Coca-Cola

Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: David, I cannot believe we’re about to do a four hour podcast on syrup, sugar, and water. That’s the entire business, is just syrup, sugar, and water combined, and it’s a $300 billion company.

David: Well, Ben, you know what I’m going to say to you in response to that? Do you want to sell sugar water for the rest of your life? Or do you want to come with me and change the world?

Ben: Save it, David. Save it.

Ben: Welcome to the Fall 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I’m Ben Gilbert.

David: I’m David Rosenthal.

Ben: And we are your hosts. Charlie Munger has a famous thought experiment. It’s the 1880s. You want to build a company from scratch that eventually becomes worth $2 trillion, starting with just $2 million. So you’re looking for a one million X return, or as Charlie puts it, a Lollapalooza outcome.

David: Of course he does.

Ben: Very Charlie.

David: Very Charlie.

Ben: The constraint is it must be a non-alcoholic beverage business. And another constraint, it must throw off many billions of dollars in dividends along the way to your shareholders. This sounds almost impossible, but what ideas could you possibly dream up to give it your best shot?

David: Well, I think the first question I would have is whether I could include any (now) illegal drugs in my product.

Ben: That certainly helps. So to build this giant valuable company, the first thing you need to know is you’re not going to get there with something generic. You have to build a brand that grows into a strong, protected trademark. And to reach that scale, it must be global. It has to have a taste that’s universal in all countries.

Now conveniently for you, all humans do require large amounts of water every day to live, so it is a giant market. But you’re not going to fully replace water. It’s just going to be a small fraction of the time. So onto the beverage itself, you’re going to want to optimize it to maximize the rewards of ingesting it as refreshing as possible in any climate.

Now, you’re going to want to do a bunch of other stuff too. You want to fill it with calories to give energy. You want the flavor, texture, and aroma that makes it pleasurable to consume. And you should throw in some brain stimulants like caffeine and sugar. That’s the ideal product mix.

David: Among other things, yeah.

Ben: Now, you don’t want competitors to swoop in for a free ride on the market you just created, so you should make sure your product—the real thing—is available everywhere, anytime someone asks for it.

David: I see what you did there.

Ben: At a very low price, so there’s really not an opportunity for competitors to ever fill the vacuum. There’s never a reason for anyone to reach for anything other than your product.

David: Always.

Ben: Always, David. Since everyone is not thinking about beverages all the time like you probably are as the proprietor of this business, you’re going to want to associate your beverage with all the things that they are thinking about—the good life, family, your sports heroes, beautiful people, Christmas, happiness. Generally, you are going to want to have a Pavlovian association between your drink and happiness, and you’re going to want to spend huge amounts of money blanketing the entire world with this messaging.

Now to build something this valuable, you also can’t have a big expensive bottling and distribution operation, so you’re going to need to figure out some clever way to get someone else’s capital and employees for that while still maintaining the control that your brand requires. Ideally, it would be great if you could serve the entire world with just a few of your own production facilities.

David: That would be pretty great.

Ben: And the last thing. You must never, under any circumstances, change the formula or flavor.

David: We were doing great there.

Ben: We were doing great.

David: But this might be why Coca-Cola is not a $2 trillion company today.

Ben: Well, we’ll debate that at the end of the episode. Listeners, of course, this playbook is almost exactly what the Coca-Cola company has done, and they’ve done it over the course of 140 years. It has its roots all the way back in the Civil War. It grew up through the rise of the automobile, through the Great Depression, through two World Wars. It seamlessly and shamelessly integrated into the hippie culture of the 1970s, and then of course, it had the epic cola wars of the 1980s and onward. David, I would say this episode, perhaps more than any other that we’ve covered, is about America.

David: Well, it’s about America, and then America inserting itself everywhere else in the rest of the world.

Ben: Can’t wait to dive into it. Well, listeners, this episode was selected by you. Last month, we asked our email subscribers to vote on what company we should cover next, and Coca-Cola was the overwhelming favorite, so thank you to all of you who participated. You can join that email list at acquired.fm/email to get in on the next round of voting.

That same email list is getting a lot better. We just did a big overhaul, so each monthly email will now have episode summaries, our big takeaways from the company after studying it, and exclusive photos from our research process. Never miss an episode drop by signing up at acquired.fm/email or clicking the link in the show notes.

Before we dive in, we want to briefly thank our presenting partner, J.P. Morgan Payments.

David: Just like how we say, every company has a story, every company’s story is powered by payments, and J.P. Morgan Payments is a part of so many of their journeys from seed to IPO and beyond.

Ben: So with that, the show is not investment advice, David and I may have investments in the companies we discuss, and the show is for informational and entertainment purposes only. David, where do we start our story?

David: Well, Ben, as you so aptly set up there, the story of the birth of Coca-Cola starts arguably with the birth of America as we know it today, in a newly reunified United States of America following the Civil War.

Mark Pendergrast in his great book, For God, Country, and Coca-Cola—that was a main source for this episode—has a great quote. He says, “Coca-Cola remains emblematic of the best and worst of America. It is a microcosm of American history. Coca-Cola grew up with the country, shaping and shaped by the times. The drink helped to alter not only consumption patterns, but attitudes towards leisure, work, advertising, sex, family, life, and patriotism,” just a few small things.

If you remember back to our Standard Oil series a couple of years ago, one of the biggest industries in post-Civil War America was oil of a certain kind, but it wasn’t the same oil as Standard Oil. It was snake oil.

Ben: Ah, good hook.

David: Or as it came to be known after the war, patent medicines. Before this industry, there were no national brands in America or anywhere else. There were railroads and there were big national industrial companies, but there weren’t any national consumer product companies. Everything was local.

There weren’t any CPG companies, there weren’t any supermarkets, there weren’t any car companies, there weren’t gas stations, and there weren’t advertising agencies to go along with them. Patent medicines were like this seed crystal that created the modern American consumer business.

Ben: And what were patent medicines?

David: Going back again to our Standard Oil series, John D. Rockefeller’s dad, if you remember, was a traveling…

Ben: Snake oil salesman.

David: Yeah. In his days back before the Civil War, these were medicines that promised a cure to all sorts of ailments—nausea, indigestion, headaches, cancer, tuberculosis, skull fractures, paralysis, and impotence.

Ben: All based on zero research, zero studies.

David: Zero science, nothing. The Civil War changed all that, not necessarily for the better. After the war, there were so many wounded soldiers in America that were in such chronic pain that the market for medicines like this, from these snake oil salesmen just exploded. A huge, huge percentage of veterans from the Civil War developed what is called “army disease,” i.e., they were addicted to morphine for the rest of their lives as a painkiller.

Ben: Which actually did work.

David: Yes, that actually did work.

Ben: Very well.

David: At killing pain. It wasn’t just physical injuries from the war and the soldiers who fought in it. The Civil War ripped America apart. These guys and their families had just gone through this devastating trauma. There were so many deaths, so many wounded, it was families fighting against one another. It was truly arguably the worst moment in our nation’s history. Naturally, whenever there’s a big problem, American capitalism sees a big opportunity.

Some of these enterprising traveling snake oil salesmen started scaling up the medicines that they were making to meet all this new demand. As they scale up and they start to standardize the products that they’re offering, this industry comes to be known as patent medicines.

Now, most of these medicines were not actually patented, but as the producer of them, you wanted customers and would-be competitors to think that they were, that there was some barrier to entry. Pretty quickly, these newly scaling patent medicine guys discover that the best way to reinforce that message with consumers and to stimulate demand was advertising, especially in newspapers. And this is the birth of the advertising industry in America.

Ben: Really?

David: It’s these patent medicines that start spending the first real scale dollars in newspapers, which are also coming up in industrializing post Civil War, and building the business model of the media industry as we know it today. Because just like you were talking about in your great Charlie thought experiment from the intro, what are these patent medicines?

It’s just commodities like leaves, nuts, water and stuff that go into these things. It’s—

Ben: Extracts, David?

David: Extracts, right. It’s super cheap commodities that are very easy to obtain in great quantities, very easy to then produce into your product and transform, then pretty small relative to other products, easy to transport around the country. You do start to get some of these patent medicines that scale up and build early national brands in this day.

You might think that all this is ancient history. A whole bunch of products that we still buy today started as patent medicines—Luden’s cough drops, Vicks VapoRub, Vaseline, Listerine the mouthwash, all patent medicines. Those are patent medicines that are still used for health purpose today. Plenty of products that we still use and consume today started as patent medicines but are no longer marketed as medicines. Graham crackers started as a patent medicine.

Ben: Really?

David: Grape-Nuts the cereal.

Ben: Neither grape nor nuts.

David: Angostura Bitters. You know, the bitters that you get in old fashioned stuff?

Ben: Oh, yeah.

David: That was a patent medicine.

Ben: Okay, that makes sense. That’s squarely what I believe a patent medicine is.

David: And then, a couple of things you might be familiar with. Dr. Pepper.

Ben: Really? I didn’t know Dr. Pepper was that old.

David: Dr. Pepper predates Coca-Cola. And of course, Coca-Cola started just the same way as a patent medicine. Which brings us to Dr. John Pemberton, a confederate war veteran, who had not only been stabbed, he had also been shot during the war, and got army disease just like all these other soldiers, and was addicted to morphine for the rest of his life.

After the war, he moves to Atlanta, and as part of his entrepreneurial aspirations in this new patent medicine consumer economy, and also to probably solve his own problem, he starts casting about for other drugs that could cure him and others of army disease.

That is how in the mid-1880s, he learns about a new miracle drug sweeping America, promising to cure all ills including army disease, cocaine. Cocaine was really, really in America in the 1880s, perhaps foreshadowing a little bit the 1980s in America, as we will get to later in the episode.

Ben: Except in the 1880s, it’s really legal and really broadly encouraged. Certainly there’s no FDA or anything to make it illegal, but society’s posture toward cocaine wasn’t bad.

David: It was like caffeine today.

Ben: They did not really discover the addictive nature of it, or demonize the addictive nature of it yet.

David: Or the side effects, et cetera. Pretty quickly, cocaine becomes the most popular patent medicine ingredient out there.

Ben: It’s probably the only ingredient that actually did anything.

David: And there is a product on the market, an imported product from France—you can’t make this up—that quickly becomes the most popular delivery vehicle for cocaine. A cocaine-fortified wine from Bordeaux in France called Vin Mariani.

Ben: It’s the most extreme Four Loko you could ever dream of.

David: Exactly. This sounds utterly ridiculous today, but let me read you the list of public endorsers of Vin Mariani, the testimonies in the Rolex parlance. “Thomas Edison, Buffalo Bill Cody, United States President William McKinley—gets even better—Queen Victoria of England, and not one but three consecutive popes in the Vatican, all swore by Vin Mariani.

Ben: Feels like a thing I would be swearing by and endorsing too. I imagine once you start, it’s the best thing ever.

David: So entrepreneurial Pemberton in Atlanta sees Vin Mariani’s success and like, well I wonder if there’s a way that I could copy and improve on that. The way he comes up to improve upon it is to add caffeine to the mix.

Ben: Why not?

David: Yeah, why not? He decides that he’s going to get the caffeine from African kola nuts.

Ben: Which we should say is the first introduction of the word cola—period—in the American lexicon. Cola drinks were not a thing.

David: Yup, and it’s very bitter. But the reason he chooses it is it has an even greater caffeine concentration than coffee beans. He really wants this product to work.

Pemberton starts selling Pemberton’s French wine, Coca, which is still wine, but is now infused both with coca leaves for the cocaine and kola nuts for the caffeine. And it’s a hit.

Ben: This could not have tasted good.

David: No, I can’t imagine what it tasted like. President Ulysses S. Grant becomes a fan, and Pemberton starts selling thousands and thousands of bottles in and around Atlanta.

Ben: Which makes sense. People are drinking it for its drug-like medicinal qualities, not that it’s in any way refreshing.

David: Yup. Now I say bottles. Keep that in mind here. Bottling technology in the 1880s is not what it is today. Not very good at preserving liquids or foods. Certainly not good at preserving carbonation. However, because this is a wine at this point in time, wine has natural preservatives in it, so it’s self stable. You can sell bottles of wine and people have been selling bottles of wine for centuries at this point in time.

Ben: So then prohibition hits. Party’s over.

David: Yup. Fall of 1885. Atlanta, I think might have been the first major city in America that institutes prohibition and becomes a dry town, no alcohol. Pemberton’s now like, well shoot, I’ve got this hit product. I need to scramble and come up with a soft version of a soft drink. And this is the origin of soft drinks. They’re not hard as in alcoholic drinks. They’re soft. There you go.

He starts madly experimenting with all sorts of flavors and ingredients. After six months or so in April of 1886, he nails a formula.

Ben: The question is, how does he arrive at this formula? The book I was reading, which is called Secret Formula—it’s a great book on the history of Coca-Cola that had access to all the corporate archives—really describes Pemberton in this phase as finding his capitalist streak, as realizing, okay, take a step back. Patent medicines are sold for 75¢ a dollar. It serves a crowd of people when they’re looking to recover from some ailment, or really at this point, probably serve an addiction.

David: We’re now 20 years from the Civil War, so a new generation is coming up that doesn’t have army disease.

Ben: Is there a product that I can make that people can afford anytime they want, that’s not a medicine, that’s just a refreshment, and has all these other great properties using some of the ingredients that we’ve been using?

He comes up with this idea of a 5¢, again, because the ingredients cost so little, these extracts, it’s a super high margin product. A 5¢ thing that anybody can have just to have a little pick me up, a little treat when they’re at the soda fountain, when they’re sitting down in the social gathering space. Because drug stores at that time were the Starbucks of this time. It really was this gathering place to go and spend time. He says, I’m going to serve this other market of anytime refreshment.

He’s playing around with these ingredients, and he’s got the kola seed that’s got this natural caffeine in it. Fun story: in the original Coca-Cola, for the first, I don’t know, a couple of decades, it actually had four times the amount of caffeine that Coke does today. It was effectively an energy drink, even leaving the cocaine aside.

However, the kola seed tastes really bitter. It’s absolutely horrible. Which was not a big deal previously because he was mixing it with wine. People were drinking it for medicinal purposes, just slugging it down. But he is trying to create a refreshing beverage here.

I did not know that this was possible way back in 1886, but what he does is he uses synthetic caffeine. Merck, the pharmaceutical company, had already been extracting pure caffeine from kola seeds. Pemberton just got a hold of Merck and bought a bunch of the powder. The first version of Coca-Cola is a little tiny bit of the kola seed, just to say that it’s in there. He’s going to call this thing Coca-Cola, but the caffeine actually comes from a synthetic extract.

David: Interesting. It’s always been synthetic, huh?

Ben: That’s right.

David: I didn’t know that. That’s amazing.

Ben: It was a great excerpt from the book, Secret Formula. “At last, he stood on the verge of inventing Coca-Cola. Down in the basement, Pemberton filled his 40-gallon kettle with plain water, which he then heated to a boil over an open fire. Using a wooden paddle to stir the solution, he melted in sugar and caffeine.”

David: Sugar because of the extreme bitterness of the kola nut.

Ben: And actually the coca plant was also bitter, so sugar was to offset it. “Next, he added caramel for coloring, giving the syrup its dark, distinctive port wine color. To balance the sweetness of the sugar and give the syrup its tang, he added lime juice, citric acid, and phosphoric acid.

Then as the basic blend cooled, Pemberton turned to the question of flavor. Into the mix went vanilla extract, elixir of orange, and several pungent oils refined from various fruits, herbs, and trees—lemon, nutmeg, spice brush, coriander, and neroli. The last ingredient in perfumes distilled from a flower of the orange tree.

The most exotic was oil of cassia, also known as Chinese cinnamon, made from the bark of a tree found in the tropical regions of Asia. Of course, Pemberton added this brew to the fluid extract of coca leaves. Exactly how much cocaine went into the inaugural batch of Doc Pemberton’s new soft drinks syrup is impossible to calculate more than a century later, but with even a touch of the drug in combination with the sugar and caffeine, four times the amount in today’s Coke made Pemberton’s concoction quite a stimulating beverage.”

David: Yes, indeed. As best as I was able to read from a few different sources, I think roughly, once Coca-Cola starts being produced in that first decade, (call it) four or five glasses of Coca-Cola would be about the equivalent of a line of cocaine today.

Ben: So it would take a lot of Coca-Cola. If you’re drinking that much of that formula, you’re having the equivalent of 16 cokes worth of caffeine. It’s an absolute crap ton of caffeine and sugar. By that description, the cocaine probably would affect you less than the sugar and caffeine in the mix.

David: That’s a good point. Regardless, you’re going to get hype when you drink this.

Ben: And this amount of cocaine really was only a part of the formula for those early first few years.

David: But it lends the first half of the name, which Pemberton’s business partner at the time, a guy named Frank Robinson comes up with a simple, descriptive, perfect name for this new brew, Coca-Cola.

Ben: Which is funny because it neither contains much kola since the caffeine is actually an extract and it’s just a tiny little drop from the kola seed, and very soon they would strip out almost all the cocaine, so you have a product that for the next 140 years would be called Coca-Cola that contains really not very much coca and really not very much kola.

David: Yes, indeed. They go about getting the new product installed and distributed in drugstore soda fountains around Atlanta. Ben, you were saying a minute ago about, oh, drugstores were this gathering place at the time.

Remember I said about bottling technology. If you weren’t selling alcohol, which had natural preservatives, the only way that you could buy and consume a drink that really wasn’t water or milk or something was fresh.

That’s how soda fountains come to be installed in these drugstores. They’re selling the patent medicines, many of which are liquids. That’s also how carbonated water comes to the drugstore because mineral water, carbonated water is thought to be a health tonic. So it all mixes together. Then over the years, these morph into social places, thanks in large part to Coca-Cola.

Ben: Makes total sense. I’m pretty sure what actually happens is Pemberton lets his formula settle, and it’s this thick syrupy thing, brings it down the street to the first drugstore, and that druggist, that proprietor is the one who actually combines that syrup with the carbonated water and makes the choice, which I think could have gone either way. Is it a still or a sparkling beverage to give it that champagne sparkle to create the Coca-Cola that would endure from there?

David: Well, thank goodness they do use the carbonated water. Could you imagine Coke if it were still? That wouldn’t be very good.

Ben: Well, it wouldn’t be as successful. There were probably hundreds of things like Coke that were still, that did not succeed.

David: Pretty quickly, Coca-Cola gets into the market with these drug stores and soda fountains, and people love it. This is great. It’s a dual benefit product. It has all the medicinal benefits of cocaine and caffeine, the cola that they’ve been marketing, and it’s actually really enjoyable to drink and it tastes great.

The next year in 1887, Frank Robinson, the business partner who also named the drink, also introduces the script logo. He writes out the Coca-Cola script logo that we still use to this day.

Ben: This is unbelievable. I read that this guy was Pemberton’s bookkeeper, and yet he’s the one who came up with the name Coca-Cola and the Spencerian script (that logo Coca-Cola) which has been unchanged, other than just tightening it up a little bit since he created it in 1887.

David: It is true that he was his bookkeeper, but he was also his business partner. It was like—

Ben: I’m your bookkeeper–type thing.

David: Exactly. The two of them come up with a pretty ingenious advertising and distribution method, because in the early days they don’t yet have a ton of capital to start spending on advertisements like all the other patent medicines out there.

They decide that they are going to offer tickets to consumers, redeemable at their local Atlanta soda fountains for free glasses of Coke. They start mailing out these free Coke tickets or coupons you might say, to every address in the Atlanta City directory. Then they also give them to traveling door-to-door salesmen to go hand out on their routes. Not Coca-Cola salesmen, but salesmen that are selling a variety of different products.

Ben: And this is the very first manufacturer’s coupon redeemable at a retailer.

David: Yes. There’s an image on Wikipedia of one of these tickets from 1888 that is the oldest known coupon used in America. And it is actually beautiful. It looks like a dollar bill. We’ll put a photo of it in the email. It’s incredible. This becomes absolutely huge for Coca-Cola and integral to its success.

Ben: Well, yeah. It’s a high gross margin product where you can give out giant amounts, where if you mail someone a little ticket that says you can come and redeem a free drink that tastes good, that’s full of sugar, caffeine, and cocaine, I’m pretty sure they’re going to buy more from you.

It’s a high gross margin product. You have lots of dollars to play with. And on top of all this, this is a new product category, this notion of a soft drink that’s not a patent medicine that’s much cheaper than traditional patent medicines. You do actually need to do some category creation marketing where you make people aware that this cool new thing exists.

David: All of that is true. Even more so, this couponing strategy aligns incentives for everybody in the value chain in a way that had never been done before. Consumers love it. They get free drinks of this great tasting beverage. Drug stores and soda fountains super love it because now they’re getting more foot traffic. Then once consumers come back and start buying their second, third, fourth, 400th drinks, this is a highly profitable drink for them to sell. They have gross retail margins on this.

Then three, the traveling salesman who Pemberton and his associates are giving these tickets out to, well, they love it too. This is like, oh wow, now a great new free benefit I can offer my customers. Why wouldn’t I want to do this? It’s this incredible invention that completely incentivizes rapid extreme growth in distribution of the product.

To further illustrate how awesome this is for the soda fountains Coke, when they were selling gallons of syrup to the soda fountains, they sold them for about $1.30 per gallon. The soda fountains then sold drinks to customers at 5¢ a drink. There are 128 drinks per gallon. They’re making $6.40 of revenue for a product that costs them $1.30 to buy. I’m not a retailer, but I’m pretty sure those are good margins.

Ben: Pretty sweet deal if you can get it then, and pretty sweet deal to be McDonald’s today offering my large Coke with a meal.

David: Yeah, man. Pretty sweet deal, indeed.

Okay, so all of this happens within the first year, year-and-a-half of Coca-Cola being on the market. Pretty quickly, Pemberton, who wasn’t really doing much anyway after inventing the drink—as we said, Frank Robinson named it, made the logo, is doing a lot of the distribution work—Pemberton becomes convinced that he’s dying,

Ben: Which he generally was slowly over all these years.

David: Yes. And he secretly decides that he’s going to sell off the rights to the formula.

Ben: Without telling Robinson.

David: Without telling Robinson, without really telling anybody. This kicks off a whole mess of very questionably legitimate transactions that results, by mid-1888 early 1889, in Frank Robinson discovering what’s going on and seeking out a wealthy Atlanta businessman named Asa Candler to come in and be his new partner, to reunite all these various claims to ownership of the formula and the company that they can then grow, scale, and manifest its destiny across America and the world. Asa Candler is really the person who creates the modern Coca-Cola company with Frank Robinson’s help in 1892, which he incorporates as the definitive Coca-Cola company.

