(This is the second of two excerpts from Neville Isdell’s new book, “Inside Coca-Cola: A CEO’s Life Story of Building the World’s Most Popular Brand.”)
Oct. 25 (Bloomberg) -- I was the first non-German since 1933 to head Coca-Cola in stoic, sophisticated West Germany, which was then vying with Japan to be the company’s largest international division. As division president of Central Europe, I also had Switzerland and Austria under my auspices. But Germany was the focus.
Coke dominated the German market, but sales were stagnant. Our 6-to-1 lead against Pepsi in Germany meant we could charge a premium for our product, with prices often 20 percent higher than those of “the Imitator.” But this tactic couldn’t last.
We had to bring costs down, first by consolidating the 116 bottlers in West Germany. The bottling system had been developed after World War II with equipment that had been used during the war to ensure that U.S. soldiers had Coca-Cola on the battlefront. By 1985, these smaller bottling plants no longer made sense, and it was expensive to have such a large number of them. As we struggled to figure out what to do, another tricky situation developed.
In the spring of 1985, Coca-Cola introduced a new, sweeter formula: New Coke. The consumer backlash was palpable, as I had discovered on a visit to our Atlanta headquarters. The new product had been one of the most heavily tested of all time, and while many consumers had liked the taste, the studies had failed to detect the impact of killing the old formula. No one looked into what the reaction would be if the result of New Coke was no old Coke.
(This was a great lesson on market research: It’s important to ask the right questions in the right way in the right context, and to remember that the brand belongs to the consumer.)
The original formula was scrupulously guarded. In 1977, when the Indian government demanded that we partner with an Indian company and disclose the secret formula, we walked away from a market of almost 1 billion people rather than divulge it. Why were we changing the formula now?
Germany had been scheduled to be next behind the U.S. to launch New Coke, but the bottlers wanted no part of it. I then discovered that we were about to launch Cherry Coke in Germany, so I requested that headquarters delay New Coke, arguing that handling two launches at one time would be too difficult. They agreed. And by the time Cherry’s launch was complete, the company had resurrected “Classic Coke.” New Coke faded away.
I began settling into my new life, working hard to connect with the local culture. At the office, managers always kept their doors closed. I had read about German culture and its do’s and don’ts. The classic American way was to make abrupt changes that alienated people, so I avoided anything too obvious. I simply kept my own door open, hoping to set an example.
With the help of Heinz Wiezorek, the region manager, I also tried to create a more relaxed atmosphere. Senior management was accustomed to eating lunch in an executive dining room. After I’d been there a while, though, I closed it -- and required executives to have lunch in the canteen with everyone else. There was very little grousing; perhaps they sensed I had enough problems.
And then I got an unexpected break: As a security measure - - this was the era of a terrorist group called the Red Army Faction, which kidnapped and killed leading business figures -- company executives were provided with drivers. It took me months to notice that, although the drivers didn’t speak English, they understood it. This allowed me to build a relationship with them. They would pick up visitors from Atlanta in Frankfurt for the drive to our offices in Essen. As the guests sat in the back seat, talking about business and about me, the drivers listened. Later, they relayed what they heard to me.
Ultimately, it was the Germans who would give me grief. I was caught between three: Klaus Puetter, Claus Halle and Erich Kreusch. Puetter was Europe’s head of Coca-Cola and Halle was international president. Puetter was my boss, but Halle instructed me to report to him as well. Then there was Kreusch, my predecessor as head of Central Europe, who had stayed on to manage the bottlers. Although he was reporting to me, he had set himself up among them as my superior. So I let him go.
My next task was even less pleasant: I eliminated 100 high- cost positions in the head office. We weren’t investing enough money in the marketplace, hence the sales stagnation. In order to free up funds, I needed to cut costs.
In the wake of Kreusch’s departure, I took over relations with the bottlers. In my first speech to them, I said, “I want to give you the good news and the bad news. The good news is that I’m a bottler and I know your business. The bad news is that I’m a bottler and I know your business.” They banged their fists on the table in applause, though there were battles yet to be fought.
As Heinz and I began examining the consolidation issue, we realized that Coca-Cola had a major bargaining chip. German bottlers had been reluctant to invest in canning plants, so Coca-Cola had built most of them instead, which made the company the owner of all Coke canning operations in West Germany. Over the years, cans represented an increasing percentage of overall sales and the German bottlers regretted ceding this segment of the business.
