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The reward for this fame have been princely. At the end of 1995, the Coca-Cola Company had a market value in excess of $100 billion. It was the fourth most valuable publicly traded company in the United States.
The Pepsi-Cola story is equally remarkable. PepsiCo, the parent company which owns Pepsi-Cola,was worth more than $50 billion at the end of 1995. Pepsi-Cola was bought out of bankruptcy for $12,000. But it has emerged as Coca-Cola's only sustained rival.
How was all this wealth created from a product as simple as a carbonated soft drink? How did Coca-Cola become such a marketing powerhouse? How did Peps-Cola grow from a price of $12,000 to being a key component in a company worth more than four thousand times that amount?
This chapter answers these questions.
-Richard Tedlow, author of New and Improved
THE GREAT COLA WARS
COKE VERSUS PEPSI
Soft drinks-that is, nonalcoholic beverages-trace their ancestry back to the mineral springs of Europe. In the nineteenth century, numerous mineral waters were sold in the United States. Druggists often flavored mineral water with various extracts, serving homemade brews of root beer or ginger ale to please the patrons of their soda fountains. By the late nineteenth century, the owners of a few such beverages were attempting to distribute them beyond their local trading areas. However, the difficulties in obtaining broad, regional distribution were considerable. Bottling technology was in its infancy, so most soft drinks were sold at the soda fountain. And there was little reason for fountain proprietors to pay for the use of someone else's drink when they could mix their own with such ease.
I call this Phase I of the soft drink industry. Few beverages were widely available. No brand had real pull. Barriers to competitive entry were low.
Coca-Cola was invented in 1886, and by the turn of the century it was making progress in achieving national distribution and brand pulling power. Coca-Cola's owners wanted to make it the industry standard. Further, they wanted everyone to drink it anytime, as their advertisements stressed. To achieve this goal, they launched a coordinated advertising and sales force drive so well executed that it created one of the most powerful brands in the history of marketing.
This was Phase II of the soft drink industry. Coca-Cola was the national brand, the dominant force, the emblem of American consumption. In the nineteenth century no barriers to entry could be built in soft drinks, but by the early 1930s Coca-Cola was being referred to in the trade press as a national monopoly. Other brands tried to compete. When, the trade press asked, would the country see the next Coca-Cola? Industry analysts were puzzled about the nature of Coca-Cola's competitive muscle.
In the 1930s, Pepsi-Cola, a brand that was invented in the 1890s but that had experienced two bankruptcies, emerged as a challenger to Coca-Cola. Pepsi's entry strategy was based on price. Coca-Cola was aimed at a mass market, but by the time of the Great Depression Coke's pricing strategy left room for a cola offering dramatically lower prices. Pepsi's strategy achieved impressive success in part because the company had a solid base of distribution through a large chain of confectionary stores.
In my view, the "twelve full ounces" era of Pepsi-Cola from 1931 through 1949 can be seen as another Phase II strategy. Pepsi did not make any clams of product superiority, nor did its advertising campaign suggest that it was best suited for a certain kind of person or occasion. Rather, Pepsi's appeal was strictly price oriented, a defining characteristic of Phase II competition.
Pepsi's strategy, however, was founded not on any cost advantage in production or distribution but on Coca-Cola's price umbrella. That price umbrella disappeared with postwar inflation. By the late 1940s, Pepsi had to raise its prices; and it lost its customers in the process. The company's very survival was in question. A new strategy was essential.Pepsi inaugurated that strategy in the 1950s, by appealing to customers on the basis of who they were rather than what the product was. This was a fundamental change, a bold step into the Phase III world of demographic and psychographic segmentation. Market segmentation strategies now dominate the industry, which is why supermarket shelves are so crowded with line extensions. The world of the universal cola-the one brand perfect for anyone, anytime, anywhere-is now gone.
COCA-COLA AS PRODUCT
Coca-Cola was invented in Atlanta on 8 May 1886 by John Styth Pemberton, a 53-year-old druggist. Pemberton had moved from his hometown of Columbus, Georgia, to Atlanta in 1869, where he became known as much for his soda fountain concoctions as for his medicinal preparations. During his seventeen years in Atlanta, Pemberton had been employed at, or part owner of, nine different pharma- ceutical firms. He was, according to Coca-Cola historian Pat Watters, "a druggist of the old school, thoroughly versed in the manufacturing part of the business and ... constantly experimenting with new preparations," such as Pemberton's Extract of Styllinger and Globe Flower Cough Syrup.
During the mid-1880s, Pemberton devoted most of his attention to his "French Wine of Coca," touted as an "Ideal nerve tonic and stimulant." The stimulation was provided by extract of coca leaf. Pemberton was determined to produce a nonalcoholic nostrum-thus a "soft" as opposed to a "hard" drink-so he eliminated the wine. Alcohol caused fatigue and upset the stomach; Pemberton was looking for an elixir to do the reverse. He added the extract of cola nut, knowledge of which had been brought to the South by slaves. It was said to be invigorating, to cure hangovers, and to have the properties of an aphrodisiac. The result of all this experi- mentation was a bitter-tasting liquid.
Pemberton continued his efforts until May of 1886, when he and his colleagues were convinced that they had it right. One problem remained, the new-born product was anonymous. Recalled Frank M. Robinson, one of Pemberton's partners, "It had no name in the beginning. . .I just took Coca-Cola as a name, similar to other advertising names, thinking that the two Cs would look well [sic] in advertising." Robinson's modesty belies the importance of the name be chose. Coca-Cola stands today as the second most widely understood term in the world, after okay.
Having decided that they at last had a product worth taking to market, Pemberton and his colleagues marched over in the warm spring weather to the drugstore of Dr. Joseph Jacobs. There they encountered Willis Venable, who was leasing the fountain from Jacobs. As Watters recounts the story:
After mutual greeting and some small talk, Dr. Pemberton placed the jug of syrup on the counter and explained what he had done. Meanwhile, they were joined by Dr. Jacobs who bad been working at his desk in the back of the store. Pemberton suggested to Venable that he mix some ice and plain water with the syrup in the proportion of one ounce of syrup to five ounces of water. He made three drinks and placed them on the counter. The three of them stood smacking their lips and nodding their heads in approval. However, on the second go-around, by accident, Venable put carbonated water into the glasses instead of plain water.
After tasting the contents of the second glass, the three men became excited, all talking at once. Their delight and pleasure was obvious on discover- ing what a delicious drink was produced by the combination of carbonated water with Dr. Pemberton's syrup.
Interest in the medicinal properties of effervescent mineral waters dates back many centuries, but the first commercial manufacture of artificial seltzer water was undertaken only in 1783. Paul, Schweppe, and Gosse founded their mineral water business in Geneva six years later. Jacob Schweppe moved to Bristol, England, where he and three English part- ners founded Schweppe and Company in 1798.
In the United States, soda water was being dispensed on draught and in bottles by 1807. The U.S. Pharmacopeia listed soda water among its medicated waters in 1820, and the Journal of Health reported in 1830 that flavored syrups were being added to soda water. In 1831, patents were issued for counter fountain machinery; and by the end of the decade, soda water flavored with fruit syrup was being sold at apothecary shops. Soon thereafter, root beer was on the market.
The census began tracking the bottled soda water industry in 1849. Other noteworthy developments in the industry from the mid- nineteenth century to the invention of Coca-Cola in 1886 include the first soft drink trademark registration in 1871 (for "Lemon's Superior Spar- -Ginger Ale"); the manufacture of root beer by Charles E. Hires in Philadelphia in 1876; the founding of the Cliquot Club Company for the manufacture of ginger ale and other beverages in Milles, Massachusetts, in 1881; the bottling of White Rock mineral waters in Waukesha, Wis- consin, in 1883 the purchase of space in national magazines by Hires; and the founding in 1885 of the Moxie Nerve Food Company in Boston. Also in 1885, the Dr Pepper flavor (though not yet named as such) was invented in Waco, Texas.
From this brief survey we can see that the epiphany in Atlanta in 1886 did not yield a distinctive or original product. Carbonated water flavored with syrups of various kinds had been around for years, in bottled form as well as at the druggist's fountain. Such soft drinks had always been thought to have curative properties of various kinds-note, for example, the Moxie "Nerve Food" Company. Coca-Cola had been predated by what would in the twentieth century become major national brands; and one of these, Hires, had already begun national advertising. Moreover, Pemberton and his friends had entered a rapidly growing market. Total cases of soft drinks shipped increased by more than 175 percent in the 1880s. It is tempting to ascribe this growth to temperance sentiment, especially in the South; and indeed, by 1905 Coca-Cola was being adver- tised as "The Great National Temperance Drink." Yet even though case shipments increased from 113 to 182 million (or 61 percent) during the Prohibition decade of the 1920s, they skyrocketed to 322 million (a leap of 77 percent) during the Depression years of the 1930s, despite the repeal of Prohibition in 1933.
The soft drink market has responded to all outside influences by growing, making it one of the great dream markets in the history of consumer products in the United States. Shipments of 4.6 billion cases with a wholesale value surpassing $22 billion in 1984 represent increases by orders of magnitude from 1889. In 1984, the typical American consumed an average of 469 12-ounce containers of soft drink, up more than 7,000 percent from the 1889 figure of 6.6 containers.
What, then, was distinctive about Coca-Cola? Flavor chemists abroad had been experimenting with cola drinks for a decade, and Pemberton, as well as others, had long been familiar with coca. But according to J. C. Louis and Harvey Z. Yazijian in The Cola Wars, "Pemberton's decision to blend the two was boldly original, for it brought together two of the most massive stimulants known to preindustrial cultures."
Much has been said of the "magic formula" for the syrup, especially about the ingredient known as Merchandise 7X. Charles Howard Can- dler, son of Asa Griggs Candler (who bought the company from Pember- ton), and himself a Coca-Cola executive, wrote in 1950 that for some years the syrup was made only by Asa Candler and his partner Frank Robinson. The formula was later transmitted to a few trusted employees, but only "by word of mouth." "[O]ne of the proudest moments of my life," the younger Candler recalled,
came when my father, shortly after the turn of the century, initiated me into the mysteries of the secret flavoring formula, inducting me as it were, into the "Holy of Holies." No written memorandum was permitted, No written formulae were shown. Containers of ingredients, from which the labels had been removed, were identified only by sight, smell, and remembering where each was put on the shelf.... To be safe, father stood by me several times to insure the integrity of the batches and to satisfy himself that his youthful son had learned his lesson and could be depended upon.