But before we tell the story of the Coca-Cola company, now is a great time to thank our presenting partner, J.P. Morgan Payments.

Ben: Who wants to wish all of you a happy holidays.

David: Happy holidays.

Ben: And to share some stats on how their infrastructure kicks off its holiday season. Last year they processed over $53 billion during Thanksgiving week. That is insane scale. At one point on Black Friday last year, they were processing over 6000 transactions per second, and that is actually 17% higher than the previous year.

David: Wow. Yes, that is insane scale.

Ben: On our history of credit cards a few years ago, we told the story of how in the early 1990s, customers behind you in line used to get mad if you pulled out a credit card because it was actually slower than cash. It’s hard to fathom today that payment processing was measured in seconds and in minutes, not in milliseconds like today.

David: I won’t even do any holiday shopping in person anymore. It’s just not worth the hassle. I do everything online.

Ben: Well, that’s where I was going. Our friends at J.P. Morgan told us that 50% of the top 10 online transaction days now occurred during the Black Friday to Cyber Monday period. But that means that the payment landscape has gotten enormously more complicated with all the different ways to pay. This is awesome for consumers like you, David, but it creates a ton of data for merchants that causes complexity, especially with holiday shopping.

Enter J.P. Morgan Payments, commerce solutions. They manage the complexity for you, and they’ve built a customer insights platform to turn payment data into actionable insights. You can make reports of things like revenue in different geographies each day, demographic shifts in your customers, benchmark against peers, or even purchase patterns for repeat customers.

David: And this is huge for businesses during the holiday season because while I do my shopping online, J.P. Morgan actually found that the next generation of shoppers are going back to source, which is wild. Over 55% of Gen Z’s holiday spend is through omnichannel experiences, far surpassing other age groups.

Ben: So listeners, if you’re looking to do more with your payments data with invaluable customer insights and meet your customers where they are, visit jpmorgan.com/acquired to learn how commerce solutions can grow your business.

All right, David, this is the first professionally run version of the Coca-Cola company.

David: Yes, but to give you a sense of just how much of a hit this product becomes, how quickly, even in the couple of years before the professionalization and the founding of the Coca-Cola company, in 1887 so the first year that Coke (the product) is on the market, Pemberton and Robinson sells 600 gallons of Coca-Cola syrup to soda fountains, which equates to about 75,000 glasses of Coke served. By 1889 (two years later), that is quadrupled to over 2000 gallons. By 1890, it’s almost 10,000 gallons.

What’s that? Three years into the business with no professional management, they grow the business 10x without even really trying.

Ben: It’s amazing. In that next year (1891) when Asa Candler buys the last piece to fully own Coca-Cola, he got an incredible deal. Even with all that growth having already happened, he only paid $2300 to buy it all. That is the base of the company that he builds.

David: And that’s just buying all the various rights and claims from the people that Pemberton sold it off to. No capital needs to be invested in this business, ever.

Ben: Unbelievable.

David: It is a cash flow bonanza since day one.

Ben: It’s crazy.

David: So in 1892, the first official year of operation of the Coca-Cola company—we have the books—we know just how profitable they were. They spent just over $20,000 on ingredients and production costs. I think that includes all operations and stuff. There are only three people working in the business here.

They spend just over $10,000 on advertising. With those costs, they sell 35,360 gallons of syrup at an average price of $1.30 a gallon. That is $46,000 in revenue and $12,000 in profit.

Now for reference, the average household income in 1892 was about $500. There are three people working in this business, including Candler (the owner). They made $12,000 in annual profit in the first year of the business. They are crushing it.

Ben: Each person at the company, if they were paid equally, is making 8x the average household income.

David: They are in a promising business. And that’s just for the Coca-Cola company. Remember, the soda fountains are selling to consumers at $6.40 a gallon. So the actual gross revenue of Coca-Cola in the marketplace in that first year is close to a quarter million dollars.

Ben: That’s a quarter million dollars on, what’d you say? A little over $20,000 of ingredients in manufacturing?

David: Yes, and then another $10,000 in advertising.

Ben: That’s crazy. It’s only a 10th of the ultimate sale price of the beverages is there in the costs of the ingredients, the manufacturing, and the advertising when you fully load it.

David: Yes. There’s a lot of margin to go around. Speaking of advertising costs, in the next few years they invest heavily into advertising. Of course, the Coca-Cola company still does right up to this day.

The advertising they were doing, on the one hand, is very different from Coca-Cola advertising today. Specifically, it’s different in that it’s all purely intrinsic advertising. It’s about the nature of the product itself. Remember, they’re still positioning Coca-Cola as this dual use, refreshing beverage, non-alcoholic social drink, but also patent medicine.

Here’s some of the early ad copy during this period. “Coca-Cola is the ideal brain tonic and sovereign remedy for headache and nervousness. It makes the sad glad, and the weak strong.”

Ben: It feels patent medicine-y.

David: Feels patent medicine. Not a pause that is refreshing just yet. But what Robinson and Candler do do that is very much still on brand for Coke today is they are all about outdoor and point of sale signage and presence. They put the script Coca-Cola logo everywhere across Atlanta.

They make oil cloth signs. They paint murals on walls of buildings. They do billboards. They put it in street cars. They print posters for all the soda fountains to display. Then they’re like, why stop at posters? Let’s make calendars, let’s make cabinets, let’s make serving trays, let’s make glasses, let’s make clocks. All with the big Coca-Cola logo.

Ben: They would go on to paint 20,000 murals on the signs of barns and walls across the countryside starting in 1894. Unbelievable.

David: Incredible.

Ben: What you’re talking about, David, is this great use of all these extra margin dollars. They would do all this for free for drug stores and they would say, hey, don’t you wish you had a big, bright, beautiful sign to bring customers into their store, and Coca-Cola would design, pay for, fabricate, and deliver signs for drugstores that had the store name in big letters, and Coca-Cola’s name just as big. They did this for thousands of drugstores across the south. You see all these great old pictures of these stores that effectively look like Coca-Cola stores.

David: They’re beautiful, yeah.

Ben: It almost looks like they’re franchising Coca-Cola rather than Coca-Cola just being a thing that’s sold at the drugstores.

David: It’s so beautiful because, like you said, it seems like they’re franchising Coca-Cola with no capital investment. And the drug stores freaking love it because they’re making 80% retail margins on this Coca-Cola. Of course, they want it to be their number one product.

Ben: They want a big advertisement that says ‘We have Coke.’

David: Yes. So by 1898, Coca-Cola is distributing over one million branded promotional items per year. This is before the year 1900. Nuts. They also start expanding geographically because—we talked about syrup earlier—all the Coca-Cola companies doing here is selling this concentrated syrup. It’s the drugstore soda fountains that are then mixing it with carbonated water and making it a drink.

The syrup is small, compact, it’s shelf-stable, it’s easy to transport. Combined with the couponing strategy, they’ve got this killer national growth strategy. By 1895, Coca-Cola is being sold in at least one soda fountain in every single state and territory in the United States at this time. Wild.

Ben: Wow. If you look at old pictures of this time, they had landed on what you were talking about, the intrinsic advertising, a slogan that most people will know, delicious and refreshing, that you see on all the old Coca-Cola memorabilia. That’s coming into view.

They’re not yet talking about the lifestyle you could have if you associate with Coke. They’re talking about quality and they’re also talking about price. They’re advertising as many places as they can. Hey, this is 5¢.

They also start for the first time working with celebrities and athletes in some of these advertisements that they’re doing. Of course, as you would expect, in 1895 they trademark the Coca-Cola script for the first time. They are granted that unbelievably valuable trademark.

David: The delicious and refreshing slogan actually evolves during these years. It’s Frank Robinson who starts to lean more towards delicious and refreshing and the social benefits, and away from the patent medicine, brain tonic slogans.

There’s actually a great quote on this from him in For God, Country, and Coca-Cola. He said, “We found that we were advertising to the few, i.e., people who needed a brain tonic, when we ought to advertise to the masses.” So he starts dropping all this, ‘oh, sovereign remedy for headaches and nervousness’ stuff and then starts really emphasizing the drink, ‘Coca-Cola: Delicious, refreshing.’

This is really important because he is hitting on like, hey, Coca-Cola is for everyone. It’s not only for people who have something wrong with them that they need a medicine to fix. It’s not a niche, it’s not a demographic. It’s for everybody.

Two, just instinctually he understood, hey, we don’t want to associate our product with negative things, with problems. Headaches, nervousness, those are problems. We want to associate our product only with positive things—delicious, refreshing, friendship, et cetera.

Ben: Which is so funny. At this point, all the cocaine is not gone yet. It’s being marketed as this unabated good. Well, at the same time, the company’s like, eh, we should probably do our best to start moving away from cocaine because it doesn’t actually seem to be the value proposition that people are here for. And the anti-cocaine sentiment is coming.

David: Yup. Before they fix the cocaine issue, though, Candler in 1899 makes what is maybe simultaneously the best and the worst business deal in history. He gives away the right to bottle and sell Coca-Cola for free.

Ben: Definitely one of the dumbest deals ever if you just look at it as it was in that moment, but would be Coca-Cola’s second great business model innovation after couponing.

David: So in 1889, two guys from Chattanooga, Tennessee named Benjamin Thomas and Joseph Whitehead come to Candler with a proposal. They want to bottle Coca-Cola. They’re convinced that bottling technology has matured enough at this point that they can now bottle fully mixed Coca-Cola beverages. Not only will they not go bad, it’ll keep the carbonated fizz. It will still be delicious when opened and consumed at a later date.

Ben: And Candler’s very anti-bottling, right?

David: Yes. He is extremely skeptical. He’s like, yo, we’ve tried this before. I really don’t think the technology’s there. I’m not sure about this. Thomas and Whitehead, though, were very persistent. They say, well, totally get that, understand that. What if we do it at no risk to you? You let us buy Coca-Cola syrup from you, same as all the soda fountains are doing. We will bottle it and sell it at our own expense. If the product isn’t up to your standards, you can just pull our license and we’ll stop selling it.

Candler thinks it over and he’s like, that’s a pretty good deal. I’ve got nothing to lose here. Why not? I’ll let you two young bucks have a go at this.

So in July of 1899, the three of them sign a contract that includes the following terms. For a token contract price of $1, which Candler never collects, the Coca-Cola company will sell syrup to Thomas and Whitehead at a volume discount price of $1 per gallon, so even less than they are selling to the individual soda fountains out there because (I think) this is going to be a higher volume business. Thomas and Whitehead will have the exclusive, assignable right to market and sell bottled Coca-Cola for 5¢ per bottle, same price as at the soda fountains, across practically the entire United States.

Ben: But this 5¢ per bottle, operating a bottle is a tougher business than operating the soda fountain in this respect because there is one meaningful additional cost: the bottle itself.

David: Yeah, the bottle. You can see why Candler was reluctant to get into this business. Thomas and Whitehead must use only Coca-Cola syrup. They can never use any substitutes or competitors as the syrup for the products that they’re selling. They cannot sell to soda fountains. That channel will remain directly sold by the Coca-Cola company. And if they fail to supply enough product to meet the demand for bottled Coke in the territories that they have rights over, the contract will be forfeit.

The Coca-Cola company will provide all advertising needs for the product and maintain all control over advertising. That’s it. There is no term length on the contract.

Ben: And gosh, there’s got to be something in there about how that $1 per gallon could change over time, right?

David: Nope. No, there is not.

Ben: So the Coca-Cola company, as long as this bottler continues to satisfy the demand and doesn’t violate any of the other terms, is obligated to keep selling syrup at $1 per gallon to the bottler.

David: Yes, and the bottlers are obligated to keep selling bottles to the public at 5¢ retail cost.

Ben: Fascinating. So let it be written.

David: Obviously there are so many things wrong with this, but also so many things right with this. This lets the Coca-Cola company enter and scale the bottle business completely capital- and investment-free. They don’t have to do anything besides advertising, which they are already doing for their growing national business.

Ben: In fact, they’re not doing any different advertising. They’re just amortizing the cost of the same advertising against one more touch point that they could have with the customer. They’re still painting the same barns, they’re still putting up the same signs.

David: Yup. Thomas and Whitehead go back up to Chattanooga. They set up the Coca-Cola bottling company, and they start selling bottled Coke for the first time to groceries, stands, and saloons (as they put it). Obviously all three of those are pretty big markets for Coca-Cola today, especially the groceries and stands AKA gas stations, convenience stores, et cetera.

Ben: And at this point in history, in 1900, the Coca-Cola company is still just 20 employees. They’re about to get ridiculous leverage on just a handful of people that work at the parent company. And that includes making the syrup. It’s a small head office.

David: High margin product, baby. Pretty quickly, two things happen with young Thomas and Whitehead here. One, they didn’t actually know each other very well before going into business together. They end up getting into a fight and splitting into two separate companies. Remember, the contract is assignable. They can do whatever they want with it.

So they split up the territory across America and they say, great, we’re going to assign the rights we have in this contract with the Coca-Cola company to our two separate companies. Then they both independently decide, actually owning and operating these bottling operations, dealing with the capital investment of both setting up the production lines and then buying the bottles, recycling them, returning and cleaning them, et cetera…

Ben: It’s a low margin, very upfront capital-intensive thing to bottle Coca-Cola.

David: And operationally very intensive too, of course. We’ve realized we can just assign the rights that we have here. Well why don’t we keep assigning the rights? They start subcontracting out little sub-territories to other entrepreneurs and small bottling operations across the country. Basically overnight, first dozens, and then hundreds of local Coca-Cola bottling operations pop up in these entrepreneurial endeavors in basically every town and countryside across America.

Ben: That have no contractual relationship with the Coca-Cola company. They have a relationship with this “parent bottler.”

David: Either Thomas or Whitehead. Thomas and Whitehead’s companies come to be known as the parent bottlers. Then all the guys doing the actual work come to be known as the actual bottlers or the first line bottlers.

Ben: This is the ultimate rent seeker. Thomas and Whitehead just have a little toll booth set up in between the Coca-Cola company that owns the intellectual property, makes the syrup, markets it, and the bottlers who are actually doing the work. They’re just clipping little coupons as the money flies by on the way over to the bottlers and the Coca-Cola company.

David: But hey, Candler and Robinson weren’t going to do this, so more power to them.

Ben: That is the argument here is that there is economic value from Thomas and Whitehead and actually spurring bottling to happen at all.

David: And they need to go find the local bottlers, set up these entrepreneurs, and teach them how to do it. Eventually they’re doing nothing, but in the early days they’re not doing nothing.

Ben: That’s true. Within 10 years, they managed to find 400 proprietors of bottling operations, get them to stand it up, and by 1925 there was 1200. It is a busy, busy 25 years finding all these child bottlers.

David: Basically this creates a second wave of blitzscaling, if you will, for the Coca-Cola company across America, because they’d already nationally expanded to soda fountains. But soda fountains are only in towns large enough to have a soda fountain. What about all the rural areas of the countryside? Not to mention just the simple market expansion of letting people drink at home or wherever, restaurants, anywhere else.

Ben: Huge deal.

David: The net of this is that within a few years, basically every single man, woman, and child in the United States becomes intimately aware of and familiar with Coca-Cola, and the company doesn’t have to lift a single finger to do it.

Ben: This reminds me a lot of our Visa episode where we were talking about the difference between if you’re Visa and you’re scaling as a network of networks versus if you’re Amex as a closed loop system. We were talking about how Visa achieved tremendous scale relative to their head office size, their employee headcount. They did it in a very short period of time.

Coca-Cola is in the same thing here, where they can scale so fast because of the bottlers, where they’re not actually having to do all this work themselves. I don’t think Coca-Cola is the ubiquitous international product that it is today where they just created and then won the market without this bottler scale thing.

David: No, absolutely not. If they had taken the Amex approach and Candler had decided, ah we’re going to enter the bottling business ourselves and we’re going to go market-by-market and invest the capital in the production lines and the bottles, absolutely no way would they have reached the critical scale that they did in the country. And then internationally too. They use the same model to go around the world.

Ben: Yup, and Coca-Cola would start referring to this as the Coca-Cola system. I don’t think we’ve ever studied a business before that has a system like this, where you can look at the Coca-Cola company, which is ostensibly what we’re doing on this episode, but actually to understand the scale, impact, and reach of the product, you have to look at the system holistically. The sum of the Coca-Cola company and all the bottlers.

The crazy thing is this is still the system today. Coca-Cola still doesn’t bottle. We can talk about the exceptions to that, but in large part, and their desired end state is there are all these bottlers around the world that they just sell syrup to.

David: It’s like Microsoft and Intel in the PC era, except even more closely tied. It’d be like if Microsoft had contracts with Intel where they got to stipulate what the processes were going to look like and what the machines were going to look like.

Ben: It’s funny. The thing that it made me think of was it’s like our Rolex episode where Rolex, you don’t want to be in the authorized dealer business. It’s operationally expensive, the training’s hard, but you do want the control over the retail experience. And Rolex managed to have their cake and eat it too like we talk about that on that episode where they can say, hey, it’s a privilege to be able to sell our watches. So you’re going to make your store conform to our exact standard.

Coca-Cola does the exact same thing with the bottlers and they say, hey, you have a license to print money. It’s not as much money as we’re going to print, but you can print some money, and you know it’s going to be a good business.

David: More than some money. The local Coca-Cola bottlers usually become the wealthiest family in any given town across America.

Ben: Very true. But just to make sure we’re super clear, Coca-Cola versus their bottlers, the Coca-Cola company has higher gross margins, much better returns on invested capital, requires less invested capital. They get to focus on just making syrup and marketing. They don’t have to do any of the undifferentiated stuff. You’d much rather be Coca-Cola than the bottlers. But it’s a good business to be the bottler too.

David: Especially if you’re a small town entrepreneur and turn of the century America. Hell yeah.

Ben: And if the Coca-Cola company is going to dictate terms to me and tell me exactly how red my truck needs to be, that it must say Coca-Cola in this particular way, and the bottles must come off exactly like this, that is fine. I’ll agree to all of this because I know…

David: I’m going to make money, yes. So once things turbocharge with the bottlers and scaling across America, a lot of imitators and copycats start popping up, trying to make another cola drink, use the same model, go to other bottlers or maybe other aspiring entrepreneurs who didn’t get the Coca-Cola franchise, might want to open a competitive franchise in their local town, et cetera.

By the mid-1900s, there are hundreds of Coca-Cola competitors out there. There’s Afri Cola, Char Cola, Carbo Cola, Coca and Cola, Fig Cola, [...] Cola, King Cola, Standard Cola, on and on and on and on and on.

Ben: And by the way, a cola like what I’m holding up right now, David, this brown flavored fizzy drink, wasn’t a thing before Coca-Cola. Coca-Cola was insistent that we aren’t the coca variant of cola. Coca-Cola is one thing that means our formula, our secret formula with this mystery merchandise 7x, which is the real crux of the formula. And there are no other things that can be colas because we created the concept of Coca-Cola and we are N of one.

David: So in 1905, Congress passes the Federal Trademark Act in the United States, and they federalize trademark protection in the country. Previously, it was just done state by state, which I think is probably how Coca-Cola trademarked the script logo earlier than that might have just been in Georgia.

Ben: Yup.

David: Of course, the Coca-Cola company is one of the first registrants for their trademark. And they start using this new law to sue the crap out of all the competitors out there.

Ben: And really winning on these grounds like cola isn’t a category. You can’t be a something-cola. It’s not a general term. We own Coca-Cola as a lockup.

David: And they succeed. Over the next 15–20 years, by the mid-1920s, it’s estimated that Coca-Cola sues and shuts down over 7000 copycat cola brands in a very, very busy legal department. This becomes the next critically important pillar of building Coke. Only Coke is the real thing. Coke is real. Everything else is an imitator. It is a copycat. It should not exist.

Ben: And there is a famous 1920 case that went all the way to the Supreme Court. There was a company called the Koke Company. Actually, it’s worth an aside here to say at this point in time, Coca-Cola did not embrace the nickname Coke. One because of the affiliation with the drug. We should say by 1905, cocaine is pretty much entirely gone. There’s no more Coke in Coca-Cola.

David: It’s actually an amazing story. In 1903, they contract with a company called the Schafer Alkaloid Works of Maywood, New Jersey, that has developed a process to de-cocainenize coca leaves. This company, which still exists today and is still the sole supplier of de-cocainized coca leaves to Coca-Cola today, is granted a federal exemption by the US government from the DEA. They’re the only commercial entity in the United States that is allowed to import coca leaves.

Ben: Because they import it with cocaine in it still, right?

David: Yes, then they have a process to take the cocaine out of the coca leaves. They sell the de-cocainized coca leaves to Coca-Cola.

Ben: And I’m pretty sure the way that this ended up happening was the Hoover administration said, if federal agents are present on site and can supervise the destruction of the cocaine byproduct, then you can do this on American soil. You can import the coca leaves, do this, create a giant pile of cocaine, and then we will watch you destroy it. That’s still how they produce Coca-Cola.

David: Which is also another piece of protecting Coca-Cola. Nobody else has access to coca leaves. You want that taste? You are not going to get it.

Ben: Because the coca leaves, as much as the cocaine is gone, the coca leaf is still an important part of the formula. Anyway, there’s this 1920 case where Koke is tongue-in-cheek saying, what do you mean? You guys aren’t saying you’re Coke? So certainly we can be Coke. The other point they were making is Coca-Cola, you guys can’t actually even use your trademark. It’s unprotectable, since there’s not really much coca in it. All the cocaine’s been removed, so it’s actually misleading.

David: False advertising.

Ben: You’re misleading the public by saying that you are coca or cola. You’re not. The Supreme Court says, uh-uh. We are ruling in favor of Coca-Cola. It is a phrase that has transcended being a descriptive name, and it is now just a brand. The official ruling, which is the stuff of legend, contains this phrase: “Coca-Cola means a single thing coming from a single source and well-known to the community.” That is the new description of what the Coca-Cola brand is and why it is a trademarketable thing that has nothing to do with Coca or cola.

David: This is the first biggest front of the war that Coca-Cola wages on the imitators through the courts.

Ben: It goes to the Supreme Court.

David: To the Supreme Court. Amazing. The second most important front of the battle against the imitators is the bottle. Coca-Cola realizes, hey, we’re not actually in the bottling business ourselves, but we have full control over it. If we really want to drive home to consumers that Coca-Cola is the real thing and have it be immediately identifiable what the real thing is, we actually can force our bottlers to develop and invest in a proprietary bottle that’ll become instantly visually known to all consumers in America and then around the world.

This results in 1916 in the famous proprietary bottle that you all know today, the Ben you’re drinking out of right now, the contour bottle as it is officially called, or as it is then known in the vernacular the May West bottle because its proportions look like the famous actress, May West.

