This story is from the May 31, 1993 issue of Fortune. It is the full text of an article excerpted in Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012, a Fortune Magazine book, collected and expanded by Carol Loomis.
FORTUNE — It’s been more than 12 years now since the Coca-Cola Co.’s patriarch — a nonagenarian, cigar-smoking, Old South tycoon known simply as The Boss — emerged from the live-oak shadows of his Georgia plantation to commit one last, seminal, almost Shakespearean act. That’s when Robert Woodruff flexed the power of his stock and vetoed the handpicked successor of his imperious — but ailing and confused — CEO, J. Paul Austin. Instead of Austin’s choice, Ian Wilson, Woodruff summoned Coke (KO) executive Roberto Goizueta, a 48-year-old, Cuban-born chemical engineer, to his office and asked a simple question: ”Roberto, how would you like to run my company?”
Goizueta, a Latin patrician who is nothing if not courtly, responded, ”Well, Mr. Woodruff, I’d be flattered.” Then, Goizueta recalls, he asked Woodruff if he could pick his own team, if he could name as his right-hand man Don Keough, a Coke executive whom many outsiders had believed to be the front- runner for the chairman’s job. ”You have answered my question,” Woodruff replied. ”You are running my company, so you can do whatever you want. There’s no sense to talk anymore. Good-bye. I’m going to take a nap.”
Goizueta took Woodruff’s words to heart. His first significant act was to name Keough, a charismatic leader and quintessential Coke salesman, as his president and COO, giving him sweeping authority across the organization. Then the new chairman summoned all his senior executives to a meeting in Palm Springs, where, as Keough puts it, ”he let them know several things: We weren’t here to be a nice company; we were here to be a growth company. We were going to get our balance sheet in order. And we were going to reward the hell out of performance, but we were no longer going to pay for perfect attendance.”
An introverted Yale intellectual who speaks English as a second language, Goizueta was happy to have the boundless energies of Keough to dispatch around the world while he spent more of his time in Atlanta ruminating on strategic matters, particularly on a subject with which he had become obsessed: enhancing shareholder value — not a big topic among CEOs in those pre-LBO days. It was time well spent. Coke’s market value in 1980 was only slightly more than $4 billion, pegging the company as a ripe takeover target. By the end of last year it had risen to about $56 billion, making it America’s sixth most valuable public company. Before Goizueta, Coke’s ten-year total return to investors averaged less than 1% a year; under Goizueta it has averaged almost 30%.
As promised, executives who performed were rewarded — with bonuses, stock options, and especially stock grants that mature upon retirement. When Goizueta, 61, hosted a retirement dinner for Keough, 66, in April, the departee had the security of knowing he was taking with him stock, options, and grants of Coke stock worth about $166 million. The current value of Goizueta’s eventual stake is around $378 million. Stock grants have made virtually every one of the 35 or so other corporate officers attending that dinner a paper millionaire several times over.
That’s the raw score, which somehow makes it all sound like clear sailing. It wasn’t. To refresh some memories, here are just a few highlights of the Goizueta-Keough era:
Diet Coke. Introduced in 1982, the first-ever extension of the company’s hallowed trademark. Forbidden by Goizueta’s predecessor and opposed by company lawyers as a risk to the copyright. Now the world’s third most popular soft drink after Coke Classic and Pepsi. Probably the most successful consumer product launch of the Eighties.
Columbia Pictures. Coke bought it for $692 million in 1982 and quickly won an Oscar for Gandhi, but never really got the hang of running a studio. Invested well in TV programming, especially game shows, then sold its stake to Sony (SNE) in 1989 for $1.55 billion, reaping a healthy profit.
New Coke. Probably the most embarrassing consumer product launch ever, worse even than the Edsel. Goizueta and Keough took full responsibility for the 1985 disaster, wiped the egg from their faces, and brought back Coke Classic. Pepsi (PEP) executive Roger Enrico was moved to write a book titled The Other Guy Blinked.
Warren Buffett. Through Berkshire Hathaway (BRKA) he bought some 93 million shares of Coke stock starting in the late Eighties, making him the company’s largest stockholder, with more than 7% ownership. The self-styled investment guru, who admits to a five-Cherry-Coke-a-day habit, has watched the value of his investment almost quadruple in about six years.
