A History of Coke
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By Goofyhoofy
February 20, 2007

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MKlein's35 year Coke chart:
It's below the -1 RMS line, the only other time it has been this low was during the 1981/1982 recession. It appears to be climbing along at -1.30 RMS now.

Coca Cola may or may not be a buy, but this is where knowing the history of the company may help.

If you go to the 40 year chart of Coke, you'll notice that they had flat performance for a decade (perhaps more) before their significant runup which began in 1982. The runup corresponds almost perfectly with the tenure of Roberto Goizueta, CEO from 1981 until his death in 1997.

Goizueta is most famously known for the introduction of that colossal flop, "New Coke", but the performance of the stock, if not the company, tells us there was more going on. There was, largely in two things: He introduced Diet Coke and reshuffled the corporate structure. Of the two, the financial legerdemain was far more important; much of Diet Coke's success came at the expense of KO's existing low-calorie product "Tab", and from cannibalization of the mainline product: Coca Cola. (That is not to diminish Diet Coke's importance today, merely to note what happened.)

The significant outperformance of the stock during Goizueta's term came because the Coca Cola company was a mess. They were a syrup company, and had traded the territorial franchise rights to independents (known as 'bottlers') across the country and world. They received no franchise payments; indeed, the only thing they could do was "sell syrup" to them. But wait, it gets better: many of the franchise agreements said that Coca-Cola could not raise the price of the syrup to the bottlers. Ever.* In the 1940's most of those contracts were abrogated (thanks to World War II), but most still contained a clause disallowing any price increases even if sugar prices increased - and sugar was the most important (read: price sensitive) ingredient.

That left Coca-Cola in the unenviable position of selling syrup to independent bottlers who could charge whatever the market would bear, but the mother company couldn't raise its own prices to cover its own costs. Profitability sank, and with it, the stock.

[There is some speculation that Goizueta introduced "New Coke" as a "new" product so that it was not bound by the "old Coke" price contracts with bottlers. The more commonly accepted story is the fight with Pepsi and the "Pepsi Challenge" (the taste-test comparison). Personally I believe both were factors.]

OK, I'm getting there.

Ivester, an astute, workaholic accountant, had perfected the plan which rescued Coca-Cola after the New Coke debacle and sent its stock value into orbit. For years, Keough and other Coke executives had tried to wear down the bottling firms into selling-out or toeing the company line. Ivester perfected a plan of diabolical simplicity to finally achieve this goal. He favored a massive buy-out of Coke's independent bottlers while encouraging others to expand operations, provided they did so on new terms favorable to Coke. But instead of loading Coca-Cola with the debt of the purchases, he proposed establishing a client firm, Coca-Cola Enterprises, which would consolidate the bottling firms while assuming the debt. The Coca-Cola Company could then raise the price of the syrup for making Coke at will, evade antitrust legislation and use its escalating profit margin to entice powerful investors like Warren Buffett to "catch the wave."

Goizueta's stunning stock success was a product of Ivester's financial rearrangement with the bottlers (and Ivester got the CEO job when Goizueta died), not from an improvement in the core business of selling soda.

They bought out the worst of the recalcitrant bottlers with muscle and threats, but put them in a separate corporation, because "bottling" is hugely capital intensive: delivery trucks, glass factories, filling lines, etc. "Making syrup" is so much easier - and profitable - particularly when you are the only one who can do it since you own the trademark and the secret formula.

Buying the bottlers and putting them in a separate corporation and leaving the mother company capital-lite but now with complete pricing control over the product made for a stunning improvement in profitability, and the stock followed.

Unfortunately for the company, that is a game you can only play once, and since that period the company has not managed to repeat the performance. They have introduced, and promoted their bottled water line into prominence, and they have managed some other minor successes - but contrary to the breathless article in The Street, I doubt guava grapefruit drinks sold in "tiny Korean shops" is going to be the next huge wave for a company as large as Coca Cola.

Of course I could be entirely wrong about that, but given that 80% of their business is fizzy, and fizzy is in (modest) decline, I am hard pressed to know what they might do to perk things up. They tried "movies" and that didn't work out so well. PepsiCo tried "snack foods" and it has been terrific. They also tried "quick serve restaurants" and that didn't.

So, as I say, Coke may or may not be a buy, I don't know. But if you remove the period when their CAGR gains and stock gains came from financial jiggering, it appears that this company hasn't improved the core business in 40 years, at least over the cost of their capital and advertising - while I note they have perhaps the most valuable trademark on the planet and a distribution system the envy of everyone except, perhaps, WalMart.

So good luck with Coke; I'd like to see them start back up. I had it for part of Goizueta's ride but have been out ever since. However, this is one where there's a story behind the charts, and now you've read it.

* The founder of the company was a famously bad businessman. For example, he sold the bottling rights for the mid-South territory (Tennesse & surrounds) for $1, in perpetuity. When it began, there was no such thing as "bottling", the syrup was sold to soda fountains and restaurants. He didn't realize the eventual value, he was just happy to sell these new guys "syrup" and when bottling took over as the primary driver, the original corporation was mildly toasted. The price agreements were a function of his (very) bad bargaining ability.

As "soda fountains" fell out of favor the bottlers came to believe they were more important than the mother company, and the relationship between parent and child grew acrimonious, to say the least. When KO went to them to raise prices because its own future was threatened, the bottlers practically told them to get lost; they figured they'd buy the shards of the syrup manufacture in a bankruptcy proceeding.

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