The Coca-Cola Company received an object lesson in the magic of the formula as late as 1985. On April 22 of that year, in what proved to be the most flamboyant miscalculation in the company's ninety-nine years, management announced that it was changing the product's original for- mula. The result was a blizzard of protest so intense that within three months the original formula was brought back. Said one trade journalist, "The company didn't fathom the depth of the emotional commitment to Coke," and a Coke bottler observed that "some consumers were mad. It was almost a psychological thing."
The Coca-Cola formula, of course, produced the taste, about which devotees have waxed rhapsodic-the "sweet-and-bitter taste of first love," in the words of one. The drive to crack the secret code dates back at least to the turn of the century, when the Druggists Circular and Chemical Gazette ran an advertisement offering five dollars for the "Secret Coca-Cola flavor formula." A number of years ago, Coca-Cola's vice- president for quality control explained that outsiders trying to discover the product's makeup would face an "extraordinarily difficult, if not down- right impossible," task. Even chemists trained in the use of techiques like infrared spectrum analysis could not easily break down mixture of citrus oils into its component parts.
Those who are not commercial chemists and who do not know the precise ingredients of the formula are not in a position to evaluate how mystifying it is. However, one must be skeptical about the role that the Coca-Cola formula played in the product's success. How really different was this product from other colas in taste? Further, does it not seem likely that Coca-Cola in the early years varied as much from region to region, perhaps even from fountain to fountain, as it did from simillar soft drink products? According to a 1931 Fortune magazine story, Coke syrup contained up to 99 percent sugar and water, and the drink itself was made up of one part syrup to five parts carbonated water. Therefore, the ratio in each glass of Coca-Cola was 599 parts sugar and water to one part essential components.
The constitution of water varies throughout the country, thus affecting taste. And when Coca-Cola is served at the soda fountain, the server also affects the mix.
These thoughts suggest that the attention paid to the secret formula of Coca-Cola has not been without hyperbole through the years. Alfred Steele, who spent ten years at Coca-Cola before becoming president of Pepsi in 1950, noted, "Their chemists know what's in our product, and our chemists know what's in theirs. Hell, I know both formulas." Roger Enrico, president of Pepsi-Cola at this writing, planned in 1985 to bring out the original Coca-Cola formula after Coke took it off the market. He has written that "It didn't take us long to crack the Merchandise 7X code.
One therefore doubts that the inherent chemical and physical composi- tion of Coca-Cola-the core product-can be given the principal or even a significant share of the credit for the company's great success. Coca-Cola had to create its market. If the drink had remained in the hands of John Styth Pemberton, it would have gone the way of his Extract of Styllinger and Globe Flower Cough Syrup.
But Coke did not stay in Pemberton's hand
COCA-COLA AS SYSTEM
Pemberton sold his two-thirds interest in Coca-Cola in 1887 for $283.29, of which $76 was for advertising paraphernalia. Asa G. Candler ac- quired some company stock in 1888 and complete ownership by 1891. Born in Villa Rica, Georgia, in 1851, Candler moved to Atlanta in 1873, where one of the first places he applied for work was the Pemberton- Pulliam Drug Company (there was no opening). He was already a prosperous businessman when he bought the Coca-Cola Company for $2,300. In 1916, be gave almost all of his stock to his sons, who in turn sold it to a consortium of banks headed by Atlanta businessman Ernest Woodruff in 1919. The price was $25 million, two-fifths of it in cash, and it was the biggest business deal in the South up to that time.
Coca-Cola was able to grow as it did because of its success in gaining national distribution. The obstacles to this achievement were considera- ble. The product sold for only a nickel, and its ingredients were bulky and heavy. Further, a beverage such as this was a convenience good par excellence. Coca-Cola may have been selling syrup, but the consumer was buying the quenching of thirst. It is a rare consumer who will save his or her thirst for twenty or thirty minutes in order to find a Coca-Cola or any other specific soft drink. Since a thirst unquenched by Coca-Cola was a sale lost forever, Coke had to be everywhere, or, in the words of a company executive in the 1930s, "within arm's-length of desire."
What were the means by which Coke's ubiquity was achieved? Five factors stand out: the vision and entrepreneurship of Candler and of his successor, Robert Winship Woodruff; the company's aggressive sales force; the system of franchised bottlers; the advertising program; and the legal right to defend the trademark together with the wit and resources to carry out the defense.
ENTREPRENEURSHIP
Asa Griggs Candler was profoundly devoted to the Methodist Church. He was baptized in June 1869, at the age of 17, and "[f]rom that day on," according to his son, the Christian religion became the central purpose of Asa G. Candler's life. His ambition for success and his keen competitive instinct led him to take pleasure in the conduct of his business affairs, it is true. But at no time was the accumulation of wealth an end in itself to him. . . .He had a profound reverence for his Creator, an abiding faith in the revealed word, a complete reliance on the Blood of the Cross, and an unbounded love for his fellow man.
Candler's commitment to religion carried a number of implications for his entrepreneurship. First, he saw a close relationship between faith and business achievement. "Religion in the soul," he said, "raises the produc- tive forces of any life to its highest power. It quickens intellectual facili- ties, arouses industry and inspires inventiveness. This fact explains why the Christian nations of the world are the richest nations on earth."
Candler believed in Coca-Cola with a fervor rarely matched by the executive of today's diversified firm. In his later years, he said that Coca- Cola's success might appear like "a wonderful romance, but if people knew the good qualities of Coca-Cola as I know them, it would be necessary for us to lock the doors of our factories and have a guard with a shotgun" to control the people who wished to buy it. Candler lavished on Coca-Cola a marketing effort that was not provided for his other products, such as Botanic Blood Balm or Dr. Biggers' Huckleberry Cordial ("The Great Southern Remedy for all Bowel Troubles & Children Teething"). "My experience," he said, "is that the public does not value one's wares higher than [the proprietor himself] does." Candler's commitment to Methodism also meant that the thought of doing business in far-flung places was not alien to him. He was involved in nationwide religious work as well as international missionary efforts.
Candler was also an ardent Southerner. The Civil War had been a disaster for his family. Wrote his son:
The fact of the war and its crushing impact on his family represents a climactic point in my father's life. It carried two of his brothers into uniform and off to far away battlefields. It reduced the standard of living of his father's home from that of near affluence to one of base subsistence. It resulted in financial ruin and loss of everything but the land, almost completely denuded of any- thing animate or inanimate which might have been of service to marauding bands from both armies. It meant the death-knell of Father's hopes and those of my grandfather for a medical career for him. More than that, it meant that he had . . . almost no formal education beyond the elementary grades.
Despite his Confederate sympathies, Candler readily adopted a national point of view for Coca-Cola. As early as 1892, he made arrangements for its sale in New England and soon thereafter for its manufacture in Chicago and Philadelphia. Coca-Cola was advertised in national magazines by 1904. In 1909, Candler sent a dirigible plastered with Coca-Cola advertising over Washington, D.C.
Unlike his top sales and advertising executives, Candler was apparently neither an inspirational speaker nor a glad-hander. Ross Treseder, an early Coca-Cola salesman, recalled that Candler only came to the sales meetings I attended to greet everybody in the kindest southern hospitable manner. I can remember very vividly his coming to the last day of the sales meeting when it was about to close and all of us would be packing our bags and catching our trains returning to our territories. In his rather high-pitched voice he wanted to wish us a "God Speed" and in closing his remarks he asked all of us to rise and join him in singing "Onward Christian Soldiers."
Judging from his early annual reports, Candler appears to have been a frank and straightforward person with more than a hint of combativeness. These reports, unmediated by the hand of public relations and reflecting Candler's basic honesty, are a pleasure to read today. One typical selection from 1908 follows:
When I wrote my first annual report, December 2, 1892, 1 thought all presi- dents of industrial corporations made reports in full detail to stockholders. Since then I have learned much. I now know that such reports are not often given stockholders. I believe they are entitled to know exact conditions and how well or bad their investments are being managed. And so we will have this report.
Perhaps Candler's most outstanding attribute as an executive was his superior management of the problem of commitment and flexibility. He had the ability to change when his judgment told him change was called for. Although Candler was originally attracted to Coca-Cola because it cured his headaches, for example, he was astute enough to observe that customers prized it more as a beverage than as a medication. He was able to learn from his customers and to reposition the product.
THE SALES FORCE
The sales force was of critical importance in achieving national distribu- tion for Coca-Cola. Coca-Cola under Candler relied heavily on a per- sonal, face-to-face selling approach. Although there are other ways to reach the customer-such as mass-media or direct-mall advertising- personal selling has the advantages of high impact on the customer and flexibility. The salesperson can tailor the message to the individual cus- tomer, answering questions and responding to objections. At Coca-Cola, management worked to maximize sales force performance in such subtle exchanges. "Sales demonstrations can be staged," explained a Coca-Cola vice-president at a 1923 bottler convention, "one salesman taking the part of a merchant and the other taking the part of a salesman. Questions can be asked, ideas can be brought out, and a general discussion of territories can be gone into."
This customization of the selling message sharply differentiates inter- personal from mass communication. Mass-media advertisement is the lowest common denominator appeal, designed to speak to as many poten- tial customers as possible. This reach is achieved, however, by sacrificing knowledge and awareness of individual needs. Although prior to the broadcasting era advertising was often referred to as "salesmanship in print," the absence of a two-way selling exchange marks advertising as fundamentally different from personal selling.
Shrewd salespersons not only talk but listen. They can bring market intelligence back to the regional office. The Coca-Cola Company was relentless in its desire for market information. "Know thy customers," proclaimed vice-president and director of sales Harrison Jones in a speech, to the bottlers:
Know them intimately. Know them well. Have a daily tab on them, and this is where your duplicate card that you keep in the home office fits in. If a record of purchases is kept tabulated at all times, daily, in your office, you yourself or your sales manager, has constantly at hand a record of what every customer is doing and above all, a record of what he is not doing. It is the pulse of your business, and the only way to feel the pulse of your entire business at one time. It enables you to intelligently analyze and to describe and to prescribe remedies.
