Downloaded by Sekou White on 2/04/2016. New York University, Sekou White, Spring 2016

9-500-067 R E V : O C T O B E R 3 1 , 2 0 0 1

________________________________________________________________________________________________________________

Professor Susan Fournier prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 1999 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

S U S A N F O U R N I E R

Introducing New Coke

Background: The History of Coca-Cola

Coca-Cola was invented by John Styth Pemberton, a pharmacist who served as cavalry general for the Confederates during the Civil War. Settling in Atlanta after the war, Pemberton started a business selling patent medicines such as Triplex Liver Pills and Flower Cough Syrup. In 1885, he registered a trademark for French Wine Coca—“an ideal nerve tonic and stimulant.” The name was apparently appropriate as the beverage contained coca leaf and wine. One year later, Pemberton removed the wine, added caffeine and the flavor of the kola nut, and introduced a product improvement called Coca-Cola, which he packaged in used beer bottles and distributed to soda fountains. Pemberton’s friend advocated the name change since he thought the two C’s, written in Spencerian script, would look good in advertising. Pemberton considered the beverage a headache remedy rather than a refreshment, and saw additional uses as a curative for hangovers. Quite by accident, one druggist discovered that the syrup tasted great when mixed with carbonated water, and the Coke we know was born.

Pemberton sold the right to bottle and distribute Coca-Cola syrup to Asa Griggs Candler, a small- town Georgia boy turned druggist, for $2,300 two years later. Pemberton believed that sales of Coca- Cola would remain predominantly in drug stores, and wanted no part of what he considered to be expensive bottling operations. The destitute Pemberton died in 1888 and was buried in an unmarked grave.

Candler organized the Coca-Cola Company in 1892, and began promoting the beverage based on its refreshment versus therapeutic qualities. The network of independent bottlers that Candler put in place would form the heart and soul of Coca-Cola’s distribution system, and would come under attack a century later when the FTC charged the company with the violation of antitrust law. Candler also introduced the idea of selling Coca-Cola in shapely glass bottles, such as those that stand as collector’s items today. Candler put the secret formula for Coca-Cola—the company’s sacred cow—into the company vault, and instituted a policy that no more than three people at any time would know the proper mixture of ingredients.

In 1916, Candler left Coca-Cola to run for mayor of Atlanta, placing control of the company in the hands of relatives. In 1919, without benefit of counsel with Candler, the relatives sold Coca-Cola to a group of Atlanta businessmen for $25 million. Ernest Woodruff, an Atlanta banker, headed the

Downloaded by Sekou White on 2/04/2016. New York University, Sekou White, Spring 2016

500-067 Introducing New Coke

2

acquiring business group. Under the guidance of Robert Winship Woodruff, Ernest’s son, the Coca- Cola Company became a household word within the United States, and a recognized symbol the world over. The Coca-Cola Company remains in the hands of the Woodruff family to this day.

Robert (“The Boss”) Woodruff became president of Coca-Cola in 1923, a period of severe financial strife for the organization. An untimely purchase of sugar had precipitated the need for serious borrowing to keep the company afloat. Necessary increases in the price of syrup threatened bottler relations, where contracts guaranteed fixed prices. When the company tried to pass on some of its financial burden to the bottlers, they sued in revolt. Share prices dropped from $40 to $18, and sales of Coke syrup plummeted from 18.7 million gallons in 1918 to 15.4 million gallons in 1922.

The Boss moved quickly to repair bottler relations (“We want everyone in conjunction with Coca- Cola to make money.”1) New contracts were negotiated in which all syrup ingredient prices were fixed at 1921 levels save that for sugar. Quality control programs were also initiated to ensure taste consistency across bottlers. In a radical move, Woodruff called an impromptu meeting of the sales force and announced that the department had been eliminated and that everyone was fired. The next day The Boss called everyone back and rehired them into the new “service” department. Job duties were expanded beyond the simple sale of syrup to the installation of fountain equipment, retailer training, and advisory roles in bottler operations. “I didn’t have vision,” a chagrined Woodruff explains, “I was just curious.”2

The Boss’ dream was “to place Coke within arm’s reach of desire. . .wherever there are people who get thirsty.”3 Gas stations were adopted as a major new distribution outlet. Advertising touted Coke as being “around the corner from anywhere.”4 For the first time, Coke sold in bottles began to outsell Coke sold at the fountain. Expansion continued. Against the advice of the board, Woodruff took the brand to Europe, established a foreign sales department, and showed a profit within three years. Woodruff was adamant that the Coke sold oversees should be identical in taste to the Coke sold in the U.S. despite advisors who recommended adapting the taste to local palettes.