Ben: And the story of how the contour bottle came to be is awesome.

But first, we want to tell you about a friend of the show that we are very excited about: WorkOS. If we’ve learned anything from Coca-Cola, it is that if you have a great marketing message, you should just keep reinforcing it. I called the founder of WorkOS and said, what are we going with? We’re happy to brainstorm. Let’s figure out the right message. His comment back to me was, we’ve got the right message.

David: We’ve gotten some insane feedback on WorkOS from our last episode. Somebody even called The Read that we did, that you really mastermind have been the best podcast ad they’ve ever heard, so we’re rolling with it again.

If you’re building software that’s used in enterprises, you’ve probably felt the pain of integrating things like SSO, SCIM, permissions, audit logs, and other features required by big customers.

Ben: WorkOS turns those potential deal blockers into simple drop-in APIs, letting you scale revenue earlier in the life of your company, or simplify your internal code base if you’re already a larger company.

David: The founder, Michael Grinich, pointed out to us that it’s not just about scale and revenue. It’s about landing a customer so your competitors don’t. It’s like Coca-Cola here. Enterprise readiness has become table stakes for companies no matter what their stage, and WorkOS is the go-to choice for the best software companies to shortcut this process and get back to focusing on what makes their beer taste better, building the product itself.

Ben: So interestingly, this has accelerated in the AI era. There are hundreds of AI companies that rely on WorkOS as their auth solution, including OpenAI, Anthropic, Cursor, Perplexity, Sierra, Replit, Vercel. The list goes on. Why have all of them jumped on the WorkOS train?

David: What we learned from Michael is it’s basically two things. One, AI companies are just scaling so much faster that they need things like authorization, authentication, and SSO to quickly become enterprise-ready early on. Two, unlike the old world of bring your own SaaS product for your little team, these AI products reach really deep into your customer’s systems and data to be the most effective. IT departments are scrutinizing more than ever to make sure new products are compliant before they can adopt them.

Ben: So if you’re ready to get started with just a few lines of code for SAML, SCIM, RBAC, SSO, authorization, authentication, and everything else to please IT admins and their checklists, check out WorkOS. That’s workos.com or click the link in the show notes and just tell them that Ben and David sent you.

Okay, David, the bottle.

David: The May West bottle.

Ben: So in 1912 the Coca-Cola bottling company sent a note to all of its members that Coca-Cola company has this great distinctive logo. It’s highly protected in the courts. We’ve got the trademark on it, but we don’t have a way to protect our business as the bottlers. The proposal is that the members all join together to create a distinctive package for the products. So in April of 1915, trustees of the Coca-Cola Bottling Association vote to develop such a distinctive bottle.

David: And this is great. At the convention of the bottlers where I think they approve this, the Coca-Cola company’s head of legal, a guy named Harold Hirsch who is doing all these lawsuits of the imitators across the country, comes with the mission of trying to convince these bottlers that spending this great capital expenditure is going to be in their interest.

This is what he says to them. “We are not building Coca-Cola alone for today. We are building Coca-Cola forever. It is our hope that Coca-Cola will remain the national drink to the end of time. The heads of your companies are doing everything in their power, a considerable expense to bring about a bottle that we can adopt and call our own child. And when that bottle is adopted, I ask each and every member of this convention to not consider the immediate expense that would be involved with changing your bottle, but to remember this: that in bringing about that bottle, the parent companies are bringing about an establishment of your own rights.”

It’s exactly what you’re saying, Ben. Isn’t that amazing? What an orator.

Ben: Help us help you. Wow. They create this design brief and they send it around to 10 different glass companies around the country that says, we want to develop a bottle so distinct that you would recognize it by feel in the dark or lying broken on the ground. So simple. It’s like, what do you really want the product to be?

So the Root Glass Company of Terre Haute, Indiana designs the bottle that goes on to win the contest. You all know what it looks like, the contour bottle. Interestingly, it’s got this wide top and then—as one of the books put it—a snatched waist, which is why they call it the Mae West bottle. It’s this Georgia green color.

David: That’s right.

Ben: But hilariously, the first version of it was actually much more round.

David: It was almost like a cartoon version of the bottle we know today.

Ben: You might wonder why this striated striped super round pod, something got lost in translation and the bottle was designed to look like the coca plant, the coca pod that you smash open to get out coca beans. But ultimately, it satisfied the design brief. You definitely recognize it. It’s super distinct. It’s beautiful with the rounded, we’ll put it in the email all based on a misinterpretation of what the plant actually is. But very distinctive.

Ultimately in 1915, the patent for the contour bottle gets granted. Actually not referencing Coca-Cola at all because they wanted the whole thing to be a surprise when it hits the market. They would then—this is some classic Coca-Cola lawyering—get additional patents for iterations on the design that effectively renewed the patent all the way from 1915 until the final one expired in 1951.

The company then went to the patent office and made the case that the bottle shape was so distinctive and so well-known in 1951, that it should be granted trademark status, which they got. It’s highly unusual for packaging to be granted a trademark. Their rationale was, look, in 1949 we conducted a study that showed that less than 1% of Americans could not identify the bottle of Coke by shape alone.

David: It’s an integral part of the product, of the brand. There you go.

Ben: Yes. Talk about a successful accomplishment of that creative brief, that all those years later 99% of America could look at it and say that’s a Coke bottle.

David: Amazing. By the next year, one year after, everybody in the extended Coca-Cola family system is prospering, and nobody more so than the Coca-Cola company at the top.

Ben: They had gotten a variety of monkeys off their back at this point. The cocaine is gone. They’ve really started defending the trademark. They’ve got this bottle thing. They had another issue where there was a federal regulator who thought caffeine was evil. So they appeased him by cutting the caffeine content down by two-thirds.

David: And by this point in time, the Coca-Cola brand and what it stands for in the beverage—delicious, refreshing—it’s such an integral part of America that taking out the cocaine, cutting the caffeine by two-thirds or by three quarters doesn’t really impact things. The country is still hooked on Coca-Cola.

Ben: In fact, it probably helps.

David: It probably helps, yes. Makes it more of a wholesome beverage.

Ben: It makes it so you consume a lot more Coca-Cola.

David: Okay, so 1916, everybody’s doing great. Nobody’s doing better than the Coca-Cola company. Asa Candler is a big man about town in Atlanta, probably the most important person in town. So much so that a group of other Atlanta citizens convince him to run for Mayor, which he does. He wins and becomes the mayor of Atlanta in 1916. He retires from Coca-Cola and gives his Coke shares to all of his children.

Then a couple of years later in 1919, a local banker named Ernest Woodruff puts together an investor syndicate, basically stages a takeover of the company, and buys out the family members for $25 million. This also effectively serves as the IPO of the company because it’s a syndicate of investors, shares start trading hands, and the company becomes publicly traded. Certainly they didn’t need to raise capital by going public.

Ben: And it was a complicated little period because some of the kids did want to have this happen. Other ones didn’t want to have it happen. There’s family infighting. But ultimately after a few years, Ernest Woodruff and his syndicate of investors do own and control the company.

In fact, there was some clever financial engineering that had to happen to buy this company. $25 million in 1919 is a huge amount of money. As a result, this is actually the first time the secret formula for Coca-Cola gets written down. It had been this cool secret before, but as collateral for the loan that Woodruff took out to complete this transaction, they wrote down the formula and placed it in a vault at the Guarantee Bank of New York. Because that’s where they got the capital from, so they get to hold the formula as collateral.

Prior to this, it had always been verbal. The system Asa Candler set up was insane. This is from the book, Secret Formula about Asa and his son Howard Candler. “Asa made his son memorize the contents of the various containers that were stored carefully in a locked room with their labels peeled or scratched off, for days with his father standing watch over his shoulder.

Howard practiced making the ultra secret flavoring compound, merchandise number 7x, learning to recognize the pungent fruit and vegetable oils by sight, smell, and remembering each was put on the shelf when it came in from the supplier, until he knew by heart the proper amounts and the exact order in which to mix them.”

This is crazy. The way in which this giant mass produced thing is created, it’s only stored (I believe) in two people’s head at any given time. They deliberately kept this a trade secret and didn’t patent it, because if you patent something, eventually it does become the property of the public and anyone can use it to further innovate. But Coca-Cola has kept this secret all these years.

David: And it’s still part of the lore at the company to this day that oh, there are two people that know the formula, and they can’t travel together. Well the formula is out there. You can find it on the Internet.

Ben: Really? The Coca-Cola company would maintain that is absolutely not true.

David: Well the original formula is, it’s in the appendix of For God, Country, and Coca-Cola.

Ben: Which I think they also maintain is not the right formula. I would swear up and down too, but yes, this is the best example ever though of someone electing to use a trade secret instead of a patent, and then creating all this lore, secrecy, and myth around it. But for six years, as collateral, the first written version of the formula was in the Guarantee Bank of New York vault.

David: So Ernest, when he takes over, he’s a banker, he’s an investor. This was a crown jewel investment that he could get his hands on in Atlanta. He doesn’t really have any interest in running it. So the company plods along for a couple of years with the existing management team.

Ernest really doesn’t like this perpetual contract thing with the parent bottlers. He’s like, what are you two guys doing? As far as I can tell, you’re not doing anything. He tries to get rid of that. This leads to all sorts of lawsuits. The parent bottlers win. Ernest is frustrated. Finally in 1923, he’s had enough. He decides that he’s going to recruit a new company president to come in.

Ben: This is just four years after he buys it.

David: And almost against his will, he has to consider his son Robert as a candidate. Ernest barely approves of this wayward son, Robert. Who is this Robert Woodruff character?

Ben: He’s the protagonist of this story. For all the John Pemberton lore and all the Asa Candler lore, Coca-Cola as we know it today is Robert Woodruff’s Coca-Cola.

David: The boss as he would come to be known. So Robert is 33 at this point in time. He has left Atlanta to seek his fortune away from his father’s influence. He has become the vice president of the White Motor Company in Cleveland, Ohio, which (I think) was one of, if not the, largest truck manufacturer in the US at the time.

Robert is a star there. He’s widely regarded as one of the most talented young executives in new burgeoning corporate America here in the 1920s. He’s best friends with the major league baseball star, Ty Cobb. They go hunting together. He’s a man about town. And Standard Oil of New Jersey is trying to hire him as an heir apparent, to come in and potentially be the next CEO of Standard Oil of New Jersey.

Ben: And David, do you know what Standard Oil of New Jersey is today?

David: SO, right?

Ben: Exxon. It’s ExxonMobil.

David: Oh, Exxon. That’s right. I can never keep track of which breakup company became which. So yeah, there’s an alternative future where, instead of CEO of Coke, Robert Woodruff became CEO of Exxon.

Robert, through his own devices—again, almost against his father’s will—had been an original investor in the syndicate that bought out Coke from the Candlers. The board of Coke makes Ernest consider his son. Ernest finally says, all right, fine.

His first offer to Robert to come be the new president of Coca-Cola is a salary less than half of what he’s making at White Motor Company. Robert rejects that. They negotiate back and forth, and finally they reach a deal with Robert saying, one condition that I absolutely must have is you, dad, you are out. You are going to fully exit the business. Everything gets handed over to me and I am going to have full control and run this company.

Ernest is frustrated enough. He says, okay. So in 1923, Robert takes over as president of the Coca-Cola company, becoming the youngest president of any major corporation in America at that time. He would run the company for the next 32 years as president, and then control the company as chairman of the board for another 30 years after that until his death in 1985. Wild.

One of the first moves that Robert makes when he comes in is to become close with the head ad man at Coke’s ad agency at the time, a firm in St. Louis called the D’Arcy Ad Agency. Coca-Cola’s main creative account man there is a guy named Archie Lee. Lee had already created a hit slogan for Coca-Cola in Christmas of 1922 with his ‘thirst knows no season’ campaign, which is a great phrase with a great ring to it, but was particularly good because Coke had a legacy of primarily being enjoyed in the summer.

Ben: You drink it in the hot southern summers of Georgia.

David: They’re like, wintertime is a big opportunity for us. This was part of moving in on Christmas. More to come on Christmas in a sec. Together, Archie Lee and Robert Woodruff make a pretty massive leap forward for Coca-Cola advertising. It’s really the last critical piece of the brand.

They embrace, maybe I might even say create, lifestyle advertising. This is everything that we talked about in the Rolex episode, but that was much later when Rolex did that in the 1950s and 1960s. This is in the 1920s. Coca-Cola is inventing this idea that through advertising we can associate our products with feelings.

Ben: Oh yes. This is the opposite of the intrinsic advertising that we were talking about earlier. This is extrinsic advertising. Advertising that really has nothing to do with the features of the product. It’s about the life you will live if you associate with our brand.

David: Coca-Cola isn’t a carbonated sweetened soft drink with unique flavor manufactured by the Coca-Cola company. Coca-Cola is happiness. Coca-Cola’s friendship. It’s romance. It brings you closer with the people you love. Coca-Cola is summertime. Coca-Cola is holidays. Coca-Cola is Christmas.

Ben: And whether you are in America or not in America, Coca-Cola is America.

David: And boy, do the two of them just turn out some bangers. So Archie eliminates basically all verbiage from Coca-Cola advertising, except for one simple slogan. This is radical. Think back to those original ad copies that we were reading a minute ago.

Ben: So many words.

David: In this day and age in the 1920s, there are so many words. Everything is so descriptive. In 1923 when Robert takes the helm of the company, they come out with ‘Coca-Cola always delightful.’ Period. Four words. That’s the campaign.

The next year in 1924, they do better. ‘Refresh yourself.’ That’s it. You don’t need to say anything more. That was simplified from Archie Lee’s original idea for the theme that year, ‘Pause and refresh yourself.’ He would come back to that a couple of years later in 1929 with the grand slam mother of them all, ‘The pause that refreshes, Coca-Cola.’

Ben: Which is so funny because I know this is the winner. ‘The pause that refreshes’ is the most successful campaign of this era. I actually didn’t hear about that at all until doing this research. I associate all these other campaigns—delicious, refreshing, or always delightful—but God, did that take off. This idea that in your life you just need a pause. Everybody experiences that problem of needing a pause, and we are the thing that you do during that pause.

David: Genius.

Ben: But by today’s standards of language, it’s a little bit kludgy I think.

David: I think there was an element of the context of the time that came out in 1929, same year as the stock market crash. So all through the 1930s of the Depression, this idea that Coke is a pause away from the harsh realities of your day-to-day existence in the depression. A simple luxury that you can take a pause and refresh with for only 5¢ when everything around you is going to shit. I think it really resonated.

So the slogans are revolutionary, cutting out all the verbiage, all the descriptive language. The other half of what Archie Lee and Bob Woodruff do with the brand is the imagery. Lee goes out and he contracts with all these famous American artists and illustrators of the day to create these American lifestyle tableaus for the visual aspects of the Coke ads.

Ben: It should be a Coca-Cola advertisement that’s as…

David: Idyllic as a Norman Rockwell painting, you might say, because they actually go get…

Ben: Norman Rockwell.

David: Along with N.C. Wyett, Haddon Sundblom, and some of the greatest American artists of the day, to create what you think of as the idyllic Americana family life. It’s all coming out of the Coca-Cola ad department.

Ben: And they’re partnering with the most looked up to athletes and celebrities. These athletes promoting health that must be part of why they’re so great at athletics. They have Carrie Grant, Jean Harlow just associating with wholesomeness in Americana.

David: Archie Lee would describe the function of the imagery aspect of the campaigns. He says, “The idea in an illustration must hit the viewer like a shot. It ought to force the exclamation from them, what a peach of an idea. Not only that, but they must remember that it was Coca-Cola that was refreshing and good to drink in the image.”

He and the D’Arcy agency come up with a list of commandments for the Coca-Cola account. Some of them are: never split the trademark Coca-Cola on two lines. Coca-Cola must always be together on one line. The circular sign should always carry the phrase delicious and refreshing. You should never refer to Coca-Cola as it, it’s not an impersonal pronoun. It is Coca-Cola. And you should never use Coca-Cola in the personal sense such as Coca-Cola invites you to lunch or Coca-Cola invites you to enjoy. Coca-Cola is above that.

Ben: The other thing that happens in this era is billboards. By 1930, there are now 29 million cars on the road. So billboards became this really valuable way to promote the brand and lifestyle of Coca-Cola. Woodruff, his lieutenants would often go around saying that what Woodruff wants to do is make Coca-Cola the most American thing in America.

David: Well, speaking of the most American of things, how about the commercialization of Christmas and Santa Claus? Because in 1931, Lee, Woodruff and the Coca-Cola crew create what I think is unquestionably the greatest lifestyle advertising success in human history, where they manage to associate Santa Claus with Coca-Cola.

Ben: It’s amazing. And really bring the modern Santa Claus into existence. Period. They standardized the concept of Santa. The one that we see today is pretty much Coca-Cola’s Santa.

David: Okay, so what happens? Coke does not invent Santa as a common urban legend.

Ben: First, let’s bust that myth.

David: The concept of Santa Claus existed long before 1931 in Coke. The famous night before Christmas poem was written in 1823, so it’s been around for a long time. Of course, there was Saint Nicholas. It goes back many, many hundreds of years.

Ben: And there was a very popular Santa which was Thomas Nast’s Santa who was this shorter elf-like Santa—we’ll link to it in the email—that is on its way to becoming Santa but is not the big, smiley, approachable, red-faced, cheery, jolly Santa.

David: Big fat dude, yeah. That’s the thing. You read The Night Before Christmas poem. Santa’s an elf. He’s little. Or he was before Coca-Cola.

In 1931, Coke commissions the artist, Haddon Sundblom, to create Christmas ad imagery for Coca-Cola featuring Santa Claus. This being a Coke ad, Sundblom is like, well I’m going to make Santa as red as possible, in Coca-Cola red, and then I’m going to make him as big as possible to get as much Coca-Cola red in the picture.

He creates the first of his Coca-Cola Santa campaigns that he would make for the next 33 years until 1964. It debuts at Christmas time in a full color advertisement in the Saturday Evening Post. People absolutely love it.

You got to remember, this is 1931. This is before television, and magazines had only just started to be commonly printed in color. Before this point in time, you couldn’t really get mass-produced color images out to the public. Santa didn’t have a color. Nobody really thought about what color Santa was.

Ben: That’s right because sometimes Santa was red, sometimes Santa was green.

David: Blue, yellow. The point is, there was no standardization. All of a sudden now, Coke’s got this huge, industrial imagery machine of not only advertisements in the Saturday Evening Post, but all the billboards, the signs, the point of sale merchandise, et cetera. They’re just plastering America with this big, beautiful color version of Santa.

Ben: Which is funny because Pepsi also did do some Santa illustrations, but Coke ran away with it and it became clear pretty early Coke is just going to own Santa.

David, do you know who had Sundblom also created or created the most famous illustration of?

David: I don’t. I should know.

Ben: There are two. One is Quaker Oats, the Quaker Oats Man.

David: Oh yes, I did read that.

Ben: Which interestingly is owned by Pepsi today.

David: Oh, we will get into Quaker Oats.

Ben: And the other is Aunt Jemima.

David: Aha, I did not know that.

Ben: As discussed on our Mars episode, and this was really the nail in the coffin for Coke being a summer drink. I’ve heard that the most Coke is now sold during the holidays, which is amazing since it was a refreshing thing served…

David: For the hot Atlanta summers, yeah.

Ben: Unbelievable. They also, during this time period, get into partnerships. Big, giant, landmark brand partnerships, the first of which is the Olympics. Coca-Cola was a sponsor of the 1928 Olympics in Amsterdam, which makes them the longest-running Olympic sponsor, and at the LA 2028 games that will make 100 years of Coca-Cola partnering with the Olympics.

David: I was going to say the 1928 games in Amsterdam, were there any other sponsors? The Olympics probably weren’t a commercial thing yet.

Ben: I think that’s right. I think it was really innovative.

David: Man, no Coca-Cola, no visa.

Ben: And this predates all the stuff that Coca-Cola did with the World’s Fair, the World Cup, and with all these other big global brand stage events.

David: Interesting.

Ben: The other big pillar in the ground that Woodruff puts in in these first 10 years is around standardization. This is when he really throws his arms up and says, we’re going to stop changing the formula. My understanding is from that point on in 1920-ish all the way until 1985, there were no changes to the Coca-Cola formula. Woodruff’s Coca-Cola was that 65-year unchanged formula.

David: Oh geez. What happened in 1985 besides Robert Woodruff dying, which is directly related to what else happened in 1985?

Ben: We will get there. But it’s this notion of everything should be standardized. It should be the formula, it should be the marketing, it should be the packaging. They were already in this ballpark, but it was his idea that wherever you are when you reach for a Coke, it should feel the same, it should taste the same, it should have the same temperature.

The spiritual thing that he does to illustrate this is he goes to the bank in New York and says, we are repaying the loan, we are taking our formula, the canonical, one-of-one formula, and we are moving it to our bank, the Trust Company Bank in Atlanta, which would become SunTrust and it would sit there for the next 86 years.

David: And is now in World of Coca-Cola, right?

Ben: Yes. The reason it is there, they made this whole big parade of we’re taking it out of the bank and we’re putting it in World of Coca-Cola theme park, for lack of a better phrase.

David: The Coca-Cola version of Hershey Park.

Ben: That is a vault that is very meant to be gazed upon, because when they did move it there about a decade-and-a-half ago, they realized for a long time to many generations, we made a big deal of we have this secret formula and you need to know about it. We’re going to be really loud about it, but it’s super secret so you can’t see it.

That worked and it really lived in the public’s consciousness, and it had fallen out. It was an effort in 2011 to shake the public, especially the younger generations and say, we are Coca-Cola. We have the one secret formula, and we want to bring it back to your attention that we have something that is super secret and worth protecting.

David: The other thing Woodruff does in these early years is he creates the company’s first statistical department to do market research, to study the business and customers quantitatively. They realized that by this point, they’ve basically saturated the market of every man, woman, child in America. The population growth is only going to get them so far in terms of growth of the business. What they need to do is they need to find ways for existing Coca-Cola drinkers to access and drink Coca-Cola more often.

Now remember, what was Woodruff doing before he negotiated with his dad to come to Coca-Cola? He was at the White Motor Company and he was being recruited by Standard Oil of New Jersey. He’s like, guys, we need to get Coca-Cola into gas stations.

He decrees that gas stations are the next major growth opportunity for the company. We need to take that opportunity to put a Coke in their hands. So they contract out a design for a cooler, because if you’re going to keep Coke ice cold at 34 degrees in gas stations, they need to be in a cooler. They get a company to manufacture it, go around the country, and install 32,000 Coca-Cola coolers in gas stations around the country just in the first year.