Says Buffett: ”If you run across one good idea for a business in your lifetime, you’re lucky, and fundamentally this is the best large business in the world. It has got the most powerful brand in the world. It sells for an extremely moderate price. It’s universally liked — the per capita consumption goes up almost every year in almost every country. There isn’t any other product like it.”
He’s right. Coke, the drink, is still priced moderately. But Coke stock — following a 92% run-up two years ago — is by most measures hardly a bargain. With a price/earnings ratio of 26, it trades at about a 40% premium to the S&P 500, while its price is around 13 times book value — among the highest multiples for any blue chip. Partially because of these high multiples, Coke’s stock price has scarcely changed over the past year.
Result: For all the glory of the recent era, these are tense times at Coke. Like several other superstar performers of the past decade — Wal-Mart (WMT), for one — Coke is facing what may be its toughest challenge yet: how to continue the growth magic of the Eighties when the targets of the Nineties keep getting harder to hit. Granted, this is a problem many big corporations would love to have, but it is a problem nevertheless. When a company spotlights shareholder value as brightly as Coke does and uses stock appreciation to motivate the troops, the uninterrupted nature of its climb takes on outsize importance. Coke won over the shortsighted seers of Wall Street by consistently reporting earnings increases of 18% to 20%, year after year, no surprises. Now it is being held to its own high standards.
Says Jay Nelson, a security analyst for Brown Brothers Harriman, who has a hold recommendation on the stock: ”Coke is and has been one of the best big companies in the world. People know that, and it is priced accordingly.” Adds Mark Rowland of Rowland & Co., an Atlanta money manager: ”It’s a great company at a supernatural price. In the last decade the stock has outperformed the company. Now we may begin to see the company outperform the stock.”
With every executive’s net worth riding on the results, the pressure inside the company to maintain growth in volume and earnings — to keep up the magic — is intense. Especially on the international front, where Coke earns more than 80% of its profits and where it has staked its future on rapid growth in volume. Now it faces recession in such key markets as Brazil and Australia. International unit volume increased only 4% last year, short of the company’s stated long-term goal of 8% to 10%, which it hasn’t achieved since 1990.
Still, given Goizueta’s track record of leveraging every ounce of mystique and profit from the world’s best-known brand, few are betting against him, especially over the long haul. His strategy seems logical enough. Says he: ”We have really just begun reaching out to the 95% of the world’s population that lives outside the U.S. Today our top 16 markets account for 80% of our volume, and those markets only cover 20% of the world’s population.”
Coke’s international strategists really get torqued up when they start talking ”per capitas.” In a mature market such as the U.S., for example, the per capita is 296, which means that on average, every man, woman, and child in the country drinks 296 eight-ounce servings of Coke products a year. At that level growth comes damned slow and damned expensive. But when the standard of living in developing countries rises, goes the theory, so does sugar consumption, and Coke plans to make its sugary products available to catch that tide anywhere it may happen to rise. The outcome is not entirely determined by demographics or even climate. ”Per capita is a state of mind,” says John Hunter, a salty Australian who is the executive vice president responsible for international business. He points out that among Coke’s highest per capita countries are, strangely, Iceland at 397 and, maybe less amazingly, American Samoa at 500.
Coke has, of course, long had a global presence — built to critical mass by Woodruff’s decision to provide the drink to American GIs during World War II and further enhanced by Austin’s love of international adventurism. But before Goizueta, its empire was strung together as a loosely knit chain of very eccentric fiefdoms, affording Atlanta virtually no control over how its bottlers chose to grow, or not grow, their Coca-Cola business. Describing the corporate culture when he took over, Goizueta says, ”Unprofessional would be an understatement. We were there to carry the bottlers’ suitcases.” The difference today? ”We used to be either cheerleaders or critics of bottlers. Now we are players.”
