're going to do. We're going to go buy a ton of home video camcorders.”

And card tables. We're going to distribute them to all of Pepsi's local bottlers around the country. We're going to inform them about this Pepsi Challenge and say, “Go run your own versions of the Pepsi Challenge.”

“Film real people in your markets taking the Pepsi Challenge with the camcorders, and put them on local television—local ad spots on local TV channels.” This is perhaps the most successful grassroots marketing campaign in history.

I didn't even realize it was grassroots. Everyone knows what the Pepsi Challenge was. It's almost a descriptive way to describe a form of marketing. Do you remember when Microsoft did Bing It On? It was like, “Oh, I see the Pepsi Challenge for search.”

I had no idea until talking to him and doing the research. This was all shot with camcorders. We'll link to YouTube footage of these old videos. It's all just malls, supermarkets, beaches, and fire stations around the country, and then local ads run on local TVs. Incredible.

Which is funny, being our age, David. I knew what the Pepsi Challenge was, but of course I've never actually seen it. It's funny to now actually go watch it and see how that meets my expectations of what I thought it was going to be.

Yes. Same as you. I had the same expectations: “Oh, this must have been a BBDO national campaign,” and so on. Total opposite. This is probably the first reality-television commercial ever produced. Nobody was doing this back in the day.

So, it just hits all these local markets around the country like a bomb. And Coke is so poorly set up to react to this. Their whole marketing and ad strategy with McCann is national: one sight, one sound, one sell. They're not set up to go buy local TV ad slots.

It's good counterpositioning. But the punch line of the whole thing is that it wouldn't have worked if it wasn't true. It was true that people did prefer the taste of Pepsi.

And I think it also wouldn't have worked if it had been a big national, corporate rollout, because people wouldn't have believed that it was true. I think it's really critical that it was real people doing the Pepsi Challenge instead of actors.

Yes, I absolutely agree.

And I think it was also important that it was happening in my community.

Right.

So, they blow this out all across the country. In 1977, Pepsi outspends Coke in advertising for the first time in history. Pepsi actually passes Coke in market share in the bottled market.

Coke still has an overall market-share lead in the country because of the fountain business and places like McDonald's.

Right? Pepsi basically never was able to break into the fountain business and the volumes that even today Coke has run away with—the restaurant business serving soft drinks out of fountains.

So, it's interesting. In the late 1970s, Pepsi does try to break in. They buy Taco Bell, Pizza Hut, and KFC and then install Pepsi. But, yeah, it never approaches Coke.

Which actually kind of backfires, because then Coke uses it to counter-sell. They start going around to everyone else who is considering Coke or Pepsi and saying, “Pepsi owns these restaurants that are competing with you. Why do you want to give them more profit dollars?”

Coke is able to win sales on that, which I think is part of why Pepsi then spun that all out as Yum Brands, but also because it was a drag on their business.

Yep. So, on the back of this huge, nationally known, obvious success with the Pepsi Challenge, the young marketing executive starts to become pretty well known in the business community.

And David, we should say who it is now.

His name is John Sculley.

Yep. And for some of you, that will mean a lot, and for most of you, that will mean a lot in about 30 seconds.

John starts getting a bunch of CEO offers from recruiters on the back of his success. He loves Pepsi. He's built his career there. But finally, in 1983, he gets an offer that he can't refuse.

Steve Jobs comes to pitch him and says, “Do you want to sell sugar water for the rest of your life, or do you want to come with me and change the world?” And he goes with Steve and joins Apple Computer as CEO in 1983. Yeah.

And finish the story, David. What would then happen after John became CEO of Apple?

Well, I think the narrative that a lot of people know—we'll have to save this for our Apple episode someday—is that things did not go well. Steve Jobs got kicked out of the company. Apple floundered. Jobs had to come back.

Sculley actually grew Apple's revenue from under $1 billion when he joined to almost $8 billion when he left.

Ah, well, Tim Cook before Tim Cook.

And then there would be 2 more CEOs, I think, before Jobs came back.

Yeah. Gil Amelio and—

Michael Spindler.

That's right. But, yeah, John is awesome, by the way. He's 87 years old. He's a huge Acquired fan. He's listened to every single episode that we've done.

Also, thank you to Arvin Navaratnam, friend of the show, for introducing us. It was a fun email to get, like, “Wait, John Sculley listens to Acquired?”

Yeah, so cool. He's currently on the board of 3 different companies that he's helped start over the last couple of years, and he's responsible for the Pepsi Challenge. So, obviously, Coke eventually, after years and years of bleeding thanks to the Pepsi Challenge, decides that they need to respond.

And the response ends up happening a full decade later. The response comes in 1985, and the Pepsi Challenge was in 1975. Pepsi had already been taking share from Coke starting in about 1970—meaningful chunks.

So, why is Coke so slow to respond to the Pepsi Challenge?

Well, in addition to just plain getting their ass kicked, 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.

He has strong opinions about what Coca-Cola is and isn't. 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.

Basically, no decisions can get through between Woodruff being set in his ways—

And it's hard for him to see, read, or hear. I mean, he's hard to communicate with, in addition to having strong opinions and control of the company.

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.

Yep. All of this finally resolves in May 1980, when the board appoints a young chemical engineer named Roberto Goizueta as CEO.

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 2 people who knew the secret formula.

That's right, because he was a chemical engineer. He was on the product-formulation side of things.

Yep. And he had just had a huge win within the company when he replaced sugar in the U.S. with high-fructose corn syrup. He's the one who brought corn syrup in.

So, starting in 1980, it got to 50%, and then by 1984, sugar had been replaced 100%. But basically, because sugar kept getting more expensive and farm subsidies for corn kept making high-fructose corn syrup less expensive, it became a no-brainer economically, as long as customers were willing to do it and it didn't seem to be worse for people's health.

Yep. So he's a real dark-horse candidate to be CEO. The person who everybody thinks is going to get the job is Don Keough, the famous longtime president and COO of Coca-Cola.

What Roberto does when he becomes CEO is he says, “Don, you are my partner in crime. We are going to 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 going to be a dynamic duo here.”

Ultimately, Goizueta got it because he was Woodruff's protégé. I would say Goizueta, at least as it comes across in the book The Secret Formula, did a very good job of managing up and making sure that Woodruff felt taken care of and informed.

I could see that.

Yeah.

So, they go on to have a great run. One of the early things they do is buy Columbia Pictures, the movie studio—

Which I always thought was stupid. Whenever you hear stories of, “Oh, in the crazy 1980s, when everyone was doing crazy stuff, Coke even went and bought Columbia Pictures—”

A movie studio.

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—it was financially pretty good for them when they ultimately sold the business to Sony a few years later.

It also leads to a lot of really good stuff for Coca-Cola, because this is how they get to know Herb Allen Jr. of 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. Actually, this relationship continues right through to this day. Herb Allen III, who took over from Herb Jr. in the early 2000s to run Allen & Company, is still on the board of Coca-Cola.

Amazing. So this is how Coca-Cola executives start going to Sun Valley—

Where Don Keough reconnects with his old neighbor from his early young-professional days, when he was working in his first job in Omaha, Nebraska.

This is insane.

Living on Farnam Street in Omaha, he was neighbors with Warren Buffett. 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—greatest-of-all-time investments—it's like, “Oh, that was a guy who lived on my street. Oh, that was the woman who ran the furniture store in my town growing up.” It happens over and over and over again. Are you kidding me? Don Keough was Warren Buffett's old neighbor.

Crazy. And so this is how the Berkshire Hathaway–Coca-Cola relationship starts.

Well, so Warren at this point in time, as we covered on our Berkshire series, is a Pepsi guy. He's part of the new generation. He took the Pepsi Challenge. Keough converts him to Coke by telling him about this new product that they're going to launch, Cherry Coke, because Buffett loved cherry syrup in his Pepsi. And so he converts Warren to a Coke guy before Warren ever invests a dollar in the Coca-Cola Company.