Ben: And giant signs that say Coca-Cola sold here, or drink Coca-Cola, or Coca-Cola always refreshing.

David: Yup, in the gas stations. This is the precursor to coin-operated vending machines which they introduced in 1937. And Coke is the first company to do that.

Ben: Someone told me in the research that the gas station owners absolutely loved this because: (a) the signs told people, you can come get a Coke here, which was a value proposition for people, but (b) just like we’re talking about there’s so much margin to go around being the retailer of soft drinks, especially at this time, that they were making more money on Coke than gas.

So of course you want this. The gas is a pure commodity. You’re selling against other gas stations in the area. This is where you can actually make some real margin dollars.

David: Totally. You don’t make money on the gas, you make money on the convenience store, starting with Coke.

The other big change in operations that Robert brings to the company is the relationship with the bottlers. This is part of his standardization push. A whole bunch of bottlers are great and a whole bunch are not. There are 1200 independent businesses out there. So he goes around and at first he starts trying to bully and intimidate the (shall we say) less standardized bottlers into meeting his maniacal quality standards.

After a while he realizes, wait a minute. Why am I wasting my time trying to convince these small town entrepreneurs to do what I want? I’ll just buy them out. So he changes course for the Coca-Cola company and says, I’m now willing to buy and own and operate bottlers, not because I want to, but as a way to force standardization and clean up underperforming bottlers. I’ll buy them out, fix them up, and then I’ll resell them to local entrepreneurs.

Ben: I didn’t realize that started that early.

David: Yeah, he started that in the 1920s. He also realizes, wait a minute. This bottling franchising operation works pretty well here in America. Pretty sure we can do it overseas too.

So during the 1920s and 1930s, he goes to Europe, to South America, starts setting up international bottlers there. Same model. Local entrepreneurs, locally-owned businesses, with every incentive in the world to push Coca-Cola.

Ben: Now, there is still that one term of the deal that was we will always sell a gallon for a dollar. That starts to become problematic with inflation. You want the ability to change the price at some point over several decades. It’s pretty interesting to think about the two sides of the coin of having to sell it at $1 in perpetuity.

The con is obviously, well inflation’s going to happen, so our margins are going to get squeezed, where it’s just going to cost more and more and more To make Coca-Cola. The bet that they basically were making is, well since we can’t raise prices at all, we need to scale, to amortize all of our fixed costs and get greater and greater economies of scale on manufacturing.

It forced them into this massive scale mentality that they were already in. They wanted to be the one Coca-Cola for the world. But this really backed them into that strategy as you don’t have another strategy. Your economies of scale in manufacturing need to outpace inflation, so get going.

David: The flip side of it is, it was also in the contract that the bottlers had to sell to retailers at the enforced retail price of 5¢ a Coke. As we get into the depression, that becomes a huge lever against potential competitors.

Ben: How’s that?

David: Because all the other competitors who are at much smaller scale than Coke, as the depression hits and inflation starts running rampant, they need to raise their prices. But here’s Coke, which is arguably a superior product. It’s certainly superior in that its brand recognition is much wider than any competing cola. And Coke is cheaper. It’s this amazing leverage that they have over the market.

Between the trademark litigation, the proprietary bottle, and now the pricing power across the market, Coke is just steamrolling all existing and potential competition out there.

Ben: Which is so funny you say pricing power, because it’s not more expensive. In fact it’s most often far less expensive than the competition.

David: But I think the competition was having to hit the nickel price to try and compete with Coke and their margins because they were subscale would be much, much, much worse.

Ben: Coke can be profitable at way lower and consumer prices than the other subscale companies. They actually have pricing power that they’re not using.

David: They have latent pricing power.

Ben: It’s more strategic to them to not raise prices.

David: Yes. So not good news for any competitors out there. They basically all, except for a small handful, get steamrolled. Except for one—Pepsi.

Ben: Which amazingly started way back when Coca-Cola started.

David: Yup, 1894. For many years it was just one of the other colas out there, would be competitors. Actually, I had no idea about this till doing the research. Pepsi tried to sell itself to Coca-Cola, sell its operations to Coca-Cola three separate times over the years.

Ben: Three? I didn’t know that.

David: Three times. Coca-Cola, the various owners over the years, turned it down three times.

Ben: Amazing.

David: Until the depression. That is what changes Pepsi’s fortunes. Coke, like we’ve just been saying, is selling for a nickel, and it’s super hard for anybody else to match it. But they had one weak spot that they didn’t quite think through. It was actually the proprietary May West contour bottle. It was 6½ ounces. That’s not a lot of drink in that bottle, especially by today’s standards. It’s smaller than a mini can. I think the mini cans are 7½ ounces today.

Ben: Let’s see, I got one right here. The mini cans, very popular today. That’s been a shift. Seven-and-a-half. Yeah. It’s crazy. The original bottles were smaller than this.

David: Six-and-a-half ounces. Very small. Even though they were a nickel, you weren’t getting a lot of refreshment in that bottle. In 1934, Pepsi, in almost a last ditch effort to try and just do something to stay alive and save the company, tests using recycled beer bottles, which are 12 ounce bottles to sell Pepsi, also for a nickel.

Ben: When you say save the company, just before you go on, this is not new to Pepsi. The Pepsi that exists today is like four Pepsis later from the Pepsi that was started around the same time Coca-Cola was. Coca-Cola has been approximately one company all the way through. Pepsi’s been bankrupt 2–3 times, sold the new owners, and completely new company started with the word Pepsi in it. This has been a rocky road for them.

David: But this is when its fortune turns. 1934, they start selling Pepsi in 12 ounce recycled beer bottles. Now, they still have the same pricing pressure/margin pressure from Coke selling in a nickel, but it turns out, if you look at the unit drivers of margins on beverages…

Ben: Oh, there are two expenses. There’s sugar and there’s the bottle, then everything else is approximately free.

David: So the amount of liquid in the bottle, like you said, Ben, is approximately free. Whether you’re serving six ounces of liquid per bottle, or 12 ounces of liquid per bottle, or later 64 ounces of liquid per bottle. not going to impact your margins that much.

And hey, oh by the way, there are a lot of existing 12-ounce beer bottles out there that we can buy up super cheap and put our Pepsi in. Pepsi starts selling 12-ounce bottles also for a nickel. Their cost structure just declined because they can get the recycled beer bottles, didn’t impact their margins by putting more liquid in there, and now they’ve got a really compelling consumer value proposition during the depression. Twice as much cola for the same price.

Ben: And that is the first real punch that anyone’s been able to land on Coca-Cola.

David: This is textbook counter positioning. Coca-Cola cannot respond because they and their bottlers have just invested all of this capital and all of this IP into the 6½-ounce contour bottle. They can’t react.

Ben: It’s genius.

David: Truly genius. It was back-against-the-wall genius, but genius.

Ben: Now it doesn’t do much for Pepsi’s brand. They’re very obviously saying, pick us because of quantity, not because we are the more delicious or better or more prestigious beverage. I think this decision, while it kept them alive, was a hangover that they would have for the next 80 years of this, we’re not as good, we’re not the best flavor, but we’re also here and you can get a lot of us for cheap.

David: Are they the best flavor? Are they not? We’ll come back to that.

Ben: Well that’s all subjective.

David: There’s a discount promise to the brand, which in 1934 is all that matters with consumers.

Ben: Went over real well.

David: So Coke can’t fight them on the amount of liquid in the bottle because they’re locked into the 6½ ounce.

Ben: And they don’t want to cheapen their brand.

David: So instead, they pull out another arrow in their quiver to fire against competitors. They sue Pepsi for trademark infringement. Pepsi-Cola, you can’t use the word cola. We have trademarked the word cola.

In this court process, the president of Pepsi at the time, a guy named Walter Mack, ends up discovering that Coca-Cola had illegally bribed and intimidated another cola competitor out there into shutting down. They paid a bribe to the company owner to just shut down rather than going through a litigation.

Mack brings this evidence to the court where Coca-Cola is suing Pepsi for trademark infringement. Bob Woodruff immediately calls him up and requests a meeting. Bob comes up to New York, sits down with Mack, and he is like, hey, this is all a big misunderstanding. I’m a good southern gentleman. I don’t know anything about this. But you know what? Why don’t we just settle all of this trademark stuff.

Ben: You can still use the word cola, is that what he is offering him?

David: Yeah. The outcome of this is that Pepsi-Cola becomes the only Coke competitor that is allowed to use the word cola, legally, at this point in time.

Ben: Which destroys any precedent of Coca-Cola protecting cola. It means they are forever giving up their argument in the courts that we own cola as a part of our trademark.

David: Woodruff apparently, despite this conciliation, hadn’t learned his lesson and was still not above trying to bribe his competitors. He tries to bribe Mack by saying, do you really want to be running this Pepsi thing? I’m still great buddies with the White Motor folks. I think you would make a great president of White Motors. I would really love to recommend you for that job. And Walter Max like, absolutely not. I’m keeping Pepsi. Thank you for settling the trademark litigation.

Ben: Wow. And doesn’t Coca-Cola’s general counsel quit over this too?

David: Yes, that’s right.

Ben: I think the idea is like, come on. We got to fight this. We can’t just be giving up our trademarks. But Woodruff, this is one of the few times where I feel like he put an idealistic approach aside and said, we got to be pragmatic here. We’ve got to settle with these guys.

David: The result of this is that Pepsi becomes Coke’s first real legitimate competitor. By August, 1941, at 6–7 years later, colas that are not Coca-Cola have 14% of the US soft drink market share, the majority of which is Pepsi. It’s a major chink in the armor. Is basically 100% Coke before this happened, and Pepsi establishes a pretty meaningful foothold.

On the one hand, this is a real bad thing for the Coca-Cola company. They went from having essentially a monopoly on the market, to letting a real legitimate competitor get established in the US. But a really, really good thing is also about to happen to the Coca-Cola company that makes the US market itself one of many, shall we say, and that is World War II.

Ben: But before we tell that story, now is a great time to thank one of our favorite partners, Shopify. Last time, David, I took you on a tour of my house and all the brands I own that have built their businesses on Shopify. Today, I’m going to take you on a tour of all the places or all the channels that you can sell with Shopify.

David: Great. I love it. Let’s do it.

Ben: All right. Starting with the most obvious: direct-to-consumer websites. glossier.com, warbyparker.com, mattel.com, all built on Shopify. Next, a lot of people don’t realize this, but Shopify also powers a lot of physical retail with Shopify Point of Sale. Brands like Allbirds, Parachute, and Aloe. When you buy in store, you’re often checking out on Shopify hardware with Shopify software.

David: Interesting. Got it. Okay.

Ben: Then there’s social commerce. Instagram, TikTok, Pinterest, YouTube, and even Roblox. Brands can connect their Shopify store and enable shopping directly where the customers are. And all the selling and fulfillment actually happens on Shopify behind the scenes.

Another big one that surprises people—get this David—Amazon.

David: Whoa, Amazon.

Ben: Yeah. Walmart, Target Plus. Shopify makes it easy to expand into these marketplaces, so merchants can sync their products and manage sales all from one unified platform. Of course, there’s the Shop app which now has over 100 million users.

Lastly, the big recent one, AI. Tobi has talked about how all in the company is on AI. I’m sure you saw recently, David, that OpenAI launched instant checkout. So when you see buy links in ChatGPT, there’s a good chance Shopify is powering those. On top of that, Shopify just launched what they call an AI co-founder called Sidekick, which can help answer business questions, create marketing slogans, edit product images, and even design and code your store, all within Shopify.

David: The innovation coming out of Shopify is just awesome. Some of the biggest brands in the world are now on board, including General Motors, Estee Lauder, and Erwan are all using Shopify to sell directly to their customers.

Ben: So whether you’re just starting out or you’re at global scale, Shopify lets you sell anywhere your customers are. Get started at shopify.com/acquired and be sure to tell them that Ben and David sent you.

Okay, David, World War II.

David: All right.

Ben: Gee, how did Coke end up all over the world?

David: Remember we said a minute ago that Woodruff had set up international bottlers in the 1920s and 1930s before World War II. But none of it was very big yet. By the time America enters World War II in 1941, Coke at this point has already been around for 55 years, and has already established itself as a quintessential part of America.

The military and the US government realize, hey, Coke may actually be one of America’s best weapons in this war. One, it’s a symbol of home and something for the troops’ morale. They can keep fighting for abroad all across the world. And two, what greater symbol of American prosperity to bring and plant seeds of all around the world than Coca-Cola? It’s our perfect cultural ambassador product here.

Ben: Whether the rest of the world looked at it that way, TBD, but I’m sure the US government looked at it as a great ambassador of our values.

David: And however people around the world saw it at the time, one way or another, they ended up drinking Coca-Cola.

First, at the outset of the war, the US introduces sugar rationing. Coca-Cola immediately lobbies the government for an exemption, and they produce supporting evidence like this letter from a military supply officer. “Very few people have ever stopped to consider the great part that Coca-Cola plays in the building and maintaining of morale among military personnel. Frankly speaking, we would be at a loss to find anything as satisfying and refreshing a beverage to replace Coca-Cola. In our opinion, Coca-Cola could be classified as one of the essential morale building products for the boys in the service.”

Ben: Which is interesting because what Coke doesn’t win is an exemption on the sugar rationing. What they do win is they get to supply Coca-Cola free of rations to the military, and they just get to take a really broad lens on what ‘to the military’ means.

David: I believe the way it ends up coming down is technically yes what you said, Ben, but it applies to any bottler that serves retailers that are located near a military base, regardless of whether that bottler also serves civilian customers. For large portions of the US, they can still get full sugar Coca-Cola during the war.

Ben: Wow.

David: None of Coca-Cola’s competitors, including Pepsi, get anything like this.

Ben: This was a big legal battle. Pepsi was basically saying, hey, you can’t just say this supplier gets an exemption by name. You have to say colas do, and the response back from the government is basically like, sorry, Coca-Cola is about as American as it gets. That’s what we need right now, and that’s what our boys are requesting, including general soon-to-be President Eisenhower.

David: Oh yeah, he is a Coke man. The military under Eisenhower grants Coca-Cola employees “technical observer” status, meaning that they can participate in the supply and infrastructure build-out of the military around the world, just the same as military infrastructure people. This is unbelievable.

As the American military is advancing in the global theater all around the world, Coca-Cola is right there with them setting up bottling plants and production lines to supply the troops.

Ben: And documenting the absolute crap out of it to use in their advertising. Robert Woodruff, 1941, comes right out and pledges that anywhere where an American soldier is fighting the war, they will be able to get a Coca-Cola and they’ll be able to get that for 5¢.

David: There are these just unbelievable quotes from American GIs during the war that are in for God, Country, and Coca-Cola. There are two of them I picked out here. One, “I always thought Coca-Cola was a wonderful drink, but on an island where few Americans have ever set foot, it is a godsend. I can truthfully say that I haven’t seen smiles spread over a bunch of boys’ faces as they did when they saw Coca-Cola in this godforsaken place.”

And then, “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.” These are actual quotes from letters from American GIs during the war.

Ben: It’s unbelievable. And supply them they did. 1941 to 1945, 64 portable bottling plants were sent to Asia, Europe, and North Africa. The best estimates are that more than 5 billion bottles were distributed to troops during the war.

David: Wow. I saw an estimate that it was 10 billion, which of course the US government loves just as much as it loved it during the war because what better symbol of America to have left behind in all these countries around the world than Coca-Cola?

Coca-Cola internally ends up calling the war effort “the greatest sampling program in the history of the world.” They estimate that the war effort opened up markets abroad for Coca-Cola that otherwise would’ve taken 25 years and untold millions of dollars of investment to open. To say it accelerated Coke’s international rollout is an understatement of the century.

Ben: That’s international. But then back home it really cemented Coke as this is apple pie in a bottle. All the servicemen coming home Coke was the treat that you could get when you were at war. You better believe their Coke drinkers for life now. They’re not switching brands.

David: So after the war in 1950, a third of Coke’s profits are already coming from abroad from all these [...] that they got set up. Time Magazine features Coca-Cola on the cover of Time Magazine. Have you seen this?

Ben: Oh, wasn’t it the first product ever on the cover of the magazine?

David: It might have been. I’m not sure about that, but have you seen what the image is?

Ben: No.

David: It’s an oil painting of an anthropomorphized red Coca-Cola disc with arms and a face. And it is larger than the Earth. It is sitting behind the earth reaching around and feeding the smiling Earth a bottle of Coca-Cola.

Ben: Oh my God.

David: The caption on the cover of Time Magazine says, World and Friend, the implication being that Coca-Cola is a friend to the world. Crazy, right?

Ben: It’s funny. Before World War II, there was a presence for Coca-Cola in pre-Nazi Germany.

David: Oh yes. I know what story you’re about to tell.

Ben: As you can imagine, it became difficult to supply Nazi Germany with American Coca-Cola during the war, since those factories—German Coca-Cola factories—lost touch with the mothership and all the ingredients that they would need to source. They found alternate ingredients and made a crappier knockoff drink that they could make with the supplies they had. That drink is Fanta.

David: Fanta owned by Coca-Cola was the brainchild of Nazi Germany Coca-Cola bottling entrepreneurs.

Ben: Who lost access temporarily to the real thing and did that instead. They would change the formula and they would launch it the US later in 1960. But Fanta has its origins as ‘we can’t get real Coca-Cola in Germany during World War II, so this is what we’re making,’ name and all. Fanta is the name they came up with.

David: Parts of history that most people don’t know.

Ben: Don’t you want a Fanta Fanta? The thing that happens post-war, just because we’ve planted this seed elsewhere to follow it through, 1945 is the year that Coca-Cola officially embraces Coke and trademarks it. From here on out, they actually do start referring to it as Coke in the advertising.

David: Coming out of the war, Coca-Cola’s business at least had never been better. The brand domestically has regained any of the ground that it lost to Pepsi during the depression. Internationally, they’ve just accelerated 25 years worth of market development into four, and are basically part of US government policy during the Cold War to keep Coca-Cola flowing into countries around the world.

For Pepsi, things are not as bright after the war. They didn’t have any of the benefits that Coke had. Once again, they find themselves in a position of backs against the wall. Need to do something different here.

Right at the end of the 1940s, they poach a Coca-Cola executive named Alfred Steele. He does the unthinkable for a Coke man. He defects to Pepsi, the inferior imitator.

Ben: That’s how they refer to it in internal communications. They don’t write Pepsi. They say the imitator.

David: The imitator. Steele had been an ad man at the D'Arcy agency, and then he moved to Coke and joined Coke in-house. Basically as soon as he gets to Pepsi, Steele stages a coup and kicks out Walter Mack, who had been running Pepsi for the last 20 years. He shoves him out and Steele becomes the new president of Pepsi.

He’s quite the maverick, shall we say. There are just some hilarious quotes from him about his management philosophy. One example, “The whole trick in hiring executives is to find a good man and turn him into a prick. A good man will be able to stand the course, but if the guy was a prick to begin with, he’ll crumble along the way.” Then, “I don’t care if the consumer wants carbonated sweat in a goat skin pouch. If so, this side of the room go looking for goats and that side start running fiercely in place.”

This is Alfred Steele. Not only does he turn around Pepsi’s fortunes. I think Pepsi really becomes the more interesting company than Coke for at least the next, (call it) 30–40 years here after World War II. Coke has had this incredible success on the back of the war, but they’re also pretty fat and happy. They’re not interested in rocking the boat, shall we say. Steele clearly doesn’t give a crap about tradition or history or anything.

Ben: Nothing to lose.

David: So Steele, when he gets to Pepsi, says, all right. We are going to do three radical things. One, this was started by Walter Mack before Steele got there, but he continues it. We are going to market our product to black Americans.

This was radical probably for any major consumer industry at the time. We are going to hire an all black sales team that is going to target black retail outlets for Pepsi. We are going to run marketing campaigns specifically targeted at the black community with black celebrities.

Not only was this radical for any brand at the time, it was especially radical for the soft drink industry because Coke was not doing anything close to this. In fact, Robert Woodruff was openly supporting segregationist politicians during his time. So this is a huge opportunity for Pepsi.

Ben: And Woodruff would later radically flip on that, right?

David: Yes.

Ben: Wasn’t he a big part with Mayor Hartsfield of desegregating a lot of stuff in Atlanta? He eventually really came around, but…

David: During the 1940s, definitely not. This was a big area for Pepsi to make inroads. There’s also an element of geography here too. Coca-Cola is Atlanta’s biggest company, is a traditional southern company, whereas Pepsi’s based in New York. Okay, so that’s one.

Two, Steele decides we’re going to start appealing to this early trend that I see happening in post-war 1950s America of diet fads. We’re going to position Pepsi as the lighter drink versus Coca-Cola. It will refresh without filling. Now, how much of this is actually true in terms of calories?

Ben: Which is funny because I think it’s actually even sweeter, may have even more sugar than Coke does.

David: Well this is back in the days before sugar is vilified. Sugar is okay, fat is bad, calories are bad.

Ben: But the only calories in soda come from the carbohydrate macronutrient and specifically from sugar, so there’s a direct relationship between sugar and calories.

David: You’re assuming that consumers back in the 1940s and 1950s where thoughtful about such things.

Ben: That’s true. That’s a great point.

David: Regardless of any veracity to it, they start directly trying to appeal to the light market.

Then third, and maybe most importantly, we are going to wholeheartedly embrace a revolutionary new advertising medium in technology: television. We’re going to use it to target the youth of America.

This is crazy. Pepsi discovers James Dean. You know, the actor James Dean.

Ben: Really?

David: Yup. His very first acting job is in a 19- either 49 or 50 Pepsi commercial.

Ben: Wow, I had no idea.

David: This ultimately would morph into the Pepsi Generation ads later, then the Choice of a New Generation, Generation Next, all the Pepsi marketing for the next 30, 40, 50 years of we are for the young people, we’re for the next generation. It all starts with TV and Alfred Steele in the 1950s.

All three of these things work pretty fantastically well, in addition to Steele also bringing over just generally better operational practices to Pepsi from Coke. He knows what a real professional operation is like. He brings standardization and tighter controls over the bottlers.

Ben: Because Pepsi had a similar, or today even still, has a similar bottling system, where they have bottlers outside the company.

David: Yes, but Pepsi, at least until this point in time, never had anywhere near the same operational excellence you would call it today as Coca-Cola. Remember back to the 12 ounce bottles, they were using recycled beer bottles. They’re putting Pepsi in beer bottles.

Ben: Fair.

David: That’s what Steel’s working with here when he gets to Pepsi. On the back of this, Pepsi’s US market share jumps pretty astronomically. It’s in the low 20s in the early 1950s. By 1955, it’s 35% of domestic market share in America. Basically, all of that is coming at the expense of Coke. Coke is still this beloved American brand, but with these three things that Steel is doing, he starts getting a significant amount of the market.