That seemingly minor distinction represents the most sacred cow slain by Goizueta and Keough, and a quantum leap in profit opportunity for a company that always said it was in the business of selling concentrate and syrup, not actually bottling soft drinks. The breakthrough came in 1981, when John Hunter, then Coke’s regional manager for the Philippines, came to Atlanta and declared that if Coke wanted to reverse Pepsi’s 2-to-1 market share lead in that important market, the company would have to invest $13 million to become a controlling joint-venture partner with its bottler, which was neglecting the Coke business in favor of its San Miguel brewery. Goizueta said go. Keough oversaw the deal. Hunter and a manager he brought in from Australia, Neville Isdell, made it work. Coke regained a 2-to-1 lead in the Philippines, in the process sending a powerful message that the era of bottler entitlement was over.
The Philippine campaign spawned numerous legacies, including a new template for Coke’s overseas business: the anchor bottler, a big, committed, well-heeled bottling outfit, sometimes controlled by Coke, always ready to expand into other markets around the world. Hunter, who spearheaded the operation, is now in charge of all international business. And Neville Isdell is president of the Northeast Europe/Middle East Group.
Isdell — a towering, animated Irishman — played host to Goizueta when he recently toured a group of former Soviet bloc satellites for a firsthand look at how Coke and its partners are investing the $1 billion they have committed to the region. That doesn’t include $450 million in the former East Germany or $100 million in the former Soviet Union. The trip offers a glimpse at Coke’s operating style and the response that its brand elicits.
The CEO’s tour begins in Prague, where the new $28 million bottling plant is a textbook case of how the modern template for international expansion works. The plant is operated by Coke’s largest anchor bottler, Coca-Cola Amatil, an Australian-based company in which Coke owns a controlling interest. Amatil already operates more than 35 bottling plants in eight other countries, including Austria and Hungary, which makes it a natural choice to open the franchise in the neighboring Czech Republic. As Hunter says, ”There’s very little necessity to go from country to country reinventing the wheel.”
Arriving at the plant, Goizueta’s entourage of Coke executives and partners is a vision of the true global company: an Irishman, a Turk, a Greek, and an Australian. Goizueta addresses the assembled crowd, taking the opportunity to play on his Cuban heritage: ”Today, hundreds of Prague citizens will take an important step — the beginning of their careers at the Coca-Cola Company — just like the one I took in Havana, Cuba, in 1954.”
The Czech Prime Minister, Vaclav Klaus, is on hand to salute Coke’s remarkable progress in bringing the plant to production in less than a year, which wouldn’t exactly be a miracle in, say, Atlanta, but is impressive in a country where the former government tried for seven years to finish this same plant and failed.
Says the Prime Minister, who sees a hopeful parallel: ”Very often we hear complaints from those hoping to do business here about the problems they encounter with bureaucracy and regulations. Yet some firms succeed and some don’t. Coca-Cola shows that you need a vision of what you want to do and people who know how to do it. They started in an incomplete plant and transformed it. I am certain our country will be as successful in its attempts to transform.”
The dignitaries on the dais push some ceremonial buttons, and the bright red cases of Coke come rolling down the line. A Bohemian band of clarinets and accordions strikes up a unique rendition of an old Patsy Cline tune, and the buffet lunch begins. Goizueta doesn’t linger over the canapés. He is off to Poland.
Minutes after his Gulfstream IV touches down in Warsaw, the chairman is whisked by motorcade to an appointment with Polish Prime Minister Hanna Suchocka. The two discuss her difficulties in trying to push privatization legislation through a recalcitrant parliament, but then she has a personal question for the distinguished American capitalist: ”When are we going to get Coke Light [Diet Coke] in Poland?”
Goizueta is quick to respond: ”As soon as your government approves it, we will sell it.” Two weeks later he receives word that the Polish government has approved Coke Light. This is good news. The profit margin is usually considerably higher than that on regular Coke.
The next day, at the opening of a bottling plant in Warsaw — operated by another anchor bottler, Ringnes of Norway — Goizueta tells the assembled Poles: ”We do business in more than 195 countries, but today we are most excited about East Central Europe. Coke is not a novelty here anymore. It is an important part of Poland.” Indeed, on Saturday afternoon, the square of Warsaw’s Old Town is dotted with red and white Coke umbrellas, while young Coke employees walk around handing out samples of the soft drink.