And Warren reportedly drinks 5 Cherry Cokes a day.

Yeah, he is perhaps single-handedly supporting his investment these days. Later on at Sun Valley, Bill Gates lets it slip on a panel with Warren, Roberto, and Don Keough that Warren has always told Bill that Coca-Cola could be run by a ham sandwich while Roberto is sitting right there.

Yeah, Roberto gets very offended and apparently never talks to Bill Gates again. Now, given what's about to happen here, it's actually highly debatable whether Roberto was a ham sandwich or not.

My opinion has always been that Coca-Cola is the type of business that could be run. But maybe let's save this for the Quintessence. We should finish the episode deciding if that is true about the Coca-Cola Company or not.

Yes. Well, Roberto is about to become responsible for both the company's greatest success since Coca-Cola and its worst disaster of all time.

Yes.

Okay. So, first the success. Of course, we're talking about the most successful diet drink in the history of humankind. Basically, the only soda that I drink today: Diet Coke.

You're a Diet Coke man, not a Coke Zero man.

I'm a Diet Coke guy. Yeah, I know. Coke Zero was sort of marketed as the Diet Coke for men, but, like, Diet Coke—

And not just for men, but also the one that's closer to the original Coca-Cola formula. Diet Coke is sort of meant to be its own thing.

Yeah. They did those great ads of the taste-infringement ads. Do you remember those?

Oh, I don't remember them.

Oh, yeah. When Coke Zero launched, they did a whole series of ads of Coca-Cola lawyers going around suing Coke Zero for taste infringement. It's a great premise—

Great, sort of self-reflective advertising from Coca-Cola there.

So, Diet Coke is fascinating because they did start work on it earlier in the '70s. It didn't come out until 1982, but they're kind of in the lab tinkering with the flavor because the Pepsi Challenge has basically thrown down the gauntlet that Americans prefer the taste of Pepsi.

They're starting to play with this idea of, obviously, we're not going to replace Coke, but is there a way that we can make something that does compete with Pepsi, that tastes a little bit more like Pepsi, that tastes lighter or sweeter? They're in the lab, they're working on it, and eventually they do land on this formula that they think is great. It's artificially sweetened, as you were talking about.

It is a huge risk in 2 ways to release Diet Coke. One is because of everything we talked about earlier: you have to be really careful with the Coca-Cola brand. It's the sacred cow. But 2, TaB is currently, in 1982, the best-selling diet drink in the world. So why would you release another diet drink that risks dethroning the one that you have that is the clear winner? And the answer is—

You need a win.

A, you need a win. B, it is so clear that diet is going to be a gigantic market and that's the way the world is going, and we're just holding ourselves back from competing with our best foot forward by not using our big brand.

Yep. There was one other reason why they finally decided in the late '70s to start work on Diet Coke.

In 1975, the Coca-Cola Company acquired the Thomas Company. So, to the extent that the Thomas Company and the parent bottlers, if it is true that they had a right to a 10-cent royalty on other Coca-Cola drinks, that is no longer a problem.

Fascinating. So, David, do you know about how they announced Diet Coke?

Ah, I was going to ask you the same thing. I thought I was going to get you. Of course I do.

I'd be surprised if any listeners know, but listeners, you are going to delight in learning this with us. They announced Diet Coke in the summer of 1982.

In July of 1982—

The same month.

That's right. 43 years before.

43 years before us. A very special location in the Acquired cinematic universe: Radio City Music Hall.

That's right. Diet Coke was announced onstage with the Rockettes performing to celebrate the new beverage.

That's right. To say it works is quite the understatement. By the end of 1983, the first full year on the market, Diet Coke is the number one diet drink in America.

And unlike TaB, which clearly, from that commercial you talked about earlier, was exclusively marketed to women, 30% of Diet Coke drinkers, even in the early days, are men. By 1984, Diet Coke becomes the 3rd best-selling soft drink in America, period, behind Coke and Pepsi. And Diet Coke costs significantly less for Coke to produce because it doesn't have sugar.

Yeah.

You know what's not as expensive? Artificial sweeteners.

Yes. So, Diet Coke is Goizueta's huge, huge grand slam win. And the way they market it is not apologetic. The campaign is “Just for the taste of it.” They are full-on marketing that this tastes great, and it also happens to have no calories.

This is Coca-Cola playing offense.

Win-win.

It works incredibly well.

You can have your Coke and drink it, too.

That's right.

And then Goizueta decides to play defense. [laughter] Yeah—

With New Coke. So despite all the success of Diet Coke—and it was a huge success—even in 1982, 1983, and 1984, 10-ish years into the Pepsi Challenge, it's still kicking Coca-Cola's ass.

[laughter and gasps]

Coke in 1982 brought in Bill Cosby as its main celebrity endorser.

That's right.

The spots that they have him do in 1982, 1983, and 1984 directly address the Pepsi Challenge. It's unbelievable. Coca-Cola is a singular, N-of-1 product. Coca-Cola does not exist in a universe with other competitors. And here's Bill Cosby directly talking about Pepsi and the challenge. It's the worst thing that Coca-Cola could possibly do.

They were in bad shape.

They are bleeding. And Pepsi, of course, in typical Pepsi fashion, says, “Oh, you just signed Bill Cosby, and you're talking about the Pepsi Challenge in your spots? We're going to sign Michael Jackson.” [laughter]

Just brutal. Obviously, both of those men, as the world would later find out, were deeply problematic. But at the time, I think they had among, if not the highest, Q ratings of any celebrity in the world. A Q rating is the percentage of people surveyed who are familiar with the person and think highly of them.

Yeah. But from the time that Pepsi launched the Pepsi Challenge in 1975 until the New Coke disaster in 1985, Pepsi's share grew every single year in America while Coca-Cola's share declined every single year. And so the question is: If you're Coca-Cola, what do you do here?

Yep. What they decided to do was, after 99 years with the same formula, carefully building a brand around that logo, the taste, and the secret formula, and defining this cultural object for the world—stupidity struck. [laughter] [gasps] And yes, we can't downplay how stupid this really was.

But somewhat in their defense, if you're going to introduce a new taste to try to counter the Pepsi taste, which you believe is the reason why you're losing market share, it has to be a full replacement. There actually is no logical path to adding a new flavor. So a bunch of people are like, “Well, why didn't they just release Coke 2 or something like that?” Remember, Coke is a singular product. There cannot be two Cokes. [laughter] It would destroy the brand. I mean, this destroys the brand, too, but—

I don't know, David. There's Coke Zero and Diet Coke.

Well, now there is, but you have to put yourself in the mindset back then. The other, more practical problem was that if they introduced a secondary flavor and kept original Coke on the market, they would bifurcate the base and Pepsi would become number 1. So they were paranoid about that. They were pretty sure that if they had multiple Cokes on the market, Pepsi would become number 1.

Who cares what the base is? It's just pure bragging rights.

Coca-Cola cared a lot. [laughter] Coca-Cola—it's number 1. Pepsi's the imitator. How could they ever stand to let Pepsi become number 1?

So, what did they actually do? There's a lot of people who probably aren't terribly familiar with New Coke and what actually happened.

So, Christmas of 1984, the executive team makes the decision: They're going to do it. They're going to replace the original Coca-Cola formula with New Coke.

And they've all tasted it, as have 200,000 people. Yeah, they've done tons of taste tests. Not only does it beat Pepsi in taste tests, it beats original Coke; people prefer the taste of New Coke.

Robert Woodruff is still alive at this point. He's 95 years old. So they're like, “All right, before we do this, somebody's got to go have a conversation with Robert and tell him what we're doing.” And, Roberto, this one is on you. [laughter]

So, New Year's Day 1985, Roberto goes to see Robert Woodruff at his home. Robert can barely hear and barely speak. And according to Roberto, he was the only other person present in the room with him; it was just the 2 of them. Woodruff gives his blessing to change the formula.