Coke’s not targeting black people, Coke hasn’t embraced television yet, and Coke hasn’t even crossed their minds about anything diet yet.

Ben: It’s true. This would happen much more in the 1970s and 1980s, but they’re starting to be thought of a little bit as the soda for your parents. Not our soda, the cool new soda.

David: Not the choice of a new generation brand.

Ben: That’s right.

David: By the mid-1950s, Woodruff back at Coke is finally like, all right, got to respond. We need to make a radical move of our own. He switches Coke’s ad agency from D’Arcy, RT Lee, the whole legacy of everything that they built from the 1920s, 1930s, through the war, to McCann Erickson.

Ben: The most premium ad agency in America.

David: And one of the first things—is incredible I found in the research—the McCann does when it comes on board with the Coke account, is it starts conducting scientific market research. One of the first things they do is they run a blind taste test between Coke and Pepsi.

Ben: No way. Coke runs this first internally?

David: Coke runs this first in the late 1950s. Or McCann does for Coke. And guess what they find?

Ben: That people prefer Pepsi?

David: Consumers, when presented with the two drinks, Coke and Pepsi, in a blind taste test, a statistically significant number of people prefer the taste of Pepsi.

Ben: Wow.

David: I’m pretty sure Pepsi doesn’t even know this yet. McCann comes in, they’ve just won the account. They think this is, oh we found this really, really important thing. They come, they present it to Woodruff. They present the findings. His response is, do not ever share this with anyone and do not ever run this test again.

For Coke, Bob Woodruff would’ve stayed the case.

Ben: It’s crazy that it really doesn’t bite them for 30 years.

David: Another, well 20 years after this. For the moment, McCann does a bunch of things. One, right away they respond to Pepsi in television. They say, hey, we got to take TV way more seriously. This is not just the future, this is the present.

Ben: Is this the, things go better with Coke?

David: Yup. They start doing TV campaigns, jingles. Coke starts sponsoring the Mickey Mouse Club show starting in 1955. Ultimately, what McCann decides, they say we need to unify our marketing collateral and messaging across all of Coca-Cola’s channels. We can’t be having different messaging and different imagery for TV, point-of-sale, newspapers and magazines, or for our radio ads. The idea is we need to have one Coca-Cola sight, sound, and sell. It’s all the same integrated campaigns. The first of which is the ‘things go better with Coke’ campaign in the early 1960s.

Ben: I see.

David: And then two, as we get into the back half of the 1950s and the early 1960s—we’re now in the civil rights movement—they convinced Woodruff and the company like, hey, you can’t ignore the Black America market. You need to market to black Americans too.

They start running ads with prominent black athletes like Jesse Owens and Satchel Paige. This is fun. Remember we learned from Jesse Cole in our Savannah Bananas conversation, that the Harlem Globe Trotters should have become the NBA at this point in time? They were the big basketball product in America? So yeah, Coke co-Sponsors the Globe Trotters.

Ben: And they had started a little bit before that with Willie Mays in 1952, too.

David: And then the last thing McCann convinces Woodruff of is hey, we need to take this diet thing seriously. So in 1962, they finally appealed to the diet market by launching Tab, which is their new diet drink product that they had considered naming Diet Coke, but Bob Woodruff rejected it. Now the given reason is supposedly he says if God had wanted Coca-Cola to have saccharin in it, he would’ve made it that way in the first place.

Ben: There is one Coke. You don’t want to mess with the one and only Coca-Cola.

David: That is the stated reason. I heard rumors in the research, I couldn’t confirm this, but I heard rumors that apparently the Thomas company, which is one of the two parent bottler organizations—remember back to the perpetual contract and the parent bottlers and all that—supposedly ended up with the rights to have a 10¢ royalty per beverage on any other products that the Coca-Cola company launched that carried the Coca-Cola name. Supposedly, that is actually the real reason why they didn’t call Tab, Diet Coke, whatever the reason they launched Tab in 1962.

Ben: They want to dip their toe in. They’re not willing to go all in yet. They’re not willing to lend the brand that’s been built over the last 80 years to…

David: A fad diet product.

Ben: Exactly.

David: Meanwhile, by that point in time, Pepsi had launched Diet Pepsi and was doing quite well with that.

Ben: Also—listeners, we’ll put a link in the show notes to this—there is an astonishing ad for Tab.

David: Oh man, you said this to me this morning and I was like, I cannot believe this is for real.

Ben: The entire ad is a man like leering down creepily at this woman practicing tennis in a tennis skirt. It’s this jolly, almost haunting jingle. The words are, “Have a shape he can’t forget. Tab is a taste to remember for a shape he can’t forget. When you can’t be with him, be in his mind. Be a mind sticker. Don’t you want to have a good shape? He wants you to have a good shape. Why don’t you keep your shape in shape? It’s great to have a good shape. Enjoy Tab and keep your shape in shape,”

David: Eh, the 1960s.

Ben: Yeah. But dude, they knew in the 1960s, 40 years before obesity started becoming a conversation, that full sugar sodas were not good for your shape.

David: Well leave it at that. They do enter the diet market.

Ben: But the diet market becomes real and enduring from this point forward. Tab quickly becomes the best-selling diet soda in America, I think in the world, and stays that way all the way up until they released Diet Coke, which we’ll talk about in a little bit.

Ben: Tab recently killed, actually. It was one of the brands that they sunset a couple of years ago.

David: Oh, did they only kill it in 2020? I thought it was before then.

Ben: When they winnowed from 600 brands to 200 in 2020, that was one of the ones that caught the ax.

David: Interesting. There’s one more thing, though, that Coca-Cola does in response to this insurgent Pepsi challenge, shall we say, in the 1950s and 1960s: McDonald’s. I know you have the story on this one.

Ben: This is actually something more that McDonald’s does and less something that Coca-Cola does. But boy does it become important to Coca-Cola fast. To illustrate it, if we flash all the way forward today, there’s a Coca-Cola executive on the website whose entire job is the McDonald’s division of the Coca-Cola company. There is no other division dedicated to a company like this.

What happens is Ray Kroc in 1955, one of the first things he does when he gets the expansion rights to expand McDonald’s is to look for a beverage supplier for this new Illinois location that he is opening. He calls up Coca-Cola, meets in person and does a handshake deal with Waddy Pratt who ran Coke’s fountain division. From that point forward for 40 years, they built this deeply-entrenched relationship purely on a handshake deal.

David: Wow. There’s no contract, no term?

Ben: No. I’m sure there is today, but for a long time, McDonald’s isn’t going to bid it out like everyone else always does, and they’re going to get amazing preferential treatment. Here’s some of the preferential treatment that they get. Have you ever heard, David, that Coke tastes better when you get it from McDonald’s?

David: No, but I would believe it.

Ben: This is a big thing. People insist that I prefer to swing by McDonald’s to get a Coke versus getting it somewhere else. If it’s just that it’s a fountain and you like fountain versus bottle or… and they’re like, no. It’s actually better at McDonald’s. It is better at McDonald’s.

David: No way.

Ben: Here are a variety of things that I’ve heard from somewhat credible sources and that show up in articles that may contribute to the taste actually being better. The thing that is definitely true is Coca-Cola ships the formula to McDonald’s in stainless steel tanks instead of being delivered in bags. Normally, it’s bags wrapped in cardboard and it’s actually delivered through the bottlers. Even though the bottlers have nothing to do with it, they are the delivery arm.

David: Oh yeah, because this is the fountain business.

Ben: Coke doesn’t actually deliver the syrups to all these restaurants. The bottlers do it on behalf of them. even there are no bottles involved. Coke is “selling directly” when they sell syrup to fountain owners.

David: But the bottlers are doing the delivery.

Ben: Yes. With McDonald’s, it’s different. It comes in these stainless steel tanks. Mcdonald’s does some stuff. They prechill the water, and they make sure that the hoses are chilled all the way up in the dispenser. Mcdonald’s apparently actually has a different syrup to water ratio that accounts for ice melt. They add a little bit more syrup than the standard recipe, which sounds like it would be heresy.

David: Wow. And Coca-Cola lets them do it because Coca-Cola wouldn’t let anybody else change the mixture.

Ben: Yes. They developed custom straws that are a little bit wider to let a little bit more Coca-Cola taste buds on your mouth. This is just incidental, but because of the volume that’s done at McDonald’s of selling Coke products, the syrup’s a little bit fresher because the syrup actually does get worse over time if you leave it in the back room.

David: Wow. Well it is a beautiful partnership for both sides, shall we say.

Ben: Here’s something crazy. I think a lot of people associate McDonald’s and Coca-Cola, both big American companies, both historically American, a lot of Americana in each. Until listening to this episode, I didn’t really think about the fact that Coke has a 60-year head start on McDonald’s in going global.

I read in a couple of places that when McDonald’s was opening in new countries, the employees would camp in Coca-Cola offices and use Coca-Cola’s relationships to get a foothold in the country when they were opening. It’s like this unofficial partnership that they have.

David: Well, it’s good for both sides.

Ben: Lastly, Coke sales teams are prohibited from selling syrup to restaurants for less than McDonald’s pays, even if it means they’re going to lose the business to Pepsi. It is this rule at Coca-Cola that no one gets a lower price per unit volume than McDonald’s.

David: Wow. Big customer.

Ben: So back to the 1960s. In 1960, a few other things happen. The first 12 ounce aluminum cans are introduced of Coca-Cola in the United States.

David: They also buy Minute Maid. Coca-Cola buys Minute made.

Ben: Yes. A little precursor to what was to come four decades later with non soda drinks. But this is weirdly the only thing that they have other than soda for a long time.

David: Speaking of acquisitions, in 1965, Pepsi buys the Frito-Lay Company.

Ben: Famously, where there’s still one company today at PepsiCo.

David: Ben, you found out Coke had the chance to buy it.

Ben: Yes, they did. Made a giant mistake not buying it. The company’s headquarters, I think the original Lay company, is an Atlanta company. In many ways, Coca-Cola’s the preferred buyer and Coke turns it down.

The wild thing is today, if you look at the health of Pepsi’s beverages business and their food business with Frito-Lay products, Frito-Lay is a much, much better business. While the revenues are a little bit smaller than the Pepsi business by revenue, Frito-Lay generates twice as much profit inside the parent company, PepsiCo. That’s a good one to own.

David: Big miss from Coke. On the opposite end of the spectrum, toward the end of the 1960s, McCann and Coke really start hitting their stride. Ben, you mentioned in the intro about co-opting the hippie and counterculture movement.

Ben: Oh yeah.

David: In 1968, McCann and Coke launch their latest unified marketing campaign, the Real Thing, which is an enormous success. At first, subtly tries to co-opt the counterculture moment, is it’s real, the hippies like real things.

Ben: It doesn’t have high fructose corn syrup yet. So ostensibly, it is the real thing.

David: If Coke is a real American thing, then it’s the real thing. This is capped off in 1971 by the series finale of Mad Men.

Ben: Yes. That’s why I’ve always thought of it too.

David: And Don Draper’s greatest work. It’s so funny. I know this ad from Mad Men. Even though it’s considered one of, if not the greatest television commercial of all time. I didn’t know anything about it until the Mad Men series finale.

Ben: So listeners, if you don’t know…

David: The Hilltop ad.

Ben: Yes, the Hilltop ad to the song I’d Like to Buy The World a Coke is fictionally created or alluded to be created by Don Draper in the finale of Mad Men, but of course is a real ad 40 years before Mad Men came out.

David: It’s so cool. Doing the research for this episode, I always thought that Mad Men was one of the greatest works of media ever created. I have even more appreciation. They set the whole thing up all the way back in the first season of the show by introducing McCann Erickson. McCann Erickson comes in as the foil to Sterling Cooper in the beginning and then they’re running throughout the whole series. I didn’t realize that McCann Erickson, the reason they’re so big and the reason that it’s such a big thing is the Coke account.

Ben: Pretty amazing.

David: And then it all pays off in the Hilltop ad.

Ben: I think it’s given them a little bit too much credit. If you’re going to do a show about advertising in this era, you have to do McCann Erickson.

David: But I didn’t realize the deep connection between McCann and Coke and how integral that was. Now, understanding this makes me appreciate the series finale just even more. It’s so great.

Ben: For sure. The story behind this ad is awesome. Bill Backer at McCann Erickson, who is the big partner of Coca-Colas there—

David: The Archie Lee of his day.

Ben: Yes, for a long time, said that he was on a flight that was grounded at an airport in Ireland, and he noticed a diverse crowd of passengers. Everyone’s upset that this flight isn’t happening. They’re chatting and joking with each other and it’s over bottles of Coca-Cola.

He’s like, man, Coca-Cola really brings people together across borders, across languages. He jots down on a napkin, I’d like to buy the world a Coke. They conceptualize this ad, and there’s this whole great story of finding the songwriters and the musicians who performed it and all this stuff. They want to film it at the Cliffs of Dover in the UK. They got the budget green lit from the head of advertising at Coca-Cola to do the most expensive ad of all time, a $100,000 budget.

David: How quaint.

Ben: They’re going to film it over the course of three days. They got there with the full cast who were going to stand on the hillside and sing.

David: They wanted to have 200 people from all countries around the world. The point is that Coca-Cola brings everybody together.

Ben: It’s a hard cast to assemble because you need people representing all these different ethnicities and nationalities. And they have three straight days of rain.

David: I was going to say Cliffs of Dover, it rains a lot there.

Ben: They burn through the entire budget. They’re like, where are we going to go that it won’t rain? Let’s go to Rome. They get approval to go all the way up to $250,000. It rains in Rome, in the hills outside of Rome. They actually have no usable footage from everything they shot because by the time they actually caught the actors, they were also covered in rain, looked like crap, and no one looked happy.

It’s this hilariously cobbled together thing where the third time’s the charm. They have to go wander around Rome looking for new actors. They find a new leading lady, that woman that the commercial opens on. They actually have to film it in two separate locations. The hillside is different from the closeups, but they ultimately release it.

It becomes absolutely beloved. It’s the catchiest tune. I’ve had it in my head the entire time doing research. They start getting calls at radio stations to play the Coca-Cola ad song. Then the band goes and rerecord it as a real song to release on an album that has different lyrics than I’d like to buy the world a Coke. And it turns out to become a bestselling song also.

David: So great. The lyrics are just great. They’re great. And it’s so 1971 and Coca-Cola.

Ben: It’s the real thing.

David: Yup. “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. What the world wants today is the real thing.”

Ben: And you’re watching it, and it does actually stir up emotions. You’re like, this is really beautiful. Look at this. There are all these people that are all here together. They’re all getting along.

Then you realize this is a giant corporation selling sugar water. And they managed to borrow the hippie movement to create one of the most successful commercials of all time.

David: Oh my God. It’s Mad Men.

Ben: Unbelievable.

David: Don Draper, maybe. So great. Well, so the end of the 1960s and the early 1970s, going pretty well for Coca-Cola. Then in 1975, that deep, dark, deeply embarrassing secret that McCann had discovered 20 years earlier in 1955, and Robert Woodruff had tried to bury as far down as he possibly could, comes out. The Pepsi challenge. But before we tell that story, now is a great time to thank one of our favorite partners, Sentry.

As you know by now, Sentry does application performance monitoring, helping developers debug everything from errors to latency to performance issues, basically any software problem, and they do it excellently. Over 150,000 teams use it every day, from Disney to Anthropic to Epic games.

Ben: Today, though, we want to talk about the Sentry community, which is awesome. We just did an event with them last month in San Francisco. It was so cool to see how many great folks use Sentry and how much they love this company.

David: Michael Truell, the CEO of Cursor was there. He did a great fireside chat with Sentry’s founder, David Cramer.

Ben: And mentioned to me that his favorite Acquired episode is PowerPoint. Michael, thank you for listening to the old stuff.

David: The only person we’ve ever met who told us that their favorite episode is PowerPoint. A bunch of our friends from Anthropic were there, and Sierra, and Vercel. All of those are Sentry customers, by the way.

Then my favorite part of the night was we got to interview Jess Smith, the president of the Golden State Valkyries, the new WNBA team here in San Francisco, which in just one season has gone from zero to the most valuable women’s sport franchise in the world. Jess and the Valkyries are just awesome. It was so fun.

Ben: And Claire Vo, the founder of ChatPRD, interviewed David and I on stage. The whole night was awesome, and just showed how wide Sentry’s world really is from startups to AI giants, to pro sports teams, to indie developers. Sentry just rocks. Were very happy to be partners with them.

David: Speaking of rocks, Sentry created perhaps the most awesome Acquired swag ever for this event.

Ben: These guys get it.

David: These guys totally get it. They made custom 1980s Walkman-style cassette players.

Ben: Throwback to our Sony episode.

David: That’s right. Acquired-branded, complete with an actual cassette containing some of our favorite Acquired moments from the show over the years. They made 100 extras just for the rest of the Acquired community. So go grab one right now from the link in the show notes. I think these are going to last about five minutes, but there’s a link in the show notes to go get one of these Walkman-style cassette players. They’re awesome.

Ben: Yeah, so our huge thanks to Sentry for being such great partners and hosting really an incredible night. If you want to join the 150,000 teams including Linear, CloudFlare, GitHub, Instacart, and Atlassian who rely on Sentry to keep their software running smoothly, head on over to sentry.io/acquired, and just tell them that Ben and David sent you.

All right, David, the Pepsi challenge.

David: I’ve been so stoked all episode. Just to get to this. And to start it off…

Ben: Are you about to do a Pepsi challenge?

David: I am going to do a Pepsi challenge right here on air. Of course, it’s not really a challenge because I didn’t hide the containers, that I would administer it to myself so it wouldn’t work.

Ben: At what temperature are they, though? Because I hear that plays a big role.

David: It does, but they’re the same temperature. I took both of them out of the fridge right after World War II or so, however long ago that was.

Ben: Because at warmer temperatures, the Coke people will insist that Pepsi has the edge because sweeter tastes better at warmer temperatures. But Coke at that just above freezing, perfect temperature is the best.

David: Well, let’s see.

Ben: All right. That’s the real thing I’m seeing right now.

David: All right. The real thing. It’s good. Oh, Pepsi. It’s got that lemony little zest to it.

Ben: Pepsi’s a little lemony, a little sweeter.

David: I think I’m with the majority on this one.

Ben: The Pepsi’s better?

David: I think Pepsi tastes a little better.

Ben: Wow. David Rosenthal right here on the Coca-Cola episode declaring that Pepsi is your pick.

David: Well over Coca-Cola Classic. I’m mostly a Diet Coke guy these days, but we’ll get to that in a minute.

Ben: Which one could argue was formulated to better compete with Pepsi.

David: Indeed. All right. The Pepsi Challenge. Back in 1967, a young Wharton MBA graduate joins Pepsi after a few years of working at IPG, the big ad agency which owned and I believe still owns McCann Erickson, parent Company of McCann.

Ben: They do, Interpublic Group.

David: Now Ben, I know you know who we’re talking about here, but listeners, you all are in for a real fun surprise when we reveal who this person is in a minute. Pepsi, as we’ve discussed, up until Alfred Steele came in, had always been a seat of the pants school of hard knocks management–type company. This person who joins (I think) might have been the first MBA to join the company, and he was one of the very few, even college graduates.

He comes in as the Director of New Product Development, and the first new product that he develops and hits the market isn’t a new drink, but rather a new bottle. A really, really big bottle. Sixty-four ounces. He realizes in doing market research that hey, supermarkets are becoming more and more of a thing. We’re now in the late 1960s, early 1970s here. There’s a really underserved part of the soft drink market, which is large families and parties for at-home consumption Buying a whole bunch of pretty heavy breakable glass bottles and lugging them home for your large family or a party that you’re throwing…

Ben: Or even cans. Who wants to open a single can for each person around the dinner table?

David: Totally. And again, remember how we talked about the cost scaling element of soda is not volume of soda. It doesn’t actually cost that much to go from 6½ ounces to 12 ounces to a whole lot of ounces.

Ben: This is why basically anyone is willing to sell you free refills on your fountain drink.

David: Yup. So he and Pepsi start working on a big bottle. They pretty quickly realize like, oh, glass is not going to work. It would be a really heavy bottle and really breakable as you’re porting around this big bottle.

So they go to DuPont.

Ben: I had no idea.

David: And say, hey, can you guys engineer us something that would work here? And DuPont says, oh, well actually you have found us at the perfect point in time. We have a new type of plastic that we have engineered—polyethylene terephthalate or PET—that we think would be great for this application. It’s lightweight, it’s super strong, it’s really cheap to produce, and—here’s the kicker for Pepsi—we can send it pre-molded to all of your bottlers. So rather than your bottlers having to set up really expensive new production lines for these new bottles, all they have to do is just inflate the molds with air and then fill them up.

Ben: Have you ever seen them inflate? It’s the coolest thing ever watching a two-liter bottle inflate.

David: The 64 ounce, or now two liter bottle is born. Pepsi gets a big jump on this against Coke. It takes Coke another 3½ years to come out with their own big party bottle. On the back of this success for this young executive…

Ben: And you talked to him, right?. This person you’re talking about?

David: Oh, yes. All these stories are firsthand.

Ben: Okay.

David: On the back of this success, Don Kendall, the then CEO of Pepsi is like, all right kid, you passed the test. You’re ready for your next big job.

Ben: And this is the first time that plastic is used in soft drinks?

David: Oh yes, I missed the punchline there. This is the first plastic bottle.

Ben: That’s crazy, and good for Pepsi to log this win. Pretty bad for the world to start this single use plastics treadmill that we’re all on now. Just to get that out of the way, I was looking up studies recently. The Coca-Cola company is the number one polluter globally of crap in the ocean. Pepsi’s very close behind, all the big drink companies. Everyone is always saying, we’re trying to do a better job at this. We’re trying to do a better job creating recyclable stuff. But the world is full of a crap ton of single use plastics.

David: 100%. Man, I had not focused on this issue at all until doing the research. I am going to only buy can and glass bottles going forward. There’s no reason not to buy cans and glass. They’re actually recyclable.

Ben: It’s funny. I’ve accidentally started doing that anyway because whenever I travel now, I use those PATH Water bottles that they sell in airports and you can just refill them. I’m not going out of my way to be like, oh my gosh, I need the metal over the plastic, but now it just feels weird to buy plastic bottles.

Now that I’m so much more attuned to microplastics, I’m also never going to drink fluid that was sitting in a plastic bottle for a long time after I opened it or refill it. I used to refill plastic water bottles and now I’m like, ugh. Who knows what’s degrading in my beverage? But yeah, this is the start of the plastification.