Coca-Cola also wanted its sales force to be everywhere. In the view of its executives, every conceivable outlet should carry the product. The Coca-Cola sales force sold not only to soda fountains, where the syrup was mixed with carbonated water on site, but also to bottlers, independent entrepreneurs under contract to Coca-Cola who marketed the beverage in bottled form to retailers. By 1928, the chief executive officer of Coca- Cola, Robert Woodruff, was convinced that the most intensive fountain distribution possible had been achieved: "We can count on our fingers the soda fountains in the United States that do not serve Coca-Cola." For the bottlers, on the other hand, total distribution was a goal that could never be achieved: "How many people can handle Bottled Coca-Cola?" Harrison Jones asked the bottlers in 1923. Here was his answer:
Bakers Grocers
Bowling alleys Shoe-shine parlors
Cafes Homes
Cigar stands Hospitals
Clubs Hotels
Colleges-schools Ice cream parlors
Confectioners Markets
Construction jobs Manicure parlors
Dairy depots Military organizations
Dancing academies Parks
Delicatessens Places of amusement
5¢ & 10¢ stores Police stations
Filling stations Pool rooms
Fire engine houses Railroad offices
Fish, game, poultry, meats Restaurants
Fraternal orders Tea rooms
Fruit stands Telegraph offices
Garages Telephone offices
General merchandisers Wiener stands
Jones told the bottlers that their success would be based on their ability "to make it impossible for the consumer to escape Coca-Cola." William C. D'Arcy, who owned the advertising agency that handled the Coca-Cola account (and who had been set up in business by Asa Candler and Samuel Candler Dobbs in 1904), echoed Jones in the same year: "Gentlemen, there is no place within reach, by steps, elevator, ladder, or derrick, where Coca-Cola can be sold, but what should be reached by a Coca-Cola salesman, or that salesman should be fired."
Intensive distribution was more than a strategy at Coca-Cola. It was an obsession. Coca-Cola executives felt that accounts could not be visited too often. "The trade like to be cultivated," advised Samuel Candler Dobbs, "they must be cultivated. . . . See your trade, know your trade, like your trade, and they will like you." Said Harrison Jones:
Repetition cuts through. A drop of water will wear through a rock. Continual chewing will enable you to digest your food. If you keep hitting the nail on the head it will drive up. Salesmen should keep calling unremittingly on their prospects.
And from William D'Arcy:
No matter how many times you have talked to a dealer about Coca-Cola, there is always something new to say. Repetition convinces a man. A merchant buys so many different things that a persistent salesman wins an opening where a casual order-taker never makes an impression.
The names of some early salesmen-Charles H. Candler, Asa G. Candler, Jr., Ezekiel Candler, Samuel Candler Dobbs-show that where possible the company made use of Asa Candler's immediate and extended family for sales help (as it did for legal services as well). But a great many more people were needed to achieve the scope and frequency of coverage that Coca-Cola managers envisioned. The seasonal nature of the selling effort during the first fifteen or more years of the company's existence provided a staffing opportunity. Soda fountains were closed during the winter, and the sales force was on the road from four to eight months a year outside the South. Recalled Charles H. Candler:
Probably the most effective salesmen we had were cotton buyers who were not actively engaged in their ordinary avocation during the summer months and were consequently available for what might be termed part-time employment by an institution like the Coca-Cola Company, which felt that it was necessary to put forth intensive efforts only during the summer months. These were men usually of robust health, affable personality and hard workers.
Charles Howard Candler joined Coca-Cola's sales force in 1899, when the company had fifteen salespersons on the road at peak season. He has given us a glimpse of how the company approached the task of sales-force training:
A man employed as a salesman was brought to Atlanta, and after several weeks during the late winter or very early spring was informed and instructed, as opportunity afforded the time, concerning the policies of the Company, its problems and its plans by my father, Mr. Robinson and Sam Dobbs. If he was not already sold on Coca-Cola, he was thoroughly acquainted with its merit, and was afforded the opportunity of watching its manufacture, particular attention being called to the quality of ingredients used; the profit to be derived by a retailer in dispensing Coca-Cola was demonstrated to him; the various pieces of advertising material were displayed to him and he was taught how best to use them. He was also informed respecting a selling plan to both wholesalers and retailers, known as the rebate contract plan, and impressed with our preference that, as far as possible, all sales be made through jobbers. His attention was called to any customers on his proposed route who were not in good credit standing, and specific instructions were given him as to how these customers might be best approached and handled.
An important part of the training process was the sales force convention in Atlanta. The first convention took place in 1905, with twenty-nine people in attendance. Management addressed the salespeople on sales strategy, advertising strategy, and the mission of the company. These meetings were designed to increase the flow of information from the home office about retailer lists, advertising strategy and material, and expenses and from the sales force about customer performance, sales and advertising productivity, and expenses. Equally important, the salespeople had the opportunity to meet and learn from one another. Moreover, the location of these conventions in Atlanta, where Coca- Cola sales were phenomenal, did not fall to make an impression on the ambitious salesperson. Recalled Treseder of his first convention in 1914:
My first trip to Atlanta was also my first journey to the deep South. I had heard so much about the great popularity of Coca-Cola and of the big volume fountains were selling. Although Coca-Cola was nationally known and available in the Western States that I covered, the sales of Coca-Cola at fountains were " peanuts" as compared to the deep South.... There was a fountain in the Candler building on Peachtree Street very close to my hotel which was dispensing approximately a barrel of Coca-Cola syrup a day, meaning several thousand glasses of Coca-Cola a day. lt was unbeliev- able to me....To me, one of the greatest impressions I gathered from the other salesmen was the potential possibilities of Coca-Cola in my western territory.
The enthusiasm of such meetings was infectious and enduring. Six decades later, Treseder recalled that on the completion of his first meeting, "I felt like a new man."
The decision to focus all its efforts on one product greatly eased Coca- Cola's sales management problems. The sales force was deployed geo- graphically, and by the 1920s it was organized into a system of regions and districts that other soft drink companies have since copied and still use today. Coca-Cola's traveling sales force dealt solely with soda fountain operators; its mission until 1928 can be stated succinctly: open more accounts.
In the early or mid-1890s (Asa Candler was unclear on the date), the company "undertook to interest certain prominent dispensers in large places all over the country giving to each one who sold a certain amount of Coca-Cola, stock in the company." By the 1900s, the traveling salesforce no longer had that particular incentive to offer a prospective customer. They did, however, have premiums to offer to the new account, such as cash drawers, eight-day clocks (i.e., clocks that run for eight days on one winding so that they only need to be wound once a week), and dispensing urns.
Under another promotional plan, a salesperson sold a 5-gallon keg of syrup to a fountain operator for the regular price of $8.75. Then the salesperson mailed to at least 100 names on a list provided by the fountain operator a complimentary ticket entitling the recipient to a free glass of Coca-Cola at the fountain specified. The fountain operator sent the tickets off to Atlanta and received $5 from the company in return. This promotion provides a glimpse of the economics of the Coca-Cola business for the retailer. One gallon of syrup produced 100 glasses of Coca-Cola, which retailed at the fountain for 5 cents each, so a 5-gallon keg costing $8.75 should produce $25 in revenue for the retailer, or a 65 percent gross margin. The plan had a number of inviting aspects from the trade's perspective. First, it reduced the risk involved in getting acquainted with the new product. Second, the plan pulled consumers into the retailer's establishment, thus demonstrating Coca-Cola's power to generate traffic.
From the company's point of view, the promotion gave the salespeople something to talk about to the new accounts in order to overcome the natural skepticism about a new product. One story recounted the trials of a salesman who tried to sell a 50-gallon barrel of syrup to a fountain proprietor who had never heard of Coca-Cola. The proprietor simply laughed at him. The salesman tried again with a 1O-gallon barrel, with no result. Finally: "Well how about buying a one-gallon jug? Anybody can sell a gallon of Coca-Cola." Came the reply: "Well, mister, you ain't done it yet." The promotion gave the salesperson the chance to cut price on a one-time-only basis and also to distance the price cut by a number of steps-distribution and redemption of ticket-from the purchase of the Coca-Cola syrup itself. "One of the cardinal principles of the house, which was very thoroughly drilled into all salesmen," wrote Charles H. Candler, "was a positive stand that our card prices must be main- tained."
The sales force left the Atlanta conventions armed with lists of towns, their populations, and rosters of prospective customers doing a fountain business therein, including druggists, confectioners, grocers, and res- taurateurs. Credit ratings (from Dun's) and purchases the previous year, broken down by month, accompanied the names of these merchants. The sales force visited retailers. The retailers, however, did not purchase direct from the company, but rather from wholesalers.
The salespeople rode into their assigned towns like well-equipped shock troops, heavily armed with quantities of advertising material as well as complimentary tickets and circulars, which they carried with them in a large trunk. They attempted to sell not only syrup, but also glasses with the Coca-Cola trademark and, for a time, Coca-Cola chewing gum and cigars. The gum and cigars met with little success, but the glasses sold better, despite some resistance caused by the trademark. The over- whelming effort, however, was to sell the syrup, to show customers how best to serve it, to reacquaint them with the company's selling plan, to hang advertising signs wherever possible, and to negotiate with the local bill poster. All this selling, promoting, and educating had to be done quickly, since the typical salesperson seldom remained in a town longer than twenty-four hours.
A good deal of the information that we would like to have about sales force management at Coca-Cola has, unfortunately, not survived. We do not know, for instance, how the company established compensation, evaluated productivity, or managed career paths. Indeed, we do not even know how many salespeople the company fielded, except for occasional years. Statistics have survived on jobbers and fountains handling the product. The rate of increase in accounts slowed during the 1920s. From 1919 to 1924 the total number of soda fountains served increased by more than twenty thousand, or 30 percent. From 1924 to 1929, total fountain outlets grew by about one-third that number.