The more distant a country’s culture is from America’s, it seems, the more potent Coke is as an icon of American culture and — especially in the former communist world — as a symbol of the market economy. On a visit to a fast-food restaurant festooned with the Coke logo and called the Atlanta Bar, Neville Isdell explains, ”It’s hard to believe, but this is a country where a crowd gathered and spontaneously applauded one of our first delivery trucks coming down the street.”
Poland is a large, relatively sophisticated market compared with poor, benighted Romania’s, where Coke’s first-class corporate style sticks out from the moment Goizueta’s plane touches down at the Bucharest airport. His G4 is the only thing here that is sparkling clean and in good working order; everything else at the airport is rusted and seemingly inhabited by mongrel dogs picking through the detritus of a collapsed society. Still, per capita here is eight and growing, and the workers at the Coke plant, who look to be from another time, crowd around Goizueta as if he had come to personally save them.
Misu Negritoiu, a senior Romanian official, welcomes Goizueta to his country: ”Mr. Goizueta, you are the highest-ranking international businessman to visit our country in the two years since our transformation. You are investing $80 million, but Coca-Cola is more than that. Coca-Cola is the spirit of the system, the symbol of our new life. It brings jobs and color to our streets, and now that you are here, we are confident other businesses will come. You have that power.” The minister’s speech sounds as if it were written by Coca-Cola, which it wasn’t but which isn’t really so implausible given that company lawyers had to help the Romanian government draft the national decree and subsequent laws allowing them to open for business.
After the ceremony the Coke party returns to the airport, where Goizueta will hop his plane back to the more civilized confines of Dusseldorf. But Muhtar Kent — a hard-charging Turk who, under Isdell, oversees a territory of 21 countries between the Alps and Himalayas inhabited by a quarter of a billion potential Coke drinkers — is off to Sofia, Bulgaria, and possibly on to Albania to stir up some per capitas. Right now Isdell and Kent are clearly among the most golden of the company’s golden boys. An independent market survey showed that during last year’s fourth quarter Coke had taken the market share lead in every Eastern European country, a region where Pepsi basically held exclusive rights under the communist regimes. For the year, Pepsi still maintained leads in several countries.
Coke strategists can barely contain their excitement over Muhtar Kent’s territory, mostly because per capitas have grown from 20 to 31 in just two years. By 2000, he projects with relish, per capita will reach 71. In Hungary today per capita is already 83, close to the per capita eight years ago in Austria, which is now more than 150. Coke hopes the Czech Republic falls right into this line of growth. The model can’t, of course, anticipate instability in such places as Bosnia-Herzegovina.
Goizueta believes the sophistication and progress he sees on this trip underscore a major change: ”We used to be an American company with a large international business,” he says. ”Now we are a large international company with a sizable American business.” As Goizueta toured Eastern Europe, Don Keough was hopping around Russia in his G4, slapping backs, visiting customers, and making speeches in such cities as St. Petersburg, where Coke will build a $50 million plant. This was Keough’s final globetrot as president of Coca-Cola, and it raises the question of who, or what, will take his place.
”I don’t think he’s replaceable, no question about that,” says Warren Buffett, who knew Keough as a young man when they were neighbors in Omaha. ”But if you think you’ve got a great business and it’s dependent on one guy, it’s not really a great business. And Coke has a great business. There’s no one to fill his shoes, but this company can take it.”
Everyone concedes that there is no gregarious, warm-hearted motivator waiting in the wings to extract the last ounce of emotional commitment from the troops while simultaneously kicking them in the rear if necessary. But even Keough — who has a lot riding on the company’s continued success — argues that big corporations in the information age may have somewhat different needs than those he served.
Says he: ”In this day and age, he who has the information fastest, and uses it, wins. And this company has the best information flow of any global company in the world. These young guys are as comfortable calling stuff up on their screens and teleconferencing between continents as I was getting on a plane at midnight, catching a few winks, then shaving and getting back out there. Believe me, this ship has just left the dock.”
Predictably, Coke argues that it has the finest group of young international executives anywhere and lets it be known that the best among them are chained to the company’s future with heavy-gauge, 18-karat-gold handcuffs. Ostensibly, Keough is being replaced by two executive vice presidents: Hunter, 55, principal operating officer, international; and Doug Ivester, 46, principal operating officer, North America. Goizueta insists that the race for succession to Keough’s job is still wide open. For the time being, the world supposedly divides equally between Ivester and Hunter, but a quick comparison of stock, stock grants, and options dispels that myth: The younger Ivester stands to own some $55 million in stock, while Hunter is slated for a mere $20 million.