David: Yes. So back to the timeline. Don Kendall, the CEO is like, okay, you passed the test. You are now going to take over all of marketing for Pepsi, and I want you to figure out how we’re going to dethrone Coke.

The executive takes over marketing. He’s getting settled in. He is surveying the current state of things. He notices that the local Pepsi bottler down in Dallas, Texas is doing something really interesting. The local ad agency for the bottler there had accidentally discovered the secret that Coke and McCann has known for 20 years that consumers prefer Pepsi to Coke. The way they figure it out is that they’re doing research for 7-Eleven in Dallas.

Ben: No way.

David: 7-Eleven is selling a generic cola at the time, and they run a taste test with both Coke and Pepsi as the controls for the 7-Eleven generic cola. This local agency happens to also be the agency of the Pepsi bottler in Dallas. They go to the Pepsi bottle and they’re like, hey, guess what we discovered?

Locally in the Dallas market, they start running these commercials there of people taking the “Pepsi Challenge.” They roll up to a supermarket in Dallas, they plunk down a card table, and they have Coke and Pepsi behind a cardboard screen, then they give the consumers a glass. They say, which do you prefer? And a statistically significant number of people say Pepsi.

Ben: And they did this at malls all across America. They then really expanded this.

David: Well, we’ll get to that now. At first, this is just the local Dallas bottler that’s doing it. It’s a huge success. Pepsi’s market share in Dallas jumps by 14% thanks to these ads. It really, really resonates with consumers.

The new VP of Marketing sees this and he’s like, oh, oh. Okay we got to blow this out, but we’re not going to do what Coke would do. We’re not going to turn this into a big corporate one site, one sound, one cell national campaign. We got to keep this grassroots. We got to go market-by-market. This is working so well in Dallas because it’s grassroots, because it’s real people who are living in Dallas taking this challenge. And the technology that can enable this has just come out.

VCRs have come out and early home video camcorders are just starting to hit the market. He says, okay, here’s what we’re going to do. We’re going to go buy a ton of home video camcorders.

Ben: Oh that’s awesome.

David: And card tables. We’re going to distribute them to all of Pepsi’s local bottlers all around the country. We’re going to inform them about this Pepsi Challenge and we’re going to say, go run your own versions of the Pepsi Challenge. Film them with the camcorders of real people in your markets taking the Pepsi Challenge and put them on local television, local ad spots on local TV channels. This is maybe the most successful grassroots marketing campaign in history.

Ben: I didn’t even realize it was grassroots. Everyone knows the Pepsi challenge is almost like a descriptive way to describe a form of marketing. Do you remember when Microsoft did Bing it on? It was like, oh I see the Pepsi Challenge for search.

David: I had no idea until talking to him and doing the research. This was all shot with camcorders. We’ll link to YouTube footage of these old videos. It’s all just malls, supermarkets, beaches, and fire stations around the country. It’s then local ads run on local TVs. Incredible.

Ben: Which is funny. Being our age, David, I knew what the Pepsi challenge was, but of course I’ve never actually seen it.

David: I hadn’t seen it either.

Ben: And it’s funny to now actually go watch it and see how that meets my expectations of what I thought it was going to be.

David: Same as you. I had the same expectations of, oh this must have been a BBDO national campaign, blah-blah-blah. Total opposite. This is probably the first “reality television commercial” that’s ever produced. Nobody was doing this back in the day. It just hits all these local markets around the country like a bomb, and Coke is so poorly set up to react to this. Their whole marketing and ad strategy with McCann, they’re all national. One sight, one sound, one sell. They’re not set up to go buy local TV ad slots.

Ben: It’s good counter positioning. But the punchline of the whole thing is it wouldn’t have worked if it wasn’t true. But it was true that people did prefer the taste of Pepsi.

David: And I think it also wouldn’t have worked if it had been a big national corporate rollout, because people wouldn’t have believed that it’s true. I think it’s really critical that it was real people that were doing the Pepsi Challenge instead of actors.

Ben: Yes. Oh absolutely agree.

David: And I think it was also important it’s happening in my community. So they blow this out all across the country. In 1977, Pepsi outspends Coke in advertising for the first time in history. Pepsi actually passes Coke in market share in the bottled market. Coke still has an overall market share lead in the country because of the fountain business, like McDonald’s.

Ben: Pepsi basically never was able to break into the fountain business and the volumes that even today Coke ran away with the restaurant serving soft drinks out of fountains business.

David: So it’s interesting in the late 1970s, Pepsi does try to break in. They buy Taco Bell, Pizza Hut, and KFC, and then install Pepsi, but yeah, it never approaches Coke.

Ben: Which actually backfires because then Coke uses it to counter sell. They start going around to everyone else that is considering Coke or Pepsi and saying, Pepsi owns these restaurants that are competing with you. Why do you want to give them more profit dollars? So then Coke is able to win sales on that, which is (I think) is part of why Pepsi then spun that all out as Yum brands, but also just because I think it was a drag on their business.

David: Yup. So on the back of this huge, nationally-known, obvious success with the Pepsi challenge, the young marketing executive starts to become pretty known in the business community.

Ben: And David, we should say who it is now.

David: His name is John Scully.

Ben: Yup. And for some of you, that will mean a lot. For most of you, that will mean a lot in about 30 seconds.

David: John starts getting a bunch of CEO offers coming in from recruiters on the back of his success. He loves Pepsi, he’s built his career there. But finally in 1983 he gets an offer that he can’t refuse. Steve Jobs comes to pitch him and says, do you want to sell sugar water for the rest of your life or do you want to come with me and change the world ? He goes with Steve and joins Apple Computer as CEO in 1983.

Ben: And finish the story, David. What would then happen after John became CEO of Apple?

David: Well, I think the narrative that a lot of people know—we’ll have to save this for our Apple episode someday—is things did not go well. Steve Jobs got kicked out of the company. Apple floundered, Jobs had to come back. Scully actually grew Apple’s revenue from under $1 billion when he joined to almost $8 billion when he left.

Ben: Ah, well Tim Cook before Tim Cook.

David: And then there would be two more CEOs (I think) before Jobs came back. Gil Amelio and…

Ben: Michael Spindler.

David: That’s right. But yeah, John is awesome, by the way. He’s 87 years old. He’s a huge Acquired fan. He’s listened to every single episode that we’ve done.

Ben: Also, thank you to Arvind Navaratnam, friend of the show, for introducing us. That was a fun email to get of like, wait. John Scully listens to Acquired?

David: Yeah, so cool. He’s currently on the board of three different companies that he’s helped start over the last couple of years, and he’s responsible for the Pepsi Challenge. Obviously, Coke eventually, after years and years of bleeding thanks to the Pepsi Challenge, decides that they need to respond.

Ben: And the response ends up happening a full decade later. The response comes in 1985 and the Pepsi challenge was in 1975. Pepsi had already been taking share from Coke starting in 1970. Meaningful chunks.

David: Yeah. So why is Coke so slow to respond to the Pepsi challenge? Well, in addition to just plain getting their ass kicked, they have another problem. Woodruff is still the ultimate decision-maker and chairman of the board, but he’s getting pretty old at this point in time. He’s already in his 80s approaching his 90s.

Ben: He has strong opinions about what Coca-Cola is and isn’t.

David: But there’s also another management problem at Coca-Cola, which is that the CEO, Paul Austin, has gotten Alzheimer’s and stays in the CEO position. Coke, for the back half of the 1970s is just paralyzed. Basically, no decisions can get through between Woodruff being set in his ways.

Ben: It’s hard for him to see, read, hear. It is hard to communicate with, in addition to having strong opinions and control of the company.

David: And then you have a CEO suffering from Alzheimer’s and Woodruff probably doesn’t recognize what’s happening. Well it’s a real mess. All of this finally resolves in May of 1980 when the board appoints a young chemical engineer named Roberto Goizueta as CEO.

Goizueta was a Cuban immigrant, who had worked his way up to become head of technical research at age 35. He was one of the mythical two people who knew the secret formula.

Ben: That’s right because he was a chemical engineer. He was on the product formulation side of things.

David: And he had just had a huge win within the company when he replaced sugar in the US with high fructose corn syrup. He’s the one who brought corn syrup in.

Ben: So starting in 1980 he got 50%, and then by 1984 they were replaced at 100%. But basically because sugar kept getting more expensive, and farm subsidies for corn kept making high fructose corn syrup less expensive. As long as customers are willing to do it and it doesn’t seem to be worse for people’s health, economically it became a no-brainer to do it.

David: Yup. He’s a real dark horse candidate to be CEO. The person who everybody thinks is going to get the job is Donald Keough, the famous longtime president and COO of Coca-Cola. What Roberto does when he becomes CEO is he says, Don, you are my partner in crime. We are going to run this company as a team. You’ll be my president and COO. You are great externally. I’m great with the product and the strategy internally. We’re going to be a dynamic duo here.

Ben: And ultimately Goizueta got it because he was Woodruff’s protege. I would say Goizueta, at least as it comes across in the book Secret Formula, did a very good job of managing up and making sure that Woodruff felt taken care of and informed.

David: I could see that. So they go on to have a great run. One of the early things they do is they buy Columbia Pictures, the movie Studio.

Ben: Which I always thought was stupid. Whenever you hear stories of, oh, and at one point in the Coke out 1980s where everyone was doing crazy stuff, Coke even went and bought Columbia Pictures.

David: A movie studio.

Ben: But financially, it actually was great for them, even though no business is as good as Coca-Cola’s core business. Everything pales in comparison, unless it’s Visa or a software company or something like that.

David: Well, not only was it financially pretty good for them when they ultimately sold the business to Sony a few years later, it leads to a lot of really good stuff for Coca-Cola because this is how they get to know Herb Allen Jr., and Allen & Company, who was one of the principal shareholders of Columbia Pictures before Coke bought it.

He ends up joining the board of Coca-Cola after the transaction. Actually, this relationship continues right through to this day. Herb Allen III, who in the early 2000s took over for Herb Jr. running Allen & Company, is still on the board of Coca-Cola.

Ben: Amazing.

David: So this is how Coca-Cola executives start going to Sun Valley, where Don Keough reconnects from his old neighbor, from his early young professional days when he was working in his first job in Omaha, Nebraska.

Ben: This is insane.

David: Living on Farnam St. in Omaha, where he was neighbors with Warren Buffett.

Ben: Warren Buffett is this real life Forrest Gump. The number of things that he invested in, that would become these unbelievable bonanza investments, like greatest of all time investments, oh is a guy who lived in my street, oh is the woman that ran the furniture store in my town growing up. It happens over and over and over again. Are you kidding me? Don Keough was Warren Buffett’s old neighbor?

David: Don’s first job out of college, he worked for I believe a coffee company that ended up getting acquired by Coca-Cola, and that’s how he came into Coca-Cola. But yeah, he was just living in Omaha on Farnam St.

Ben: Crazy. This is how the Berkshire Coca-Cola relationship starts.

David: Well, so Warren, at this point in time, as we covered on our Berkshire series, is a Pepsi guy. He’s part of the new generation. He took the Pepsi challenge, Keough converts him to Coke by telling him about this new product that they’re going to launch: Cherry Coke. Because Buffet loved cherry syrup in his Pepsi, so he converts Warren to a Coke guy before Warren ever invests a dollar in the Coca-Cola company.

Ben: And Warren reportedly drinks five Cherry Cokes a day.

David: He is perhaps single-handedly supporting his investment these days. Later on at Sun Valley, Bill Gates lets it slip on a panel with Warren, Roberto, and Don Keough that Warren has always told Bill that Coca-Cola could be run by a ham sandwich.

Ben: While Roberto is sitting right there.

David: Roberto gets very offended and apparently never talks to Bill Gates again. Now, given what’s about to happen here, it’s actually highly debatable whether Roberto was a ham sandwich or not.

Ben: My opinion has always been that Coca-Cola is the type of business that can be run. But maybe let’s save this for the quintessence. We should finish the episode deciding if that is true about the Coca-Cola company or not.

David: Yes. Well Roberto is about to become responsible for both the company’s greatest success since Coca-Cola and its worst disaster of all time.

First the success. Of course, we’re talking about the most successful diet drink in the history of humankind. Basically the only soda that I drink today, Diet Coke.

Ben: You’re a Diet Coke man, not a Coke Zero man.

David: I’m a Diet Coke guy. Yeah, I know Coke Zero was marketed as the Diet Coke for men, but like Diet Coke.

Ben: And not just for men but also the one that’s closer to the original Coca-Cola formula. Diet Coke is meant to be its own thing.

David: Yup. They did those great ads of the taste infringement ads. Do you remember those?

Ben: Oh, I don’t remember them.

David: When Coke Zero launched, they did all this series of ads of Coca-Cola lawyers going around suing Coke Zero for taste infringement.

Ben: It’s a great premise.

David: Great self-reflective advertising from Coca-Cola there.

Ben: So Diet Coke is fascinating because they did start work on it earlier in the 1970s. It didn’t come out till 1982, but they’re in the lab tinkering with the flavor because the Pepsi Challenge has basically thrown down the gauntlet that Americans prefer the taste of Pepsi.

They’re starting to play with this idea of like, okay, obviously we’re not going to replace Coke, but is there a way that we can make something that does compete with Pepsi, that tastes a little bit more like Pepsi, that tastes lighter or sweeter or… They’re in the lab, they’re working on it. Eventually, they do land on this formula that they think is great. It’s artificially sweetened, as you’re talking about.

It is a huge risk in two ways to release Diet Coke. One is because of everything we talked about earlier. You got to be really careful with the Coca-Cola brand. It’s the sacred cow. But two, Tab is currently (in 1982) the best-selling diet drink in the world. Why would you release another diet drink that risks dethroning the one that you have that is the clear winner? And the answer is…

David: You need a win.

Ben: (a) You need a win. (b) It is so clear that diet is going to be a gigantic market and that’s the way the world is going, and we’re just holding ourselves back from competing with our best foot forward by not using our big brand.

David: There was one other reason why they finally decided in the late 1970s to start work on Diet Coke. In 1975, the Coca-Cola company acquired the Thomas Company, to the extent that the Thomas company and the parent bottlers, if it is true that they had a right to a 10¢ royalty on other Coca-Cola drinks, that is no longer a problem.

Ben: Fascinating. David, do you know about how they announced Diet Coke?

David: Oh, I was going to ask you the same thing. I thought I was going to get you. Of course I do.

Ben: I’d be surprised if any listeners know. But listeners, you are going to delight in learning this with us.

David: They announced Diet Coke in the summer of 1982.

Ben: In July of 1982.

David: The same month.

Ben: That’s right. Forty-three years before?

David: Forty-three years before us at a very special location in the Acquired cinematic universe, Radio City Music Hall.

Ben: That’s right. Diet Coke was announced on stage with the Rockettes performing to celebrate the new beverage.

David: That’s right. To say it works is quite the understatement. By the end of 1983, the first full year on the market, Diet Coke is the number one diet drink in America. Unlike Tab, which clearly from that commercial that you talked about earlier, was exclusively marketed to women, 30% of Diet Coke drinkers, even in the early days, are men.

By 1984, Diet Coke becomes the third best selling soft drink in America, period, behind Coke and Pepsi. And Diet Coke costs significantly less for Coke to produce because it doesn’t have sugar.

Ben: You know what’s not as expensive? Artificial sweeteners.

David: Yes. So Diet Coke is Goizueta’s huge, huge grand slam win.

Ben: And the way they market it is not apologetic. The campaign is just for the taste of it. They are full-on marketing that this tastes great and it also happens to have no calories.

David: This is Coca-Cola playing offense.

Ben: Win-win.

David: It works incredibly well.

Ben: You can have your Coke and drink it too.

David: That’s right. Then Goizueta decides to play defense with New Coke. Despite all the success of Diet Coke—and it was a huge success—even in 1982, 1983, 1984, 10-ish years into the Pepsi Challenge, it’s still kicking Coca-Cola’s ass.

Coke in 1982 brought in Bill Cosby as their main celebrity endorser. We’ll also link to these in the show notes. The spots that they have him do in 1982, 1983, 1984 are directly addressing the Pepsi challenge. It’s unbelievable.

Coca-Cola is a singular N of one product. Coca-Cola does not exist in a universe with other competitors. And here’s Bill Cosby directly talking about Pepsi and the challenge. It’s the worst thing that Coca-Cola could possibly do.

Ben: They were in bad shape.

David: They are bleeding. Pepsi, of course, in typical Pepsi fashion says, oh, you just signed Bill Cosby and you’re talking about the Pepsi Challenge in your spots? We’re going to sign Michael Jackson.

Ben: Just brutal.

David: Obviously, both of those men, the world would later find out were deeply problematic. But at the time, I think they had among, if not the highest, Q ratings of any celebrity in the world—Q rating being a percentage of people surveyed who are familiar with the person and think highly of them. But from the time that Pepsi launched the Pepsi Challenge in 1975 until the New Coke disaster in 1985, the share of Pepsi grew every single year in America while the share of Coca-Cola declined every single year.

Ben: So the question is, if you’re Coca-Cola what do you do here? What they decided to do was after 99 years with the same formula, carefully building a brand around that logo, the taste, the secret formula, and defining this cultural object to the world, stupidity struck.

David: We can’t downplay how stupid this really was, but somewhat in their defense, if you’re going to introduce a new taste to try and counter the Pepsi taste, which you believe is the reason why you’re losing market share, it has to be a full replacement. There actually is no logical path to adding a new flavor.

A bunch of people are like, well, why didn’t they just release Coke II or something like that? Remember, Coke is a singular product. There cannot be two Cokes. It would destroy the brand. I mean, this destroys the brand, too.

Ben: But I don’t know, David. There’s Coke Zero, there’s Diet Coke, there’s…

David: Well, now there is, but you got to put yourself in the mindset back then. The other more practical problem was if they introduced a secondary flavor and kept original Coke on the market, they would bifurcate the base and Pepsi would become number one. They were paranoid about that, oh, we’re pretty sure if we have multiple Cokes on the market—

Ben: But who cares? What about the base? It’s just pure bragging rights.

David: Coca-Cola cared a lot. Coca-Cola, it’s number one Pepsi’s the imitator. How could they ever stand to let Pepsi become number one?

Ben: So what did they actually do? There are a lot of people that probably aren’t terribly familiar with New Coke and what actually happened.

David: Christmas of 1984, the executive team makes the decision. They’re going to do it. They’re going to replace the original Coca-Cola formula with New Coke.

Ben: And they’ve all tasted it, as has 200,000 people?

David: Yup. They’ve done tons of taste tests. Not only does it beat Pepsi in taste tests, it beats original Coke. People prefer the taste of New Coke. Robert Woodruff is still alive at this point. He’s 95 years old. So they’re like, all right. Before we do this, somebody’s got to go have a conversation with Robert and tell him what we’re doing. Roberto, this one is on you.

New Year’s Day, 1985, Roberto goes to see Robert Woodruff at his home. Robert can barely hear, barely speak, and according to Roberto, who is the only other person present in the room with him, it’s just the two of them in the room, Woodruff gives his blessing to change the formula.

However, the very next morning, Woodruff stops eating. He’s hospitalized a few days later, and he ends up passing away on March 7th 1985, one month before the New Coke announcement.

Ben: So poetic. The formula was never changed while Robert was alive.

David: No it was not. Six weeks later, Friday April 19th, Coca-Cola sends out a press invitation for the “most significant development in the company’s nearly 100 year history,” that they’re going to hold the following Tuesday. Well, news of what is about to happen leaks over the weekend, and Pepsi takes out a full page ad in newspapers across the country on Monday morning with the announcement reading, “the other guy just blinked.”

Ben: After 87 years of going at it eyeball to eyeball, the other guy just blinked. And they gave all their employees the day off to celebrate, which by the way, this couldn’t have been sequenced any worse because Pepsi does that. Pepsi starts giving interviews to everyone they can in the press before the announcement actually happens.

The press all comes in. No one’s tried it yet. The executives can’t even get their message out about it because everyone’s just preloaded with like, how bad are you losing that this is the case? Does it taste like Pepsi? Because Pepsi ceded, hey, you should ask them. Is it meant to copy Pepsi?

The message that the Coke executives have is that they’re trying not to say too much. They’re trying not to describe the flavor. They’re trying not to compare it to Pepsi. They’re up there just looking like complete idiots with no answers that are substantive while everyone is just attacking them.

David: It is an unmitigated disaster. At one point the questioning gets so tough that Don Keough says, “There are a lot of things I’d rather be doing than being here right now.” This is at a press conference.

Ben: At a new product launch.

David: Launching the biggest product in the company’s history. Then the final question of the day, a reporter asks whether—assuming this New Coke thing is a success—if Diet Coke will also be reformulated. Roberto responds, no. I don’t assume that this is a success. It is a success.

Ben: The two crazy quotes to double down on that, Goizueta says, “Some choose to call this the boldest single marketing move in the history of the packaged goods business. We simply call it the surest move ever made.”

David: Oh, my goodness.

Ben: Then, Don Keough follows up, “I’ve never been as confident about a decision as I am about the one we’re announcing today.”

David: Wow, this is so bad.

Ben: Which I don’t think either of those things are true. That can’t be true.

David: No.

Ben: Just based on how timid they were in the messaging.

David: So it turns out that in all the research that they conducted for New Coke, all 200,000 people that they did the taste test with, they never asked them how they would feel if this new beverage replaced the old Coca-Cola.

Ben: And Goizueta’s response to this in later years is you can’t ask a question like that because people don’t know. You can’t get real data on emotional questions like that. You can only actually test, do you like this taste better or not? Sure, you can run that experiment, but ultimately, how much faith are you going to put in the data?

David: They would’ve learned something if they’d asked that question. So the company immediately starts getting thousands of letters and phone calls every single day. One of my favorites is a letter that reads, “My dearest Coke. You have betrayed me. We went out just last week as we had so often and when we kissed, I knew our love affair was over.

I remember walks across campus with you discussing life and love and all that matters. I remember the southern summer nights we shared with breezes leaving beads of water hanging delicately from your body. But last week I tasted betrayal on your lips. You had the smooth, seductive, sweet taste of a lie. You have become corrupted by money denying your ideals.” Oh man.

Or this story. “In Marietta, Georgia, a woman assaulted a Coke delivery man with her umbrella as he tried to stock a supermarket shelf with New Coke. ‘You bastard,’ she screamed. ‘You ruined it. It tastes like shit.’”

Ben: And I think they just didn’t realize that what they were taking away was people’s childhood.

David: They’re taking away America.

Ben: It’s not about what tastes better, it’s what they were used to, and it’s what they had built an entire lifestyle brand around believing that America meant to people.