Robert Woodruff observed not long after he became CEO of the Coca-Cola Company in 1923 that a new sales approach was needed. The object was no longer to gain national distribution. That job had been done. The new goal was to ensure that Coca-Cola stayed on top. The more intensive development of business through existing retailers should there- fore replace opening new accounts as the company's primary objective. He explained:
It requires a higher order of merchandising to maintain volume than to gain new volume. Many salesmen offering slow-moving goods are on the job. Every retailer is continually the object of much strong selling. As a result a peculiar condition constantly threatens the successful product. The retailer may drift into a habit of pushing the various products which obviously need pushing with the thought that an article like Coca-Cola pushes itself.
Woodruff felt that a reorganized sales department was needed to imple- ment this new philosophy. The previous sales structure had provided inadequate supervision for the field force of a nationally distributed prod- uct. In the old system, as Fortune described it, there was "hardly anything except large stretches of geography" between the salesperson and the home office in Atlanta. With the new approach, control and monitoring would be increased. In place of the former system, in which one sales department with headquarters in Atlanta supervised all selling activities in the United States and Canada, Coca-Cola adopted a decentralized structure. Two subsidiary sales corporations, wholly owned by the parent, were set up for the United States and Canada. The United States was divided into five sales divisions, which were then subdivided into a total of sixteen (increased to twenty by 1929) district offices. The divisions were to be the new focus of attention. Meetings were to be held and agendas set at that level rather than in Atlanta. Woodruff hoped that greater regional autonomy would lead to intensified contact with retail outlets.
In 1927, Woodruff carried out another dramatic change in the sales approach, which he presented in a particularly striking fashion. He called the sales force to Atlanta and announced that the sales department had been abolished and along with it their jobs. At the same time, he told them to attend a meeting the following day concerning their future with the Coca-Cola Company. After what must have been an anxious night for these people, Woodruff announced that the company was creating a service department in which each of them was being offered a job.
The old plans and old formulas for selling no longer applied in the late 1920s, Woodruff asserted, because they were based on the strategy of increasing distribution. Now, however, distribution had been secured. Almost every fountain in the nation had standing orders for the syrup and served it as a matter of course. A salesperson could perhaps push an extra unit of product on the retailers and might even get an order more quickly than otherwise, but the approach of a salesman, whose object it is to sell [the retailer] more of something he already has and which he will buy anyway when he needs it, is likely to be somewhat tiresome to him and to impress him as a rather useless procedure. He continues as a customer of the company; he may even give the salesman an order then and there. But his feeling toward the salesman, and even toward the Coca-Cola Company itself, is one having within it the ele- meats of resistance. He feels, some way or other, that his interests and ours are somewhat divergent; that we are trying to force on him more of our goods than he really needs or wants at any one time.
Thus, the focus of the Coca-Cola sales effort would shift from selling merchandise to dealers to helping dealers sell merchandise for themselves. The members of the field force were being transformed from salespeople to teachers:
The serviceman is schooled in the fine points of refrigeration, carbonation and sanitation. He is in no sense a repair man or plumber. But he is able quickly to look over the mechanics of a fountain and point out any faults. The result . . .is a high quality of drink ....
Not only the mechanics of serving the product but also such concerns as the optimal arrangement of dealer help advertising now fell within the purview of the new "serviceman."
In changing the focus of Coca-Cola's selling effort, Woodruff was acting on the adage that "The time to make a change is when you don't have to," rather on the one that holds, "If it ain't broke, don't fix it." The company set sales records every year from 1925 through 1930. No one would have faulted it in 1927 for maintaining the sales system that had achieved successive records in 1925 and 1926. But Woodruff anticipated the need for change.
THE BOTTLER NETWORK
The Coca-Cola Company began its corporate history as a manufacturer of a syrup sold to soda fountains located predominantly in drugstores. The fountain proprietors mixed the syrup with carbonated water at the point of sale and sold it to the customer. When bottling of Coca-Cola began is unclear. Some evidence suggests that bottling occurred as early as 1887 in Atlanta, but if so, the original venture was not long-lived.
The company usually cites Joseph A. Biedenharn as the first Coca-Cola bottler. Biedenharn, who operated a family-owned wholesale and retail confectionary business, certainly agreed with this view. In a profile pub- lished in the Coca-Cola Bottler in 1959, he stated:
I know it is a fact that I am the first bottler of Coca-Cola in the world because when I began there wasn't anybody bottling at that time. The soda water bottlers didn't want to bother with it besides, they said, the price for Coca- Cola was too high. They were merely content to make soda water.
Biedenharn first became interested in Coca-Cola in 1890, when Samuel Candler Dobbs, then a Coca-Cola traveling salesman, "placed a five- gallon keg of Coca-Cola syrup on the counter of Joe's store and explained what it was." Biedenharn sold a lot of syrup in the succeeding years and felt he could greatly increase business by "bringing the product to the customer. I wanted to bring Coca-Cola to the country people outside the limits of the fountain."
Bledenharn's bottling operations began in 1894. "I did not say anything to Mr. Candler about it," Biedenharn recalled, "but I did ship to him the first two-dozen case of Coca-Cola I bottled. Mr. Candler immediatelv wrote back that it was fine." Thus originated one of the Coca-Cola family bottling dynasties. Biedenharn had six brothers, all of whom, with their children, went into Coca-Cola bottling.
The subject of bottling was again raised with the company in the summer of 1899, when two lawyers from Chattanooga, Benjamin Franklin, Thomas and Joseph Brown Whitehead, tried to interest Candler in the potential of this form of distribution. The idea of bottling came to Thomas while he was serving as a clerk for the military in Cuba during the Spanish-American War. PiÒa Fria, a carbonated pineapple drink in bottles, was well received there. Thomas approached Whitehead about the idea, and Whitehead was receptive. He liked to go to baseball games, and he was annoyed that he could not enjoy his favorite drink at the park. If it were bottled, Coca-Cola would be far more accessible to consumers than if it were permanently exiled to soda fountains. Despite the enthusiasm of Thomas and Whitehead, and despite whatever success the Biedenharn operations may have experienced by that time, Candler apparently was not impressed by the idea of bottling.
The reasons for Candler's point of view are not known precisely; perhaps, having been a druggist all his life, he naturally thought in terms of the rest, refreshment, and camaraderie of the soda fountain. Or perhaps he was concerned about safety and purity. The technology of bottling carbonated beverages was still at an early stage. Not infrequentiy, bottles exploded. The bottle seal most commonly used was the Hutchinson stop- per-a cork attached to the inside of the bottle with a wire. This contrap- tion was not effective in keeping the beverage fresh much longer than ten days. Crown Cork and Seal had been marketing the bottle cap since 1892, but the new device did not gain complete acceptance for a number of years.
Despite his reservations, Candler granted Whitehead and Thomas a franchise to bottle and sell Coca-Cola everywhere in the United States except in New England, Mississippi, and Texas, where prior distribution arrangements (such as the one with Biedenharn) had already been made. The contract provided that Thomas and Whitehead would bottle soft drink made from syrup provided by Coca-Cola, and Coca-Cola granted them sole use of the trademark on their bottles and furnished labels and advertising matter. This franchise cost Thomas and Whitehead a grand total of one dollar-which was never actually collected. "If you boys fall in the undertaking," historian Watters quotes Candler as having said, "don't come back to cry on my shoulder, because I have very little confidence in this bottling business."
Soon thereafter, Thomas and Whitehead parted company; and White- head, realizing that he did not have the $5,000 he needed to set up his own bottling operations, brought in another Chattanooga businessman, John Thomas Lupton. These two firms (Thomas's and Whitehead and Lupton's) set up four more so-called parent bottlers. The primary activity of the parent bottlers soon ceased to be the bottling of Coca-Cola and became instead the franchising of a whole network of bottlers to whom they wholesaled Coca-Cola syrup. It was estimated in 1960 that three- fourths of the fortunes made in Chattanooga derived from Coca-Cola or related businesses, such as the production of bottles, crates, and coolers.
The decision to franchise bottling thus established a second kind of Coca-Cola fortune (the first being the syrup fortunes). A Fortune article described the system in 1931:
The Coca-Cola company supplies parent bottlers with syrup at $1.35 ... a gallon. Now let us suppose that a bottler puts up 500,000 gallons a year (which is about the production of the New Orleans bottler). This amount of syrup makes about 2,167,000 cases of Coca-Cola, with twenty-four bottles to a case. The retailer pays eighty cents a case, so the bottler receives $1,730,000 on a syrup investment of $675,000. He must, of course, buy his carbonic gas and maintain his bottling plant, but (provided he gets back his empty bottles to refill) he makes on his business a very fine profit. Indeed, his franchise to bottle Coca-Cola is a privilege upon which he can borrow money at the bank, and which he can sell at from $7 to $12 per gallon bottled per year. In other words, our New Orleans bottler has a franchise worth (at a $ 10 a gallon median figure) some $5,000,000; and a franchise which any New Orleans bank would accept as good collateral.
Had Candler not franchised bottling, those profit dollars would have found their way to the bottom line of his company's income statement. Moreover, company ownership of the bottling operations would have greatly enhanced the freedom to price and would have facilitated the process of working out coordinated marketing programs. But such considerations were for a distant future. In 1899, the bottling of Coca-Cola did not seem nearly as important or as lucrative as it was to become.
Further, the bottlers did essential work in market development their success can be attributed at least in part to Coca-Cola's perpetual licenses. Commitment to the business was heightened by the bottlers' right to sell their franchises if Coca-Cola approved the purchaser or to bequeath them to their children. By 1960, a number of franchises spanned four generations.
Despite his entrepreneurial abilities, Candler failed to foresee the impact of Coca-Cola in bottles. Yet he might not have done better had he foreseen it. Although there has been a marked trend recently at Coca-Cola and in the industry generally toward the purchase of bottlers by the syrup or concentrate manufacturers, it is not clear that Coca- Cola could have expanded so quickly had it tried to do all the work itself.