In assessing Coke’s future, the more relevant point is this: Roberto Goizueta has spent the better part of the past decade reengineering Coca-Cola — culturally, organizationally, and in particular financially — to meet his vision of the future. And at age 61 he clearly plans on staying around to see it unfold. From his beginning as CEO, Goizueta applied his engineer’s mentality to a large, hidebound, diffuse corporation. He took it apart methodically, examined each piece in the process, then decided what it should look like when he put it back together.
As part of the effort, he enlisted bright young protégés: Ivester and Jack Stahl, the 40-year-old chief financial officer, also frequently mentioned as a candidate for higher office. He took them into his confidence, heaped responsibility on them, and allowed them to take bold risks so that today they run much of the company they helped design. None of this is to take anything away from Hunter, a Keough protege whose strong relationship with overseas bottlers and 40-lashes-of-the-whip approach to motivation are crucial to the company right now. He has perhaps the clearest job assignment at Coke: Deliver those 8% to 10% international volume increases, and keep those per capitas rising.
The much more sophisticated Coca-Cola Co. that has emerged from Goizueta’s reworking is one of the simplest of all large corporations to define — certainly much less exotic than some of its previous incarnations. Gone are the wine, coffee, tea, industrial water treatment, and aquaculture businesses that Goizueta inherited, as well as the entertainment business he bought. Today Coca-Cola is a beverage company. More specifically, it is a global soft drink company that holds 45% of the world market in carbonated drinks; it has 47% of the market outside the U.S. and plans to make that 50% in the next two years. It is more focused, more single-minded, and, surprisingly, more open about its intentions than at any other time in its 107-year history.
Goizueta concedes that his record has benefited tremendously from the unusual circumstances under which he assumed command. His predecessor, J. Paul Austin — a tall, handsome, red-haired Olympic rower from Harvard — had been suffering, without Coke’s knowing it, from a combination of Alzheimer’s and Parkinson’s diseases, and many believe from alcoholism as well. ”The company had no sense of direction whatsoever,” says Goizueta. ”None.”
His most horrifying discoveries, he says, were financial. Coke prided itself on a nearly debt-free balance sheet. But most of the capital the company was investing was equity capital, with an effective cost of about 16%. So with all its businesses except soft drinks and juices returning only 8% to 10% a year, says Goizueta, ”we were liquidating our business, borrowing money at 16 and investing it at eight. You can’t do that forever.”
What’s more, even if rationally financed, many of Coke’s businesses didn’t stand up to the engineer’s scrutiny. ”It’s simple,” says Goizueta. ”You make a chart. Across the top you put your businesses: concentrate, bottling, wine, foods, whatever. Then you put the financial characteristics on the other axis: margins, returns, cash flow reliability, capital requirements. Some, like the concentrate business, will emerge as superior businesses. Others, like wine, look lousy.” So, says Goizueta, while Keough went off to straighten out the company’s disorganized, sometimes disastrous, and absolutely crucial relationships with bottlers, ”I stayed home to clean out the stables.” He quickly sold off the ”lousy” businesses. Everybody else around the company learned just as quickly how to make financial charts, which, among other things, calculated their cost of capital. From now on, all company operations would be judged on what Coke calls economic profit: after-tax operating profit in excess of a charge for capital.
Says Goizueta: ”When you get right down to it, what I really do is allocate resources — capital, manpower. And I learned that when you start charging people for their capital, all sorts of things happen. All of a sudden inventories get under control. You don’t have three months’ concentrate sitting around for an emergency. Or you figure out that you can save a lot of money by replacing stainless-steel syrup containers with cardboard and plastic.”
Goizueta, who spent years on the technical side of the company before moving on to administration, is sensitive to the charge that he is strictly a financial guy who surrounds himself with other number crunchers, like Ivester and Stahl. ”We’re not just financial people,” he says, ”but until 1981, none of our operating executives could even read a balance sheet. What we’ve insisted on is weaving a strong financial thread into the marketing fabric of this company.”
