David, I cannot believe we're about to do a 4-hour podcast on syrup, sugar, and water. I mean, that's the entire business is just syrup, sugar, and water combined. And it's a $300 billion company.
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?
Oo, save it, David. Save it.
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sitting down. Say it straight.
Welcome to the fall 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.
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 million-x return, or as Charlie puts it, a La Palooza outcome.
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.
Okay. This sounds almost impossible, but what ideas could you possibly dream up to give it your best shot?
Well, I think the first question I would have is whether I could include any now-illegal drugs in my product.
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. So you have to build a brand that grows into a strong protected trademark. And to reach that scale, it must be global. So 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 kind of 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, uh, you should throw in some brain stimulants like caffeine and sugar. That's sort of the ideal product mix among other things.
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.
I see what you did there.
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.
Always, David. And 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, I mean, 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. I mean, ideally, it would be great if you could serve the entire world with just a few of your own production facilities.
That would be pretty great.
Yes. And the last thing: you must never, under any circumstances, change the formula or flavor.
We were doing great there.
But you know, this might be why Coca-Cola is not a two-trillion-dollar company today.
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 70s, and then of course, it had the epic cola wars of the 80s and onward. And David, I would say this episode, perhaps more than any other that we've covered, is about America.
Well, it's about America and then America inserting itself everywhere else in the rest of the world. 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/e to get in on the next round of voting. And 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. So never miss an episode drop by signing up at acquired.fm/e or clicking the link in the show notes.
Before we dive in, we want to briefly thank our presenting partner, JP Morgan Payments. Yes, just like how we say every company has a story, every company's story is powered by payments. And JP Morgan Payments is a part of so many of their journeys from seed to IPO and beyond. So with that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. David, where do we start our story?
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.' You know, just a few small things. So, if you remember back to our Standard Oil series a couple years ago, one of the biggest industries in post-Civil War America was oil of a certain kind, but it wasn't the same kind of oil as Standard Oil. It was snake oil.
Yeah. 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 like 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 sort of like this seed crystal that created the modern American consumer business.
And what were patent medicines?
So going back again to our Standard Oil series, John D. Rockefeller's dad, if you remember, was a traveling snake oil salesman.
Yeah. In his days, back before the Civil War, these were medicines that promised like a cure to all sorts of ailments: nausea, indigestion, headaches, cancer, tuberculosis, skull fractures, paralysis, and impotence.
All based on zero research, zero studies,
zero science, nothing. The Civil War changed all that. Not necessarily for the better.
So 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, quote unquote, i.e., they were addicted to morphine for the rest of their lives as a painkiller,
Yes, that actually did work very well at killing pain. And it wasn't just physical injuries from the war and the soldiers who fought in it. The Civil War ripped America apart. I mean, these guys and their families had just gone through this devastating trauma. I mean, 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.
Yeah. So naturally, whenever there's a big problem, American capitalism sees a big opportunity. So some of these enterprising traveling snake oil salesmen started scaling up the medicines that they were making to meet all this new demand. And as they scale up and they start to standardize the products that they are 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 sort of barrier to entry.
So, 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.
Really, it's these patent medicines that start spending the first real scale dollars in newspapers, which are also coming up and 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. It's like leaves and like nuts and water and stuff that go into these things. I mean, it's extracts, right? Okay.
It's super cheap commodities that are very easy to obtain in great quantities, very easy to then produce into your product and transform, and 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.
So you might think that all this is like 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 sort of a, you know, 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.
Angostura bitters. You know the bitters that you get like in Old Fashioneds and stuff. That was a patent medicine.
Okay, that makes sense. That's squarely what I believe a patent medicine is.
Yep. And then a couple things you might be familiar with: Dr Pepper.
Really? I didn't know Dr Pepper was that old.
Yeah, 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. So after the war he moves to Atlanta and as part of his sort of 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. And 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 in America in the 1880s. Perhaps foreshadowing a little bit the 1980s in America as we will get to later in the episode. 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.
It was like caffeine today, right?
They did not really discover the addictive nature of it or demonize the addictive nature of it yet.
Yep. Or the side effects, etc., etc.
So pretty quickly, cocaine becomes the most popular patent medicine ingredient out there.
It's probably the only ingredient that actually did anything.
Yeah. Yeah. Yeah. 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. It's like the most extreme Four Loko you could ever dream of.
So this sounds utterly ridiculous today, but let me read you the list of public endorsers of Vin Mariani, the like testimonies in the Roll of Honour. 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.
Feels like a thing I would be swearing by and endorsing, too. I imagine once you start, it's the best thing ever.
So entrepreneurial Pemberton in Atlanta sees Vin Mariani's success and is like, well, I wonder if there's a way that I could copy and improve on that. And the way he comes up to improve upon it is to add caffeine to the mix.
Yeah, why not? He decides that he's going to get the caffeine from African kola nuts. K-O-L-A, kola nuts,
which we should say is the first introduction of the word cola, period, in the American lexicon. Cola drinks were not a thing.
Yep. 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. So 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.
This could not have tasted good.
No, I can't imagine what it tasted like. Atlanta Mayor Asa Griggs Candler becomes a fan, and Pemberton starts selling like thousands and thousands of bottles in and around Atlanta,
which makes sense. People are drinking it for its drug-like medicinal qualities, not that it's in any way refreshing.
Yep. 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. So, you can sell bottles of wine. People have been selling bottles of wine for centuries at this point in time.
So, then prohibition hits. Party's over.
Yep. 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. So 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.
So he starts madly experimenting with all sorts of flavors and ingredients. And after six months or so, in April of 1886, he nails a formula.
Yes. And so the question is, how does he arrive at this formula? The book I was reading, which is called Secret Formula, 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 sort of realizing, okay, take a step back. Patent medicines are sold for 75 cents, 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.
We're now 20 years from the Civil War, so a new generation is coming up.