Perhaps the franchised bottler system was the best method for Coca- Cola to achieve the intensive nationwide distribution essential to its success. One suspects, however, that Candler might not have allowed the two-tiered franchise system to develop had he appreciated the importance of the bottle. In fact, this system has been terminated, and Coca-Cola now owns all the parent bottlers and sells syrup directly to the bottler network. Also, Candler might have been more concerned about payment for the franchise. Coca-Cola literally gave away an element of its distribu- tion system that it has cost the company many millions to buy back. Yet another change might have been in the duration of the franchises. "Per- petuity" is a long time. In 1920, a year after the Woodruff interests took control of the company, they tried to rewrite the bottler contracts to make them terminable at the wish of either party. When the bottlers heard about the plan, they countered by refusing to agree to an increase in the price of syrup. The issue wound up in the courts, which eventually decided that Coca-Cola could pass along higher costs of raw materials to its bottlers in return for agreeing that the bottler contracts were indeed "perpetually perpetual."
The tensions of this distribution system are worth considering. Coca- Cola and its bottlers had one basic goal in common, the sale of Coca-Cola. But for the company, profit resulted from the drink's sale in the glass as well as in the bottle; for the bottler, sales and profits came only from bottled sales. Thus the company to an extent competed against its own distribution system. Many Coca-Cola bottlers believed, in the words of the president of the Coca-Cola Bottlers Association in 1923, that the company was their strongest competitor, and in some cases there was actual antagonism. The Coca-Cola Company's salesmen would try to convince customers of the bottlers that it was more advantageous to handle the fountain product, and the bottler would try to convince customers of the Coca-Cola Company that it was better to handle Coca-Cola in bottles.
On the other hand, the bottlers could (and many did) bottle other carbonated beverages-such as soda water--that were not directly competitive with Coca-Cola, though the company discouraged the practice. Speaking for the company, advertising man William D'Arcy estimated that in the early 1920s, one-third of bottler output consisted of drinks other than Coca-Cola:
Now, some fellow starts a company out of his imagination. He wants to get into the soft drink business. He thinks it is profitable. The first customer he thinks of is the Coca-Cola bottler. . . .
You know your trade. You understand your credits. You have the plant and you have the trucks to make deliveries. This gazebo waltzes up to the Coca- Cola bottler because the Coca-Cola bottler is a national figure; he is part of one of the best organizations in the country; his credit is good; his customers know him and have confidence in him. This salesman says: "I'll give you a cheaper price per gallon. I'll put twelve salesmen on your trucks and send them out with your salesmen and keep them at it for a week. For one week, mind you, when there are fifty-two weeks in the year. I will send them into your merchant's store whom you give credit and sell this merchant merchandise that won't turn over."
You wouldn't let a burglar walk into your home and take what he wants! Why it happen so often that this fellow walks in and walks away with the results of your investment, with your good will? I tell you it is not right- from your standpoint or from Coca-Cola's standpoint-for they are one and the same.
In the management of its bottling network, Coca-Cola tried to con- vince the bottlers that their interests and the company's were indeed one and the same. To that end, company executives made presentations to the bottlers designed to show that sales by the glass and by the bottle could and did increase together, that one did not take share of a stagnant market from the other. The company also expended considerable effort in schooling the bottlers in how to motivate and manage their own sales forces and how best to utilize the company's national advertising efforts. In 1923, sales vice-president Harrison Jones said that "inevitably the progress of Coca-Cola from now forward will more largely depend on you men, the bottlers, than on any other one branch of the Coca-Cola fam- ily." He was right. Since the fountain outlets were becoming saturated, the effort to make Coca-Cola available everywhere would have to focus on the bottle.
Indeed, Jones was more right than he could have known. In 1922 or 1923, the six-bottle carton was first developed. This device proved an important wedge into grocery outlets and into the homes of consumers. If a consumer bought six bottles at a time, the number of times during the course of a year that she or her family made a decision concerning what beverage to buy decreased, and the opportunities for a competitive brand to penetrate Coca-Cola's market were reduced. And with Coca- Cola always in the home of the consumer, consumption was bound to increase. Meanwhile, new coolers were being developed for retail sale of the product, and electric home refrigeration was just around the corner. In 1928, Coca-Cola sales in bottles surpassed fountain sales for the first time.
THE ADVERTISING PROGRAM
"The trade of advertising is now so near to perfection," Dr. Johnson wrote in 1759, "that it is not easy to propose any improvement." Most con- sumer product marketers in 1900 (and doubtless most today as well) would have taken issue with the good doctor on this point. We are so accustomed today to branded product manufacturers spending heavily on ad- vertising that it takes some effort to realize that such expenditures were new in the 1880s, 1890s, and early 1900s. To be sure, advertising itself is almost as old as communication, but the expenditure of hundreds of thousands and soon millions of dollars on advertising in sustained cam- paigns year after year by large corporations is a development of the twentieth century.
The corporate advertising manager at the turn of the century could have proposed numerous improvements in the advertising trade as he knew it, Dr. Johnson to the contrary notwithstanding. Perhaps the first would have been better information. The advertising manager would have asked the same six questions that today's managers ask (questions that are still rarely answered to the advertiser's satisfaction):
1 . What is it precisely that I should be trying to do with my advertising? Is it designed actually to sell the product? Or rather is my real goal simply to make consumers aware of the product so that when they see it the salesperson will be able to close the deal at the point of purchase?
2. To whom should I advertise? Whom should I be trying to reach?
3. What should I say to the target market and how should I say it?
4. Where should I place my advertisements to achieve maximum impact?
5. How much money should I spend?
6. How should I measure the extent to which my advertising is working?
Coca-Cola was advertising incarnate. Remember that Frank Robinson chose "Coca-Cola as a name, similar to other advertising names, thinking that the two C's would look well in advertising." Everyone knew from the beginning that advertising would play a big role in this product's future. Coca-Cola advertising was designed not only to sell the product to the end consumer, but also to defend Coke against the many charges that it contained dangerous amounts of cocaine, alcohol, or caffeine.
Coca-Cola advertising was also aimed specifically at the trade, to con- vince druggists that the company would treat them fairly and well. The company's commitment to consumer advertising was very early used as a talking point in advertising to the retailer. Coca-Cola told the drug trade in 1913 that it would spend over $1 million that year in advertising. The company used consumer advertising to excite the bottlers about their sales prospects, as this passage from Harrison Jones's speech to a bottlers' convention demonstrates:
Thank God for a Board of Directors and heads of a business that came 100 per cent clean and said, "You need the ammunition, and here she is," and they gave us a million dollars more than we have ever had in this world for sales and advertising. [Applause.] And they could have kept it for profits-but they didn't do it; they gave it to us, and, believe me, with your help and God's help we are going to get them in 1923. [Applause.]
The basic goal of Coca-Cola advertising was to make customers think of Coca-Cola when thirsty and to assure them that the beverage would satisfy their thirst better than any other. But how did Coca-Cola define the customer? At whom was its advertising primarily aimed? An observer today would expect to find in the marketing of a product such as Coca-Cola a market segmentation scheme designed to discover the desires of groups of potential customers and to speak as directly as possible to them. Modern market segmentation is, however, something for which the researcher will seek in vain during the early history of this company. Here, for example, is an advertisement that appeared in a national magazine in 1905:
Coca-Cola Is a Delightful, Palatable, Healthful Beverage. It Relieves Fatigue and Is Indispensable for Business and Professional Men Students, Wheelmen and Athletes. Relieves Mental and Physical Exhaustion and, Is the Favorite Drink for Ladies When Thirsty, Weary, Despondent.
This advertisement covers a lot of ground, and it is not atypical. Each time a Coca-Cola executive began a statement suggesting a modern segmenta- tion scheme (e.g., "To formulate a proper selling plan, one must analyze the class of people whom he is desirous of reaching"), another statement followed, suggesting that the segment comprised everyone (e.g., "in other words, our advertising must be an appeal to each class of people"). Coca-Cola was looking for thirsty throats. If you had one, no matter who you were, where you were, or what season of the year it was, you were the market.
Coca-Cola spent freely to reach its market. It was ready, as Harrison Jones said, to put into advertising money that could have been profit dollars. From the beginning, Coca-Cola looked on advertising as a long- term investment. In 1892, Asa Candler had noted in his annual report that "We have done very considerable advertising in territory which has not as yet yielded any returns." But even during those years in which Candler "would be grateful if we could only claim solvency," he was willing to wait. "We have reason to believe that it [the advertising that had not yet yielded results] will show good returns during the ensuing year." Coca-Cola advertising expenditures increased rapidly from 1892 to 1929. Although other companies matched Coca-Cola's advertising expenditures I 1930. In 1892, by 1901, Coca-Cola's outlays topped $100,000. This sum probably placed the company among the top thirty advertising spenders. And all this money was being devoted to a single product. By 1912, the year that the Advertising Club of America declared Coca-Cola to be the best-advertised product in the United States, advertising expenditures had increased to almost $1.2 million, a figure greater than total sales in 1904.
What did all this money buy? The data are startling. Five million litho- graph signs! Where were all these signs hung? Were five million more signs put up the following year, Coca-Cola was doing its part to see to it (to borrow Harrison Jones's phrase) that it was impossible for the consumer to escape Coca-Cola.
TRADEMARK DEFENSE
The problem of "bogus substitutes," "unscrupulous pirates," "miserable little substitutes, little mushroom beverages that rise up at every morning's milestone and wither before the day is done," and "contemptible, white- livered hound[s]," as company organs variously described them in the 1890s, had plagued the Coca-Cola Company from the beginning. Re- tailers, bottlers, and manufacturers all over the nation tried to cash in on Coca-Cola's reputation and consumer recognition in a bewildering variety of ways.
The most common problem was caused by companies that tried to convince the customer that their product was essentially the same as Coca-Cola and a court-in the suit that inevitably followed-that their product was essentially different. Here is a partial list of brand names
Taka-Kola Afri-Cola
Chero-Kola Star Coke
Espo-Cola Co Kola
John D. Fletcher's Genuine Coca and Cola Coke-Ola
Takola Kos-Kola
Klu-Ko Kola Cafa Cola
Crescent Coca Cola Sola Cola
A.D.S. Ext. of Coca and Cola Carbo-Cola
Caro-Cola Celro-Zola
Coke Celery-Cola
Koke Okla-Cola
Some of these brands suggested by their very names the segmentation
strategies contemplated by their producers. Thus Afri-Cola was aimed at
the African-American market while Klu-Ko Kola apparently targeted the
bigot market. In 1926, a business journalist reported that there had been
more than seven thousand cases of trademark infringement against Coca-
Cola.