However, the very next morning, Woodruff stops eating. He's hospitalized a few days later, and he ends up passing away on March 7, 1985, 1 month before the New Coke announcement.

So poetic. The formula was never changed while Robert was alive.

Nope. No, it was not. So, 6 weeks later, on Friday, April 19, Coca-Cola sends out a press invitation for “the most significant development in the company's nearly 100-year history” that they are going to hold the following Tuesday.

Well, news of what is about to happen leaks over the weekend, [laughter] and Pepsi takes out a full-page ad in newspapers across the country on Monday morning with the announcement reading, “The other guy just blinked.” After 87 years of going at it eyeball to eyeball, “The other guy just blinked.” And they gave all their employees the day off to celebrate.

Yeah. [laughter] Which, by the way, this couldn't have been sequenced any worse because Pepsi does that. Pepsi starts giving interviews to everyone they can in the press before the announcement actually happens. And so the press all comes in, and no one's tried it yet. The executives can't even get their message out because everyone's just preloaded with, “How badly are you losing that this is the case? Does it taste like Pepsi?”

Because Pepsi sort of seeded, “Hey, you should ask them: Is it meant to copy Pepsi?” And the message that the Coke executives have is that they're trying not to say too much. They're trying not to describe the flavor. They're trying not to compare it to Pepsi. So they're up there just looking like complete idiots with no substantive answers while everyone is attacking them.

It is an unmitigated disaster. At one point, the questioning gets so tough that Don Keough says, quote, “There's a lot of things I'd rather be doing than being here right now.” This is at a press conference for a new product launch—

Launching the biggest product in the company's history.

And then the final question of the day: A reporter asks whether, assuming this new Coke thing is a success, Diet Coke will also be reformulated. And Roberto responds, “No, and I don't assume that this is a success. It is a success.”

The 2 crazy quotes to double down on that. Goizueta says, “Some choose to call this the boldest single marketing move in the history of the packaged goods business. We simply call it the surest move ever made.”

Oh.

Then—

Oh, my goodness.

Don Keough follows up, “I've never been as confident about a decision as I am about the one we're announcing today.”

Wow. This is so bad.

Which I don't think either of those things is true. That can't be true.

No.

Just based on how timid they were in the messaging.

So it turns out that in all the research they conducted for New Coke—all 200,000 people they did the taste tests with—they never asked them how they would feel if this new beverage replaced the old Coca-Cola.

And Goizueta's response to this in later years is, “You can't ask a question like that because people don't know. You can't get real data on emotional questions like that. You can only actually test, ‘Do you like this taste better or not?’” And so, sure, you can run that experiment, but ultimately, how much faith are you going to put in the data?

They would have learned something if they'd asked that question.

Yeah.

So the company immediately starts getting thousands of letters and phone calls every single day. One of my favorites is a letter that reads:

“My dearest Coke, you have betrayed me. We went out just last week, as we had so often. And when we kissed, I knew our love affair was over. I remember walks across campus with you, discussing life and love and all that matters. I remember the southern summer nights we shared, with breezes leaving beads of water hanging delicately from your body. But last week, I tasted betrayal on your lips. You had the smooth, seductive, sweet taste of a lie. You have become corrupted by money, denying your ideals.” [laughter] Oh, man.

Or this story: In Marietta, Georgia, a woman assaulted a Coke delivery man with her umbrella as he tried to stock a supermarket shelf with New Coke. “You bastard,” she screamed. “You ruined it.”

And I think they just didn't realize that what they were taking away was people's childhood. Yes, they're taking away America.

It's not about what tastes better. It's what they were used to, and it's what they had built an entire lifestyle brand around, believing that America meant to people.

Yes. So, for a couple of months, from April to July, they stick with it.

Well, because here's the craziest thing: They were prepared for a vocal minority to be very mad. So you're sort of in denial about all the feedback at first. You're like, “Yep, this is just what we thought.” And then you get a couple of months in and you're like, “Wait—”

This isn't ending. Yeah.

Does everyone hate this? [laughter]

Yes. The answer is yes.

So, I thought this lasted a year or 2. I asked family members. I asked people who were like, “Yeah, I think that was a 2- or 3-year period.” There were 79 days between when they released New Coke and when Coca-Cola Classic made its return.

Yep. So when they finally decide they've got to bring it back, there's a question of what they call it and what they do with New Coke and Coke. Their lawyers ultimately decide that if they keep New Coke on the market as the official Coke and call the old Coke Coca-Cola Classic, they can make an argument to all the bottlers that Coca-Cola Classic is a new drink.

Really?

Yeah. This is part of why they bring it back in this way, because there was an opportunity to renegotiate: “Hey, actually, the rights that you own are to New Coke, and the more advantageous deal that we’re going to cut is Coca-Cola Classic.” Interesting, huh?

So, on July 10, 1985, they announced that Old Coke was coming back as Coca-Cola Classic and New Coke would remain on the market. At the press conference, Don Keough said, “Some critics will say that Coca-Cola made a marketing mistake. Some cynic will say that we planned the whole thing. The truth is, we are not that dumb and we are not that smart.” [laughter] I don’t know. It all seems pretty dumb to me.

The crazy thing is they thought, when they introduced Coca-Cola Classic, that that would be the product for the diehards—for this vocal minority that was really upset about it. In practice, what happened is everyone went back to Coca-Cola Classic, and nobody stayed on New Coke. I mean, its market share was 3%.

Yeah. It plummeted.

And I think this completely surprised the executives of Coca-Cola, who were like, “It’s better. We were going to make small quantities of this Coca-Cola Classic just to appease the people who need it.” But it’s crazy: people just went back to the worse-tasting one. So there’s a delicious, one might say, coda to this whole thing.

Well, wait, we didn’t say the best part of how this ends. Within a year, Coca-Cola Classic surged past the heights of where Coca-Cola was before the whole debacle started. So the whole thing worked as an accidental publicity stunt. No advertising campaign could have ever gotten people to pay this much attention to Coke. In many ways, this actually did save Coca-Cola. After this, they started building back share.

What’s the song? You don’t know what you got till it’s gone. [laughter] This made people realize, “Oh my God, I do love Coca-Cola.”

Yes, you’re right. That is the most important takeaway from this. This is what finally stopped the Pepsi Challenge. [laughter] Pepsi won, and then after Pepsi won and Coke lost, Coke was able to come back. But yes, they had to literally kill Coca-Cola in order to resurrect it from the ashes and survive the Pepsi Challenge.

The little fun trivia is, David, do you know what New Coke became after they removed the name New Coke but left the product on the market?

Oh no, I don’t.

They renamed it Coke 2.

And it was not fully abandoned until 2002.

Wow. That’s how long they stuck with it.

Yep. So I don’t know who the Coke II fans were, but it was available for you at some point.

[laughter] For a while. Somebody has hoarded a whole stash of Coke II somewhere. It’s in some bunker somewhere.

Yes. [laughter]

All right. So, the delicious coda to this whole thing—please remember how I set up the Warren Buffett ham sandwich thing. I think this whole episode is probably where he decides, “Jesus, Coca-Cola could be run by a ham sandwich. It would have been better off.”

But actually not, right? This whole thing was so stupid that it was actually amazing.

What’s the Bernard Arnault quote? Even when he loses, he wins.

Yes. [laughter] [gasps]

So, after this whole New Coke disaster, Coca-Cola Company’s stock is in the dumps. And who comes in but Warren Buffett, who 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, well, a debatable investment.

He owns about 9.5% of Coca-Cola today.