Yeah. That doesn't have army disease. 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? So he kind of comes up with this idea of a five-cent, again because the ingredients cost so little, these extracts, it's a super high-margin product, a five-cent 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 drugstores at that time were sort of the Starbucks of this time. It really was this gathering place to go and spend time. And so he says, 'I'm going to serve this other market of anytime refreshment.' And so he's playing around with these ingredients and he's got the kola nut that's got this natural caffeine in it. Fun story: in the original Coca-Cola, for the first, I don't know, a couple decades, it actually had four times the amount of caffeine that Coke does today.
Okay, so it's effectively an energy drink, even leaving the cocaine aside.
However, the kola nut, it tastes really bitter. It's absolutely horrible, which was not a big deal previously cuz he was mixing it with wine. People were drinking it for medicinal purposes, just kind of slugging it down. But he's trying to create a refreshing beverage here. And so, 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 nuts. So Pemberton just got a hold of Merck and bought a bunch of the powder. And so the first version of Coca-Cola is a little tiny bit of the kola nut just kind of 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.
Yeah. Interesting. It's always been synthetic. Huh.
I didn't know that. That's amazing. So, it's 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.'
Right. Sugar because of the extreme bitterness of the kola nut.
Yes. 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 bush, 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. And 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 drink 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.'
Yes. 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.
Okay. 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.
That's a good point. Regardless, you're going to get hype when you drink this.
And this amount of cocaine really was only a part of the formula for those early first few years.
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 the simple, descriptive, perfect name for this new brew: Coca-Cola, which is funny because it neither contains much cola, since the caffeine is actually an extract and it's just a tiny little drop from the kola nut, and very soon they would strip out almost all the cocaine. And 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 cola.
Yes, indeed. So they go about getting the new product installed and distributed in drugstore soda fountains around Atlanta. But 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 like water or milk or something, it was fresh. And so that's how soda fountains come to be installed in these drugstores. They're selling the patent medicines, many of which are liquids. And that's also how carbonated water comes to the drugstores because mineral water, carbonated water is thought to be a health tonic. And so it all mixes together. And then over the years, these morph into social places, thanks in large part to Coca-Cola.
Makes total sense. And I'm pretty sure what actually happens is Pemberton lets his formula settle and it's kind of 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?
Well, thank goodness they do use the carbonated water. Could you imagine Coke if it were still? That wouldn't be very good.
No. Well, it wouldn't be as successful. I mean, there was probably hundreds of things like Coke that were still that did not succeed.
So, pretty quickly Coca-Cola gets into market with these drugstores 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. So the next year in 1887, Frank Robinson, the business partner who also named the drink, he also introduces the script logo. Like he writes out the Coca-Cola script logo that we still use to this day.
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, the logo Coca-Cola, which has been unchanged other than just tightening it up a little bit since he created it in 1887.
Yes, it is true that he was his bookkeeper, but he was also his business partner. It was like
It's like I'm your bookkeeper type thing.
Yeah, exactly. So 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. And they start mailing out these free Coke tickets or coupons, you might say, to every address in the Atlanta city directory. And 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.
And this is the very first manufacturer's coupon redeemable at a retailer. 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 kind of 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.
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 kind of a new product category. This notion of a soft drink that's not a patent medicine that's much cheaper than traditional patent medicines. And so you do actually need to do some category creation marketing where you make people aware that this cool new thing exists.
Yep. All of that is true. And even more so, this couponing strategy aligns incentives for everybody in the value chain in a way that had never been done before. Consumers, they love it. They get free drinks of this great-tasting beverage.
Yep. Drugstores and soda fountains, they super love it because now they're getting more foot traffic. And then once consumers come back and start buying their second, third, fourth, you know, 400th drinks, this is a highly profitable drink for them to sell. They have gross retail margins on this. And 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. So 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 a dollar thirty per gallon. The soda fountains then sold drinks to customers at five cents a drink. There's 128 drinks per gallon. They're making $6.40 of revenue for a product that costs them a buck thirty to buy.
Yeah, I'm not a retailer, but I'm pretty sure those are good margins.
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.
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,
which he generally was slowly over all these years.
Yes. And he secretly decides that he is going to sell off the rights to the formula
without telling Robinson.
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 a company that they can then grow and scale and manifest its destiny across America and the world. And 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, JP Morgan Payments.
Yes, who wants to wish all of you a happy holidays.
And to share some stats on how their infrastructure kicks off its holiday season. So 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 6,000 transactions per second. And that is actually 17% higher than the previous year.
Wow. Yes, that is insane scale.
On our history of credit cards a few years ago, we told the story of how in the early 90s, 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.
Oh yeah, I won't even do any holiday shopping in person anymore. Like, it's just not worth the hassle. I do everything online.
Well, that's where I was going. Our friends at JP 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 JP 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 custom 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. And this is huge for businesses during the holiday season because while I do my shopping online, JP 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. 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. So, David, this is the first professional version of the Coca-Cola Company.
Yes. But to give you a sense of just how much of a hit this product becomes, how quickly, even in the couple 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 sell 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 has quadrupled to over 2,000 gallons. And by 1890, it's almost 10,000 gallons. So, what's that? Three years into the business with no professional management, they grow the business 10x without even really trying.
It's amazing. And 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 $2,300 to buy it all. That is the base of the company that he builds.
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.
It is a cash flow bonanza since like day one.
It's crazy. 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. And I think that includes all like operations and stuff, too. There's only like three people working in the business here. So, they spend just over $10,000 on advertising. Okay. And with those costs, they sell 35,360 gallons of syrup at an average price of a buck thirty a gallon. So 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. So they are crushing it.
So that's each person at the company, if they were paid equally, is making 8x the average household income.
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.
That's a quarter million on, would you say, a little over $20,000 of ingredients and manufacturing?
Yes. And then another $10,000 in advertising.
So that's crazy. Only a tenth 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.