Protecting the trademark was a multifaceted activity. It included prose- cuting those who adopted names such as those in the preceding list. It also meant navigating the treacherous course between the charge that the name Coca-Cola was merely descriptive-a generic phrase not worthy of capitalization that any producer could use to describe his wares-and the charge that the name was deceptive, depriving the company of the right to be protected.
The most important date in the long history of Coca-Cola's defense of its trademark was 6 December 1920, the date of the victory over the Koke Company of America in the Supreme Court. Coca-Cola had sued Koke for trademark infringement and won in Federal District Court only to see the decision reversed in the Ninth Circuit Court of Appeals. Harold Hirsch, the firm's general counsel and a law partner of Asa Candler's brother, litigated Coca-Cola's case before the Supreme Court. Writing for the majority was Oliver Wendell Holmes, Jr.:
Since 1900 the sales have increased at a very great rate corresponding to a like increase in advertising. The name now characterizes a beverage to be had at almost any soda fountain. It means a single thing coming from a single source, and well known to the community. It hardly would be too much to say that the drink characterizes the name as much as the name the drink. In other words Coca-Cola probably means to most persons the plaintiff's familiar prod- uct to be had everywhere rather than a compound of particular substances. . . . We see no reason to doubt that, as we have said, it has acquired a secondary meaning in which perhaps the product is more emphasized than the producer but to which the producer is entitled.
In the view of the Supreme Court and of millions of consumers as well, Coca-Cola had, by 1920, succeeded in establishing its brand. The process of decommodification had been completed.
Even if Coca-Cola meant more to the consumer than "a compound of particular substances," the company still had to employ chemical tests to determine whether the beverage being sold at a soda fountain was Coca- Cola or a substitute. Protection of the trademark also included ensuring that suppliers, such as fountain operators, did not substitute a brand that was more profitable for them to serve when the consumer asked for Coca-Cola. Given the number of soda fountains in the United States, this problem presented a detection challenge. To discover which fountains may have been cheating, the company hired teams of investigators to order Coca-Cola where substituting was suspected.
Yet another aspect of trademark protection concerned how and where the name Coca-Cola was used. "It's amazing how few books there are that don't mention Coca-Cola," an executive once commented. The company encouraged employees to read widely and to flag possible trademark violations in the process. Was the spelling correct? Were the words capitalized? This was not mindless worry. Should the company not take care in this area, the chances were increased that it would lose its pro- tected trademark.
COCA-COLA AS A CONCEPT: ROBERT WOODRUFF
Gradually beginning about 1914, Asa Candler started to lose interest in Coca-Cola. Advertising manager Frank M. Robinson retired that year, thus terminating an enduring and happy partnership. New federal taxes and rules limiting executives' latitude in managing the assets of their firms left Candler feeling constrained. As his son put it, "He could no longer conduct his business in the way he believed it should be conducted to assure its best progress and to realize its potential greatness." A major, ongoing irritant was the litigation both to preserve the company's trade- mark and to defend it against federal prosecution instigated by the Food and Drug Administration concerning its use of caffeine. Yet another factor was Candler's election to the mayoralty of Atlanta in 1916. On Christmas of that year, just before taking office, Candler divided among his wife and five children almost all of his Coca-Cola stock. The death of Candler's wife in February 1919 plunged him into a depression from which he apparently never fully recovered. He spent much of the decade that remained of his life in a state of painful confusion. He was informed only after the fact of the sale of the company in September 1919 to a consortium of entrepreneurs headed by his neighbor, Atlanta financier Ernest Woodruff.
Woodruff, described by Fortune as "gruff, much feared. . . , relentless," was a deal maker. "He originally made money . . . by assembling small companies into big ones, capitalizing the whole at greater than the sum of the parts, and taking a generous cut on the deal." The price for Coca-Cola was $25 million, $10 million in cash and the rest in preferred stock. Woodruff proceeded to issue a half million shares of new common stock, which he and his associates bought up for $5 a share. By the end of World War II, each share was worth $900 (adjusting for splits) and had generated $475 in dividends.
The company's onward march was not without detours. Indeed, Coca- Cola's performance soon after World War I gave those associated with it deep cause for concern. Samuel Candler Dobbs, the new president, made a major purchase of sugar at $.28 a pound in 1920. The price soon collapsed to $.07, and eventually to under $.02. These fluctuations almost bankrupted Woodruff and his partners, who had to borrow over $20 million to stay in business. Also in 1920, a dispute arose with the bottlers that lasted eighteen months because the company wanted both to raise the price of syrup and to change the terms of the bottler franchise. The bottlers claimed fraud and bad faith on the part of the company, and they took their complaints to court.
Meanwhile, unit and dollar sales were softening ominously. For what must have been the only time in the company's history, a complaint was published in an Annual Report (from 1921) about the "attitude of many bottlers who allowed themselves to become discouraged and get into a state of lethargy insofar as pushing the sale of Coca-Cola was concerned."
If we recall Frederic William Maitland's dictum that things now in the past were once in the future-if we remember, in other words, that in 1923, when Ernest Woodruff with the support of the Coca-Cola board of directors prevailed upon his son, 33-year-old Robert W. Woodruff, to leave his vice-presidency at White Motors in Cleveland to become Coca- Cola's CEO, no one knew what Coca-Cola was to become so soon there- after-we realize that during these crisis years the game appeared to be over. A Fortune article later recalled that: "It seemed then that Coca-Cola had perhaps reached its peak. Weak from losses on sugar and having suffered drops in gallonage sales for three successive years, Coca-Cola looked indeed as if it might at last have reached senescence." So intense was the crisis that a decade and a half afterward-long after Coca-Cola had made millions of dollars for her own family and many others-Ernest Woodruff's wife, Emily Winship Woodruff, could still say, "I never wanted Ernest to buy that company and I've been sorry ever since that he did."
Robert W. Woodruff was not cast in the Horatio Alger mold. In the words of W. C. Bradley, chairman of Coca-Cola's board in the 1920s and a heavy investor in the company, "Bob's grandfather made a lot of money and kept it, Bob's father made a lot of money and kept it, Bob has made a lot more than either of them and kept it. A wonderful family. "
Robert Woodruff was born in Columbus, Georgia, on 6 December 1889. In the six-plus decades from his accession to Coca-Cola's presi- dency in 1923 to his death in 1985 at the age of 95, Woodruff was the company's chief executive, Èminence grise, icon-he was the company's great man.
Despite his family's wealth, the younger Woodruff did not enjoy an easy road to success. His relationship with his father appears to have been a difficult one. Ernest Woodruff "constantly needled" him and "with one hand [would give] him many advantages, such as a 10,000-mile trip in the private rail car of his railroad friend C. A. Wickersham, but with the other [would take away his] cash allowance." Woodruff attended but did not graduate from Emory University in Atlanta. His father refused to honor his college debts, and to pay them off he got a lob as a laborer in a foundry. From there he went to the General Fire Extinguisher Company, where he soon became a salesman.
Selling turned out to be Woodruff's special talent. He was tall, dark-haired, dark-eyed, quiet, and self-assured. He was not the shake- hands-with-my-friend drummer who expects to be discounted, but the rare and more valuable salesman who can act naturally and make a person feel at-ease before he gets to the matter at hand.
By one acquaintance, he was described as "a retirin' showman." Another remarked: "His personality is so gratifyin' men actually like to be out- smarted by him."
Woodruff's next move was to one of his father's combinations, Atlantic Ice and Coal. While there, in the early 1910s, he bought a fleet of White Motor trucks to replace horse-drawn wagons. His father was upset by the expense of the transaction, but Walter White, president of the trucking concern, was sufficiently impressed by Woodruff's negotiating skill to hire him. Woodruff was thus vice-president and general manager of White Motors when he was summoned back to Atlanta to do something about Coca-Cola.
One of the things that Woodruff did not do was change the product. The unchanging nature of the core product and the consistency of adver- tising appeals used to sell it are among the most remarkable aspects of Coca-Cola history. Coca-Cola experienced major changes in distribution and packaging from 1886 to the Depression, but the product did not change. Its advertising was also basically consistent. The 1925 slogan "Six Million a Day" is not that different from the one used in 1917, "Three Million a Day." As late as the 1950s, the company was proclaiming on television that "Fifty million times a day, at home, at work, or on the way, there's nothing like a Coca-Cola, nothing like a Coke."
Coca-Cola is distinctive in the constellation of consumer products. All major consumer durables sold between 1886 and 1929 experienced substantial changes in their core product, and these changes have con- tinued through the twentieth century. Automobiles, radios, cameras, phonographs, and the host of electrical products whose introduction was just over the horizon in 1929-such as televisions, air conditioners, and dishwashers-underwent dramatic changes in the course of any given decade. Indeed, some of these products, driven by both technological and market considerations, changed every year. Yet, as a Fortune article comented in 1945, "Unlike the auto or refrigerator or electrical-goods maker, Bob [Woodruff] would be properly horrified at changing his." Such rapid change was not confined to the world of technology-intensive hard goods. Any products with a high fashion content, including apparel and such semidurables as luggage and furniture, were in a constant state of flux. Even food products were changing, especially with the creation and development of quick freezing during the Depression and World War II.
Although Coca-Cola was remarkable in its unchanging core product, it was not unique. Other consumer products, such as some soaps and detergents, remained essentially the same for years. Yet it is worth noting that most of these were manufactured by companies that were constantly changing their overall product offering. Hence, though a bar of Ivory soap may have remained unaltered between 1886 and 1929, Proctor & Gamble as a company did not. It marketed an increasing variety of soaps, and foodstuffs as well.
Coca-Cola also experimented with product diversification at the turn of the century, trying to sell Coca-Cola Chewing Gum and Coca-Cola Cigars. Management, however, decided to stick with what it knew best and to stay away from other markets. Through the 1960s, well into the era of the multiproduct firm, Coca-Cola consistently opted not to exploit its superb distribution system and advertising economies to market other convenience goods.
The company's ability to succeed with a single, unchanging product in the tumultuous world of twentieth-century consumer marketing leads to speculation about the true nature of Coca-Cola. It was, of course, a beverage; I but, as we have argued, its core nature was not special. It was also a service, but the quick quenching of thirst could be provided by many other products.