Yep. Berkshire owns about 9.5% of Coca-Cola today. That stake is worth about $28 billion, which is a 22–23x gross return on the $1.3 billion investment over the course of 40 years, which equates to only just over an 8% IRR. But Coca-Cola stock kicks off these days about $1 billion 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.

Which I imagine he would have been better off buying Berkshire Hathaway stock. He would have been better off buying the S&P 500 over that same time period. That’s brutal. 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?

When I did some math on this, my first glance at it was, “This has been an unbelievable investment,” because even though the equity value has gone up, would you say 20-something times, over a long period of time, it’s been fine.

22–23x. Yep.

The dividend yield is insane. They get $800 million to $1 billion out every year, and their principal was $1.3 billion. That’s like a 60% to 80% dividend yield on 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—

But 40 years is a long time, right? Over a long period of time, you better have insane multiples to justify locking capital up for 40 years.

Yep. And you know, the thing about the S&P 500, right, is it’s a rotating set, right? That’s not really fair. Over the last few years, of course, the tech companies have rotated in, and the returns from the Magnificent 7 over the last 10 years dwarf anything else.

But I’m sure buying Berkshire in 1988 to 1994, which was the stretch that he bought Coca-Cola, and holding it to today would have 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.

Yep. 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 an annualized basis has not been great.

Yeah. Well, speaking of the good initial few years of the run there, there’s one more fruit, shall we say, to be harvested from the Columbia Pictures acquisition that Roberto Goizueta and Don Keough did in the early ’80s.

The relationship with CAA.

Yes. And super-agent Michael Ovitz, past Acquired guest.

Indeed, part of the Acquired cinematic universe. So when Coca-Cola sells Columbia to Sony, Ovitz and CAA are official advisers on the deal.

That’s right. When Ovitz tried to take CAA from a talent agency and movie packaging into also doing investment banking—

Yes.

And on the back of that success expanding CAA into investment banking, Ovitz was like, “Why stop there? Why don’t we expand into ad agency land, too?”

So he comes back to Goizueta and Keough and says, “Hey, I want to pitch you guys on taking over as your ad agency from McCann Erickson,” which is crazy. This is Coca-Cola. But Ovitz’s pitch is pretty good. He’s like, “McCann Erickson has been great for you guys.” And, of course, there was the Hilltop ad and “The Real Thing” and everything over the past set of years, but, hey, this “one sight, one sound, one sell” thing is not going to work in the new media landscape.

I mean, look at how badly you got your butt kicked by the Pepsi Challenge in grassroots marketing. What you need are different messages that are going to resonate on different mediums. We’ve got the cable network landscape these days. We’ve got ESPN. We’ve got sitcoms. We’ve got kids’ shows. We’ve got all this different media. It’s not just the whole family watching I Love Lucy anymore.

You need a whole new approach for the new media landscape. And so you shouldn’t have just one television ad. You should have a whole suite of different television ads for different audiences at different times of the year.

There should be a democratic approach to this, where it’s not just one creative director at one agency. You want the best ideas that can come from anywhere, and we have all the talent relationships with all these different writers, directors, and actors. You just give us a creative brief, and we’ll come back with 30 great ideas for you from 30 different sources.

So he pitches Goizueta and Keough that CAA can make 40 ads a year for them for the same cost that McCann Erickson is making 7, and they can all stay unified under the new Coca-Cola slogan of “Always Coca-Cola.” In 1992, CAA wins the business and dethrones McCann Erickson.

Among the many ads that they create for Coke is a new Christmas Coca-Cola motif, not featuring Santa Claus, but instead the polar bears.

Yep. [snorts]

Ovitz makes the polar bears. Amazing.

Wow.

Yeah. I mean, he didn’t make the polar bears, but Ovitz found the talent through the CAA network to make the polar bears.

So, I think this is basically the climax of our story. New Coke, what happens afterwards, the polar bears, these beloved ads, the rest of the ’90s and 2000s—there’s a lot of company building that happens, but it’s just not that romantic of a story as much as Coca-Cola’s first century was.

Well, the thing that really started to happen in the ’90s and then accelerated in the 2000s is the beverage market just moved away from colas and toward a whole variety of other drinks. The first battleground for this is sports drinks and Gatorade.

Gatorade really came on the scene in the ’80s and established the market for sports drinks. And Gatorade was part of Quaker Oats.

That’s right. I forgot Quaker Oats ended up owning it.

Yeah. Way back in the day. So Coca-Cola, in response to Gatorade’s success, launches Powerade in 1988. Powerade is a homegrown product at Coca-Cola. It never achieves anywhere near the same success as Gatorade.

I think it maxes out at market share in the teens or low 20s. Finally, in 2000—the then-CEO of Coca-Cola, Roberto Goizueta, had tragically died of lung cancer in 1997—the CEO of Coke publicly announced a $16 billion deal to acquire Quaker Oats and Gatorade.

Whoa. Yeah, that didn’t happen.

He announced it without board approval. The board rejected it after the public announcement. The deal fell through, and the next year Pepsi ended up swooping in.

It bought Quaker Oats and Gatorade, and Gatorade has been a home run for Pepsi ever since.

I had no idea. Wow.

Wild, right? It’s total echoes of the Frito-Lay disaster. Coke could have owned Frito-Lay and Gatorade.

Wow. Yeah. And that is a little illustration of the CEO situation at the time. There have been 5 CEOs since Goizueta, from 1998 onward, and the first 3 only lasted 3 to 4 years each. Very different from the Woodruff dynasty and the long run that Goizueta had, too.

Yeah. The thing that is extremely clear, which you touched on, David, is that they had to diversify into what they call a total beverage company, really prompted by this backlash against soft drinks. The world lost interest first in full-sugar colas, and then in colas generally. The thing that was driving it—not really in the 1990s, but in the 2000s and certainly the 2010s—was obesity.

It was clear that America was only going in one direction, and sugar and processed foods, coupled with the sedentary lifestyle that a lot of Americans live, are a giant culprit in obesity. Coke is trapped, trying to figure out what to do about this. The American Heart Association says the recommended daily limit of sugar for men is 36 grams and for women is 25 grams per day. That’s the recommended limit per day. A 12-ounce can of Coca-Cola contains 39 grams of sugar.

Yep. 39 grams.

So you’ve got this hard problem where Coca-Cola itself—just that one product, that one product line—is this unbelievable business: super high margin, low capital investment, and a brand built and established all over the world. It’s hard to want to invest in anything else when that’s your current business.

At the same time, they need to. It’s existential. This product is probably only going to go downhill from here. Maybe it’s got a few more years, maybe another decade of success, but 50 years from now, will this be your cash cow? No. So how do you start diversifying without admitting that your current main product, which is the company’s namesake, is bad for you? It’s just bad for you.

Yep. Tough spot to be in.

Not an enviable position to be in. You can see how that churns CEOs pretty quickly.

Now, the interesting thing, though, back to Pepsi: They’ve managed this, at least from a business standpoint, pretty well over the past several decades. First with Frito-Lay, then with Quaker Oats and Gatorade, and then in the bottled-water market. Pepsi launches Aquafina, and Coke launches Dani.

Yeah, they were pretty late to the game in water. I think the story of the last 25 years is that they sit there in a privileged position, look around, and wait and see. Then, when something really starts happening, they become active in it. They just have to hope that all the assets they have, including the Coke distribution system, make it okay that they’re not first to market on some of these things.

But I don’t know. Sometimes it’s really cost them. The biggest and most interesting one is Monster Energy. Do you know the story behind Monster Energy?

Well, I know what happened, but I don’t know the story. They started acquiring and investing in a lot of other beverage companies through the 2000s. There was Odwalla, Vitaminwater, Fuze, and then Monster comes along.

Yep. So Monster started as Hansen’s Natural. Do you remember Hansen’s Natural?

Yes.

That is Monster.