Yes. So there's a lot of margin to go around. So speaking of advertising costs, in the next few years, they invest heavily into advertising, and of course the Coca-Cola Company does still right up through to this day. The advertising they were doing on the one hand is very different than Coca-Cola advertising today, and 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 sort of positioning Coca-Cola as this dual-use refreshing beverage, non-alcoholic social drink, but also patent medicine. So 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.'
Yeah, it feels patent medicine-y.
It feels patent medicine. Not, you know, 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. So they put the script Coca-Cola logo everywhere across Atlanta. They make oilcloth signs. They paint murals on walls of buildings. They do billboards. They put it in streetcars. 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. They would go on to paint 20,000 murals on the sides of barns and walls across the countryside starting in 1894.
What you're talking about, David, is this great use of all these extra margin dollars. They would do all this for free for drugstores and they would say, 'Hey, don't you wish you had like a big, bright, beautiful sign to bring customers into your 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. And they did this for thousands of drugstores across the South. And so you see all these great old pictures of these stores that effectively look like Coca-Cola stores.
Oh, they're beautiful. Yeah.
It almost looks like they're franchising Coca-Cola rather than Coca-Cola just being a thing that's sold at the drugstores. It's so beautiful because, like you said, it seems like they're franchising Coca-Cola with no capital investment, and the drugstores 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.
They want a big advertisement that says we have Coke.
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 Company is 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. So 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.
Wow. Yeah. And 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 five cents. They also start for the first time working with celebrities and athletes in some of these advertisements that they're doing. And 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.
Yes. The delicious and refreshing slogan, that actually evolves during these years. And 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.' And 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's 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.
Yep. And 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, etc., etc.
Yep. Which is so funny. At this point, all the cocaine is not gone yet. We still have
it's being marketed as this unabated good. Well, at the same time, the company's like, '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.
Yep. 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.
Yes. Definitely one of the dumbest deals ever if you just look at it as it was in that moment, but would be sort of Coca-Cola's second great business model innovation after couponing. So in 1899, 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. And 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.
And Candler's like very anti-bottling, right?
Yes. He is extremely skeptical. He's like, 'Yo, we've tried this before. I really don't think the technology is there. I'm not sure about this.' Thomas and Whitehead, though, they're 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, and 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 five cents per bottle. Same price as at the soda fountains across practically the entire United States.
But this five cents per bottle, operating a bottler is a tougher business than operating the soda fountain in this respect because there is one meaningful additional cost: the bottle itself.
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 are 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. And that's it. There is no term length on the contract.
And, gosh, there's got to be something in there about how that $1 per gallon could change over time, right?
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
Yes. And the bottlers are obligated to keep selling bottles to the public at five cents retail cost.
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.
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.
Yep. So, 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, you know, like groceries and stands, aka gas stations, convenience stores, etc., etc.
And at this point in history, in 1900, the Coca-Cola Company is still just 20 employees. So 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. This is small head office. High-margin product, baby.
So 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.' And then they both independently decide, you know, man, actually owning and operating these bottling operations and dealing with the capital investment of both setting up the production lines and then buying the bottles and recycling them and returning them and cleaning them, etc., it's a kind of low-margin, very upfront, capital-intensive thing to bottle Coca-Cola
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 subterritories to other entrepreneurs and small bottling operations across the country. And so 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
that have no contractual relationship with the Coca-Cola company. They have a relationship with this quote unquote parent bottler,
either Thomas or Whitehead.
Yes. So Thomas and Whitehead's companies come to be known as the parent bottlers and then all the guys doing the actual work come to be known as the actual bottlers or the first line bottlers.
This is the ultimate rent seeker. I mean, Thomas and Whitehead just have like a little toll booth set up in between the Coca-Cola company that owns the intellectual property and makes the syrup and markets it and the bottlers who are actually doing the work. And they're just clipping little coupons as the money flies by on the way over to the bottlers and the Coca-Cola company.
But hey, Candler and Robinson weren't going to do this. So like more power to him,
right? That is the argument here is that there is economic value from Thomas and Whitehead and actually spurring bottling to happen at all.
Yes. And they need to go find the local bottlers and 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.
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 1,200. So, it is a busy busy 25 years finding all these child bottlers.
So basically this creates a second wave of blitz scaling 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 at restaurants anywhere else. It's a huge deal. 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.
Yep. 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. And we were talking about how Visa achieved tremendous scale relative to their head office size, their employee headcount, and they did it in a very short period of time. Coca-Cola is sort of 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.
No, absolutely not. If they had taken the Amex approach and Candler had decided, ah, you know, we're gonna enter the bottling business ourselves and we're gonna 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.
Yep. 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 and impact and reach of the product, you sort of 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. I mean, we can talk about the exceptions to that, but in large part, and their desired end state is there's all these bottlers around the world that they just sell syrup to.
Yeah. It's kind of 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.
It's funny. The thing that it made me think of was uh it's kind of like our Rolex episode where Rolex, you don't want to be in the authorized dealer business. It's operationally expensive. The training is hard, but you do want the control over the retail experience. And Rolex managed to have their cake and eat it too. Like we talked about that on that episode where they can kind of say, "Hey, it's a privilege to be able to sell our watches and 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."
More than some money, the local Coca-Cola bottlers usually become the wealthiest family in any given town across America.
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.
Especially if you're a small town entrepreneur in, you know, turn of the century America. Like, hell yeah. And if the Coca-Cola company is going to dictate terms to me and tell me exactly how red my truck needs to be and that it must say Coca-Cola in this particular way and the bottles must come off exactly like this, that is fine. I will agree to all of this because I know 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, etc., etc. By the mid-1900s, there are hundreds of Coca-Cola competitors out there. There's Afrocola, Chero-Cola, Caro-Cola, Coca-Cola, Fig Cola, Coca-Cola, King Cola, Standard Cola, on and on and on and on and on.
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's no other things that can be colas because we created the concept of Coca-Cola and we are N of one. 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.