Meanwhile, Coke continued its forays into American pop culture. In 1923, Coke admen urged the harried worker to “Pause and Refresh Yourself.” In 1929, this mandate was captured in the famous tagline “the Pause that Refreshes,” a thought that would become part of the vernacular, and synonymous with Coca-Cola for the next twenty years. In the 1930s, Coca-Cola commissioned artist Norman Rockwell to paint beautiful, bucolic print illustrations for the brand that evoked a comforting nostalgic appeal (see Exhibit 1).

Perhaps the most significant cultural accomplishment was delivered through the artwork of one Haddon Sundblom, who created the classic Coca-Cola Santa Claus in 1931 (see Exhibit 2) and forever emblazoned the brand in the hearts of America’s youth. Pendergrast describes:

Sundholm’s Santa was the perfect Coca-Cola man. Bigger than life, bright red, eternally jolly, and caught in whimsical situations involving a well-known soft drink as a reward for his hard night’s work of toy delivery. Every Christmas, Sundholm delivered another eagerly awaited Santa Claus ad. Sundholm has thus directly shaped the way we think of Santa. Prior to the Sundholm illustrations, the Christmas saint had been variously illustrated wearing blue,

1 Thomas Oliver, The Real Coke, The Real Story, New York: Penguin Books, 1986, p. 20.

2 Oliver, p. 23.

3 Mark Pendergrast, For God, Country, and Coca-Cola, New York: Collier Books, 1993, p.167.

4 Oliver, p. 22.

Downloaded by Sekou White on 2/04/2016. New York University, Sekou White, Spring 2016

Introducing New Coke 500-067

3

yellow, green, or red. Sometimes he was an elf, sometimes tall and gaunt. After the soft drink ads, Santa would forever more be a huge, fat, relentlessly happy man with a broad belt and black hip boots—and he would wear Coca-Cola red.5

Cultural inroads were granted through Hollywood as well. A popular movie of 1935, Imitation of Life, gave Coke much free publicity. Broadway Bill mentioned the soft drink several times as well, and Dizzy Dean gulped many bottles while announcing baseball games. Coke officials hired specialized agents to arrange film placements for their products. Management liked these films because they “made people so actively conscious of Coca-Cola that they subconsciously bought it.”6

In 1937, Woodruff was offered the chance to buy flailing Pepsi-Cola for a nominal fee. Woodruff declined, believing that it would be unwise to market a drink that would compete directly with Coke.

Throughout the 1940s, Coke continued its deluge of world markets. Coke went to war with the GIs during World War II. “See that every man in uniform gets a bottle of Coca-Cola for five cents, wherever he is and whatever it costs the company,” ordered Woodruff.7 General Eisenhower requested that the war department establish ten bottling plants in North Africa and Italy to support the war-related distribution operations. Response and gratitude among the GIs was immeasurable, as the letters below reveal.

Today was such a big day that I had to write and tell you about it. Everyone in the company got a Coca-Cola. That might not seem like much to you, but I wish you could see some of these guys who have been oversees for twenty months. They clutch their Coke to their chest, run to their tent, and just look at it. No one has drunk theirs yet, for after you drink it, it is gone.8

One real bottle of Coke. The first one I have seen here. It was pulled out from under a pilot’s shirt. He caressed it, his eyes rolled over it, he smacked his lips at the prospect of tasting it. I offered him one dollar for half of it. Then two, three, five.9

In civilian life, when there is an abundance of Coca-Cola, you feel convinced that it is good and more or less let it go at that. But you have to experience the scarcity of Coca-Cola or suffer its absence to acquire a full appreciation of what it means to us Americans.10

My motivation to shoot down my first enemy soldier stems from thoughts of America, Democracy, and Coca-Cola.11

If anyone were to ask us what we are fighting for, we think half of us would answer, the right to buy Coca-Cola again.12

5Pendergrast, p. 181.