I think I vaguely did know this. This is a wild story. I don’t have the entire story because this is the Coke episode, not the Monster episode, but at some point, the Hansen leadership realized that they did want to get into energy drinks, but their current brand was not going to be effective in doing so.

They came up with this really crazy brand that felt dark and dangerous to counter-position the cleaner aesthetic of Red Bull, and it ended up going great—better than they ever could have imagined. There were various times early in the transition from Hansen’s Natural to Monster when Coke could have bought it, but it was subscale. Then there were lulls in growth and false starts in it becoming the big, giant thing that it became. Also, with energy drinks as a category, people weren’t sure how durable it was. Was this really going to be the thing that it became, or was it a fad?

In 2012, Monster reached out to potential buyers, including Coca-Cola and Pepsi, but Coke decided against pursuing it because the price was high. Monster’s market cap was $11 billion at the time.

Goodness. Wow. And what is Monster’s market cap today?

$70 billion.

Yeah. I’d say these energy drinks are not a fad.

Yeah. So what ended up actually happening much later on was that Coca-Cola thought, “Ah, crap. We should have done that.” They did sign a deal with Monster, and it’s a pretty interesting deal.

Coke decided, “We’re going to walk away from being in the energy-drink business. As part of this deal, we’re going to do a business swap.” Coke gave its energy-drink brands—NOS, Full Throttle, Burn, Mother, and Relentless—to Monster. Monster transferred its non-energy business, including the original Hansen’s Natural Sodas, over to Coca-Cola.

Amazing.

Coca-Cola became Monster’s preferred global distribution partner, and Monster became Coca-Cola’s exclusive energy-drink play.

And Coca-Cola gets a 20% stake in the company, right?

Well, yeah, but KO had to buy it. KO had the privilege of investing in Monster in 2015. KO put in over $2 billion. At least they’re getting on the train.

KO is the largest shareholder in Monster Energy now, and that deal looks pretty good. The $2 billion or so that they put in is worth almost $12 billion today. So, nice investment, but gosh, if you’re the global total beverage company, what has the trend been over the last 15 years in beverages?

I bet they sure wish they owned—

Owned Monster. Yeah. It is funny, though. I’m talking out of both sides of my mouth here.

If you think Coca-Cola is bad for you, wait till you see Monster Energy.

So it’s not just the obesity thing. There’s a trend toward energy drinks that has nothing to do with health.

Yeah. It’s interesting. The energy drinks are almost a callback to the original patent medicine of Coca-Cola. It’s like, “Yeah, this is really bad for you, but you’re going in eyes wide open to that.”

It is serving a function for you.

Yep. The other funny thing that happens is Coca-Cola buys Glacéau, which makes Vitaminwater and Smartwater, in yet another “Oh, we should also be in water” play. They pay about $4 billion for that.

The founder then leaves Coca-Cola and starts BodyArmor, a sports drink that I think is coconut-water-based and a little bit more sugary. He turns around and sells that back to Coca-Cola for $5 billion. For a startup, BodyArmor did great. Gatorade still has more than 60% of the market share of sports drinks. It doesn’t make a dent in PepsiCo’s number-one position in sports drinks.

Yeah. If you’re going to look at Coca-Cola as a total beverage company and say, “What beverages have really been killing it over the last 20 years that you’ve managed to bet correctly on or incubate in-house?” the answer is Diet Coke and Coke Zero.

Yep. Coke Zero, 2005. Taste infringement.

For a few years, it was growing at 10% a year, which is really fast considering it launched almost 20 years ago and was already very large. It is sort of ironic that the last 20 years have been about a metamorphosis into a total beverage company, and it’s Coca-Cola, Diet Coke, and Coke Zero that are leading the way.

That was a lot of stuff that happened in the 2000s. In the 2010s, they acquired more brands and continued to grow the total beverage company’s portfolio. They did a whole bunch of stuff that we’re not going to spend too much time on in this episode, including rehabbing their bottler operations, bringing a lot of it back in-house, making sure the quality and efficiency were where they wanted them to be, and then spinning it back out.

A lot of these bottlers came onto the balance sheet and then went back off the balance sheet to new owners. They encouraged consolidation among their bottlers, and they finally got rid of the last little element of the parent bottlers. The story for people who follow Coke as a company or a stock is largely about how good a job they’re doing restructuring all the bottlers. It seems like they’re mostly through this whole refranchising thing that they’re doing.

So that brings us to the business today.

Yeah. And the business today—the biggest piece is a part of the story that we basically haven’t talked about since World War II—is international. Coke is a global company.

Yeah.

Most of the revenue and profits do not come from the United States, even though all the storylines we’ve been talking about are about the United States.

But I think when people look at the Coca-Cola they’re holding, they think about the United States.

Right.

Maybe that’s not true. Maybe I live here, and so I’m ethnocentric about that. But I’d be curious if Coke feels like America to you if you’re a listener and you don’t live here.

Yeah. You know, the other part of it is that Coca-Cola did set up the bottlers as independent, locally owned, entrepreneurial businesses in all the countries that they went into. That produces a lot of profits locally.

Yep. So, yeah, it is a local business wherever it is. All right, so let's walk through that. Here's Coca-Cola by the numbers today.

First of all, brands. For a long time, the thought was just, build the total beverage company, and more brands is better. So let's just keep going. They had over 500 around 2020. They did a big slimming and went down to about 200. The ones that they got rid of were Tab, Zico, AdeS, Honest Tea, and Vault. Those are probably some of the ones you know that they got rid of.

They do have 30 brands that do over $1 billion in revenue. It's kind of crazy that it's a house of brands that has that many billion-dollar brands. 15 of them were created organically, like Fanta and Sprite, that we didn't talk about in this episode.

That's right. We didn't talk about Sprite. Do you know the history behind Sprite? Do you know what Sprite really is?

No, not really.

So Sprite, as we all know it today, is not Sprite. Sprite is Fanta Clear Lemon from Germany.

Really? [laughter]

Yep. They brought that over to America and rebranded it as Sprite. No way. And they stole the name from—they had a character named Sprite Boy who was a part of the Coca-Cola Santa Claus universe.

Yep, that's right. All right. Those are 2 of the 15 that were created organically in-house. 3 of them they bought that were already doing over $1 billion at acquisition. And then the remaining 12 of the 30 billion-dollar brands that they have were small, and Coke grew them to over $1 billion in revenue underneath their umbrella.

So think Minute Maid, fairlife, and Vitaminwater. And just to share some of the other brands they own: Powerade, Minute Maid, Dasani, Vitaminwater, Coke Zero, and Schweppes.

Smartwater, Ciel, which is another water brand, and Crystal, which is yet a third water brand. They recently bought Topo Chico. They're actually playing around in alcoholic beverages a little bit with Topo Chico, with a hard seltzer. And I think they're also doing a Jack and Coke and a Sprite that is alcoholic. So they're starting to dip their toe into that a little bit.

Fanta Klare Zitrone alcoholic. All right. Has a real ring to it. [laughter]

Fresca, BodyArmor, fairlife, and Core Power, the dairy products. And Fuze Tea. And here's one that is a little bit of a head-scratcher: Costa Coffee.

Yes, that they bought for quite a few billion dollars a couple years ago, right?

And it's physical retail. It's a coffeehouse in the UK.

Yeah. It's like a Starbucks competitor.

Yeah. So that's interesting that they operate a coffeehouse. By the way, speaking of coffee, someone told me that the relationship with McDonald's runs so deep that Coca-Cola sources the coffee beans for McDonald's.

Wow.

And if it's actually the sole source for McDonald's, that is a giant number of coffee beans. Well, it's interesting with both the Costa Coffee and the McDonald's coffee. I'm pretty sure we talked about, with Howard, on our Starbucks episode, the Starbucks-Pepsi partnership with Frappuccino, right?

