New brooms sweep clean, and ever since Douglas Daft arrived as head of the Coca-Cola Company empire back in December 1999, he's been attempting to brush the ailing company back into shape.
Elsevier Food International, Vol. 4, Number 4, November 2001
Pascal Kuipers

"The year 2000 was one of significant results and accomplishments in reshaping The Coca-Cola Company to capitalise upon the opportunities we see in virtually every market around the world," said Coca-Cola's President and COO Jack L. Stahl in Coke's 2000 annual report. "After a period of clearing distractions from our path, our people are focused upon building on the company's core strengths and we believe we are now clearly positioned for profitable growth for the years to come."
Stahl also took part in the reshaping process at a very personal level: by resigning early in March 2001, after a 20-year career with the world's largest soft drink maker and within a year of accepting the job as the company's deputy. In the press release that announced his resignation, both Stahl and chairman and CEO Douglas Daft stressed that the divorce was amicable. In fact, it was all part of a new management structure that divided the company into four strategic business units: the Americas, Asia, Europe, Africa and New Business Ventures. "Jack Stahl and I held a lengthy discussion about the exciting potential of this new model," said Daft in the press release. "Jack concluded that, having helped the Coca-Cola Company reset its agenda and priorities, he wanted to seek new leadership challenges elsewhere."
Despite this display of harmony, UBS Warburg cut its valuation of Coke's share price to US$52 on the news of Stahl's resignation - when euphemisms such as 'reshaping', 'resetting the agenda and priorities', and 'clearing distractions from our path' are being used, something is clearly wrong. "Coke is in a horrible in-between stage," said State Street Research analyst Maureen Depp last August in the financial magazine Barron's. "In the second quarter of 2001, for example, volumes rose around 3.5 per cent, below recently lowered guidance of four per cent for that quarter and the company's goal of advancing volumes five to six per cent this year." Barron also quotes Keith Patriquin, an analyst at Loomis & Sayles, saying "Most of the second-quarter volume gain came from non-carbonated drinks where Coke plays second fiddle to Pepsi."
Looking at the first half of 2001, revenues show no increase. However, operating income and net income record growth rates of 83 per cent and 128 per cent respectively, compared to the first half of 2000 when the company's income was negatively impacted by restructuring costs of US$871 million. According to Coke the increased operating income reflects increased sales as well as cost savings due to the restructuring of the company.

Damaged reputation
So what exactly is this 'horrible in between' position in which the Coca-Cola Company finds itself? In December 1999, when Daft came to the helm, he faced the challenge of turning around a company which in his view was too centralised and which carried the burden of excessive costs. Coke's reputation was injured by a discrimination lawsuit in 2000, costing the company US$188 million in settlement terms and causing an incalculable amount of damage to its reputation. This was a further blow to the company's credibility, which had already been damaged in 1999 when it had to execute a massive product recall after Belgian children fell ill from drinking Coke.
Coke's share price tells the story: in the fourth quarter of 1999, stock was declining from a US$ 89 peak in the summer of 1998 to a low US$47 in the fourth quarter of 1999. In Q4 when Coke's shares were traded at the same price levels it had experienced three years earlier,
Daft took action. In the year 2000, besides establishing a new management structure, Daft cut back the number of employees by 5,200 -making redundancies in all areas of the company's operations, including the presidency. In the first weeks of his leadership Daft executed a US$813 million write-off of bad performing distribution and bottling assets in North America, Russia, the Baltics, the Middle East, Japan and the Caribbean. Furthermore Coke outsourced several activities to third parties and transferred responsibilities from its corporate headquarters to local operating units. The 'Realignment', as Coke calls it, needed an investment of US$850 million in the 2000 business year. On the other hand, Coke says it resulted in some US$150 million in savings. In the end Coke's organisational structure, " ... has been redesigned from the ground up ... " as Daft puts it in the 2000 annual report. According to Daft, within a year the company had returned to the leaner, decentralised management structure on which both Coca Cola and its core brand had established prominence. Says Daft: "Local leaders are back where they belong - in charge of local business. Our cost structure is under control. Getting it that way demanded difficult decisions ¬including workforce reductions - but we now are a healthier, stronger organisation."