David: So for a couple of months, from April to July, they stick with it.

Ben: Well, because here’s the craziest thing is they were prepared for a vocal minority to be very mad. You’re in denial about all the feedback. At first you’re like, yup, this is just what we thought. Then you get a couple of months in and you’re like, wait…

David: This isn’t ending.

Ben: Does everyone hate this?

David: The answer is yes.

Ben: So I thought this lasted a year or two. I asked family members, I asked people who were like, yeah, I think that was a two- or three-year period. There was 79 days between when they released New Coke and when Coca-Cola Classic made its return.

David: When they finally decide they got to bring it back, there’s a question of what do they call it, and what do they do with New Coke? Coke and their lawyers ultimately decide that if they keep New Coke on the market as the official Coke, and they call the old Coke Coca-Cola Classic, they can make an argument to all the bottlers, the Coca-Cola Classic is a new drink.

Ben: Really?

David: Yeah. This is part of why they bring it back in this way.

Ben: Because there was an opportunity to renegotiate, hey, actually the rights that you own are to New Coke. Then more advantageous deal that we’re going to cut…

David: Is Coca-Cola Classic, yeah.

Ben: Interesting.

David: So on July 10th 1985, they announced that old Coke is coming back as Coca-Cola Classic and New Coke will remain on the market. In the press conference, Don Keough says, “Some critics will say that Coca-Cola made a marketing mistake. Some cynic will say that we planned the whole thing. The truth is, we are not that dumb and we are not that smart.” I don’t know. It all seems pretty dumb to me.

Ben: The crazy thing is they thought when they introduced Coca-Cola Classic that that would be the product for the diehards, for this vocal minority that was really upset about it. In practice, what happened is everyone went back to Coca-Cola Classic and nobody stayed on New Coke. Its market share was 3%.

David: It plummeted.

Ben: And I think this completely surprised the executives of Coca-Cola who were like, it’s better. We were going to make small quantities of this Coca-Cola Classic just to appease the people who need it. But it’s crazy. People just went back to the worst tasting one.

David: There’s a delicious, one might say, coda to this whole thing.

Ben: Well wait. We didn’t say the best part of how this ends. Within a year, Coca-Cola Classic surged past the heights of where Coca-Cola was before the whole debacle started.

The whole thing worked as an accidental publicity stunt. No advertising campaign could have ever gotten people to pay this much attention to Coke. In many ways, this actually did save Coca-Cola.

After this, they started building back share. What’s the song? You don’t know what you got till it’s gone. This made people realize, oh my God. I do love Coca-Cola.

David: You’re right. That is the most important takeaway from this. This is what finally stopped the Pepsi Challenge. Pepsi won and then after Pepsi winning and Coke losing, Coke was able to come back. But yes, they had to literally kill Coca-Cola in order to resurrect from the ashes and survive the Pepsi challenge.

Ben: The little fun trivia is, David, do you know what New Coke became after they removed the name New Coke but left the product on the market?

David: Oh no, I don’t.

Ben: They renamed it Coke II, and it was not fully abandoned until 2002.

David: Wow. That’s how long they stuck with it.

Ben: Yup. I don’t know who the Coke II fans were, but it was available for you at some point. For a while.

David: Somebody has hoarded a whole stash of Coke II somewhere. It’s in some bunker somewhere. All right, the delicious coda to this whole thing. Remember how I set up the Warren Buffet ham sandwich thing. I think this whole episode is probably where he decides, Jesus Coca-Cola could be run by a ham sandwich.

Ben: Would’ve been better off. But actually not. This whole thing was so stupid that it was actually amazing.

David: What’s the Bernard Arnault quote? “Even when he loses he wins”?

Ben: Yes.

David: After this whole New Coke disaster, Coca-Cola company’s stock is in the dumps. Who comes in? But Warren Buffet.

Ben: Perfect.

David: Berkshire Hathaway, buys roughly $1.3 billion equity stake in the company over the next few years, and joins the Coca-Cola board. Turns out to be, well, a debatable investment.

Ben: He owns about 9.5% of Coca-Cola today.

David: Yup, Berkshire owns about 9.5% of Coca-Cola today. That stake is worth about $28 billion, which is a 22x–23x gross return on the $1.3 billion investment over the course of 40 years, which equates to only just over about an 8% IRR. But Coca-Cola stock kicks off these days about a billion dollars a year in dividends to Berkshire.

In total, Berkshire has received about $12 billion in Coca-Cola dividends, so a $40 billion total return on $1.3 billion invested. Good, but again, this is over 40 years, so that only bumps it up to about a 10% IRR on the investment.

Ben: Which I imagine he would’ve been better buying Berkshire Hathaway stock.

David: He would’ve been better off buying the S&P 500 over that same time period.

Ben: That’s brutal.

David: Including dividends over that same time period, the S&P 500 is up about 11% annually. The famous Berkshire Hathaway Coca-Cola investment today is actually underperforming the market. Crazy.

Ben: When I did some math on this, my first glance at it was this has been an unbelievable investment, because even though the equity value’s gone up, what’d you say, 20x-something, but over a long period of time it’s been fine.

David: 22x–23x, yup.

Ben: The dividend yield is insane. They get $800 million to a billion out every year, and their principle was $1.3 billion. That’s 60%–80% dividend yield on their original investment. I’d love to park a dollar somewhere so that I could pull out 60¢, 70¢, 80¢ every single year on that dollar. That’s amazing. But when you frame it the way you did…

David: But 40 years is a long time.

Ben: Right, over a long period of time, you better have insane multiples to justify locking capital up for 40 years.

David: You know the thing about the S&P 500 is it’s a rotating set.

Ben: Right. That’s not really fair.

David: And over the last few years, of course the tech companies have rotated in and the returns from the magnificent seven over the last 10 years dwarf anything else.

Ben: But I’m sure buying Berkshire in 1988–1994, which was the stretch that he bought Coca-Cola and holding it to today, it would’ve been a far better investment than buying Coca-Cola stock. That is a fair comparison, unlike an index, which has companies that rotate in and out.

By the way, this is the fault of Coca-Cola over the last 20 years. It had a ridiculous run right after Warren invested. We’ll cover it at the very end of the episode, but revenue and earnings growth over the last 20 years on an annualized basis has not been great.

David: Well, speaking of the good initial few years of the run there, there’s one more fruit, shall we say, to be harvested of the Columbia Pictures acquisition that Goizueta and Keough did in the early 1980s.

Ben: The relationship with CAA.

David: Yes, and super agent Michael Ovitz.

Ben: Past Acquired guest.

David: Indeed. Part of the Acquired cinematic universe. When Coca-Cola sells Columbia to Sony, Ovitz and CAA are official advisors on the deal.

Ben: That’s right. When Ovitz try to take it from a talent agency and movie packaging into also doing investment banking.

David: And on the back of that success expanding CAA into investment banking, Ovitz is like, why stop there? Why don’t we expand…

Ben: Become an ad agency.

David: Into ad agency land, too. He comes back to Goizueta and Keough and says, hey, I want to pitch you guys on taking over as your ad agency from McCann Erickson.

Ben: Which is crazy. This is Coca-Cola.

David: But Ovitz’ pitch is pretty good. He’s like, hey, McCann Erickson has been great for you guys. Of course, there’s the hilltop ad and the real thing and everything over the past set of years. But hey, this one sight, one sound, one sell thing is not going to work in the new media landscape.

Look at how badly you got your butt kicked by the Pepsi Challenge in grassroots marketing. What you need are different messages that are going to resonate on different mediums. We’ve got the cable network landscape these days. We’ve got ESPN, we’ve got sitcoms, we’ve got kids shows, we’ve got all this different media.

It’s not just the whole family watching I love Lucy anymore. You need a whole new approach for the new media landscape. You shouldn’t have just one television ad. You should have a whole suite of different television ads for different audiences at different times of the year.

Ben: And there should be a democratic approach to this, where it’s not just one creative director at one agency. You want the best ideas that can come from anywhere. We have all the talent relationships with all these different writers, directors, actors. You just give us a creative brief, we’ll come back with 30 great ideas for you from 30 different sources.

David: So he pitches Coke that CAA can make 40 ads a year for them for the same cost that McCann Erickson is making 7. And they can all stay unified under the new Coke slogan of Always Coca-Cola.

In 1992, CAA wins the business, dethrones McCann Erickson. Among the many ads that they create for Coke is a new Christmas Coca-Cola motif. Not featuring Santa Claus, but instead the polar bears. Ovitz makes the polar bears. Amazing. He didn’t make the polar bears, but…

Ben: Ovitz found the talent through the CAA network to make the polar bears. I think this is basically the climax of our story. New Coke, what happens afterwards, the polar bears, these beloved ads, the rest of the 1990s and 2000s. There’s a lot of company building that happens, but it’s just not that romantic of a story as much as Coca-Cola’s first century was.

David: Well, the thing that really started to happen in the 1990s and that accelerated in the 2000s is the beverage market just moved away from colas and towards a whole variety of other drinks. The first battleground for this is sports drinks and Gatorade. In the 1980s, Gatorade really came on the scene and established the market for sports drinks. Gatorade was part of Quaker Oats.

Ben: That’s right. I forgot Quaker Oats ended up owning it.

David: Yeah, way back in the day. Coca-Cola, in response to Gatorade’s success, launches Powerade in 1988. Powerade is a homegrown product at Coca-Cola. It never achieves anywhere near the same success as Gatorade. I think it maxes out market share in the teens or low 20s.

Finally in the year 2000—this is crazy—the then CEO of Coca-Cola, Goizueta, had tragically died of lung cancer in 1997. In 2000, the CEO of Coke announces publicly a $16 billion deal to acquire Quaker Oats and Gatorade. This would’ve been a great deal for the company.

Ben: Whoa. Yeah. That didn’t happen.

David: He announced it without board approval. The board rejected it after the public announcement. The deal falls through, and the next year Pepsi ends up swooping in, buying Quaker Oats and Gatorade. Gatorade is a home run for Pepsi ever since.

Ben: I had no idea. Wow.

David: Wild. It’s total echoes of the Frito-Lay disaster. Coke could’ve owned Frito-Lay’s and Gatorade.

Ben: Wow. Yeah. And that is a little illustration of the CEO at the time. There have been five CEOs since Goizueta 1998 onward, and the first three only lasted three to four years each. Very different than the Woodruff dynasty in the long run that Goizueta had also.

The thing that is extremely clear, that David you touched on, is they had to diversify into what they call a total beverage company, really prompted by this backlash against soft drinks. The world lost interest in, first, full sugar colas, and then colas.

The thing that was driving it, not really in the 1990s but in the 2000s and certainly the 2010s: obesity. It was clear that America was only going in one direction. And sugar and processed foods, coupled with the sedentary lifestyle that a lot of Americans live is a giant culprit of obesity. Coke’s trapped figuring out what to do about this.

The American Heart Association comes out and says the recommended daily limit of sugar for men is 36 grams and women is 25 grams. Per day. That’s the recommended limit per day. A 12 ounce can of Coca-Cola contains 39 grams of sugar.

David: Yeah, 39 grams.

Ben: So you’ve got this hard problem where Coca-Cola itself, just that one product, that one product line is this unbelievable business. Super high margin, low capital investment, brand is built and established all over the world. It’s hard to want to invest to anything else when that’s your current business.

At the same time, they need to. It’s existential. This product is probably going to only go downhill from here. Maybe it’s got a few more years, maybe another decade of success. But 50 years from now, will this be your cash cow? No. So how do you start diversifying without admitting that your current main product that is the company’s namesake is bad for you? It’s just bad for you.

David: Tough spot to be in.

Ben: Not an enviable position to be in. You can see how that churns CEOs pretty quickly.

David: Now the interesting thing, though, back to Pepsi, they’ve managed this, at least from a business standpoint, pretty well over the past set of decades. First with Frito-Lay, then with Quaker Oats and Gatorade, then in the bottled water market. Pepsi launches Aquafina, Coke launches Dasani.

Ben: They were pretty late to the game in waters. I think the story of the last 25 years is they sit there in a privileged position, look around, and wait and see. Then when something really starts happening, then they go become active in it. They just have to hope that all the assets they have, including the Coke distribution system, makes it okay that they’re not first to market on some of these things.

But I don’t know. Sometimes it really costs them. The biggest, most interesting one is Monster Energy. Do you know the story behind Monster Energy?

David: Well, I know what happened, but I don’t know the story. They started acquiring and investing in a lot of other beverage companies through the 2000s. There was Odwalla, there was Vitaminwater, there was Fuze. Then I know Monster comes along.

Ben: Yup. So Monster started. Do you remember Hansen’s Juice?

David: Yes.

Ben: That is Monster.

David: Oh, I think I vaguely did know this. This is a wild story.

Ben: I don’t have the entire story because this is the Coke episode not the monster episode, but at some point the Hansen leadership realized that they did want to get into energy drinks, but their current brand was not going to be effective in doing so. So they came up with this really crazy brand that felt dark and dangerous to counterposition the cleaner aesthetic of Red Bull, and ends up going great. Better than they ever could have imagined.

There were various times early in the transition from Hansen’s Natural to Monster where Coke could have bought it, but it was subscale, then there were lulls and growth, and it was false starts in it becoming the big giant thing that it became. Also, energy drinks as a category people weren’t sure how durable it was. Is this really going to be the thing that it became or is it a fad?

So in 2012, Monster reached out to potential buyers, including Coca-Cola and Pepsi, but Coke decided against pursuing it because the price was high. Monster’s market cap was $11 billion at the time.

David: Oh goodness wow. And what is Monster’s market cap today?

Ben: $70 billion.

David: I’d say these energy drinks are not a fad.

Ben: Yeah. So what ended up actually happening much later on, Coca-Cola was like, ah, crap. We should have done that. They do sign a deal with them. It was a pretty interesting deal. Coke decided we’re going to walk away from being in the energy drink business. As a part of this deal, we’re going to do a business swap where Coke gives its energy drink brands—NOS, Full Throttle, Burn, Mother, and Relentless—to Monster. Monster transfers its non-energy business, including the original Hansen’s Natural sodas.

David: Amazing.

Ben: Over to Coca-Cola. Coca-Cola becomes Monster’s preferred global distribution partner, and Monster becomes Coca-Cola’s exclusive energy drink play.

David: And Coca-Cola gets a 20% stake in the company, right?

Ben: Well yeah, but Coke had to buy it. Coke had the privilege of investing in Monster. In 2015, Coke puts in over $2 billion, at least they’re getting on the train. So Coke is the largest shareholder now in Monster Energy.

That deal looks pretty good. That $2 billion-ish that they put in is worth almost $12 billion today. Nice investment, but gosh if you’re the global total beverage company, what has the trend been of the last 15 years in beverages?

David: I bet they sure wish they owned Monster.

Ben: Owned Monster, yeah. It is funny, though. I’m talking out of both sides of my mouth here. If you think that Coca-Cola is bad for you…

David: Wait until you see the energy drink.

Ben: Wait until you see Monster Energy. So it’s not just the obesity thing. There’s a trend into energy drinks that has nothing to do with health.

David: It’s interesting. The energy drinks are almost a callback to the original patent medicine of Coca-Cola. This is really bad for you, but you’re going in eyes wide open to that.

Ben: That’s exactly right.

David: It is serving a function for you.

Ben: The other funny thing that happens is Coca-Cola buys Glaceau, which makes Vitaminwater and Smartwater in yet another oh, we should also be in water play. They pay about $4 billion for that.

The founder then goes on to leave Coca-Cola and starts BodyArmor, a sports drink that (I think) is coconut water–based, a little bit more sugary. Turns around, sells that back to Coca-Cola for $5 billion.

David: For a startup, BodyArmor did great. Gatorade still has 60%-plus of the market share of sports drinks. Doesn’t make a dent in PepsiCo’s number one position in sports drinks.

Ben: Yup. If you’re going to look at Coca-Cola as a total beverage company and say what beverages have really been killing it the last 20 years that you’ve managed to bet correctly on or incubate in-house, the answer is Diet Coke and Coke Zero.

David: Coke Zero, 2005, taste infringement.

Ben: For a few years, it was growing at 10% a year, which is really fast considering it launched 20 years ago, and it was already very large.

David: It is ironic that the last 20 years have been about a metamorphosis into a total beverage company, and it’s Coca-Cola, Diet Coke, and Coke Zero that are leading the way.

Ben: That was a lot of stuff that happened in the 2000s. The 2010s, they did acquire more brands. They continue to grow the total beverage companies portfolio. They did a whole bunch of stuff that we’re not going to spend too much time on in this episode. Rehabbing their bottler operations, bringing a lot of it back in-house, making sure the quality and the efficiency was up to where they wanted to have it, and then spinning it back out.

A lot of these bottlers came on balance sheet, then went back off balance sheet to new owners. They encouraged consolidation among their bottlers. They finally got rid of the last little element of the parent bottlers. The story for people who follow Coke as a company or a stock is a lot around how good of a job are they doing restructuring all the bottlers. It seems like they’re mostly through this whole refranchising thing that they’re doing.

That brings us to the business today.

David: The business today, the biggest piece is a part of the story that we basically haven’t talked about since World War II is International, Coke as a global company. Most of the revenue and profits do not come from the United States, even though all the storylines that we’ve been talking about are the United States.

Ben: But I think when people look at the Coca-Cola that they’re holding, they think about the United States. Maybe that’s not true. Maybe I live here and so I’m ethnocentric about that. But I’d be curious if Coke feels like America to you if you’re a listener and you don’t live here.

David: The other part of it is Coca-Cola did set up the bottlers as independent, locally-owned, entrepreneurial businesses in all the countries that they went into.

Ben: Produces a lot of profits locally.

David: Yeah, it is a local business wherever it is.

Ben: All right, so let’s walk through that. Here’s Coca-Cola by the numbers today. First of all, brands. For a long time the thought was just build the total beverage company and more brands is better, so let’s just keep going. They got over 500.

Around 2020 they did a big slimming and went down to about 200. Ones that they got rid of were, Tab, Zika, Odwalla, Honest Tea, Vault. Those are probably some of the ones you know that they got rid of. They do have 30 brands that do over a billion dollars in revenue. It’s crazy that it’s a house of brands that has that many billion dollar brands. Fifteen of them were created organically like Fanta, and Sprite that we didn’t talk about in this episode.

David: That’s right. We didn’t talk about Sprite. Do you know the history behind Sprite? Do you know what Sprite really is?

Ben: No, not really.

David: So Sprite, as we all know it today, is not Sprite. Sprite is Fanta Clear Lemon from Germany.

Ben: Really?

David: Yup, that they brought over to America and rebranded it as Sprite.

Ben: No way. And they stole the name from, they had a character named Sprite Boy, who was a part of the Coca-Cola Santa Claus universe.

David: That’s right.

Ben: All right. Those are 2 of the 15 that were created organically in-house. Three of them they bought, that were already doing over a billion in acquisition. Then the remaining 12 of the $30 billion brands that they have were small, and Coke grew them to over a billion in revenue underneath their umbrella.

Think Minute Maid, Fairlife, and Vitaminwater. And just to share some of the other brands they do own, Powerade, Minute Maid, Dasani, Vitaminwater, Coke Zero, Schweppes?

David: Ah.

Ben: Smartwater, Ciel which is another water brand, and Crystal which is yet a third water brand. They recently bought Topo-Chico. They’re actually playing around in alcoholic beverages a little bit with Topo-Chico with a hard seltzer. I think they’re also doing a Jack and Coke, and a Sprite that is alcoholic. So they’re starting to dip their toe into that a little bit.

David: The Fanta clear lemon alcoholic. All right. Has a real ring to it.

Ben: That’s right. Fresca, BodyArmor, Fairlife and Core Power the dairy products, and Fuze Tea. Here’s one that is a little bit of a head scratcher: Costa Coffee.

David: That they bought for quite a few billion dollars a couple of years ago.

Ben: And it’s a physical retail. It’s a coffee house in the UK.

David: It’s a Starbucks competitor.

Ben: That’s interesting that they operate a coffee house. By the way, speaking of coffee, someone told me that the relationship with McDonald’s runs so deep that Coca-Cola sources the coffee beans for McDonald’s.

David: Wow.

Ben: And if it’s actually the sole source of McDonald’s, that is a giant number of coffee beans.

David: Well it’s interesting with both the Costa Coffee and the McDonald’s coffee. I’m pretty sure we talked about with Howard on our Starbucks episode, the Starbucks Pepsi partnership with Frappuccino, right?

Ben: That’s right. The Pepsi was the bottler that made the CPG version of the Frappuccino.

David: Huge success for both companies.

Ben: So those are the $30 billion brands that they have. Coca-Cola serves 2.2 billion servings of their beverages to the world every day.

David: Wild. That is a quarter of the world’s population if everybody were having just one.

Ben: Isn’t that crazy?

David: Definitely not evenly spread. There are a lot of power users of Coke products out there.

Ben: But Coca-Cola’s estimate is that there are 65 billion servings of beverages consumed every day.

David: Does that include water or no?

Ben: Yeah. The human race takes 65 billion drinks a day of something.

David: So what’s that? I guess that’s eight drinks per person per day?

Ben: Yes. By that calculation, they got a long way to go. Huge market ahead of them even if they stayed just in beverages.

David: There you go.

Ben: They have 200 bottling partners around the world with 950 unique facilities. Pretty awesome that they don’t have to own the vast majority of that. From a revenue perspective, this is what you were starting to get into and how is the revenue breakdown. The Coca-Cola company itself does $47 billion in revenue.

David: And how much is North America versus the rest of the world?

Ben: 40% of revenue is in the US and 60% is international.

David: That’s actually bigger than I would’ve thought in the US.

Ben: Still very meaningful.

David: I bet for the core cola products, it’s less than 40% in the US.

Ben: I bet that’s totally right. Okay, so the interesting thing is if you start to look at employees. Revenue, $47 billion at Coca-Cola Company out of $175 billion in total revenue by the system. This is as reported by Coca-Cola in their proxy statement.

There are 70,000 employees of Coca-Cola. But again, if you look at the system, there are 700,000 employees. Let’s look at those last two numbers together because that’s a 10x difference in employee count. A full $47 billion of the $175 billion in revenue goes to the Coca-Cola company, 27% of the revenue with just 10% of the total employees.

The Coca-Cola company gets a tremendous amount of leverage out of the bottling system. This is just employees. This doesn’t even think about the margin profile. This doesn’t think about return on invested capital, which again is all much better if you’re the Coca-Cola company versus if you’re the bottlers.

David: Then there’s the fountain customers, the retail partners, the McDonald’s of the world. Definitely, Coca-Cola is at a better return on invested capital standpoint than running restaurants.