Roberto Goizueta, CEO of Coca-Cola from 1981 to this writing, said in 1988:
There is not another company in the world like the Coca-Cola company, not one. I'm not saying we're better, I'm not saying we're worse. I am saying that there is none other like it. If proof is needed, all you have to do is go back again to the summer of 1985 [the time of the abortive formula change]. It was then that we learned that if the shareholders think they own this company, they are kidding themselves. The reality is that the American consumer owns Coca-Cola.
How did Coca-Cola achieve this unique status? Robert Woodruff's answer was, "We've always tried to be decent in our advertising. We've tried to practice what I guess they call the soft sell. ... We've tried to do with our advertising what we always try to do inside and outside the company-to be liked." Coke was your friend, your good friend; always there when you needed it. Not only was Coke your friend-I when you drank it, you became friends with other Coke drinkers. And they were the right kind of people-well-dressed, well-off, happy.
There was also a luxurious aspect to Coca-Cola. It was a mystical, dark compound of magical ingredients with indeterminate powers. But the miracle of the product was that Coca-Cola made this luxury available to everybody for only 5 cents. Americans like equality; but they have always tried to achieve it by leveling up, not by giving anything up. A luxury, yes . . . but a democratic luxury.
Thus a key aspect of Coca-Cola's competitive advantage lay with nei- ther the product nor the service but with the concept that had found its way into the hearts and minds of American consumers. Woodruff under- stood this better than anyone, as his direction of the company during World War II was to illustrate. Soon after the attack on Pearl Harbor, during which four Coca-Cola coolers were shot up at Hickham Field, Woodruff announced that Coca-Cola would be available to all members of the armed forces, wherever they might be stationed. In the process, he managed with remarkable success to identify this product with Amer- ica and Americanism. Consider the following passage from a letter written by an American private in Burma during World War II to his aunt:
To my mind, I am in this damn mess as much to help keep the custom of drinking Cokes as I am to help preserve the million other benefits our country blesses its citizens with.... May we all toast victory soon with a Coke-if flavored with a little rum, I am sure no one will object.
Could such a letter have been written about any other product?
Robert Woodruff succeeded with Coca-Cola so well in part because he understood the cultural resonance the product had achieved. After his arrival in 1923, he guided the company back to solid ground. Coca-Cola was a mature product in a mature product category by 1930. It was over forty years old. We have already seen how, in the soda fountain segment, where both the trade and its patrons were thoroughly familiar with Coca-Cola, Woodruff redefined the role of the sales force. In this case, he emphasized what he described as "the pull of better merchandising" rather than "the push of sales pressure." On the other hand, in those markets where growth potential existed, the company moved for- ward in the spirit of what might be called vigorous conservatism. Potential sales of Coca-Cola in bottles were virtually without bounds, and the company worked creatively with its bottlers to help them develop this business. Important innovations during the 1920s included new coolers for vending the bottle, the six-bottle carton, and increased penetration-of grocery stores.
Expansion abroad was also of great importance. Foreign operations can be traced to the nineteenth century, but it was only under Woodruff that systematic expansion was undertaken. He was, as he explained, taking a long-term view of the company's well-being:
The opening of foreign markets is a costly undertaking and during the early years of development promises to parallel our domestic experiences with regard to the protection of our trade-mark and the development of consumer accept- ance with the manifold problems involved. Successful prosecution of these undertakings will require time, courage, and patience, as well as large expendi- tures.
But Woodruff felt it worthwhile to develop the foreign business as op- posed "to adopting a policy that might result in increased net earnings for the immediate future at the expense of the Company's later and continued growth."
By 1929, Coca-Cola was on sale in seventy-six countries, more than twice the number only three years previously. Export sales grew 118 percent in 1927, 82 percent in 1928, and 32 percent in 1929. Perhaps the most encouraging news was from Canada, where sales increased 20 percent in 1926, 35 percent in 1927, and 33 percent in both 1928 and 1929. In the words of a securities analyst in 1930:
The increase in Canadian business has been phenomenal. Entirely under company management, the product has been distributed in a foreign country within the course of a few years only, to a point where it has attained a per capita consumption in the large cities of Montreal, Toronto and Winnipeg, which is in excess of the average for the United States where Coca-Cola has been sold for over forty-three years.
If the largest Coca-Cola bottling plant in the world in 1928 was in New Orleans, the second largest, with an annual output of almost forty million bottles, was in Montreal. The company saw such statistics as proof that, as the 1928 Annual Report stated, "Contrary to a generally prevalent belief, our experience in marketing Coca-Cola indicates that climatic, geographical, and racial factors exercise relatively small influence upon our sales over a reasonable period of time."
By the early 1930s, Wall Street analysts had come to appreciate the remarkable performance of the Coca-Cola Company. Here are some of the points that seemed to make the deepest impression:
Sales and profits had increased steadily since 1923. Both had, by 1929, set records in five consecutive years. Profit after taxes in 1929 was equivalent (after dividends on class A stock) to $10.25 a share on the outstanding one million no-par common shares. Earnings could have been considered higher because $2.2 million was deducted for contingent and miscellaneous operating reserves. Had this been added back, earnings per share would have been about $12.50. Income and expenses had been managed with skill, system, and predict-
ability. Almost $40 million in sales and over $12 million in profits (with conserva- tive accounting) were generated in 1929 with an investment in property, plant, and equipment of only $6.3 million. Gross sales equaled 6.2 times the value of this investment. Earnings (with the special reserves discussed above added back) equaled 2.4 times total plant investment. The company's current ratio was 17.7 to 1. As one analyst explained, a holder of Coca-Cola common "possesses an advantage over stockholders in most companies having large tangible as- sets, for he does not have to wait his turn at the end of a long line of senior security horders, because neither the Coca-Cola Co. nor its subsidiaries have any funded debt." There was no labor problem because there were very few laborers. Barron's reported in 1932, "Manufacture is simple, and the Atlanta plant, which makes approximately 7,000,000 gallons of syrup annually, employs only about 75 laborers, chiefly unskilled, many of them making containers." In the approaching era of labor strife, Coca-Cola was in the virtually unique position among manufacturers of being able to hire almost a complete new labor force in a day. Coca-Cola's low price of 5 cents put it within reach of nearly every consumer, and repeat purchases occurred quickly because the product could be consumed rapidly. It therefore was not greatly affected by general economic declines.
The company was uniquely important to the trade through which it sold its product. Barron's noted, "Evidently, of every 100 persons entering a drugstore, 61 patronize the soda fountain, and of these, at least 22 buy Coca-Cola. These startling figures ... impress [the retailer] with the public preference for Coca-Cola, and discourage his active pushing of any competitive drink."
Management had a proven track record. "The success which this company has attained is a remarkable tribute to its management. It shows that it has been progressive and efficient."
As for competition, all agreed that there simply was no other product in Coca-Cola's class. Eleven hundred trademarked soft drinks were said to have come and gone since the 1880s, while Coca-Cola flourished. Coca-Cola was viewed by trade analysts as "virtually a monopoly." The ubiquity of Coca-Cola, both as a product and in advertising, they believed, "created an asset in the trade name 'Coca-Cola' of very great value. This is an asset which could not readily be duplicated."
In July of 1924, Robert Woodruff asserted that the fundamental reason for Coca-Cola's unique position in the commercial world lies in the fact that Coca-Cola was placed on the market at 5 cents at a time when the nickel was adequate to pay for ingredients of the highest quality, despite an infinitesimal volume. Thus it was possible to establish the highest standards of purity, and this fact coupled with sound principles in merchandising has enabled Coca-Cola to survive hundreds of carbonated beverages. . . .This feat could not be duplicated today without enormous capital.
By 1929, sales of the Coca-Cola Company and its subsidiaries were $39.3 million. The company's total assets were $55.1 million (counting the $21.9 million carried on the books for "formulae, trade-mark, and goodwill"). The company was among the 175 largest in the United States in assets and among the 125 largest in sales.
The Coca-Cola Company manufactured one product-syrup for the beverage that gave the firm its name. In 1929, this syrup was produced at 13 plants in the United States, Canada, and Cuba. It was warehoused at 38 sites, from which it was distributed to 105,000 fountain retailers by 2,200 jobbers and to some 600,000 bottle retailers by 1,250 bottlers. The company sales force operated out of 5 regional offices, 20 district head- quarters, and 150 sales territories in the United States. Company "service- men" traveled 2.2 million miles to call on retailers in 1929. If ever a manufacturer's brand had achieved national distribution, Coke was it indeed. This small-ticket item with such an unfavorable ratio of value to weight and bulk was available in more than 700,000 different locations in the United States, Canada, and Cuba. And Coca-Cola's empire stretched beyond the seas, where the drink was available in more than seventy countries. Coke may well have been the most conveniently availa- ble product in the world during the 1920s.
In its product category, Coca-Cola was in a class by itself. In a 1920 consumer survey conducted under the auspices of the New York University Bureau of Business Research, it was mentioned by more of the 1,024 college students polled than any other soft drink brand, and by more than four times as many as the runner-up. Coca-Cola achieved this recognition level not only by a ubiquitous physical presence but also by a massive advertising campaign.
Coca-Cola ranked 55 in a list of advertisers purchasing space in a selection of thirty nonfarm and nontechnical nationally circulated maga- zines in 1929. The company spent $515,750 to buy advertising space in those publications that year; the leader, Procter & Gamble, spent $3.6 million (with sales of $202 million). Numerous companies ranking above Coca-Cola at that time, including Procter & Gamble, Colgate- Palmolive-Peet, General Foods, and others, spread their advertising over many products. Coca-Cola's total budget was devoted to just one product. Moreover, a list including only thirty magazines hardly does justice to the full advertising presence of Coca-Cola. The company customarily spent four to five times more on signs, point-of-purchase displays, and various other promotional devices than on advertisements in the print media. These signs, displays, and other paraphernalia do not constitute national advertising in the same sense that a magazine campaign does. Yet they were everywhere. As early as 1895, the company's Annual Report claimed, Coca-Cola was "sold and drunk in every state and territory in the United States." But even on the basis of national magazine advertising considered alone, the company was in a class by itself when compared to its direct competitors.