Maximise profits
In its annual report Coke says, "We seek to maximise economic profit by strategically investing in the high-return beverage business." Whenever possible the company limits its participation in the capital intensive, low-margin bottling business. In July 2000, the bottlers Coca-Cola Beverages - in which the company held a 50.5 per cent majority share ¬and the Hellenic Bottling Company merged to form Coca-Cola HBC, in which the Coca-Cola Company now holds a 24 per cent share. This change in ownership resulted in a gain of US$1l8 million for the third quarter of 2000. Selling parts of its bottling operations has been a source of revenue for the company in the past. And there it still has plenty of potential.
In its 2000 financials, Coke consolidated US$3,320 million in bottling assets. However, looking at the closing prices (December 31, 2000) of the bottlers' publicly traded shares, the value was US$6,902 million. Coke's investment in its bottlers resulted in a US$289 million loss in 2000. In the first half of 20m Coke's share of income from its bottling operations was US$63 million, compared to a US$14 million loss in the first half of 2000. In the second half of 2000, losses at the bottlers apparently skyrocketed from US$14 million to US$289 million. Despite the continuing improvement in operating performance that Coke sees at its equity bottlers, this can hardly be taken as proof that the black figures of the first half of 2001 won't turn into red ones in this year's second half. In the important German market for instance, Coke's bottling assets contributed substantially to the losses in 2000, which mounted up to DM190 million (US$90 million). Big losses are also expected for 2001. With a 42 per cent share in Coca-Cola Erfrischungsgetranke AG, Coke is the largest shareholder in Germany's main Coca-Cola bottling company and is aiming to radically restructure the bottling system in Germany. In the US, too, the outlook isn't that good. Last July the world's largest soft-drink bottler Coca-Cola Enterprises - in which the Coca-Cola company holds a 40 per cent share - reported lower operating and net profits in the second quarter of 20m and announced a US$60 to 80 million restructuring, resulting in some 2,000 job losses in North America.
This will result in savings of US$80 to 100 million beginning in 2002, says the bottling company, which acknowledges that it failed to shift consumer demand from low-profit cans and two-litre bottles to items with a higher profit margin.

Still profitable
Coke remains a profitable business, however, with a 10.64 per cent return on revenues in 2000. But since the 21.88 per cent peak in 1997, net income as a percentage of revenues has been declining rapidly.
Chairman Daft may be fiercely slashing costs, but on the revenues side he also displays himself as a man of action when it comes to his search for increased sales and profits. Last year saw his daring plan to acquire the US$5 billion Quaker Oats company, one that was turned down by the supervisory board. Despite Quaker's interesting assets, such as the Gatorade brand in sport drinks, the board thought the price Coke planned to offer was too high to grant its shareholders an acceptable pay off. It must have been a frustrating time for Coke's chairman when PepsiCo announced its acquisition of Quaker Oats in December 2000. This US$14 billion deal was approved by the Federal Trade Commission last August.
On February 21, 2001 Daft sat side by side with Alan G. Lafley, his peer at Procter & Gamble. Together they announced the establishment of a new 50/50 joint venture company focused on "developing and marketing of innovative juices, juice-based beverages and snacks on a global basis". At that time both men had been leading their respective companies for a short period of time (Lafley became P&G's president & CEO in June 2000) and both were under pressure to revive their flagging businesses. The new US$4 billion company was supposed to be a combination of best practices: Coca-Cola's worldwide distribution, merchandising and customer marketing abilities and P&G's research and development. Analysts immediately questioned the sense of this joint venture from Coke's perspective, because Coke would include half of the profit stream of its growing Minute Maid juice business in the profits of two declining Procter & Gamble brands, Pringles (snacks) and Sunny Delight (juices). That very day Coke's shares dropped six per cent. Four months later in Coke's second quarter report, the company stated that the deal with P&G, " ... will differ materially from the transaction originally announced in February 2001."
This turned out to be a major understatement. On September 26, the company announced the cancellation of its ambitious plans in a five-line press release. However, it's Coke's strategy to manage noncarbonated beverage brands through partnerships with other companies while focusing itself on its core business, carbonated soft drinks. In accordance with this, Coke and Nestle established a joint-venture partnership CCNB (Coca-Cola Nestle Beverages) back in 1991, which mainly operates in the ready-to-drink tea category (e.g. the Nestea brand). According to the world's largest drinks manufacturer and the world's largest food manufacturer, this is such a successful joint venture that they want to lift their co-operation to a higher level. They plan to create Beverage Partners Worldwide (BWP), which will focus on emerging beverage segments with growth potential, such as ready-to-drink coffee, teas, and beverages with a health positioning.
CCNB had ten years time to prove itself and now clearly feels that the time is right to upscale its operations. This is quite the reverse picture to that of Coke's joint venture with P&G, which had too high a profile from the beginning and has now been cancelled. Coke, however, can only escape its "horrible in between stage" by finding a solution to its flagging core business of carbonated soft drinks. Last March Daft unveiled his latest dream in the UK newspaper The Sunday Times: he wants to provide Coke on tap in customers' homes, where the drink syrup will be mixed with carbonated water. Coke has even invested venture capital in the scheme. " ... one day, yes, this will be a reality," Daft said. Nowadays, however, with stabilising or even stagnating volume sales in Europe and the Americas, Asia and Africa offer most opportunities for expansion of the existing business. And it's Doug Daft's difficult task to tap the growth potential of these emerging markets .