Springing A Leak

By John Greenwald

Even in a company that venerates carbonated sugar water, Douglas Ivester stood out for his missionary zeal to spread Coca-Cola around the world. An accountant by training, with an eight-day-a-week work ethic, Ivester predicted a decade ago that he would be chairman and CEO of Coke by Nov. 1, 1998. He beat that brash forecast by a year when Roberto Goizueta, his charismatic mentor and predecessor, died suddenly of lung cancer in October 1997.

So last week the business world was shocked when Ivester announced he would retire next April to make way for "fresh leadership," putting an end to a tenure that was as extraordinarily rocky as it was brief. The Georgia native insistently echoed company statements that stepping down at age 52 was his idea. But veteran Coke watchers couldn't help speculating that there must have been a shove from disenchanted members of the company's board of directors. "This was a guy you would have had to carry out in a box," says Tom Pirko, president of Bevmark, a consultant to the industry. "The pressure for him to crack just had to be nuclear."

In barely two years as CEO, Ivester appears to have done what no mere soft-drink rival could have hoped to accomplish--dimmed the luster of one of the world's brightest brands. It wasn't just Coca-Cola's seven-quarter-long profit slide. When dozens of Belgian schoolchildren fell sick after drinking Coke products last June, Ivester maintained what looked like an arrogant silence for more than a week before traveling to Belgium to apologize. (The incident resulted in a 65 million-can recall.) Nor did he burnish his company's image by failing to promote Carl Ware, senior vice president for African operations, Coke's top black executive, during a high-level shuffle in October--an omission that sent Ware to the exits even as four past and present black employees were suing Coca-Cola for alleged discrimination.

Wall Street investors are fretting over the future of the global colossus, while business strategists ponder what went wrong. Last week Coke named Australian-born Douglas Daft, 56, who runs the company's Asia and Middle East operations, as president and heir- apparent. But that didn't do anything for Coke's stock price, which fell $4.125 a share last Monday on the news of Ivester's retirement--a 6% drop that knocked $9.9 billion off the company's market value--and dropped 75[cents] more by Friday's close.

The question gnawing at everyone is whether a company that already controls 51% of the world's soft-drink market can sustain Ivester's relentless strategy of pumping up sales 7% to 8% a year. "Coke has been this perpetual growth machine," says Ari Ginsberg, a management professor at New York University's Stern School of Business, "and now all this has happened."

In fairness, Ivester inherited Goizueta's strategy. And he took office just as Coke's foreign markets, which account for nearly 75% of its profits, were sinking from Moscow to Manila beneath a worldwide wave of currency devaluations. That tanked sales and turned many of the lavish investments that Coke had been making in overseas ventures into instant losers.

That should have set off warning bells in Atlanta. But Ivester, known for his bulldog tenacity, pushed ahead with expansion plans. Coke had built its omnipresence in the 1980s by welding together a motley collection of soft-drink bottlers into the most powerful distribution channel on earth. Ivester felt compelled to fill that global network despite the spreading financial contagion. Instead of paring growth targets, he embarked on a flurry of acquisitions to put more products into the pipeline.

That led to clashes with overseas regulators, who have long suspected the company of attempting to Coca-Colonize the planet. In one confrontation last spring, the European Community forced Coke to scale back its $1.85 billion purchase of the foreign rights to Cadbury Schweppes beverage brands, which prevented the company from marketing Crush, Dr Pepper and Canada Dry in Europe. That took the fizz out of one-quarter of the company's global sales.

Then, in July, European authorities conducted a series of dawn raids on Coke facilities from the Continent to Britain in search of evidence that the company was offering retailers illegal kickbacks for favored shelf space. That investigation is ongoing. And last month French authorities rejected Ivester's $840 million bid for the Orangina soft-drink business. Observes John Quelch, dean of the London Business School: "The power of global brands may be strong, but they are not strong enough to preclude the need to cultivate [government] relationships at the national level."

Fortunately for Coke's board of directors, diplomacy is just one of Douglas Daft's strengths. The 30-year company veteran has spent most of his career overseas, building successful businesses in the uncertain, even untrammeled markets of the Middle East and Asia. If Ivester seems almost uncomfortable outside the world of the beverage business or his native Georgia, Daft is a jovial former math teacher with a wry sense of humor, a diverse range of interests and a creative streak. He pushed to develop Coke's biggest seller in Japan, for instance, and likes to joke that it is not a cola but a syrupy drink called Georgia Coffee.

Syrup may prove to be one of Daft's biggest challenges, assuming that he takes office as CEO next April. In what seems to many analysts to be an ever desperate bid to increase revenues, one of Ivester's most recent moves was to hike the price of Coke's concentrate by a steep 7.7%. In effect, that represents a penalty for the company's cost-conscious bottling affiliates. In the past, Coke has offset such cost increases by funneling hundreds of millions of dollars in financial assistance to its key bottlers. But bottlers expressed outrage at last month's move, which they feel indicates Atlanta's willingness to transfer to them the burden of Goizueta's and Ivester's growth plans.

In a letter to Coke's 30,000 employees last week, Ivester pointed to the "soul-searching" that preceded what was clearly a painful decision to abdicate the company throne. In an uncharacteristically melancholy tone, he exhorted the troops to look not toward the travails of the past but the "opportunities" of the future.

By contrast, in discussions with reporters in Atlanta, Daft struck a determined, confident note. The new millennium, he said "is the year of recovery for the world, and obviously our business will be part of that." The previous growth targets, Daft insisted, will be sustained. That made analysts nervous, because for all his attributes, Coke's new Doug was still sounding very much like the old Doug. Unless the tune changes, they say, the real value of this brand of carbonated sugar water is likely to be put to an even greater test.

--Reported by Sylvester Monroe/Atlanta and James L. Graff/Brussels

With reporting by Sylvester Monroe/Atlanta and James L. Graff/Brussels