6 Pendergrast, p. 179.

7 The Coca-Cola Company: An Illustrated Profile, Atlanta: The Coca-Cola Company, 1974, p. 77.

8 Pendergrast, “For God, Country, and Coca-Cola, New York: Collier Books, 1993, p. 199.

9 Pendergrast, p. 210.

10 Pendergrast, p. 211.

11 Pendergrast, p. 211.

12 Pendergrast, p. 211.

Downloaded by Sekou White on 2/04/2016. New York University, Sekou White, Spring 2016

500-067 Introducing New Coke

4

Coca-Cola representatives and technicians supporting the bottling plants were granted pseudo- military status as “technical observers,” a designation for civilians who aided the war effort. Wearing army uniforms with “T.O.” as a shoulder patch, they became known as the “Coca-Cola Colonels.” The T.O.s told stories of the drink’s powers during the war:

One poor devil came in with one leg and one arm gone. He told the nurse not to kid him. When he really did get a drink he cried like a baby because it reminded him so much of home.13

Men on crutches, in wheelchairs, men with bandaged hands, some who cannot see—all lined up by the hundreds to get their Cokes. 14

A theme song was created commemorating the role of the Coca-Cola Colonels in advancing the war:15

The technical observers are winning the war, parley vous. The technical observers are winning the war, parley vous. The technical observers are winning the war, so what do The Hennies keep fighting for? Hinkey, dinkey, Parlez vous.

By war’s end, GIs would consume 5 billion bottles of Coke. Black market sales of the drink thrived, with a bottle selling for an average of $5-$40, and fetching upwards of $4,000 at auction. The company’s unpublished history would state that the wartime program made “friends and customers for home consumption of 11,000,000 GIs and did an expansion job that otherwise would have taken 25 years and cost millions of dollars.”16 Zarubica, one of the T.O.s, described the behind-the-lines operation to a boss at Coca-Cola headquarters; “It’s the greatest sampling program in the world.”17

At war’s end, there would exist 64 bottling plants worldwide, each built at the government’s expense, which the company would later incorporate without cost.

Back in the States, advertising exploited the drink’s patriotic presence abroad. “Wherever a U.S. battleship might be, the American way of life goes along… So naturally Coca-Cola is there too,” claimed one print advertisement. Ads showed Coke assuaging the thirst of bond salesmen, Victory gardeners, and returning soldiers (see Exhibit 3). In 1942, Coke was “The Real Thing.” Advertising reminded consumers: “Yes, around the globe, Coca-Cola stands for the pause that refreshes—it has become a symbol for our way of living.” The word ‘pause’, in fact, became so strongly associated with Coca-Cola by 1942 that the U.S. patent office refused to register a new soft drink called Pause, calling it an infringement on Coca-Cola.18

Coca-Cola continued to thrive in the fifties, outpacing its nearest rival Pepsi by over two to one. Advertising budgets were substantial ($30 million in 1955). Crooner Eddie Fischer was enlisted as spokesperson for the brand, delivering soft-sell praises during the popular Coke Time TV show. The company also sponsored Kit Carson at this time, a western adventure series that captured the hearts

13 Pendergrast, p. 206.

14 Ibid.

15 Pendergrast, p. 206.

16 Pendergrast, p. 217.

17 Pendergrast, p. 215.

18 “The Coca-Cola Company fights Pause as a Soft Drink, Wins,” Red Barrel, April 1942, p. 36.

Downloaded by Sekou White on 2/04/2016. New York University, Sekou White, Spring 2016

Introducing New Coke 500-067

5

and minds of the day’s youth. Across TV land, the message was for urgency and ubiquity: “What you need is a Coke.”