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
and really winning on these grounds that 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.
Yes. And they succeed. So over the next like 15-20 years, by the mid-20s, it's estimated that Coca-Cola sues and shuts down over 7,000 copycat cola brands in a very very busy legal department. And 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.
Yep. And there is a famous 1920 case that went all the way to the Supreme Court. There was a company called the Koke Company, K-O-K-E, that was insisting, 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. And we should say by 1905, cocaine is pretty much entirely gone. There's no more coke in Coca-Cola.
Yeah, it's actually an amazing story. In 1903, they contract with a company called the Stepan Alkaloid Works of Maywood, New Jersey,
that has developed a process to de-cocainize coca leaves. And this company, which still exists to 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
cuz they import it with cocaine in it still, right?
Yes. And then they have a process to take the cocaine out of the coca leaves. They sell the de-cocainized coca leaves to Coca-Cola. 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." And that's still how they produce Coca-Cola.
Yeah. Which is also another piece of protecting Coca-Cola. Nobody else has access to coca leaves. If you want that taste, you ain't going to get it.
Cuz the coca leaves, as much as the cocaine is gone, the coca leaf is still an important part of the formula. So anyway, there's this 1920 case where Koke, K-O-K-E, is sort of tongue-in-cheek saying, "What do you mean? You guys aren't saying you're Coke, so certainly we can be Coke." And 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 and all the cocaine's been removed. So, it's actually misleading,
You're misleading the public by saying that you are coca or cola. You're not. And 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." And 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. And that is the new description of what the Coca-Cola brand is and why it is a trademarkable thing that has nothing to do with coca or cola. So this is the first biggest front of the war that Coca-Cola wages on the imitators through the courts.
It goes to the Supreme Court.
To the Supreme Court. Amazing. The second most important front of the battle against the imitators is the bottle. So 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. And this results in 1916 in the famous proprietary bottle that you all know today, the one you are drinking out of right now, the Contour bottle, as it is officially called, or as it is then known in the vernacular, the Mae West bottle.
Because its proportions look uh like the famous actress Mae West.
Yes. 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, Work OS. And if we've learned anything from Coca-Cola, it is that if you have a great marketing message, you should just keep reinforcing it. So, I called the founder of Work OS and said, "What are we going with? We're happy to brainstorm. Let's figure out the right message." And his comment back to me was, "We've got the right message."
Yes, we've gotten some insane feedback on Work OS from our last episode. Somebody even called the read uh that we did that you really masterminded, Ben, 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. Work OS 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 codebase if you're already a larger company.
Yep. The founder, Eran Zinman, pointed out to us that it's not just about scaling 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 Work OS 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. So, interestingly, this has accelerated in the AI era. There are hundreds of AI companies that rely on Work OS as their OS solution including OpenAI, Anthropic, Cursor, Perplexity, Sierra, Replit, Vercel, the list goes on. So why have all of them jumped on the Work OS train? What we learned from Eran 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. And two, unlike the old world of bring your own SaaS product for your little team, these AI products reach really deep into your customers' systems and data to be the most effective. So IT departments are scrutinizing more than ever to make sure new products are compliant before they can adopt them. So if you're ready to get started with just a few lines of code for SAML, SCIM, OAuth, SSO, authorization, authentication, and everything else to please IT admins and their checklists, check out monday.com. That's monday.com or click the link in the show notes and just tell them that Ben and David sent you.
Okay, David. So, the bottle,
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. So, the proposal is that the members all join together to create a distinctive package for the products. And so, in April of 1915, trustees of Coca-Cola Bottling Association vote to develop such a distinctive bottle.
Yes. And this is great. At the convention of the bottlers, where I think they approved this, the Coca-Cola company's head of legal, a guy named Howard Candler, who was doing all these lawsuits of the imitators across the country. He comes with the mission of trying to convince these bottlers that spending this great capital expenditure is going to be in their interest. And this is what he says to them. We are not building Coca-Cola alone for today. We are building Coca-Cola forever. And 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 at 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.
Wow. Isn't that amazing? What an orator.
Help us help you. Wow. So 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? And 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, so it's got this sort of wide top and then sort of a, 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.
But hilariously, the first version of it was actually much more round.
Yeah. It was almost like a cartoon version of the bottle you know today. And you might wonder why this sort of like 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. This is a whole different thing called the cocoa plant, not the coca plant. Coca versus C-O-C-A.
Yeah, I read about this, too. But ultimately, it satisfied the design brief. You definitely recognize it. It's super distinct. It's kind of beautiful with the sort of 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 is highly unusual for packaging to be granted a trademark. And 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.
It's an integral part of the product, the brand. There you go.
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." Amazing. So 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.
Yes. And 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.
Yep. And by this point in time, the Coca-Cola brand and what it stands for and 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.
In fact, it probably helps.
It probably helps. Yes. Makes it more of a wholesome beverage.
It makes it so you can consume a lot more Coca-Cola.
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, and he wins and becomes the mayor of Atlanta in 1916. And so he retires from Coca-Cola and gives his Coke shares to all of his children. And then a couple years later in 1919, a local banker named Ernest Woodruff puts together an investor syndicate and 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 and shares start trading hands and the company becomes publicly traded and uh certainly they didn't need to raise capital by going public,
right? 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, and their sort of 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. Like $25 million in 1919 is a huge amount of money. And so, as a result, this is actually the first time the secret formula for Coca-Cola gets written down. It had been sort of 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 Guaranty Bank of New York
cuz that's where they got the capital from. And 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. So, 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 like only stored, I believe, in two people's heads at any given time. And 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.
Yeah. And it's still part of the lore at the company to this day that, oh, there's two people that know the formula and they can't travel together. Well, the formula is out there. I feel like you can find it on the internet really.
The Coca-Cola company would maintain that is absolutely not true.