That's right. Pepsi was the bottler that made the CPG version of the Frappuccino.

Yep. Huge success for both companies.

Yep. So those are the 30 billion-dollar brands that they have. Coca-Cola serves 2.2 billion servings of their beverages to the world every day. Wild. [laughter] That is, what, like a quarter of the world's population if everybody were having just 1?

Isn't that crazy?

Definitely not evenly spread. Yes.

There are a lot of power users of Coke products out there.

Yes, but Coca-Cola's estimate is that there are 65 billion servings of beverages consumed every day.

Does that include water or no?

Yeah, the human race takes 65 billion drinks a day of something.

So what's that? I guess that's 8 drinks per person per day.

Yes. So, by that calculation, they have a long way to go. Huge market ahead of them, even if they stayed just in beverages.

There you go.

They have 200 bottling partners around the world with 950 unique facilities. Pretty awesome that they don't have to own the vast majority of that.

From a revenue perspective, this is what you were starting to get into. How is the revenue broken down? The Coca-Cola Company itself does $47 billion in revenue.

And how much is North America versus the rest of the world?

40% of revenue is in the U.S., and 60% is international.

That's actually bigger than I would have thought in the U.S.

Yeah. Still very meaningful.

I bet for the core cola products it's less than 40% in the U.S.

Yep. I bet that's totally right. Okay, so the interesting thing is if you start to look at employees. Revenue is $47 billion at the Coca-Cola Company, out of $175 billion in total revenue for the system. And this is as reported by Coca-Cola in their proxy statement.

There are 70,000 employees at Coca-Cola. But again, if you look at the system, there are 700,000 employees. So let's look at those last 2 numbers together, because that's a 10x difference in employee count. A full $47 billion of the $175 billion in revenue goes to the Coca-Cola Company—27% of the revenue with just 10% of the total employees.

I mean, the Coca-Cola Company gets a tremendous amount of leverage out of the bottling system. This is just employees. This doesn't even account for the margin profile. This doesn't think about return on invested capital, which again is all much better if you're the Coca-Cola Company versus if you're the bottlers.

Yeah. And then there's the fountain customers, the retail partners, the McDonald's of the world. Definitely Coca-Cola is at a better return-on-invested-capital standpoint than running restaurants.

The Coca-Cola Company just needs to sell syrup and spend marketing dollars to sell the dream. It's a beautiful position to be in.

Yes, it is.

Earnings on that $47 billion: they generate $10.66 billion of net income. The net income margins tend to average around 23%. Gross margins average about 60%. Historically, it was as high as 70%. So almost as good as a software business, but not quite. But for a physical-goods business, it's kind of unbelievable that they have 60% gross margins.

Then when you look at the revenue mix on products, this gets to what the company is today. 69% of revenue comes from sparkling soft drinks. As much as they're in water and milk and tea and juice and sports drinks, the bulk of this business is selling soda.

40% of all volume is Trademark Coca-Cola, which is just Coke, Diet Coke, Coke Zero, and the like—caffeine-free and flavored variants. 47% of the volume is the Coke family.

Wow. So I continue to maintain this mentality: they keep trying to get into other stuff, but then they're always a little bit like, “Geez, I know we should be getting into this other stuff, but it's not as good as our original thing.” It's not as good of a business. It's not as unique of a brand.

And I also think they're kind of limping into a lot of these other categories. They're not making a giant early bet on things that become the next big beverage fad. They're trying to watch and see how it plays out, and then jump in.

Yeah, whether it's sports drinks or energy drinks.

Exactly. Market cap is $300 billion. So, huge company. Not by Magnificent 7 tech standards, but a massive, very valuable company. You'll note, David, they did not achieve Charlie Munger's thought experiment of $2 trillion. And they are very unlikely to get there by the 150th birthday in 2036, which is the time frame that Charlie used.

Indeed. Growth is only 3% or 4% a year. If you look since 1998, in the post-Goizueta years, it averages out to about 3% to 4% growth. So I think it's fair to say “anemic” when you're describing their growth in recent years.

Yeah, I think that's why we focused the bulk of the episode on pre-1998 Coca-Cola. That's really where they built this unbelievable thing that frankly saturated the world.

Yeah, this incredible business with all these innovations and sort of pillars of what became one of, if not the greatest brand in American history. But, yeah, as we said, starting back in the Pepsi Challenge days, I think there's a strong argument that Pepsi was the more interesting company.

And over the last 50 years, soft drinks as a category have just gotten a lot more competitive. The stat that I saw was that back in 1948, Coca-Cola said that they had 60% market share of U.S. soft drinks. 60% in post-World War II America. In soft drinks today, they have 21%. Pepsi has 10%.

And I think there's a lot of things in soft drinks. So if you just look at carbonated, Coca-Cola does have 47% market share and Pepsi has 19%. But in soft drinks, the category has just gotten a lot more competitive, and Coke has lost share. Yep.

All right. Should we move into analysis?

Yes, let's do it.

All right. So instead of playbook this time, because I had just something kind of funny written down for Playbook, which is: this company really only does 2 things—manufacture syrup out of some unique intellectual property that they own and spend money on marketing. [laughter] [gasps] Correct.

I think the more interesting playbook this time is a brief review of why Coca-Cola worked.

Yes. Love it. Let's do it.

Well, first, you were talking about it a minute ago with the 64 billion daily thirst-quenching occasions around the globe.

Nice market to get to play in.

Yeah, they're just in a giant market. Everybody in the world gets thirsty, and everybody in the world likes to have some variety in what they drink besides just water.

Yep.

Full stop.

And in that category, they built something that, for many years—the better part of a century—people felt was N of 1.

Yes.

They were the original. They were the real thing. And it took a long time for that to get eroded. Honestly, if I'm looking at sodas, it's still the real thing. It's just that there's a lot of other things, too. And that's due to both a multidecade, 100-year-plus investment in building the brand and some of the greatest brand marketing of all time.

Yep. 3: World War II, and having an unbelievably paved path for them to expand globally and then also kind of shut the door behind them on global expansion.

Yep. And I really do think continuing the third-party, locally entrepreneurially owned franchise bottling system internationally was a huge contributor to that.

Yeah. So much of Coke's success. I mean, I keep going back to that moment earlier where bottlers enabled them to scale so much faster than not having bottlers. And even if you look at all the beautiful business dynamics—you don't have to deal with that lower-margin stuff, the high-headcount stuff, the high-complexity stuff, the high overhead, the lower returns on invested capital—even if it's just about speed to market.

Yes.

They got to blanket America and then blanket the world very quickly.

Before anyone else.

With a thing that people pick a supplier once. Whether the restaurant's picking the supplier or people are picking their favorite beverage, they pick it and then it's over. And they sort of had this unbelievably fast way to saturate in something that was a race. It turned out soft drinks were a category that was a race. And who's going to get to global scale first?

Yes. And it was all figured out by accident because of the worst business deal in history.

As Steve Jobs always says, you can only connect the dots looking backward.

That's right. The $1 contract.

Of course, it is a highly addictive substance that is also super enjoyable to drink and triggers every reward center you have. Not nearly as much as when it had cocaine in it, but plenty of reward centers from the bubbles, the sugar, the caffeine, the cold refreshment—everything about it.

I've been fired up doing this episode. The extrinsic marketing capability of associating it with everything good in your life, with happiness, with Christmas, with your family, with your favorite athletes. It's just amazing lifestyle marketing. Yep. And then lastly, I will say New Coke. It taught us to love again. I mean, it made us fall back in love with Coca-Cola.

I think Coca-Cola would be worse off today if they didn't go through the New Coke moment, which is crazy to say, but I guess we don't have the counterfactual. But if you just look at the data on the resurgence in Coke afterward, you couldn't have come up with a better marketing stunt.