The sixties and early seventies saw the creation of several other popular advertising themes. “Things go Better with Coke” broke in 1963 and ran through 1968. In 1969, Coke’s advertising agency revived the classic 1942 slogan “It’s the Real Thing” and set it to a melody that would win the world over. In 1971, 200 young adults from all corners of the globe were assembled atop a hill in Italy where they sang a sweet song destined to become a favorite:

I’d like to buy the world a home and furnish it with love Grow apple trees and honey bees and snow white turtle doves I’d like to teach the world to sing in perfect harmony I’d like to buy the world a Coke and keep it company. That’s the real thing.

The company was deluged with response to the ad; over 100,000 requests came in for sheet music. The British pop group The New Seekers recorded the song, minus its direct reference to the Coke brand, which hit the top of the charts. Over 1 million copies of the record were sold in 1972. It was, as Newsweek observed, "a surefire form of subliminal advertising.”19

Meanwhile, Woodruff maintained Coke on a path of continued expansion and diversification. Coke bought Minute Maid Corporation and Duncan Foods in 1964, merging them into a unit known as Coca-Cola Foods Division. Sprite was launched in 1961. Tab, a diet cola, was introduced in 1963. Grapefruit-flavored Fresca was launched in 1969. Each of these soda brands were thus named because of management’s belief that the trademark “Coke” should represent one product only.

Throughout the 1970s, Coke continued to rule the soft drink world. At its height, Coke was distributed in 155 countries and consumed 303 million times a day. Coke had grown up with twentieth century America, where rites of passage were marked by a shift from sipping Coke as a soda pop to mixing it with rum as an adult’s elixir. Coke’s association with America became so strong that it became a target for retaliation of anti-western insurgents: the beverage was exiled from two countries experiencing fallout with the U.S., and more than one Coca-Cola bottling plant was taken over or blown up during periods of political turmoil.

About this time, in May 1979, an irreverent first generation Mexican named Sergio Zyman came to Coke from rival Pepsi-Co. In one of his first assignments, Zyman argued vehemently for leadership through “an ongoing and continuous stream of innovations.” Zyman concluded that the diet cola segment was growing much too fast for Coke to restrict its entries to the Tab brand, which held the segment leadership at the time. The Coke name, he continued, was a boost to brand equity of the new entry, not an asset that would be diminished because of it. Research results confirmed this assertion: trial and purchase intent rose 12% when the Tab beverage was identified as Diet Coke versus Tab. Approval was granted to go ahead with a Diet Coke product, though two months later management had a change of heart, and the project was declared dead.

The Period of Turmoil

While Coke looked rosy on the outside, Oliver reported it to be less so:

19 “Have A Coke, World,” Newsweek, January 3, 1972, p. 47.

Downloaded by Sekou White on 2/04/2016. New York University, Sekou White, Spring 2016

500-067 Introducing New Coke

6

Behind the scenes, executives were snared in a very different drama, bickering among themselves, distracted by tangential issues, and losing sight of the heart of the matter—Coke itself. The top executives of the Coca-Cola Company of the late 1970s actually paid less and less attention to the marketing and sale of their central product, so caught up were they in dodging government allegations (about restrictive competitive practice stemming from the bottler’s territorial exclusivity), fighting with bottlers over the price of syrup (exacerbated by the hyperinflation of the 1970s), and squabbling over whether or not to control who owned the company franchises (most franchises were in the hands of third-generation owners who were not investing in the business).20

Several failed diversification attempts also distracted the company. In 1970, Coca-Cola bought Aqua-Chem, Inc., which produces water treatment equipment and boilers. In 1978, it bought Presto Products, a maker of plastic bags. The Wine Spectrum, which owned Taylor California Cellars, was bought in 1977. None of these companies ever made enough to cover the dividends on the Coke shares used to purchase them.21

New company president, Donald Keough, spent his first fifty meetings discussing legal battles. “I was practicing law. I made a mistake. I should have hired a roomful of lawyers and told them to deal with it and we could have gotten on with the business.”22

In 1979, The Coca-Cola Company began a string of leveraged buyouts of the bottler franchises, launching one of Wall Street’s favored tactics for acquisition, and bringing the system under better stewardship and control. And, in 1980, the firm eventually won against charges of anti-competitive activity and laid that trauma to rest.