Well, the original formula is, it's in the appendix of For God, Country, and Coca-Cola
which I think they also maintain is not the right formula. I mean I would swear up and down too but yes this is like the best example ever though of someone electing to use a trade secret instead of a patent and then creating all this lore and secrecy and myth around it. But for six years as collateral, the first written version of the formula was in the Guaranty Bank of New York vault.
So Ernest when he takes over, he's a banker. He's an investor. This is like 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 plots along for a couple 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? I, 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.
This is just four years after he buys it. And almost against his will, he has to consider his son Robert as a candidate. And Ernest barely approves of this wayward son, Robert. Who is this Robert Woodruff character? He's the protagonist of this story. I mean, 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.
The boss, as he would come to be known. Yes. So, Robert is 33 at this point in time. He has left Atlanta to seek his fortune away from his father's influence. And he has become the vice president of the White Motor Company in Ohio. In Cleveland, Ohio.
Which I think was one of, if not the largest truck manufacturer in the US at the time.
And 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 20s. He's best friends with the Major League Baseball star Ty Cobb. They go hunting together. He's like 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. And David, do you know what Standard Oil of New Jersey is today?
Oh, Exxon. That's right. 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.
Exxon. Yeah. And 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. So the board of KO 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. So, one of the first moves that Robert makes when he comes in is to become close with the head adman at KO's ad agency at the time, a firm in St. Louis called the D'Arcy Ad Agency. And Coca-Cola's main creative account man, 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, you know, 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.
Yeah. You drink it in the hot southern summers of Georgia.
Yeah. So, they're like, time is a big opportunity for us and this was part of moving in on Christmas. More to come on Christmas in a sec. And together, Archie Lee and Robert Woodruff make a pretty massive leap forward for Coca-Cola advertising. And 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 50s and 60s. This is in the 1920s. Coca-Cola is inventing this idea that through advertising we can associate our products with feelings. Oh yes. This is the sort of 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.
Yes. Coca-Cola isn't a carbonated, sweetened, soft drink with unique flavor manufactured by the Coca-Cola Company. Coca-Cola is happiness. Coca-Cola is 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.
And whether you are in America or not in America, Coca-Cola is America.
Yes. 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. So this is radical. Think back to those original ad copies that we were reading a minute ago.
In this day and age in the 20s, there's 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. And that was simplified from Archie Lee's original idea for the theme that year, pause and refresh yourself. He would uh
come back to that a couple years later in 1929 with the grand slam mother of them all. The pause that refreshes Coca-Cola, which is so funny cuz 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. I mean, this idea that in your life you just need a pause and everybody experiences that problem of needing a pause and we are the thing that you do during that pause.
But by today's standards of language, it's a little bit clunky. I think
I think there was an element of the context of the time that came out in 1929, same year as the stock market crash. And so all through the 30s 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 five cents when everything around you is, you know, going to I think it really resonated.
Yeah. 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. So Lee goes out and he contracts with all these famous American artists and illustrators of the day to create these like American lifestyle tableau for the visual aspects of the Coke ads. Yeah, it should be like a Coca-Cola advertisement that's as
idyllic as a Norman Rockwell painting, you might say. Yes.
Because they actually go get Norman Rockwell
along with N.C. Wyeth and Haddon Sundblom and like 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
and they're partnering with the most looked up to athletes and celebrities. You know, these athletes promoting health that must be part of why they're so great at athletics. They have Cary Grant, Gene Harlow, just associating with wholesomeness in Americana.
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." And so 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 is 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.
The other thing that happens in this era is billboards. By 1930, there are now 29 million cars on the road. So, billboards sort of became this really valuable way to promote the brand and lifestyle of Coca-Cola. And Woodruff, his lieutenants, would often go around saying that what Woodruff wants to do is make Coca-Cola the most American thing in America. Well, speaking of the most American of things, how about the uh commercialization of Christmas and uh Santa Claus? Because in 1931, Lee and 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.
It's amazing. And really bring the modern Santa Claus into existence period. They sort of standardized the concept of Santa. The one that we see today is pretty much Coca-Cola's Santa.
Yes. Okay. So, what happens? Coke does not invent Santa as a, you know, common urban legend,
right? First, let's bust that myth.
The concept of Santa Claus existed long before 1931 in KO. The uh famous Night Before Christmas poem was written in 1823. So, it's been around for a long time. And of course, there was St. Nicholas. Goes back many, many hundreds of years. And there was a very popular Santa which was Thomas Nast's Santa who is this sort of 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 sort of red-faced cheery jolly Santa.
Yeah. I mean that's the thing. You know, you read the Night Before Christmas poem. Santa's an elf. He's little.
Or he was before Coca-Cola. So in 1931, KO commissions the artist Haddon Sundblom to create Christmas ad imagery for Coca-Cola featuring Santa Claus. And so this being a Coke ad, Sundblom is like, well, I'm going to make Santa as red as possible and 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. So he creates the first of his Coca-Cola Santa campaigns that he would make for the next 33 years until 1964. And it debuts at Christmas time in a full color advertisement in the Saturday Evening Post and people absolutely love it. You got to remember this is 1931. So this is before television and magazines had only just started to be commonly printed in color. So before this point in time, you couldn't really get mass-produced color images out to the public. So Santa didn't have a color. Like nobody really thought about what color Santa was.
That's right. Cuz sometimes Santa was red, sometimes Santa was green.
Yep. Blue, yellow. The point is there was no standardization. All of a sudden, now KO's got this huge industrial imagery machine of not only advertisements in the Saturday Evening Post, but all the billboards and the signs and the point of sale merchandise, etc., etc., etc., and they're just plastering America with this big beautiful color version of Santa.
Which is funny because Pepsi also did do some Santa illustrations, but Coke kind of ran away with it. And it became clear pretty early Koke is just going to own Santa.
David, do you know who Haddon Sundblom also created or uh created the most famous illustration of?
There's two. One is Quaker Oats, the Quaker Oats man.