Ben: The Coca-Cola company just needs to sell syrup and spend marketing dollars to sell the dream. It’s a beautiful position to be in.

David: Yes, it is.

Ben: Earnings on that $47 billion, they generate $10.6 billion of net income. The net income margins tend to average around 23%. Gross margins average about 60%. Historically, it was as high as 70%. Almost as good as the software business, but not quite. But for a physical goods business, it’s unbelievable that they have 60% gross margins.

Then when you look at the revenue mix on products, this gets to what is the company today? Sixty-nine percent of revenue comes from sparkling soft drinks. As much as they are in water, milk, tea, juice, and sports drinks, the bulk of this business is selling soda. Forty percent of all volume is trademark Coca-Cola, which is just Coke, Diet Coke, Coke Zero, and the caffeine-free and flavored variants. Forty-seven percent of the volume is the Coke family.

I continue to maintain this mentality of they keep trying to get into other stuff, but then they’re always a little bit like, geez, I know we should be getting into this other stuff, but it’s not as good as our original thing. It’s not as good of a business, it’s not as unique of a brand.

I also think they’re like limping into a lot of these other categories. They’re not making a giant early bet on things that become the next big beverage fad. They’re trying to watch and see how it plays out and then jump in.

David: Whether it’s sports drinks or energy drinks.

Ben: Exactly. Market cap is $300 billion. Huge company, not by Mag 7 tech standards, but massive, very valuable company. You’ll note David, they did not achieve Charlie Munger’s thought experiment of $2 trillion, and they are very unlikely to get there by the 150th birthday in 2036, which is the timeframe that Charlie used.

David: Indeed.

Ben: Growth is only 3% or 4% a year. If you look since 1998 in the post-Goizueta years, it averages out to about 3%–4% growth. I think fair to say anemic when you’re describing their growth in recent years. I think that’s why we focused the bulk of the episode on the pre-1998 Coca-Cola. That’s really where they built this unbelievable thing that frankly saturated the world.

David: This incredible business with all these innovations and pillars of what became one of, if not the greatest brand in American history. But yeah, as we said, back starting at the Pepsi Challenge days, I think there’s a strong argument that Pepsi was the more interesting company.

Ben: And over the last 50 years, soft drinks as a category have just gotten a lot more competitive. The stat that I saw was back in 1948, Coca-Cola said that they had 60% market share of US soft drinks, 60% in post-World War II America.

In soft drinks today, they have 21%. Pepsi has 10%. I think there are a lot of things in soft drinks. If you just look at carbonated, Coca-Cola does have 47% market share and Pepsi has 19%. But in soft drinks, the category has just gotten a lot more competitive, and Coke has lost share.

David: Yup.

Ben: All right. Should we move into analysis?

David: Yes, let’s do it.

Ben: All right. Instead of playbook this time, because I had just something funny written down for Playbook, which is this company really only does two things, manufacture syrup out of some unique intellectual property that they own and spend money on marketing.

David: Correct.

Ben: I think the more interesting playbook this time is a brief review of why Coca-Cola worked.

David: Love it. Let’s do it. Well, first you were talking about it a minute ago with the 64 billion daily thirst quenching occasions around the globe.

Ben: Nice market to get to play in.

David: They’re just in a giant market. Everybody in the world gets thirsty and everybody in the world likes to have some variety in what they drink besides just water.

Ben: Yup.

David: Full stop.

Ben: Full stop. And in that category, they built something that for many years the better part of a century, people felt was N of one. They were the original. They were the real thing. And it took a long time for that to get eroded. Honestly, if I’m looking at sodas, it’s still the real thing. It’s just that there are a lot of other things too.

David: And that’s due to both a multi-decade, 100-year plus investment in building the brand, and some of the greatest brand marketing of all time.

Ben: Three, World War II and having a unbelievably paved path for them to expand globally. And then also shut the door behind them on global expansion.

David: I really do think continuing the second party locally, entrepreneurially-owned franchise bottling system internationally was a huge contributor to that.

Ben: Yes, so much of Coke’s success. I keep going back to that moment earlier where bottlers enabled them to scale so much faster than not having bottlers. Even if you look at all the beautiful business dynamics of you don’t have to deal with that lower margin stuff, you don’t have to deal with the high headcount stuff, the high complexity stuff, the high overhead, the lower returns on invested capital. Even if it’s just about speed to market, they got to blanket America and then blanket the world very quickly…

David: Before anyone else.

Ben: With the thing that people pick a supplier once. Whether the restaurant’s picking the supplier or people are picking their favorite beverage, they pick it and then it’s over. They had this unbelievably fast way to saturate in something that was a race. It turned out soft drinks were a category that was a race and who’s going to get to global scale first.

David: And it was all figured out by accident because of the worst business deal in history.

Ben: As Steve Jobs always says, you can only connect the dots looking backwards.

David: That’s right. The $1 contract.

Ben: Of course it is a highly addictive substance that is also super enjoyable to drink and triggers every reward center you have. Not nearly as much as when it had cocaine in it, but plenty of reward centers—from the bubbles, the sugar, the caffeine, the cold refreshment, everything about it.

David: I’ve been fired up doing this episode.

Ben: The extrinsic marketing capability of associating it with everything good in your life—with happiness, with Christmas, with your family, with your favorite athletes—is just amazing lifestyle marketing.

Then lastly, I will say, New Coke, it taught us to love again. It made us fall back in love with Coca-Cola. I think Coca-Cola would be worse off today if they didn’t go through the New Coke moment, which is crazy to say—I guess we don’t have the counterfactual—but if you just look at the data on the resurgence in Coke afterwards, you couldn’t have come up with a better marketing stunt.

David: Totally agree. I disagree with both sides of the Don Keough statement that we weren’t that dumb and we weren’t that smart. They absolutely were that dumb and they absolutely were that smart.

I’ve got two more that I would add. One, I think Pepsi was great for Coke. I think neither Pepsi nor Coke would be what they are today or be as great a product and company as they are today if it weren’t for the other one.

Ben: Definitely.

David: The Pepsi challenge is what made Pepsi. Because there was a challenge to Coke and then all of Coke’s response, they made each other better.

The last one I would add is that other than software and technology products, this is the first real physical product I think we’ve ever studied on Acquired, where you can have both a low-selling price and high margins.

Ben: Oh, that’s interesting.

David: And that’s super important when it’s also a game of scale and global scale, because it lets you sell this affordable luxury or pause that refreshes to everybody in the world. More or less everybody in the world can afford a Coca-Cola. And also, the Coca-Cola company makes great margins on those selling prices.

Ben: It’s a lot of volume, and that’s incredibly cheap ingredients. That’s the other…

David: Yes.

Ben: That’s our why Coke worked.

David: That’s our tableau of why Coke worked so well. All right, powers.

Ben: For new listeners to the show, and there are many of you. Thank you so much to all of you who shared the Trader Joe’s episode with friends and family. We saw tens of thousands of new listeners come and join us. So welcome to the party.

This section, power, is gleefully ripped from a book called Seven Powers by our friend Hamilton Helmer. In it, he examines what of these seven possible powers is it that enables a business to achieve persistent differential returns, or put another way to become more profitable than their nearest competitor and do so on a durable, sustainable basis. The seven are counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource.

David: Well it definitely wasn’t counter-positioning because Coke is the real thing.

Ben: Was the first.

David: Pepsi, master of counter-positioning. Coke is the incumbent.

Ben: Coke was mostly getting counter positioned.

So this is a business of scale economies. Everything about this business is scale economies. The amount that they can amortize their advertising over. It’s just an amortization scale economies business, period. They can manufacture and distribute things cheaper than you can to way more people than you can. And good luck catching up. They’re going to have another 100 years in them because of that advantage that they’ve built up.

David: Yup, all of the things. And perhaps the most important might be the first thing you said of amortizing their advertising spend over the life of the company. They can afford to just pour massive, massive, massive sums into marketing.

This is why it was such a big deal when in the 1970s with the Pepsi Challenge, Pepsi started outspending Coke in marketing. If you were really astutely paying attention to the dynamic, that should have tipped you off of like, oh, Coke is in big trouble relative to Pepsi. If Pepsi can afford now to make the investment to spend the same or more in marketing dollars, they’re going to catch up.

Ben: All right. While we’re there, let’s do branding because I think this is so interesting. Normally, brand power is measured by the amount. If you provide someone with two identical things, how much more are they willing to pay you? And that delta, the Tiffany over the generic piece of jewelry is how you quantify their brand power.

Coke doesn’t sell things in general that are more expensive. Pricing power isn’t really a thing that’s exercised in this industry, if it exists at all. Coke clearly has branding power, but rather than taking price they keep price low and use their latent brand power in other ways.

The funny thing is when they sell a Coke, they’re selling a billboard. There’s this flywheel element too where they want to sell as much Coke as possible, not just to keep their manufacturing costs low because It’s a economies of scale thing, but also because one more Coca-Cola floating around in the world just reinforces the brand.

David: I would say, not that I disagree with anything you’re saying, this just reinforces for me, this business is all about scale economies. It’s all the pursuit of scale.

Ben: I think this is the best interplay we’ve ever seen between branding power and scale economies where the way that they’ve built a lot of the brand that they have is through their scale economies, and they go back and forth.

I’ll tell you, you can’t measure their brand power through how much more expensive it is than Pepsi because that doesn’t exist. You can sure measure it, though, with the outcry against New Coke.

David: That is a one time experiment that most brands never run with good reason.

Ben: Switching costs, I don’t think I have any real switching costs. Sometimes I do have to drink a Diet Pepsi or a Pepsi Max, and it’s fine. It’s not my preferred drink, but it’s fine.

Network economies, none?

David: No.

Ben: Process power? Maybe, but it’s hard to discern from the outside.

David: And then the last one, cornered resource. Okay, what’s your opinion?

Ben: Of course it’s the formula.

David: You really think, yes?

Ben: But I’ll tell you, it’s not the formula itself. It is all of the meaning imbued into the formula that is actually a part of their branding power. But if Pepsi said we broke into the vault, we got the Coca-Cola formula, and we’re releasing something called Pepsi C and that is identical to Coke, something would go with it. There would be some amount of value transferred from Coke to Pepsi.

David: Okay. Yeah, some.

Ben: The public gives meaning to the formula, even if you can synthetically create something that tastes exactly the same as Coca-Cola.

David: Okay, I’m going to take the exact opposite position on this argument.

Ben: I know you’ve been texting me all week, that you think that the whole secret formula thing is a red herring.

David: I think there is today absolutely no value to the formula. There’s not just a thought exercise, there’s an actual conversation in the appendix of For God, Country, and Coca-Cola. Mark Pendergrast in his research found John Pemberton’s original formula from 1886 for Coca-Cola.

He found it, took it to his contacts at the Coca-Cola company and said, I’ve got it. What do you guys think? And they said, well, okay. You publish it. Let’s say somebody gets a hold of this formula, what are they going to do with it? Make a drink? Okay, great. How are you going to distribute it?

Okay, well, but let’s say you can figure out distribution. Well what are you going to call it? Are you going to call it Coca-Cola? Well, of course we’ll sue you for that. How are you going to brand it? How are you going to invest in marketing? Basically, how are you going to get the scale economies to do what we do? And the answer is, you’re not going to.

And to your point about Pepsi…

Ben: Pepsi’s got a better formula.

David: Well, Pepsi has a better formula one, but there actually was a case. Somebody, a former Coca-Cola employee, stole the formula and tried to sell it to Pepsi. This actually happened, and Pepsi turned them into the FBI. What is Pepsi going to do with the formula? Pepsi’s not going to market the Coca-Cola formula. These are big multinational corporations.

Ben: If anything, what you’ve convinced me of is that the bottlers are actually a cornered resource. Those bottlers have great distribution and they’re not bottling for anyone else.

David: Great point.

Ben: Coke handed them a license to print money and they’re doing it. I actually am very curious. Can you switch teams as a bottler? Probably not.

David: I guess it’s probably legal, but I bet nobody does.

Ben: Fascinating.

David: All right, quintessence.

Ben: So listeners, this is something we added earlier this year where we really tried to come up with something to land the plane. What is our takeaway from the episode? We already laid out why did Coca-Cola work? This is just David and my opportunity to come up with a quippy sentence or three that is the thing that’s on our mind as we’re leaving the episode.

But first, David, we have to come back to the question. Could Coca-Cola be run by a ham sandwich?

David: I think after studying all this history, I have to agree with Warren.

Ben: Whoa, really?

David: And Bill. I think it could be. Now, there have been great, incredible CEOs in Coca-Cola’s history—Candler, Woodruff, Goizueta. All of them have added on to what the Coca-Cola company is, I think. But if you took just Coca-Cola, yeah a ham sandwich could run it. In fact, it’s proven by the New Coke debacle.

Ben: All right, I disagree. I think there were definitely periods in history, yes, but in 1985, no. Coke had been losing share to Pepsi for 15 straight years. They did actually need active management to do something. The same thing with the obesity crisis in the 2000s.

Coke effectively bumped up against the edge of the market of humans that it could possibly expand to, and they did actually need a different company strategy. Now, whether that has been executed well is a different thing. It’s only grown 3%–4% over, whatever, the last 27 years.

If the criteria is run a high-growth, successful, great place to put money versus all the other places you could put money company, no, they haven’t succeeded in doing that. But you do have to do something rather than just be flat to anemic growth or decline.

David: Those are very fair points. Points taken. I would still pose the question to you. What is the single biggest revenue driver within the Coca-Cola company today?

Ben: Trademark Coca-Cola.

David: The real thing, baby.

Ben: Okay. But onto Quintessence. I have two.

David: Great.

Ben: One is it’s a system, not a company that’s new for us. I know franchises exist, but this is a different thing. I’m interested in studying more systems where it’s multiple companies interrelated. Two is, if you really boil it down, the Coca-Cola company, in a nutshell, it is figuring out how to incentivize partners to sell your product.

Everyone is incentivized. The bottlers are massively incentivized. The retailers, there’s great margin there for you. The soda fountain operators, the restaurant, the billboard owners.

We didn’t talk about this, but in the Great Depression when no one was buying billboard space, the billboard owners didn’t want empty, blank, sad billboards. So for free, they put Coca-Cola ads up on it. They were the preferred thing to a white wall to have there. Just everyone in the entire ecosystem is incentivized to sell Coca-Cola on behalf of the Coca-Cola company. And that is durable.

David: Robert Woodruff had a mantra, an official motto within the company during his reign as company boss, that everyone who has anything to do with Coca-Cola should make money. There you go. That is a great quintessence.

Mine that I would add, repetition works. We’ve studied a lot of brands on Acquired. It’s become a core part of what we do, especially with the luxury industry. But in the luxury industry, they’re always looking for the new spin and changing.

There are elements of repetition. Hermes is always Hermes, but it’s always whimsical. It’s always something new. Pierre-Alexis always has a new theme every year. With Coke, it’s a story of 150 years of always delicious, always refreshing. Yes, they change it up, but it’s the same core thing.

Ben: It’s a core human need. You want something delicious and refreshing no matter who you are or when you are.

David: Yup. That’s my quintessence.

Ben: It’s great.

David: All right. Well, cheers.

Ben: It’s a sugar water company, David. They make a drink of sugar water that’s not good for you. And they built one of the most incredible brands of all time.

David: But it’s always delicious and always refreshing.

Ben: It’s not good for us, it’s not good for the planet, and it’s delicious and refreshing.

David: Are you trying to tell me that I could sell sugar water for the rest of my life or I could come with you and change the world?

Ben: I promise no world changing, but I do have some trivia.

David: Great.

Ben: A thing we didn’t cover on the episode, in addition to rising to the Supreme Court and generals soon to be presidents helping the success of the company, in 1980 the government passed an amendment to federal antitrust law that exempted the soft drink industry. Coke and Pepsi could actually grant exclusive territories to their bottlers, which you might have been wondering, how do you get this local monopoly?

David: Oh yeah, how is this legal?

Ben: It’s like I get to serve all of New York and all of New Jersey or whatever. They actually have a federal exemption from antitrust law to be able to grant monopolies.

David: Wow.

Ben: Trivia number two, the Hartsfield-Jackson Airport in Atlanta. Huge airport for anyone who’s ever been there. That land was once owned by the Coca-Cola company. Same actually with the Atlanta Zoo.

David: The Coca-Cola company does a lot of international business, so they need a big airport there.

Ben: Very true. And here’s my last fun piece of trivia. Around 1930 when they were really freaked out about whether or not they’d have the ability to import the coca leaves to the United States to do the refining here. They actually leased a secret cocaine refining facility in Peru.

David: Yes, in Peru.

Ben: They spun the factory up. It was working. The employee manufactured Coca-Cola there. The extracted cocaine that came off as a byproduct, they had a big amount of it, and they were trying to be a good employee to the company and earned some money with it. They sold 42 pounds of cocaine to a narcotics broker in Paris, and the sale proceeds went in the Coca-Cola bank account. There’s this crazy period where Coca-Cola’s freaking out, like, we got to hide this. This is not good.

David: This employee wasn’t trying to steal cocaine and sell it on the black market and make money. It was trying to be a good employee and increase profits for the company.

Ben: That’s right. The Hoover administration would eventually grant that exception so they could refine the coca leaves here in the US, but that was just before.

David: Wow. I have one piece of trivia. Do you know what other very large American company Coca-Cola helped put into business and was their primary and (I think) sole customer for the first few years of their life?

Ben: No,

David: Monsanto.

Ben: Really?

David: Monsanto started as a saccharin manufacturer. Coca-Cola was their first major customer and bought their entire saccharin supply.

Ben: Was Tab saccharin-sweetened?

David: No, this is way before. I think it was just that Coca-Cola was probably experimenting with saccharin. I don’t know that they actually used it, which is odd. But yeah, this is right around the turn of the century, early 1900s. Coca-Cola was Monsanto’s very first customer.

Ben: Trying to create some mind stickers out there.

David: Oh God.

Ben: All right. Carve outs?

David: All right. Carve outs.

Ben: Great.

David: Oh boy. Well, on that theme (I guess) of diets, I recently redid my home gym, and I got a new piece of workout gear that I’m really enjoying. Have you ever heard of a SkiErg?

Ben: Oh, yeah.

David: This thing is great. I’m neither a skier nor a rower, but it is a vertical rowing machine made by Concept2, which is the main rowing erg machine manufacturer. It’s vertical, it’s attached to your wall, it takes up no space, and the movement that you do is like cross-country skiing. You reach above you, you grab the handles, and then you pull down like your cross country skiing.

It’s great because my primary form of exercise these days is running. On my off days I’ve been looking for, okay, I want another thing I can do that’s not my lower body. I was looking at a rowing machine, but like, oh, it takes up a lot of space. I don’t have a lot of space down in my gym. I went with the skier. I’m very happy with it.

Ben: I’m with you for multiple days ahead of the Super Bowl, so I’ll have to give it a shot when I’m staying at your house.

David: And then one more bonus carve out in my ongoing video gaming saga with my older daughter. I downloaded Smash Brothers Ultimate to her Switch, so we’ve been playing that. She really likes to be a princess, of course, and to “fight the bunny.” She calls Pikachu the bunny. She’s always like, I want to fight the bunny.

Ben: Pikachu is bouncy.

David: He looks like a bunny, you know? I get it.

Ben: Awesome. I’ve got three: friend of the show, Claude, for reading leases.

David: Oh, nice.

Ben: I just signed a lease on Acquired North, moving out of the basement and getting a studio next year.

David: Big news.

Ben: It didn’t warrant real lawyers looking at it. I gave it a pass and I asked Claude, is there anything that’s wrong in here? It flagged a few things for me that I found quite helpful. I don’t know if anyone’s told you this yet, but I think AI is the future, and it was quite helpful for me.

David: Do you want to sell sugar water for the rest of your life, or do you want to…

Ben: That’s right. Two is my current favorite running shoes are the Nike Vomero Plus, which seems to be the replacement for my previous favorite, the Invincible line. Big fan of the Vomero Plus.

Then the music I’m digging right now is an artist called Hermanos Gutiérrez. My good friend, Andy Sparks, recently stayed at my house and put this on while we were hanging out one morning, and it is fantastic chill music, so I highly recommend it.

David: Excellent.

Ben: Well, with that, we’ve got some thank yous for folks who helped us with this episode. First to our partners this season, J.P. Morgan Payments. Trusted, reliable payments infrastructure for your business, no matter the scale. That’s jpmorgan.com/acquired.

WorkOS, the best way to make your app enterprise-ready, starting with single sign on and just a few lines of code. workos.com.

Shopify, the best place to sell online, whether you’re a large enterprise or just a founder with a big idea. That’s shopify.com/acquired.

And Sentry, the best way to monitor for issues in your software and fix them before users get mad. senty.io/acquired.

You can click the link in the show notes to learn more. As always, all sources for this episode are linked in the show notes.

David, I’ve got some thank yous. First, as always, to Arvind Navaratnam at Worldly Partners for his great writeup on Coca-Cola, which is linked in the show notes. Actually, Arvind was very close with Charlie Munger when he was alive. He is the one who brought up that thought experiment that I did not know about, or I guess remember from the first time I read Poor Charlie’s Almanack.

David: When you brought it up, I remembered it, but I had completely forgotten.

Ben: Same. To Bill Combs, who is the past president of the Coca-Cola Collectors Club, the largest collectors club in the world. But it’s great. I talked to Bill and he had all this amazing old Coca-Cola memorabilia on the wall behind him, drugstore signs and stuff.

To Simeon Siegel from Guggenheim Partners, a retail and consumer brands analyst who helped me think through the nuances of how brand power shows up in financials. And of course to all the other past Coca-Cola folks who spent time with us helping to make sure that we got the story right.

David: And one more big thank you from my end. To John Sculley, steward of the Pepsi Challenge. Thank you so much, John, for giving us those wonderful stories.

Ben: If you like this episode, go check out our episodes on Berkshire Hathaway, Standard Oil, Rolex, or Trader Joe’s. As we head into the holiday season, feel free to share this with anyone who wants to understand the origin behind the modern Santa Claus.

David: Of course.

Ben: After this episode, go check out ACQ2, our other podcast feed, available in any podcast player if you’re [...] for more Acquired. If you’re not already on it, seriously, join our email list. This episode was selected by folks who are on our email list, and we can’t wait to ask you to vote again for episodes in our spring season.

You can join at acquired.fm/email and see the new overhaul that we just did. Each monthly email will now have episode summaries, our big takeaways, and exclusive photos from the research process.

Come join the Slack, acquired.fm/slack. Hang out and discuss it with all the other smart people who listen to Acquired. And with that listeners, we’ll see you next time.

David: We’ll see you next time.

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