All this effort was not without results at the consumer level. The company sold nearly 27 million gallons of syrup in 1929, which translates into an annual consumption of 27 bottles and glasses per person in the United States-an all-time high.
By the time of the Depression, the first-mover advantages cited by Woodruff seemed more formidable than ever. The distribution system was running smoothly. The company was hurt by the Depression, but only briefly. By 1935, when Coca-Cola was the highest priced industrial listed on the New York Stock Exchange, profits were well over $15 million. The company had proven that it could cope not only with the Depression but also with the repeal of Prohibition, which some had thought was going to deal Coca-Cola a major setback.
How could one compete with a product and a company like this?
THE COMPETITOR
In 1931, when Coca-Cola was the envy of the world of soft drinks and one of the most worry-free profit machines in the history of business in the United States, Pepsi-Cola was declared bankrupt for the second time its history. In 1987, PepsiCo, Inc., with sales of over $11 billion, ranked 29 in Fortune's list of the nation's 500 largest corporations. One analyst asserted in 1986 that PepsiCo "has emerged as perhaps the single best consumer products company that exists today." Coca-Cola's sales in 1987 were $7.7 billion, which placed it 54 in the Fortune 500.
Both companies were diversified by the mid-1980s. About 70 percent of Coca-Cola's sales and almost 85 percent of its profits, however, were still derived from soft drinks, with the remainder coming from the food and entertainment divisions. The variety of soft drinks available from the company had increased dramatically since the 1930s, when Coca-Cola was available eIther at the fountain or in the famed 6 1/2-ounce, hobble- skirted bottle. By 1985, the consumer could purchase Coca-Cola, Caffeine-Free Coke, Coca-Cola Classic, Diet Coke, Caffeine-Free Diet Coke, Cherry Coke, Sprite, Diet Sprite, Tab, Caffeine-Free Tab, Mello Yello, Fanta, Fresca, Mr. Pibb, and others in a great range of sizes, in cans or bottles, and in different kinds of vending machines as well as through the restaurant and fast-food trade. The distinction between fruit juice and soft drinks was broken down with the introduction of such products as Minute Maid Orange Soda, in response to Pepsi-Cola's Slice.
Thirty-nine percent of PepsiCo's 1985 income and 31 percent of its profits were derived from soft drinks. It too had a wide variety of soft drinks: Pepsi-Cola, Diet Pepsi, Mountain Dew, Slice, and others in a truly bewildering variety of packages and with or without various ingredients, such as caffeine. PepsiCo's soft drink offering accounted for 27 percent of the sales of the $39 billion domestic retail soft drink business in 1985, up from 21 percent a decade earlier. During the same years, Coca-Cola's share had increased from 33 to 39 percent. Thus, Pepsi's dream of reaching and surpassing Coca-Cola in the soft drink business has yet to be achieved.
Nevertheless, Pepsi's success has been remarkable. Coca-Cola had been a virtual monopoly in the nationally distributed cola business when Pepsi- Cola was bankrupt. But by 1985, Pepsi-Cola bad succeeded, where thou- sands of other soft drink producers had failed, in giving Coca-Cola all the competition it could handle. Indeed, Pepsi-Cola in 1985 had the largest sales of any individual soft drink brand in the United States. The monopoly was now a duopoly. How had this happened?
Pepsi-Cola: The Early Years
Like Coca-Cola, Pepsi-Cola was invented by a southern druggist. Caleb D. Bradham was born in Chinquapin, North Carolina, in 1867. Brad- ham's lifelong ambition was to practice medicine; but after his second year of medical school his father's business failed, and he was forced to find work. For two years he taught school in New Bern, North Carolina, but his dream of practicing medicine lived on; and when the chance came for him to buy the local drugstore, he did so.
Bradham's two years of medical education qualified him to become a pharmacist. In addition to preparing prescriptions, he also liked to mix the various nonalcoholic beverages that he sold at his soda fountain. From making drinks according to directions found in pharmaceutical publica- tions, Bradham soon moved on to creating entirely new mixtures. Some- time during the 1890s, he began offering a mixture that his friends labeled "Brad's Drink" in his honor. By 1898, Bradham was calling it "Pepsi- Cola" in recognition of his belief that the drink could relieve dyspepsia (upset stomach) and the pain of peptic ulcers. Believing that the drink had promise as a business proposition, Bradham hired a manager to run his drugstore, filed for registration of the trademark with the U.S. Patent Office in 1902, and set about to make his soft drink company grow.
Grow it did. Operating out of the back room of his drugstore, Bradham mixed and sold 2,000 gallons of Pepsi-Cola in the first three months after the formation of the Pepsi-Cola Company at the end of 1902. Total sales for 1903 came to 7,968 gallons, all of which were sold to soda fountain operators. Bradham managed advertising as well as production and sales. The first known advertisement for Pepsi-Cola appeared in the February 25, 1903, issue of the New Bern Daily Journal. The tiny notice read:
Pepsi-Cola
At Soda Fountains
Exhilarating, Invigorating
Aids Digestion
Pepsi-Cola's advertising budget in 1903 totaled $1,888.78. That same year., Coca-Cola spent over $200,000 in advertising and sold over 880,000 gallons of syrup.
Although dwarfed by Coca-Cola, Pepsi-Cola grew quickly. In 1904, Bradham moved out of the quarters he had been renting since leaving the back room of his drugstore and bought Bishop Factory in New Bern for $5,000. He equipped this factory with machinery not only for manufactur- ing syrup but for bottling it as well. Unlike Asa Candler, Bradham early saw the potential of bottling. In addition to his own bottling works, he began to franchise other entrepreneurs to bottle his syrup. The network grew speedily: 40 bottlers in 1907; more than twice that many the follow- ing year; and by 1910, 280 bottlers operating in twenty-four states.
The scale of the operation also increased rapidly. A new building was completed in 1908-one so grand that it was featured on postcards of New Bern-and motorized trucks began to replace mule-drawn delivery wagons. The following year a New York advertising agency was hired to professionalize the company's advertising, but "the material they turned out still smacked of the Gay Nineties."
Sales skyrocketed, passing the 100,000-gallon mark in 1907, only five years after Bradham set up the business. Bradham, the once penniless schoolteacher, was by 1915 the president and general manager of a com- pany with assets surpassing $1 million. He was active and popular, even mentioned in the press as a gubernatorial candidate for North Carolina. A touching photograph has survived of an exceptionally handsome Caleb Bradham at the age of 46, trim and proud in the uniform of captain in the North Carolina Naval Militia, with his young son seated at his feet.
In 1920, however, disaster struck the Pepsi-Cola Company as a result of fluctuations in the price of sugar following World War I-the same price movements that disrupted even the far better established Coca-Cola Company and led to a change of ownership. With price controls lifted, sugar prices soared to over $.25 per pound, two and a half times what the industry could accept and still keep its retail prices at $.05 per unit. Like Samuel Candler Dobbs at Coca-Cola, Bradham bought heavily at these ruinous prices, only to see Pepsi lose over $150,000 as a result of price declines in 1921. Bradham tried desperately to find the working capital needed for a comeback. He obtained a mortgage from an insurance company, and he sold off real estate and various other assets. He finally surrendered control of the firm to the Wall Street investment house of R. C. Megargel and Company. By January 1922, with Pepsi-Cola's bal- ance sheet showing current assets of $53,008 and current liabilities of $249,536, Bradham was out of the soft drink business forever. He re- turned to his drugstore in New Bern for a time but soon sold out. A series of other disasters overtook him during the next decade, and he died in obscurity in February 1934, at the age of 67.
By July 1923, Roy C. Megargel had acquired the business, trademark, and goodwill of the Pepsi-Cola Company from its previous creditors for $35,000. Megargel closed the North Carolina operation; and from 1923 to 1931, Pepsi-Cola concentrate was manufactured and shipped from Richmond, Virginia. But apparently not very much was shipped-or at least not enough to turn Pepsi-Cola into a force to be reckoned with. Megargel was a financier in a company that needed a marketer. Although he took an interest in the company and apparently invested substantially in it, his efforts were met by a wall of massive public indifference. The company continually lost money, and it could not survive the Depression. Thus, on 8 June 1931, Pepsi-Cola was bankrupt for a second time.
The lack of evidence forces us to leave unanswered the question of why Pepsi-Cola grew as quickly as it did early in the century. The product must have tasted good. Bradham did not sell 100,000 gallons in 1907 solely to friends who liked to gather at his New Bern drugstore. Distributed in half the states in the Union by World War I, Pepsi in its early years-though still only a fraction the size of Coca-Cola-could be termed with only slight exaggeration "a nationally important entity in the soft-drink field."
If Pepsi-Cola seemed to have been making an impression in the 191Os, it was thoroughly engulfed in a miasma of consumer apathy following World War I. The company lost money even during the decade of Prohibition, which was supposed to be beneficial for soft drinks. Pepsi- Cola was not even mentioned in the study of brands conducted at New York University in 1920, and it appears in no compendia of advertising expenditures.
In the 1920s, Pepsi-Cola simply was not in the traffic. There was no indication that Pepsi rather than, say, Canada Dry Ginger Ale would become the long-awaited "second Coca-Cola." Canada Dry's sales in 1928 were more than $12.5 million, over one-third those of Coca-Cola. Its ginger ale was distributed only east of the Mississippi at this time, but management had ambitions to open further territories around the nation and to increase its business internationally as well. In 1928, Canada Dry showed total assets of $7.6 million. When Pepsi-Cola was bought out of bankruptcy for the second time in 1931, the price was either $10,500 or $12,000 (depending on which source one chooses to believe). The company was worth only a third of its previous bankrupt value eight years
earlier. THE ROAD TO "TWELVE FULL OUNCES"
In 1931, the Pepsi-Cola Company was purchased by Charles G. Guth in a complex financial transaction worked out in association with, and at the instigation of, Roy Megargel. Guth was born in the mid-1870s and appar- ently had spent most of his life prior to the Depression as a fairly successful entrepreneur in the soft drink and confectionary industries. He joined Loft, Inc., a chain of confec