Which interestingly is owned by Pepsi today.
Oh, we will get into Quaker Oats.
And the other is Aunt Jemima.
Aha, I did not know that. 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
for the hot Atlanta summers. Yeah.
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 LA28 games that will make 100 years of Coca-Cola partnering with the Olympics.
Yeah, I was going to say the 1928 games in Amsterdam, were there any other sponsors? Like the Olympics probably weren't a commercial thing yet.
I think that's right. I think it was really innovative.
Yeah, man. No Coca-Cola, no Visa,
right? And this predates all the stuff that Coca-Cola did with the World's Fair and with World Cup and with all these other big sort of global brand stage events.
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." And my understanding is from that point on in 1920ish all the way until 1985 there was no changes to the Coca-Cola formula. Woodruff's Coca-Cola was that 65-year unchanged formula.
Oh geez. What happened in 1985 besides Robert Woodruff dying which is directly related to what else happened in 1985.
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. And so the spiritual thing that he does to sort of 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.
And is now in uh World of Coca-Cola, right?
Yes. And 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.
The Coca-Cola version of Hersheypark.
Yes. 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 kind of 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. And that worked and it really lived in the public's consciousness and it had sort of fallen out. It was an effort in 2011 to kind of shake the public and especially the younger generations and say we are Coca-Cola and 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.
The other thing Woodruff does in these early years is he creates the company's first statistical department to do market research and to study the business and customers sort of quantitatively. They realize that by this point they've basically saturated the market of every man, woman, child in America. Population growth is only going to get them so far in terms of growth of the business. So 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."
So, he decrees that gas stations is 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 Cokes ice cold at 34 degrees in gas stations, they need to be in a cooler. They get a company to manufacture it and they go around the country and install 32,000 Coca-Cola coolers in gas stations around the country just in the first year. And giant signs, right, that say Coca-Cola sold here or drink Coca-Cola or Coca-Cola always refreshing.
Yep. 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. And 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.
Totally. You don't make money on the gas. You make money on the convenience store.
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. You know, there's 1,200 independent businesses out there. And so he goes around and at first he starts trying to like bully and intimidate the, shall we say, less standardized bottlers into, you know, 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. And 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 like force standardization and clean up underperforming bottlers. I'll buy them out, fix them up, and then I'll resell them to local entrepreneurs.
I didn't realize that started that early.
Yeah, he started that in the 20s.
Wow. 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 20s and 30s, he goes to Europe, he goes 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.
Yep. 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. And so, 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 and 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. And so it sort of forced them into this massive scale mentality that they were already sort of 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.
Yep. And 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 cents a Coke,
And as we get into the depression, that becomes a huge lever against potential competitors.
How's that? 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. So, it's this amazing leverage that they have over the market. So 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.
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.
Yes. Yes. 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.
Yep. Coke can be profitable at way lower end consumer prices than the other subscale companies.
It's like they actually have pricing power that they're not using.
Yes. They have latent pricing power.
It's like more strategic to them to not raise prices.
So, not good news for any competitors out there. And they basically all except for a small handful get steamrolled except for one. Pepsi,
which amazingly started way back when Coca-Cola started.
Yep. 1894. And for many years, it was just one of the other colas out there, you know, would be competitors. Actually, I had no idea about this till doing the research. Pepsi tried to sell itself to Coca-Cola, like sell its operations to Coca-Cola three separate times over the years.
Three? I didn't know that.
Wow. And Coca-Cola, you know, the
Various owners over the years turned it down three times.
Until the depression. And that is what changes Pepsi's fortunes. So 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, and it was actually the proprietary Mae West Contour bottle. It was six and a half 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 seven and a half ounces today. Let's see. I got one right here. The mini cans are very popular today. That's been a shift. Seven and a half. Yeah, it's crazy. The original bottles were smaller than this.
Six and a half ounces. Very small. So, 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.
And 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's been approximately one company all the way through. Pepsi's been bankrupt two, three times and sold to new owners and a completely new company started with the word Pepsi in it. This has been a rocky road for them.
Yes. But this is when its fortunes turn. So 1934, they start selling Pepsi in 12-ounce recycled beer bottles. Now, they still have the same pricing pressure, you know, and margin pressure from Coke selling at a nickel. But it turns out if you look at the unit drivers of margins on beverages, oh, there's two expenses. There's sugar and there's the bottle. And then everything else is approximately free. 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. Yeah. Not going to impact your margins that much. And hey, oh, by the way, there's 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.
Yep. And that is the first real punch that anyone's been able to land on Coca-Cola.
Yep. 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 six and 12-ounce Contour bottle. They can't react.
Truly genius. I mean, it was like back-against-the-wall genius, but genius.
Now, it doesn't do much for Pepsi's brand. They're very obviously saying, like, pick us because of quantity, not because we are the more delicious or better or more prestigious beverage. And I think this decision, while it kept them alive, was sort of a hangover that they would have for the next 80 years of this, like, yeah, we're not as good. We're not the best flavor, but like we're also here and you can get a lot of us for cheap.
Well, are they the best flavor? Are they not? We'll come back to that.
Well, that's all subjective. There's a discount promise to the brand.
Which in 1934 is kind of all that matters with consumers.
Went over real well. Yeah.
So Coke can't fight them on the amount of liquid in the bottle because they're locked into the six and 12-ounce, and they don't want to cheapen their brand.
So instead, they pull out another, you know, 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. So 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's like, 'Hey, this is all a big misunderstanding. You know, 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?'
You can still use the word cola. Is that what he's offering him?
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, 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. 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, like, you know, 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 Mack's like, absolutely not. I'm keeping Pepsi. Thank you for settling the trademark litigation.
And doesn't Coca-Cola's general counsel quit over this, too?
I think the idea is like, come on, we got to fight this. We can't just like 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 got to settle with these guys.'
