First, the good news for Douglas N. Daft: After one year as chief executive of Coca-Cola Co., there's no doubt that he's vanquished the old regime at his Atlanta headquarters. On Mar. 4, Daft announced his boldest management shakeup, including the departure of his second-in-command, President and Chief Operating Officer Jack L. Stahl and the hiring of a highly regarded senior executive from the media industry. A 20-year veteran, Stahl apparently couldn't get with Daft's new program. "Daft had been waiting for Jack to seize responsibility, and he didn't do it," says one Coke insider. (Stahl was not available for comment.) Around the same time, Coke's board offered Daft a generous incentive package that could be worth as much as $87.2 million over five years.
Now the bad news. In order to earn that pay, he'll have to hit aggressive performance targets. And the cleanup job that Daft signed up for last February has turned out to be much messier than anyone anticipated---including him. Even though he has laid out a bold plan to move Coke beyond soda and into the faster-growing markets for bottled water, juices, and other noncarbonated drinks, Daft has not convinced Wall Street that he can reignite Coke's brands anytime soon. Coke's stock has slumped to around $50, or 23% less than its price when Daft took over. "The market seems to be harsher toward Daft than it was just a year ago, and that may be because there's a recognition setting in that this is not a one-year fixer-upper," notes Carlos Laboy, an analyst at Bear, Stearns & Co.
CAUTIONARY TALE. How long will investors--or Coke's board--be willing to wait? Wall Street investment banker and board member Herbert A. Allen says the Coke directors back Daft. Whereas M. Douglas Ivester, his predecessor, paid little heed to the board--resisting their entreaties to name a president or cut Coke's bloated bureaucracy--Daft has been more willing to delegate, tackle dirty tasks like the restructuring, and consult regularly with directors such as Allen and investor Warren Buffett. "He has made very significant achievements in a fairly short period of time," Allen says.
Still, Coke's directors are taking a more hands-on role in the company's business--leading some analysts to question their confidence in Daft. Buffett embarrassed him last November by rejecting his plan to buy Quaker Oats and its hot Gatorade sports drink. Daft had all but announced the deal when the board pulled the plug. PepsiCo Inc. got Quaker instead.
Coke may be the world's most powerful brand, but for years the company has been unable to capitalize on that. Soda sales have been flat in the all-important U.S. market--and a reinvigorated Pepsi has moved aggressively into the nonsoda business. Still, under Ivester, there was no sense of danger at the Coke headquarters, no real focus on new products. That's changed. Last year, to make the company more nimble, Daft canned one-fifth of Coke's 29,000 workers and eased out or reassigned 30 of Coke's top 32 managers. The moves were intended to smash what Daft viewed as a stifling bureaucracy and give more decision-making to his field managers. And a $4 billion joint venture he inked in March with Procter & Gamble Co., creating a new company to marry Coke's Minute Maid juices and distribution muscle with P&G's chip and juice brands, signaled an end to Coke's insular ways of doing business. "I used to think there was this big lightning rod on the top of the Coke building because we felt we had to collect every idea ourselves," says Marketing Director Stephen C. Jones. "But there are too many changes now for us to have all the answers."
Unlike Ivester, a low-key accountant who made decisions by the numbers, Daft is a passionate, idea-a-minute manager who acts off the intuitions developed during his 24 years climbing up the ranks of Coke's Asia-Pacific operations. "Doug Daft likes to make decisions. The problem is, he likes to make them every five minutes," jokes one Coke vice-president.
So far, however, few of those ideas have trickled through to the bottom line. Coke's soda sales, as measured by volume, grew only 4% last year, below the 5% to 6% that Daft had promised. Analysts believe he'll fall short of his 6% to 7% target for 2001, as well. Operating income has been essentially flat the past four years.
That's partly because Daft spent much of the past year putting out fires. He had to contend with a high-profile racial discrimination suit, the political fallout in Europe from a soda-contamination scare, and a backlash by financially strapped bottlers who felt that Coke was profiting largely at their expense. "Nobody realizes the garbage that was on his table," says retired Coke President Donald R. Keough, whom Daft retained as an adviser last year. For his part, the 57-year-old Australian allows that the past year was a difficult one. Says Daft: "There was certainly a lot more to do than I envisioned. Every time you squeeze one side, something else popped up."
Daft's management reshuffling should make Coke more responsive. He created four new division presidents reporting directly to him. Daft has just hired Steven Heyer from AOL Time Warner's Turner Broadcasting to head what will be known as the New Business Ventures unit. Jeffrey T. Dunn, who runs the North American business, will head the Americas; Charles S. Frenette will continue to oversee Europe and Africa; and Alexander "Sandy" Allan remains in charge of Asia. While Stahl was once viewed as the perfect backup to Daft--providing knowledge of Wall Street and the U.S. market that he lacked--sources say Daft had become increasingly frustrated by Stahl's reluctance to break from Coke's old ways. However, the price to be paid for the shuffle is that after a series of high-level departures, Daft now has a talented but largely untested executive team. Meanwhile, the board is still likely to press Daft to eventually elevate one of his four division chiefs to second-in-command.