Still, all this took its toll. Coke growth slowed from an historical average of 15% per year to roughly 2% in the late 1970s. Coke was steadily losing market position at retail. In 1980, for the first time in history, Pepsi pulled ahead of Coke in the supermarkets, claiming a 29.3% share to Coke’s 29%. Foreign business, which accounted for roughly two thirds of total soft drink volume, was showing a disappointing growth rate.23 The compounded return on investment for the company as a whole was less than 1%. Fountain sales (e.g., McDonald’s), historically one of the company’s most profitable ventures, were in especially bad straights: with a cost of capital of 14%, the fountain business was generating only a 13% return on capital. Inside the corporation, Austin was one year past retirement as Chairman of the Board, and power was fractionated across multiple vice chairmen whose average age was 70. As Oliver puts it, “No one was really running the company” (1986, p.42).

Pepsi Makes Inroads

While the giant stumbled, Pepsi-Co was on a roll. The “Pepsi Generation” advertising campaign, launched in the mid 1960s, rejuvenated the brand by capturing the spirit of the influential Baby Boomers through its evocation of youth, vitality, and idealism. Oliver quotes Pepsi advertising director Alan Pottasch on this change in strategy:

In the 1960s we stopped talking about the product and started talking about the user, and this was a major difference. We made cola into a necktie product. What you drank said

20 Oliver, p. 31.

21 NOTE: The Wine Spectrum was sold in 1983 to Seagram & Sons.

22 Oliver, p. 32.

23 “Is Coke Fixing a Cola that Isn’t Broken,” Business Week, May 6, 1985, p. 47.

Downloaded by Sekou White on 2/04/2016. New York University, Sekou White, Spring 2016

Introducing New Coke 500-067

7

something about who you were. We painted an image of our consumer as active, vital, and young at heart. And we targeted a group of consumers whose taste buds weren’t yet going steady with Coke. We were forced to look at the next generation of consumers as the only ones who might not have to rectify their behavior, their attitudes toward colas. The Baby Boomers. We called them “The Pepsi Generation.” (p. 48)

The “Pepsi Generation” became one of the most famous and studied advertising ideas in history. As Oliver notes, “the phrase entered the vernacular as a widely used figure of speech to define a certain group, and it therefore elevated Pepsi’s image in many people’s minds” (p.49). The concept of the “Pepsi Generation” became the backbone for the 1975 campaign containing the line “Join the Pepsi people, feelin’ free,” a line believed to capture the needs of a country recovering from Watergate, Vietnam, and a severe economic recession.

Not everyone at Pepsi-Co was high on the image campaign, however. “The image stuff is great,” noted Larry Smith, Pepsi exec in charge of Texas markets, where Coke had a 35% share, home grown Dr. Pepper a 25% share, and Pepsi a six. “But we are being outsold 8 to 1. We have got to have a campaign that will move the needle.”24 Smith argued strongly for a product-centered approach. Noting competitive standings for Pepsi and Coke in supermarkets, where consumer choices were made, Smith had long claimed product superiority for Pepsi: “We had a joke: if you put Coke in a Pepsi bottle, you’d starve to death but if you put Pepsi in a Coke bottle, you’d get rich quick. People just drink it for the trademark.”25 He approached Alan Pottasch for help, who declined, fearing that a product promotion would detract from his image campaign. Smith then approached the in-house agency of Southland Corporation’s 7-11 convenience store—Pepsi’s biggest client in Texas—for guidance, and the “Pepsi Challenge” was born.

The campaign idea came from consumer research designed and executed by Bob Stanford, Southland Corp’s head creative director. Bob approached consumers in the field, gave them a choice between two unmarked bottles of cola, and asked them to choose which was better. People chose Pepsi by a margin of 52% to 48%. He filmed the tests with a hidden camera, thus providing substance for the later campaign. The “Pepsi Challenge” comparative blind taste tests (aired in May 1975) demonstrated a clear taste preference of Pepsi over Coke, thus granting Pepsi the legal right to claim product superiority versus arch-rival Coca-Cola. The local campaign led to a rapid increase in Pepsi market share, from 6% to 14% of total Dallas-Ft. Worth soft drink sales.