Now it is a couple of weeks after the infamous Marlboro Friday — when Philip Morris kicked all national-brand consumer stocks in the teeth with its precipitous bow to pricing pressure from private-brand cigarettes. Goizueta, now Keoughless, is seated on a dais alongside his new management team — Ivester, Hunter, Stahl — at Coke headquarters in Atlanta. In the audience are most of the Wall Street security analysts who follow food and beverage stocks. They have, in effect, been summoned to Atlanta for an emergency briefing on the drop in Coke stock since the Philip Morris announcement.
Goizueta, clearly annoyed, opens the session with barely concealed anger: ”It’s one thing when your stock drops 10% because of some mistake your company has made,” he tells the analysts, ”but it’s something else when it gets caught in a downward spiral of irrational market behavior, when it drops because of a development in a business with totally different financial and social dynamics. We are getting a bum rap.”
To explain why generic soft drinks aren’t as threatening as generic cigarettes, Goizueta unleashes Ivester, whose presentation is typical of his, and Coke’s, approach to such situations. He bombards the analysts with research, leading them methodically through a logical analysis: U.S. soft drink prices have remained low while consumption has increased; premium cigarette prices, by comparison, have skyrocketed while consumption has declined. But in case they aren’t buying the explanations, Ivester also gives them some ”oh, by the way” news. Coke has just cut two deals that strike at the heart of the private-label issue: one, to stock a new beverage aisle in 1,500 Wal-Mart stores; two, to replace McDonald’s (MCD) private-label orange drink with Coke’s own Hi-C brand orange drink. So there.
While Wall Street pressure may force Goizueta to fret constantly over his stock’s short-term performance, the man — to his soul — is the essence of a genuine owner-manager, the strategist who tries to envision his company ten, 20, 30 years out. He has never sold a share of Coke stock — which constitutes almost his entire net worth — and still owns the first 100 shares he bought after joining the company, valued today at over $1 million. Cuba is one of the few countries on earth where Coke is not sold. Had Castro not taken power, Goizueta says, his father — a wealthy sugar grower and refiner — would have purchased the Havana Coca-Cola bottling franchise, and today he, Roberto, would probably be an anchor bottler.
As Goizueta peers far into his company’s future, he seems to see himself still coming to work in the next century. He is, after all, one of only two men who can truly be said to have been in charge of Coca-Cola since 1923. The other is his benefactor, The Boss, who retired from the company presidency in 1939 to pursue his passions for golf, bird dogs, and strong drink. But Woodruff stayed on as chairman of the executive committee and was still strong enough in 1980 to hand the keys over to Goizueta before dying at age 95 in 1985. Now Chairman Goizueta has been dropping hints in his recent writings on corporate governance that he favors separating the jobs of chairman and CEO — a pretty clear indication that he sees no end to his own chairmanship.
The company’s other owners seem comfortable with that prospect.
Herbert A. Allen, the New York investment banker who came on to Coke’s board with the acquisition of Columbia Pictures and stayed after he helped sell the entertainment company to Sony, says he puts his money on people and argues that you can’t find a better bet than Goizueta. ”A lot of people underestimate Roberto because he is quiet and self-effacing,” says Allen, who brought Keough over to his investment banking firm as chairman upon his retirement from Coke. ”They say Coke had one of the great names when he took over. But there were a lot of other great names back then too: Sears (SHLD), IBM (IBM), American Express (AXP), Bank of America (BAC), Eastman Kodak.”
Allen is no disinterested observer: He controls almost five million shares of Coke stock. Another fan with a huge bet on the table is Warren Buffett. ”If you have the 1927 Yankees, all you wish for is their immortality,” he says. Buffett recently sold some put options that would allow him to increase his holdings by about $175 million should the stock price drop another 15% or so. ”As long as we have the kind of people who are as focused as they are, I don’t worry about the business. If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done.”
Maybe not. But just maintaining leadership won’t be enough. The real challenge facing Coca-Cola in the Nineties is whether it can continue to conquer the world rapidly enough — and at a big enough profit — to keep shareholder value rising on the kind of trajectory of which only a few companies dare to dream.