Heinz and I developed a plan: We would consolidate the 116 bottlers into one company, which would include the lucrative canning franchises. The bottlers would receive shares in the new concern in exchange for their plants. The shares would be much more valuable than the small plants themselves, partly because of the canning franchises, but also because of the enormous savings we calculated from consolidating operations. In our initial meetings, we had greater acceptance than we anticipated but it was far from universal.
One of the bottlers was Max Schmeling, the boxing champion, with whom I had developed a strong relationship. On his 80th birthday, I had presented him with a sculptured boxing glove, holding a Coca-Cola bottle. I believe it was he who translated to the bottlers that we were sincere, but our plan led to an uproar and many calls to Atlanta.
Heinz and I met the evening after we explained our proposal to the bottlers, believing that our careers were over and that we needed to resign. But after sleeping on it, we designed a new plan with the bottlers to lower costs while whittling their number down to only 30 instead of one. We created a central sales office. We closed production facilities and gave the bottlers a piece of the canning business. It was messy, but we were able to jump-start growth and increase profits.
After that, I thought things had settled, but at a gathering of supermarket executives in Nice, France, I learned that Don Keough, the company’s president, had invited Ralph Cooper -- one of my peers in Europe -- to a dinner without me. I blamed the bottlers. “I just got stiffed by Don. I think it’s over,” I told Michael J. O’Connor, a giant in the supermarket industry. But he reassured me my job was still secure, and I was left with this lesson: Hypersensitivity can be harmful to your career, and perceptions are often misleading. In the fall of 1988, I was offered a position in Atlanta as a group president for all of Eastern and Northern Europe, the Soviet Union, Africa and the Middle East, 79 countries in all.
On Nov. 9, 1989, I watched the Berlin Wall fall on CNN. We reacted quickly, with two bottlers in West Berlin opening their warehouses and giving free cases of Coca-Cola to East Germans pouring across the border in Trabis, tiny cars literally made of plastic. As the West German bottlers began selling in East Germany, sometimes out of makeshift tents in empty parking lots, Heinz flew to Atlanta and asked for $450 million to build a company-owned bottler in the East. Atlanta resisted, but gave in after seeing the progress achieved in only a few weeks.
Less than three weeks after the Wall fell, I was in Moscow’s Pushkin Square, waiting in sub-zero cold to turn a switch that would illuminate a 20-by-40-foot red neon Coca-Cola sign. The future looked bright, but we ultimately found Russia a tough nut to crack. Under communism, its economy had been so primitive that some vending machines still dispensed Coke into glass cups secured by a chain. Attendants were needed to take the money as the coin mechanisms were often broken.
In early 1991, Coca-Cola decided to build a $12 million bottling plant in Moscow, but it was illegal then for a foreign company to purchase land. Western investors normally worked in joint ventures with Soviet partners. We tried to lease land on our own by negotiating with the city of Moscow. Our premise was, “We want to help you separate state from business.” The time, effort and resources required were enormous, yet the potential was, too.
Pepsi was initially outselling us 10-to-1 and had been deeply entrenched with the communists. But we swooped in to invest millions of dollars in 10 factories where beer and cognac, in addition to soft drinks, were bottled. It was a roll of the dice, as our lawyers were writing some of the first private contracts in Russia and there was no certainty they could be enforced. In the end, we recouped our investment on all but one of the plants.
In those years, it was not uncommon to hear gunfire on the streets of Moscow. On one occasion, the Coca-Cola company driver was caught in the crossfire of a mafia gun battle and was seriously wounded. My colleague Doug Ivester had missed the bullets by a mere 30 minutes.
There were other culture clashes as well. When the mayor of St. Petersburg, Anatoly Sobchak, visited Atlanta, he bought Coca-Cola underwear at the gift shop and, in Russian fashion, rolled down his trousers during a meeting to show them off.
What mattered most was that Coca-Cola was gaining on Pepsi, which never seemed to realize what had hit them. By 1994, Coca- Cola gained the lead, and retains it to this day. Coca-Cola helped deliver capitalism to Russia and Eastern Europe.
I am a firm believer that capitalism is the most potent form of foreign assistance. It can also be personally rewarding: In 2004, I became chairman and chief executive officer of Coca- Cola Co.
(Neville Isdell was a force at Coca-Cola for more than 30 years, including in Zambia, South Africa, Australia, the Philippines, Russia, Germany, India and Turkey. This is an excerpt, the second of two, from his memoir, “Inside Coca-Cola: A CEO’s Life Story of Building the World’s Most Popular Brand,” written with David Beasley, to be published Oct. 25 by St. Martins Press. The opinions expressed are his own. See Part 1.)
--Editors: Mary Duenwald, David Henry.
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