Coca-Cola reacted immediately to the Challenge by charging Pepsi with misleading advertising. Then the company began conducting its own taste tests. These tests confirmed what Pepsi already knew: that Pepsi tasted better than Coke. Even to Coke enthusiasts. The news caught Coke by surprise. As market leader protecting a 100-year old “secret formula,” Coke had never tested its beverage versus the competition: “It wasn’t allowed,” claimed Keough.

Coke’s second line of response to the Pepsi Challenge was no better, according to Pottash:

The response from Coke was ludicrous. It astounded us. They came back with a commercial with this effeminate-sounding announcer saying something like “They called our product ‘Q’ and theirs ‘M’ and you know people like the letter ‘M’ better.” Unbeknownst to

24 Oliver, p. 51.

25 Oliver, p. 51.

Downloaded by Sekou White on 2/04/2016. New York University, Sekou White, Spring 2016

500-067 Introducing New Coke

8

them we had filmed some tests in which Coke was labeled ‘L’ and Pepsi ‘S’. Pepsi still won. So the next day we hit them with that one.26

Coke countered with the message: “One sip is not enough.” The next commercial, according to Pottasch:

. . . showed this Texas redneck Coke drinker saying that these outsiders were coming down to Texas and pulling their wily tricks, but that it was not going to work. They played right into our hands. It was the first time they had ever mentioned Pepsi.27

Pepsi continued rolling out its Challenge campaign into other strong Coke markets. Houston was next on the block—a market where Coke posted a 25% share lead over Pepsi. It was at this time that Coke came up with the idea of airing their own taste tests in which die-hard drinkers revealed a major preference advantage for Coke. But the taste test data would not obey. Coke was favored over Pepsi, but only by a small 4% margin. Not wanting to share this underwhelming support of the brand with Pepsi via national advertising, Coke pursued execution of taste tests on an identified, versus blind, basis. Consumers picked Coke. Coke’s new campaign shared this fact, with a fact-filled voice-over that touted market share superiority and comparative sales.

In their next round of advertising response, Coca-Cola hired Bill Cosby to ridicule the Pepsi Challenge, and a series of commercials known as “The Rat Pack” was born. The text of one such ad is as follows:

This [points to Coke] is real refreshment, real big taste. Now see, if you were this other cola, number 2 or number 29, you’d do taste tests and challenges and stuff and try to compare yourself to this [points to Coke], wouldn’t you? Sure, don’t shake your head. You would too, you sneaky devil. Coke. The number one soft drink in the world.

“Coke is the number one soft drink in the world,” echoed Keough, “and we should be number one in every way.”28

Bad news seemed to be hitting Coke from all sides. Industry forecasts predicted declining volume growth for the industry as a whole as consumers aged and turned to other, healthier drink alternatives. Studies conducted by the Coca-Cola market research department revealed that while in 1972 18% of soft drink users drank Coke exclusively, and only 4% drank Pepsi exclusively, by 1982 only 12% claimed exclusive loyalty to Coke and Pepsi loyalty had risen to 11%. Market shares seemed to reflect this reality. (See Exhibit 4.) A.C. Nielsen reports continued to show Pepsi edging out Coke in supermarkets worldwide, this segment representing a third of Coke’s total market volume. Keough commented:

When you are the leader, you want to lead in all categories. Nielsen is the most visible. It is read by our investors. And the supermarkets are a growing market. You could write a scenario that Pepsi’s lead in take-home could creep into fountain. Pepsi could use it as a selling story. After all, our fountain contracts are based in large part on Coke’s status as the number-one cola.29

26 Oliver, p. 55.

27 Oliver, p. 56.

28 Oliver, p. 60.

29 Oliver p. 54.

Downloaded by Sekou White on 2/04/2016. New York University, Sekou White, Spring 2016

Introducing New Coke 500-067

9

By 1983, the Pepsi Challenge had made its way across the entire U.S. Only Coca-Cola’s own Atlanta was spared the insult

Related Tags