NEW ADS. One of the tallest orders for the new Coke team is to overhaul the sputtering marketing machine behind Coke's core soda brands. The long-running "always" advertising campaign had stalled years ago. "It lost people, it lost humanity, it became clinical," says Jones. Daft is scheduled to break new ads for Coke and Diet Coke in coming months and recently launched a gritty campaign for Sprite, called "voices of the street." And while Coke used to seek national marketing for its brands, it is now giving its bottlers free rein to tailor promotions to local events. In contrast to Ivester, who considered tie-ins with movies a waste of money, Daft recently inked a $150 million deal with Warner Bros. to co-market the new Harry Potter film around the world.
Daft is pushing managers to think outside of the box, generating everything from new products to different ways of gathering consumer research. At a recent retreat in San Francisco with two dozen Coke executives from around the world, Daft prodded his staff for smart ideas--and then funded four of them, with $250,000 each, right on the spot. "He said: `Consider it done,"' recalls Vinita Bali, whom Daft appointed in December to create an internal think tank in New York. "And he told everyone: `If you're being stalled, you get back to me."' Similarly, company sources say Daft will shortly announce an "incubator" project in which Coke will provide office space--and seed money--to startups with innovative ideas that could benefit Coke.
Much of that energy will go into building up Coke's noncarbonated business. During the global boom of the 1980s, Coke enjoyed explosive growth with a simple business model: building out an expansive bottling network around the world, and then pushing its four core brands--Coke, Diet Coke, Sprite, and Fanta--through this network. But when the global boom went bust in the late '90s, sales slumped and haven't revived. Coke realized there may be a limit to the world's appetite for carbonated sodas, particularly in maturing markets such as the U.S. Under Daft's direction, Coke scientists and marketers have busily been developing an awesome array of new products: everything from calcium-fortified waters and vitamin-enriched drinks bearing the names of Disney characters to an ambitious plan to develop a purified water filtration system for home use.
Clearly, though, it will take some time for those ventures to make up for slowing soda growth, if they ever do. Thanks to its plans to roll out new packaging and line extensions, analysts expect Coke to double sales of its U.S. water brand, Dasani, this year. But competitors contend that Coke's entry into the fast-growing energy-drink sector is too bland to resonate with teens. One rival executive laughs at its KMX drink, which is being tested in select markets. "All it has got is a couple of vitamins, very little ginseng, and guarana. It lacks all the powerful stuff that makes these drinks work," he says.
In its joint venture with P&G and a similar deal to develop coffee and tea drinks with Nestle, Coke is hoping to mine those companies' R&D labs as well. Donald W. Short, whom Daft tapped to head up the joint venture with P&G, is already salivating over the prospect of creating extensions of P&G's nascent Elations cranberry juice--which has additives that help relieve pain caused by arthritis--and then pushing them through Coke's vaunted distribution network. Says Short: "If we have a broad range of products that are not medicinal, but almost medicinal, we could be in channels where Coke isn't today," such as health-food stores.
But some industry observers feel that Coke is building ties with partners that have been just as innovation-challenged when it comes to youth-oriented alternative beverages. A few years ago, Nestle aborted a push into chocolate drinks under the brand name Cosmo and iced coffee under the Nescafe name. Meanwhile, P&G's effort to make its Sunny Delight brand ubiquitous by launching a ready-to-drink version quickly faded and an iced-coffee product never made it out of test.
Historically, Coca-Cola has struggled to parlay its killer distribution and hefty marketing resources into a meaningful presence in the high-margin "premium" beverage market dominated by the likes of Snapple, AriZona, SoBe, and Gatorade. Consider the company's first direct attempt to challenge Snapple, with Fruitopia. After years of trying to mimic Snapple's wide-mouth bottles and all-natural ingredients, sales were tepid, and Coke retrenched with a product that's more like a soft drink and easier to produce--but doesn't command premium prices.
JUST CRUMBS? That's why analysts question whether Daft can build the same kind of economies from his noncarbonated business as from soda, which generates gross margins of 80% and the high volume runs that Coke's bottlers love. Right now noncarbonated drinks account for only 10% of sales. And they fear that in his haste to push further into juice and chips, Daft let P&G get the better end of its deal. "Coke gave up half the profits from Minute Maid, which still has good growth potential, in exchange for two declining brands in Pringle's and Sunny Delight," says Sanford C. Bernstein & Co. analyst William Pecoriello, who lowered Coke to "market perform" after the P&G announcement.
Short dismisses the criticism of P&G's innovation capabilities, saying he has peeked in their labs first-hand. "They have a capability that I don't think any other company has--maybe the pharmaceutical companies, but not the food companies," he says. Short thinks one of the "hidden opportunities" in the deal will be Coke's ability to create a new sales channel for Pringle's--specifically, selling half-size cans in Coke's millions of vending machines.
Coke boasts that putting Pringle's onto its army of delivery trucks will get the brand into as many as 16 million stores worldwide, vs. the 1.6 million that Pringle's reaches now. But industry analysts doubt the wisdom of taking on PepsiCo in the chip business where its entrenched Frito-Lay brand boasts a 60% market share, vs. 6% for Pringle's.
Fitting these myriad ventures together into a new Coke machine is a daunting task that could take years. But for Daft, as for Coke, there's no turning back.
By Dean Foust in Atlanta, with Gerry Khermouch in New York and bureau reports
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