So, the result of this is that Pepsi becomes Coke's first real legitimate competitor. And by August 1941, so it's six, seven 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 shot in the arm. It's basically 100% Coke before this happened. And Pepsi establishes a pretty meaningful foothold.
Yep. So, you know, 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.
But before we tell that story, now is a great time to thank one of our favorite partners, Shopify. Boom.
Okay. So, 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.
Great. I love it. Let's do it.
All right. So 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. So brands like Allbirds and Parachute and Aloe, when you buy in store, you're often checking out on Shopify hardware with Shopify software.
Interesting. Got it. Okay.
Then there's social commerce. So 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.
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. And 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. And 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. The innovation coming out of Shopify is just awesome. And some of the biggest brands in the world are now on board, including General Motors, Estée Lauder, and Awan are all using Shopify to sell directly to their customers. 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.
All right.
Gee, how did Coke end up all over the world? So, remember we said a minute ago that Woodruff had set up international bottlers in the 20s and 30s 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 like a quintessential part of America. So the military and the US government realize, hey, Coke may actually be one of America's best weapons in this war. I mean, 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, you know, cultural ambassador product here.
Yeah. Whether the rest of the world looked at it that way, TBD, but I'm sure the US government looked at it as like a great ambassador of our values.
And however people around the world saw it at the time, one way or another, they ended up drinking Coca-Cola.
So, 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.'
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. 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. So for large portions of the US, yeah, they can still get full-sugar Coca-Cola during the war.
Wow. None of Coca-Cola's competitors, including Pepsi, get anything like this.
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 like colas do.' And the response back from the government was basically like, 'Sorry, Coca-Cola is about as American as it gets, and that's what we need right now, and that's what our boys are requesting,' including General, soon-to-be President Eisenhower.
Oh, yeah. He's a Coke man. So, the military under Eisenhower grants Coca-Cola employees quote-unquote technical observer status, meaning that they can participate in the supply and infrastructure buildout of the military around the world, just the same as military infrastructure people. This is unbelievable. So, as the American military is like 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 and documenting the absolute crap out of it to use in their advertising.
Yes. So, 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 five cents.
Yep. There are these just unbelievable quotes from American GIs during the war that are in for God, country, and Coca-Cola. There's 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.
It's unbelievable. And supply them, they did. 1941 to 1945, 64 portable bottling plants were sent to Asia, Europe, and North Africa. And the best estimates are that more than 5 billion bottles were distributed to troops during the war.
Wow. I saw an estimate that it was 10 billion.
Wow. 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.
So Coca-Cola internally ends up calling the war effort, quote, 'the greatest sampling program in the history of the world.' And they estimate that the war effort opened up markets abroad for Coca-Cola that otherwise would have taken 25 years and untold millions of dollars of investment to open. Wow. To say it accelerated KO's international rollout is like understatement of the century. 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 they're Coke drinkers for life now. They're not switching brands.
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.
And Time magazine features Coca-Cola on the cover of Time magazine. Have you seen this?
Oh, wasn't it the first product ever on the cover of the magazine?
It might have. I'm not sure about that, but have you seen what the image is?
It's a painting, like an oil painting of an anthropomorphized red Coca-Cola disc with arms and a face. And it is larger than the Earth. And it is sitting behind the Earth, reaching around and feeding the smiling Earth a bottle of Coca-Cola. And the caption on the cover of Time magazine says, 'World and friend.' The implication being that Coca-Cola is a friend to the world.
So, it's funny. Before World War II, there was a presence for Coca-Cola in pre-Nazi Germany.
Oh, yes. I know what story you're about to tell.
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 kind of like a crappier knockoff drink that they could make with the supplies they had.
Yep.
Yeah. Fanta, owned by Coca-Cola, was the brainchild of Nazi Germany Coca-Cola bottling entrepreneurs who lost access temporarily to the real thing and did that instead. They would change the formula and they would launch it in 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.
Yeah. Parts of history that most people don't know. Don't you want a Fanta Fanta?
Yeah.
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. And from here on out, they actually do start referring to it as Coke in the advertising.
Yep. So, 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 like 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. And so once again, they find themselves in a position of backs against the wall. Need to do something different here. So, 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. That's how they refer to it in internal communications. They don't write Pepsi. They say the imitator.
The imitator. So Steele had been an adman 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 like 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, quote: '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.' And 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. And 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.
So, Steele, when he gets to Pepsi, says, 'All right, we're going to do three radical things.' So, 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 this time. So, this is a huge opportunity for Pepsi.
And Woodruff would later radically flip on that, right?
Wasn't he a big part of, with Mayor Hartsfield, of desegregating a lot of stuff in Atlanta? I mean, he eventually really came around, but during the 40s, definitely not.
This was a big area for Pepsi to make inroads.
There's also an element of geography here, too. I mean, 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?
Which is funny because I think it's actually even sweeter. May have even more sugar than Coke does.
Well, this is back in the days before sugar is vilified. You know, sugar is okay. Fat is bad. Calories are bad.
But I mean, the only calories in soda come from the carbohydrate macronutrient and specifically from sugar. And so there's a direct relationship between sugar and calories.
You're assuming that consumers back in the 40s and 50s were that thoughtful about such things.
That's true. It's a great point.
Yeah. Regardless of any veracity to it, they start directly trying to appeal to the light market. And then third, and maybe most importantly, we are going to wholeheartedly embrace a revolutionary new advertising medium and technology, television, and we're going to use it to target the youth of America. So, this is crazy. Pepsi discovers James Dean. You like the actor James Dean? Really?
His very first acting job is in a 1949 or '50 Pepsi commercial.
This ultimately would morph into like the Pepsi Generation ads later and then the choice of a new generation, Generation Next. All the Pepsi marketing for the next 30, 40, 50 years of like we are for the young people, we're for the next generation. It all starts with TV and Alfred Steele in the 1950s. So 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.
Because Pepsi had a similar, or today even still has a similar bottling system, right? Where they have bottlers outside the company.