Totally agree. I disagree with both sides of the Don Keough statement that we weren't that dumb and we weren't that smart. They absolutely were that dumb, and they absolutely were that smart.

Yep.

Yep.

I've got 2 more that I would add.

Great. One, I think Pepsi was great for Coke. I think neither Pepsi nor Coke would be what they are today, or be as great a product and company as they are today, if it weren't for the other one.

Definitely.

I mean, the Pepsi Challenge is what made Pepsi because there was a challenge to Coke, and then all of Coke's response—they made each other better.

Yeah. And then the last one I would add is that, other than software and technology products, this is the first real physical product I think we've ever studied on Acquired where you can have both a low selling price and high margins.

Oh, that's interesting. And that's super important when it's also a game of scale and global scale because it lets you sell this affordable luxury—the pause that refreshes—to everybody in the world. More or less everybody in the world can afford a Coca-Cola. And also the Coca-Cola Company makes great margins on those selling prices. It's a lot of volume. And that's incredibly cheap ingredients. That's the other.

Yes.

That's our why Coke worked.

That's our tableau of why Coke worked.

Yes.

All right, Powers. For new listeners to the show, this section, Power, is gleefully ripped from a book called 7 Powers by our friend Hamilton Helmer. And in it, he examines which of these 7 possible powers enables a business to achieve persistent differential returns—or, put another way, to become more profitable than its nearest competitor and do so on a durable, sustainable basis. And the 7 are counterpositioning, scale economies, switching costs, network economies, process power, branding, and cornered resource.

Well, it definitely wasn't counterpositioning because Coke is the real thing.

It was the first.

Pepsi, master of counterpositioning. Coke is the incumbent.

Yeah, Coke is mostly getting counterpositioned.

Yes.

So this is a business of scale economies. Everything about this business is scale economies. The amount that they can amortize their advertising over—it's just an amortization scale-economies business, period. They can manufacture and distribute things cheaper than you can to way more people than you can, and good luck catching up. And they're going to have another 100 years in them because of that advantage that they've built up.

Yep. All of the things.

Yep.

And perhaps the most important might be the first thing you said: amortizing their advertising spend over the life of the company. They can afford to just pour massive, massive, massive sums into marketing. This is why it was such a big deal when, in the 1970s with the Pepsi Challenge, Pepsi started outspending Coke in marketing. If you were really astutely paying attention to the dynamic, that should have tipped you off: “Oh, Coke is in big trouble relative to Pepsi. If Pepsi can afford now to make the investment to spend the same or more in marketing dollars, they're going to catch up.”

All right. So while we're there, let's do branding because I think this is so interesting. Normally, brand power is measured by the amount—if you provide someone with 2 identical things, how much more are they willing to pay you? And that delta, the Tiffany over the generic piece of jewelry, is how you quantify their brand power. Coke doesn't sell things in general that are more expensive. Pricing power isn't really a thing that's exercised in this industry, if it exists at all. Coke clearly has branding power, but rather than taking price, they keep price low and use their latent brand power in other ways.

Yeah.

I mean, the funny thing is, when they sell a Coke, they're selling a billboard. And so there's this flywheel element, too, where they want to sell as much Coke as possible, not just to keep their manufacturing costs low because it's an economies-of-scale thing, but also because one more Coca-Cola floating around in the world just reinforces the brand.

Yeah, I would say, not that I disagree with anything you're saying, this just reinforces for me this business is all about scale economies. It's all the pursuit of scale. I think this is the best interplay we've ever seen between branding power and scale economies, where the way that they've built a lot of the brand that they have is through their scale economies, and they sort of go back and forth.

Yep.

I'll tell you, you can't measure their brand power through how much more expensive it is than Pepsi because that doesn't exist. You can sure measure it, though, with the outcry against New Coke. Yes, that was a one-time experiment that most brands never run, with good reason.

Switching costs. I don't think I have any real switching costs. Sometimes I do have to drink a Diet Pepsi or a Pepsi Max, and it's fine. It's not my preferred drink, but it's fine.

Yep.

Network economies, none.

No.

Process power, maybe, but it's hard to discern from the outside. And then the last one: cornered resource. Okay, what's your opinion?

Of course, it's the formula.

You really think? Yes.

But I'll tell you, it's not the formula itself. It is all of the meaning imbued into the formula that is actually a part of their branding power.

Yeah.

But if Pepsi said, “We broke into the vault and we got the Coca-Cola formula, and we're releasing something called PepsiC,” and that is identical to Coke, something would go with it. There would be some amount of value transferred from Coke to Pepsi.

Okay. Yeah.

The public gives meaning to the formula, even if you can synthetically create something that tastes exactly the same as Coca-Cola.

Yep. Okay. So I'm going to take the exact opposite position on this argument.

I know you've been texting me all week that you think that the whole secret formula thing is a red herring.

Yeah. I think there is today absolutely no value to the formula. This is not just a thought exercise. There's an actual conversation in the appendix of For God, Country, and Coca-Cola. Mark Pendergrast, in his research, found John Pemberton's original formula from 1886 for Coca-Cola. He found it and took it to his contacts at the Coca-Cola Company and said, “I've got it. What do you guys think?” And they said, “Well, okay. You publish it. Let's say somebody gets a hold of this formula. What are they going to do with it?” Make a drink.

Okay, great. How are you going to distribute it? [laughter] Well, let's say you can figure out distribution. What are you going to call it? Are you going to call it Coca-Cola? Well, of course, we'll sue you for that. How are you going to brand it? How are you going to invest in marketing? Basically, how are you going to get the scale economies to do what we do? And the answer is, you're not going to. And to your point about Pepsi, Pepsi's got a better formula. [laughter]

Well, Pepsi has a better formula, but there actually was a case where a former Coca-Cola employee stole the formula and tried to sell it to Pepsi. This actually happened, and Pepsi turned him in to the FBI. What is Pepsi going to do with the formula? Pepsi's not going to market the Coca-Cola formula. These are big multinational corporations.

Yep. You know, if anything, what you've convinced me of is that the bottlers are actually a cornered resource.

Those bottlers have great distribution, and they're not bottling for anyone else.

Yep. Great point.

Coke handed them a license to print money, and they're doing it.

Yep. I actually am very curious. Can you switch teams as a bottler? Probably not.

And I guess it's probably legal, but I bet nobody does.

Yeah, fascinating. All right, quintessence. So, listeners, this is something we added earlier this year where we really try to come up with something to land the plane. What is our takeaway from the episode? We already laid out why Coca-Cola worked, so this is just David's and my opportunity to come up with a quippy sentence or 3 that is the thing that's on our mind as we're leaving the episode. But first, David, we have to come back to the question: could Coca-Cola be run by a ham sandwich? [laughter] [gasps and sighs]

I think after studying all this history, I have to agree with Warren and Bill. I think it could be. Now, there have been great, incredible CEOs in Coca-Cola's history. Candler, Woodruff, Goizueta—all of them have added on to what the Coca-Cola Company is, I think. But if you took just Coca-Cola, yeah, a ham sandwich could run it. And in fact, it's proven by the New Coke debacle.

Whoa. Really? [laughter] All right, so I disagree. I think there were definitely periods in history when that was true, but in 1985, no. Coke had been losing share to Pepsi for 15 straight years. They did actually need active management to do something. And it's sort of the same thing with the obesity crisis in the 2000s. Coca-Cola effectively bumped up against the edge of the market of humans that it could possibly expand to, and they did actually need a different company strategy. Now, whether that has been executed well is a different thing. It's only grown 3–4% over the last 27 years. So, if the criteria is running a high-growth, successful company that's a great place to put money versus all the other places you could put money, no, they haven't succeeded in doing that. But you do have to do something rather than just be flat, have anemic growth, or decline.

Those are very fair points. Points taken. I would still pose the question to you: what is the single biggest revenue driver within the Coca-Cola Company today? [laughter]

Trademark Coca-Cola.

