In the U.S., the company's largest market, Coca-Cola Classic sales have declined for five years straight. Is Coke fighting a losing battle trying to win back consumers?
Neville Isdell was happily retired two years ago splitting his time between the south of France and the sun-kissed beaches of Barbados.
Then the Irishman, 60 years old at the time, was summoned to turn around Coca-Cola Co., which was suffering from failed products like midcalorie Coca-Cola C2, poor advertising and management turmoil. Coke's board considered outsiders for the top job but instead opted for the familiar in Mr. Isdell, a veteran Coke executive who got his start at a bottler in Zambia in 1966 and later turned in stellar performances in outposts such as the Philippines and Eastern Europe.
Mr. Isdell, who left Coke in 1998 as president of the company's Greater Europe group to run a bottler, jumped at the chance to climb even higher. In June 2004, he became Coke's chairman and chief executive.
At the time, Mr. Isdell refused to comment on the business and visited Coke markets around the world his first 100 days. He had to break his public silence to issue a profit warning in September 2004 and emphasized then there were no quick fixes to what ailed the Atlanta beverage giant. He asked investors for patience and said it could take as long as two years to get the company back on track.
That deadline is approaching, and Mr. Isdell will face shareholders Wednesday at his second annual meeting in Wilmington, Del. Coke shares have fallen 20% since he took the helm, with many investors skeptical he can restore the company to consistent growth. Revenue grew 6% last year to $23.1 billion, but the company's profit was essentially flat at $4.87 billion in 2005, which Mr. Isdell labeled a "transition year." World-wide volume for Coca-Cola trademark sodas, including Diet Coke, grew 2% last year, with strong sales in emerging markets such as Brazil and Turkey offset by little or no growth in the U.S. and Western Europe.
Mr. Isdell has boosted employee morale and accelerated the rollout of new drinks like coffee-flavored Coke Blak and a Tab Energy drink. He has tried to change Coke's risk-averse culture, which made it slow to recognize health trends that rivals such as PepsiCo Inc. seized upon. And after years of cutbacks at Coke, Mr. Isdell increased the global marketing budget by 20%, or $400 million a year, with some of that going toward Coke's new global advertising campaign, "The Coke Side of Life." Seated at a conference table on the 25th floor of Coke headquarters overlooking downtown Atlanta, he talked with the Wall Street Journal about obesity, kids who sneak sodas into school and the hunt for Coke's next CEO. Some excerpts follow.
WSJ:You said a turnaround at Coke would take 18 to 24 months. The two-year milestone is approaching. Is your plan working?
Mr. Isdell: Yes, but I'm not declaring victory. I'm not comfortable we have got to where we need to be. Far from it. That impatience still burns within me....We have certainly stabilized. The numbers for '05 show we got growth back in carbonated soft drinks, albeit not in some of the developed world. We recognize that. It also shows that globally we stopped losing share. In fact, in some categories we are gaining share. When you have negative momentum, you actually get no points for arresting the negative momentum. And if you know that and understand that, then you don't panic....
[My early tenure as CEO] was a time when we went reasonably slow in order to go fast later. In other words, getting it right. As I look back over that time period, I don't really have anything I regret doing at the speed I did it. Including the 120 days of silence which become 100 days. I read the other day someone who said the best thing to do in the first 100 days is not be hyperactive except for listening skills. That's exactly what I did, and I was criticized for that....
We were busy working with the top 150 [executives] in terms of building the strategy of what we wanted to do going forward. I keep emphasizing the manifesto [Mr. Isdell's blueprint for long-term growth focused on better execution behind core sodas and more innovation in noncarbonated drinks] is not anything that is earth-shattering. It's good sound business sense as to how to run the Coca-Cola Co. It probably could have been written in six to eight weeks by six people, but then it wouldn't have been something that people were able to sign on to easily because it would have been what I call the edict from the mount....
WSJ:In the U.S., the company's largest market, Coca-Cola Classic sales have declined for five years straight. Is Coke fighting a losing battle trying to win back consumers?
Mr. Isdell: I don't think we are entirely fighting a losing battle.... With regard to Coke Classic, I think we will be able to stabilize that. I think the growth is going to come from the diet arena.... Look at Coke Blak, which is not a full-calorie beverage. It's 45 calories in the [eight-ounce] packaging we have at the present time. It is indulgence. People are still looking for indulgence. Starbucks is indulgence.
Coke Blak is also re-energizing brand Coca-Cola and modernizing it. It is part of the revival of the brand and yet still based on the core.... We think it deserves a premium price [about $1.99 per 8-ounce bottle].... We will have brands out there which are high-revenue, high-margin but not necessarily high-volume.... That is a different mind-set than where we have been before.
WSJ:How well is the company responding to the obesity issue?