Yes. But Pepsi, at least until this point in time, never had anywhere near the same kind of operational excellence you would call it today as Coca-Cola. I mean, remember back to the 12-ounce bottles, they were using recycled beer bottles. They're putting Pepsi in beer bottles.
That's what Steele's working with here when he gets to Pepsi.
So, 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. And basically, all of that is coming at the expense of Coke. I mean, Coke is still this beloved American brand. But with these three things that Steele is doing, like he starts getting a significant amount of the market. I mean, Coke's not targeting Black people. KO hasn't embraced television yet. And Coke hasn't even thought, hasn't even crossed their minds about anything diet yet.
It's true. And they're starting to be thought of a little bit. I mean, this would happen much more in the 70s and 80s, but they're starting to be thought of a little bit as the soda for your parents, not our soda. The cool new soda, not the choice of a new generation.
That's right.
So, by the mid-50s, Woodruff back at Coke is finally like, 'All right, got to respond. We need to make a radical move of our own.' He switches KO's ad agency from D'Arcy, you know, Archie Lee, the whole legacy of everything that they built from the 20s, 30s through the war to McCann-Erickson, the most premium ad agency in America.
Yep. And one of the first things, this is incredible, I found in the research that McCann does when it comes on board with the Coke account is it starts conducting scientific market research. And one of the first things they do is they run a blind taste test between Coke and Pepsi.
No way. Coke runs this first internally.
Coke runs this first in the late 1950s, or McCann does for Coke. And guess what they find?
That people prefer Pepsi.
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.
I'm pretty sure Pepsi doesn't even know this yet.
So, McCann comes in, they've just won the account. They think this is, oh, we found this like really, really important thing. They come, they present it to Woodruff. They present the findings and his response is, 'Do not ever share this with anyone and do not ever run this test again.'
Ah, for KO and Bob Woodruff, would that that would have stayed the case.
It's crazy that it really doesn't bite him for 30 years.
Yeah. 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.'
Is this 'Things Go Better with Coke'?
Yep. 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 and for point of sale and for 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 60s.
And then two, as we get into the back half of the 50s and the early 60s, we're now in the civil rights movement. They convince Woodruff and the company like, 'Hey, you can't ignore the Black America market. You need to market to Black Americans, too.' So, they start running ads with prominent Black athletes like Jesse Owens and Satchel Paige. And this is fun. Remember we learned from Jesse Cole in our Savannah Bananas conversation that the Harlem Globetrotters should have become the NBA at this point in time. They were like the big basketball product in America. So yeah, Coke sponsors the Globetrotters.
And they had started a little bit before that with Willie Mays in 1952, too.
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 saccharine in it, he would have made it that way in the first place.
There is one Coke. You don't want to mess with the one and only Coca-Cola.
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, they ended up with the rights to have a 10-cent royalty per beverage on any other products that the Coca-Cola company launched that carried the Coca-Cola name. And supposedly that is actually the real reason why they didn't call Tab Diet Coke. Whatever the reason, they launched Tab in 1962.
They want to dip their toe in the water. 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 a fad diet product.
Meanwhile, by that point in time, Pepsi had launched Diet Pepsi and was doing quite well with that.
Also, I got to, listeners, we'll put a link in the show notes to this. There is an astonishing ad for Tab.
Oh man, you sent this to me this morning and I was like, I cannot believe this is for real. The entire ad is a man sort of like leering down kind of creepily at this woman practicing tennis in a tennis skirt and it's this jolly sort of almost haunting jingle and 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.'
Yeah. But dude, they knew in the 1960s, 40 years before obesity sort of started becoming a conversation, that full-sugar sodas were not good for your shape.
Yes.
Yeah. So, you know, they do enter the diet market, 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 release Diet Coke, which we'll talk about in a little bit.
Tab. Recently killed, actually.
It was one of the brands that they sunset a couple years ago.
Oh, did they only kill it in 2020? I thought it was before then.
Yeah. When they winnowed from like 600 brands to 200 in 2020, that was one of the ones that caught the axe.
Interesting. There's one more thing though that Coca-Cola does in response to this insurgent Pepsi challenge, shall we say, in the 50s and 60s. McDonald's.
I know you have the story on this one.
Yeah. So, 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 to 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. So 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. And he calls up Coca-Cola and does a handshake deal, meets in person and does a handshake deal with Wadi Pratt, who ran KO's fountain division. And from that point forward, for like 40 years, they built this deeply entrenched relationship purely on a handshake deal.
Wow. There's no contract, no term.
No. And I'm sure there is today, but for a long time, it was McDonald's isn't going to bid it out like everyone else always does, and they're going to get like amazing preferential treatment. And 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?
No, but I would believe it.
This is like a big thing. People like insist that I prefer to swing by McDonald's to get a Coke versus getting it somewhere else. And if you press, it's just that it's a fountain and you like fountain versus bottle, and they're like, 'No, it's actually better at McDonald's.' It is better at McDonald's.
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.
Oh, yeah. Because this is the fountain business.
Yeah. Coke doesn't actually deliver the syrups to all these restaurants. The bottlers do it on behalf of them even there. No, there's no bottles involved. So, Coke is quote-unquote selling directly when they sell syrup to fountain owners.
But the bottlers are doing the delivery.
Yes. With McDonald's, it's different. It comes in these stainless steel tanks. McDonald's does some stuff. They pre-chill the water and they make sure that the hoses are chilled all the way up into 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.
Wow. And Coca-Cola lets them do it because Coca-Cola wouldn't let anybody else change the mixture.
Yes. They developed custom straws that are a little bit wider to let a little bit more Coca-Cola hit the taste buds on your mouth. And this is sort of 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 kind of get worse over time if you leave it in the back room.
Wow. Well, it is a beautiful partnership for both sides, shall we say.
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. And so I read in a couple 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.
Well, it's good for both sides.