The real thing, baby.

Yep. Okay, but on to quintessence. I have 2.

Great.

One is, it's a system, not a company.

Yep. That's new for us. I know franchises exist, but this is sort of a different thing, and I'm interested in studying more systems where it's multiple companies interrelated.

And 2 is, if you really boil it down, the Coca-Cola Company in a nutshell is figuring out how to incentivize partners to sell your product. And everyone is incentivized: the bottlers are massively incentivized, the retailers—there's great margin there for you—the soda fountain operators, the restaurants, the billboard owners. We didn't talk about this, but in the Great Depression, when no one was buying billboard space, the billboard owners didn't want empty, blank, sad billboards. So, for free, they put Coca-Cola ads up on them.

They were the preferred thing to have there instead of a white wall. I mean, just everyone in the entire ecosystem is incentivized to sell Coca-Cola on behalf of the Coca-Cola Company, and that is durable. Robert Woodruff had a mantra—an official motto within the company during his reign as company boss—that everyone who has anything to do with Coca-Cola should make money. [laughter] And there you go. That is a great quintessence.

Yep. One thing that I would add: repetition works.

We've studied a lot of brands on Acquired. It's become a core part of what we do, especially with the luxury industry. But in the luxury industry, they're always looking for the new spin, changing things, and there are elements of repetition. Hermès is always Hermès, but it's always whimsical. Pierre-Alexis always has a new theme every year. With Coke, it's a story of 150 years of always delicious, always refreshing. Yes, they change it up, but it's the same core thing.

It's a core human need. You want something delicious and refreshing no matter who you are or when you are.

Yep. That's my quintessence.

Great.

All right. Well, cheers. [laughter]

It's a sugar-water company, David. They make a drink of sugar water that's not good for you, and they built one of the most incredible brands of all time.

But it's always delicious and always refreshing.

It's not good for us. It's not good for the planet, and it's delicious and refreshing. [laughter]

Are you trying to tell me that I could sell sugar water for the rest of my life, or I could come with you and change the world?

I promise no world-changing. But I do have some trivia.

Great. A thing we didn't cover on the episode: in addition to Supreme Court justices and generals—soon-to-be presidents—helping the success of the company, in 1980, the government passed an amendment to federal antitrust law that exempted the soft-drink industry. So, Coke and Pepsi could actually grant exclusive territories to their bottlers, which you might have been wondering about: how do you get this local monopoly?

Oh, yeah. How is this legal? It's like, I get to serve all of New York and all of New Jersey or whatever. Yeah, they actually have a federal exemption from antitrust law to be able to grant monopolies. Wow.

Trivia number 2: Hartsfield–Jackson Airport in Atlanta.

Yep.

Huge airport for anyone who's ever been there. That land was once owned by the Coca-Cola Company. The same is actually true of the Atlanta Zoo. I mean, the Coca-Cola Company does a lot of international business, so they need a big airport there.

Yes, very true. And here's my last fun piece of trivia. Around 1930, when they were really freaked out about whether or not they'd have the ability to import the coca leaves to the United States to do the refining here, they actually leased a secret cocaine-refining facility in Peru.

Yes, in Peru.

They spun the factory up. It was working. The employee manufactured Coca-Cola there and extracted the cocaine that came off as a byproduct. They had a big amount of it, and the employee was trying to be a good employee to the company and earn some money with it. So, he sold 42 pounds of cocaine to a narcotics broker in Paris, and the sale proceeds went into the Coca-Cola bank account. [laughter] There was this crazy period where Coca-Cola was freaking out, like, “We've got to hide this. This is not good.” This employee wasn't trying to steal cocaine and sell it on the black market and make money. He was trying to be a good employee and increase profits for the company. [laughter]

That's right. And the Hoover administration would eventually grant that exception so they could refine the coca leaves here in the U.S. But that was just before.

Wow. I have 1 piece of trivia. Do you know what other very large American company Coca-Cola helped put into business and was their—

Primary, and I think sole, customer for the first few years of their life?

No.

Monsanto.

Really? So, Monsanto started as a saccharin manufacturer, and Coca-Cola was their first major customer and bought their entire saccharin supply.

Was Tab saccharin-sweetened?

No, this is way before. I think it was just that Coca-Cola was probably experimenting with saccharin. I don't know that they actually used it, which is odd. But yeah, this is right around the turn of the century, in the early 1900s.

Yeah.

Coca-Cola was Monsanto's very first customer.

We're trying to create some mind stickers out there. [laughter]

Oh, God.

All right, carveouts.

Great.

Oh boy. Well, on that theme, I guess, of diets, I recently redid my home gym, and I got a new piece of workout gear that I'm really enjoying. Have you ever heard of a SkiErg?

Oh, yeah. This thing is great. I am neither a skier nor a rower, but it is a vertical rowing machine made by Concept2, which is the main rowing-erg machine manufacturer, but it's vertical. It's attached to your wall, so it takes up no space. The movement that you do is like cross-country skiing: you reach above you, grab the handles, and then pull down like you're cross-country skiing. It's great because my primary form of exercise these days is running, and on my off days, I've been looking for another thing I can do that's not my lower body. I was looking at a rowing machine, but it takes up a lot of space, and I don't have a lot of space down in my gym. I went with the SkiErg, and I'm very happy with it.

I'm with you for multiple days ahead of the Super Bowl, so I'll have to give it a shot when I'm staying at your house.

And then one more bonus carve-out in my ongoing video-gaming saga with my older daughter. I downloaded Super Smash Bros. Ultimate to her Switch, and we’ve been playing that. She really likes to be a princess, of course, and to, quote-unquote, “fight the bunny.” She calls Pikachu the bunny.

She’s always like, “I want to fight the bunny.”

Pikachu is bouncy.

He kind of looks like a bunny. I get it.

Awesome. I’ve got three. Friend of the show, Claude, for reading leases.

Oh, nice. I just signed a lease on Acquired North, moving out of the basement and getting a studio next year.

Big news.

It didn’t warrant real lawyers looking at it. I gave it a pass, and I asked Claude, “Is there anything that’s wrong in here?” It flagged a few things for me that I found quite helpful. I don’t know if anyone’s told you this yet, but I think AI is the future. It was quite helpful for me.

Do you want to sell sugar water for the rest of your life, or do you want to—

That’s right.

Two is my current favorite running shoes: the Nike Vomero Plus, which seems to be the replacement for my previous favorite, the Invincible line. I’m a big fan of the Vomero Plus. And the music I’m digging right now is an artist called Hermanos Gutiérrez. My good friend Andy Sparks recently stayed at my house and put this on while we were hanging out one morning, and it is fantastic, chill music. I highly recommend it.

Excellent. With that, we’ve got some thank-yous for folks who helped us with this episode. First, as always, to Arvin Navaratnam at Worldly Partners for his great write-up on Coca-Cola, which is linked in the show notes. Arvin was very close with Charlie Munger when he was alive, and he was the one who brought up that thought experiment that I didn’t know about—or I guess remembered from the first time I read Poor Charlie’s Almanack.

Yeah, when you brought it up, I remembered it, but I had completely forgotten.

Same. To Bill Combs, who is the past president of the Coca-Cola Collectors Club, the largest collectors’ club in the world. It’s great—I talked to Bill, and he had all this amazing old Coca-Cola memorabilia on the wall behind him, drugstore signs and stuff. To Simeon Siegel from Guggenheim Partners, a retail and consumer brands analyst, who helped me think through the nuances of how brand power shows up in financials. And, of course, to all the other past Coca-Cola folks who spent time with us, helping to make sure that we got the story right.

Yes. And one more big thank-you from my end to John Sculley, steward of the Pepsi Challenge.

That’s right.

Thank you so much, John, for giving us those wonderful stories.