Mr. Isdell: We are in what I would call the bull's-eye of public opinion with regard to calorie consumption. It's something I inherited and something as an industry we have not been able to rebut effectively at this point in time. It's something we are working diligently on as an industry.... We really need to widen the debate. For example, Diet Coke, a zero-calorie beverage, is actually in the obesity debate because there has been a demonization of carbonated soft drinks. But if it's really about obesity, why would you not want people to drink a diet soft drink?
WSJ:Why should any regular sodas be sold in middle or high schools?
Mr. Isdell: It's high schools where the current policy we have is 50% noncarbonated drinks. In the middle schools [full-calorie sodas are sold from vending machines] only after school [according to an industrywide agreement.]
I saw this interesting piece on a guy in California who came out very strongly and said, "Why am I allowed to vote and I can own a gun, but I can't choose my own soft drink?" I think when you reach high school, you do have a level of sophistication and you can be allowed to choose what you wish.... There are some schools where some kids are making good money bootlegging soft drinks in and selling them to students.... I think that is not all bad for us. After all, every kid likes being rebellious.
WSJ:Many people think Coke needs to diversify into food or other consumer products. Is a big deal in Coke's future?
Mr. Isdell: I really don't think we will have the need to move out in any major way outside of nonalcoholic beverages. That doesn't mean there aren't related areas that we may have a little presence in to learn something. But I really believe in focusing on nonalcoholic beverages, which are a strong growth industry.... You have seen us doing some experimentation by announcing a dispensed coffee, the FarCoast [kiosk for brewed coffees and teas that will be sold to retailers]. There are a number of opportunities out there, and you can diversify that way and still stay in beverages.
WSJ:You've been a loyal Tab drinker. What do you drink now?
Mr. Isdell: I have moved to Coke Zero. For a change of pace, a Diet Black Cherry Vanilla Coke. I don't normally have coffee. First thing I do, I met [my administrative assistant Enid] this morning when I came out of the elevator at , and she had my Coke Zero in hand. That is what I have. Yesterday morning, I actually had a Coke Blak.
WSJ:With so many young people hanging out at Starbucks today instead of at McDonald's drinking Cokes, do you ever go to Starbucks to see what people are drinking?
Mr. Isdell: I wander around places. About every couple of months I wander around the likes of Whole Foods. I'm looking at what other people are doing. I'm looking at what is new that may or may not have an attractiveness....
By and large, the great breakthrough ideas are small ideas that get big. Think about how Coca-Cola got started. [Coca-Cola inventor John] Pemberton did not design a beverage to be the world's greatest brand -- it was something to sell in the soda fountain. And that is why you need to come out with an increased level of innovation, and out of one of those you will find the next -- it may not be the next Coca-Cola -- but if it's the next Sprite, that would be pretty darn good.
WSJ:Restoring Coke's marketing glory is one of your top priorities. What is "The Coke Side of Life?"
Mr. Isdell: It is the happy side of life...this new generation coming along is actually optimistic about life and the world. We wanted to reflect that more.... It's also what our consumers expect to hear from us. So we have married together all the iconography, the contour bottle, you see all of the usual triggers that denote specialness with regard to Coca-Cola. We have talked about how many bubbles are in a bottle, about the formula, a lot of the intrinsics are there.... And then it is being executed in a modern manner. So far, so good. I think the reception has been pretty positive.
WSJ:Coke recently announced an unusual compensation plan where directors get paid only if the company hits annual earnings targets over a three-year period. This all-or-nothing pay plan generated considerable criticism for possibly giving directors the wrong incentives to boost results and not act as a corporate watchdog. Many said it would be a bad model for other companies. Why did you make the change?
Mr. Isdell: We made the change because it was right for the Coca-Cola Co., not because we wanted to change the corporate world.... A board member today has much more information with regard to the exercise of his fiduciary responsibilities because of Sarbanes-Oxley. As the board inevitably evolves, I don't believe we will be attracting directors who are any different than the ones we have right now: people of the very highest integrity and quality.
WSJ:You turn 63 this summer. What is your timetable for succession?
Mr. Isdell: There is no set timetable.... I have to be developing people inside the company who are capable of succeeding me, and equally I have to have a list of people from outside who I believe could come in in an emergency or somewhere down the road if they continue to be successful. We are looking at all of those options.
WSJ:Warren Buffett and two other directors are leaving the board at this week's annual meeting. Would Coke like Jim Kilts, a former Gillette Co. chief executive, to fill one of those board vacancies?
Mr. Isdell: I have had no discussions at all with Jim Kilts apart from when I meet him at the [Grocery Manufacturers of America meetings]. We are reducing the board to 11 members.... Therefore, at the moment, there are actually no vacancies on the board.