Coca-Cola: The Complete History & Strategy (Audio)

Coca-Cola is… sugar water. And somehow it’s also America, Christmas, summertime, friendship and happiness. Today we tell the story of how The Coca-Cola Company amazingly transmogrified a beverage into emotion in all of our collective psyches, and ALSO built one of the most incredible scale economy businesses of all-time. And oh yeah, there’s also cocaine, WW2, Mad Men, Warren Buffett, James Dean, Bill Cosby, Michael Jackson, Michael Ovitz, Steve Jobs, Bill Gates, McDonald’s and Monsanto. So cozy up to the fire with your favorite images of Santa Claus and Polar Bears and enjoy an ice-cold episode of Acquired — always delicious, always refreshing. *Links:* - The Hilltop ad https://youtu.be/1VM2eLhvsSM?si=EGPTNoPaXTMePcyx - Mad Men finale https://youtu.be/GxtZpFl3pPM?si=aZ5L7CO2gUcapMrV - Pepsi Challenge commercials https://youtu.be/mEXEdibXSak?si=9YB060i9BdgHEpYx - Pepsi’s Michael Jackson commercials https://www.youtube.com/watch?v=po0jY4WvCIc - Coke’s Bill Cosby commercials https://www.youtube.com/watch?v=cAhRphhQsmY&t=33s - Two liter bottles inflating https://youtu.be/kU_gH36GG58?si=Suwm9No6HM0-pLOw - Worldly Partners’ Multi-Decade Coca-Cola Study https://worldlypartners.com/businesshistory - For God, Country, and Coca-Cola https://www.amazon.com/God-Country-Coca-Cola-Mark-Pendergrast/dp/0465054684 - Secret Formula https://www.amazon.com/Secret-Formula-Inside-Coca-Cola-Best-Known/dp/1504019857/ - All episode sources https://docs.google.com/document/d/1EAJUc7HRYqOjvwivuYvk06yMXyq8aK4qv39bsPnkINs/edit?usp=sharing *Carve Outs:* - SkiErg https://www.concept2.com/ergs/skierg?srsltid=AfmBOoqW20PnzP0cgbkXHcVWk0FwWZXglXi67XXxBF3vUKxrWX3c2kBj - Super Smash Bros. Ultimate https://www.smashbros.com/en_US/ - Claude https://claude.ai/acquired - Nike Vomero Plus https://www.nike.com/t/vomero-plus-mens-road-running-shoes-5npsVBwT - Hermanos Gutiérrez https://open.spotify.com/artist/73mSg0dykFyhvU96tb5xQV *More Acquired:* - Get email updates and vote on future episodes! https://www.acquired.fm/email - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store! https://www.acquired.fm/store 00:00:00 Start 00:00:41 Intro 00:05:52 Patent Medicines & the Birth of an Industry 00:12:13 Dr. John Pemberton & the "Miracle Drug" Cocaine 00:16:40 Creating the Secret Formula (1886) 00:22:14 Frank Robinson's Genius & the First Coupon 00:30:38 Asa Candler & Building a National Brand (1890s) 00:39:49 The $1 Bottling Deal: A Fortuitous Mistake 00:52:21 Protecting the "Real Thing": Lawsuits & the Contour Bottle 01:03:24 Robert Woodruff: The Boss Takes Over (1923) 01:12:06 Creating Lifestyle Advertising & Santa Claus 01:23:58 Standardization, Gas Stations & Early Global Growth 01:32:39 Pepsi: The First Real Competitor Emerges 01:41:11 World War II: The Greatest Sampling Program in History 01:49:25 The Cola Wars Begin & the McDonald's Partnership (1950s) 02:16:10 The Pepsi Challenge (1975) 02:32:03 New Coke: The Worst Marketing Blunder Ever (1985) 02:59:06 Buffett's Investment & the "Total Beverage Company" 03:27:56 Analysis: Why Did Coca-Cola Work? 03:33:22 7 Powers 03:40:13 Quintessence 03:48:21 Carve-Outs + Outro _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  David, I cannot believe we're about to do a four-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.

• 0:13David Rosenthal?

  Well, Ben, you know what I'm gonna 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?

• 0:20Ben Gilbert?

  Ooh, save it, David, save it.

• 0:24Speaker 02

  Who got the truth?

• 0:27Speaker 02

  Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way.

• 0:41Ben Gilbert?

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

• 0:49David Rosenthal?

  I'm David Rosenthal.

• 0:50Ben 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 1 million X return, or as Charlie puts it, a Lollapalooza outcome.

• 1:09David Rosenthal?

  Of course he does.

• 1:10Ben Gilbert?

  Very Charlie.

• 1:11David Rosenthal?

  Very Charlie.

• 1:12Ben Gilbert?

  The constraint is it must be a non-alcoholic beverage business.

• 1:17David Rosenthal?

  Okay.

• 1:18Ben Gilbert?

  And another constraint, it must throw off many billions of dollars in dividends along the way to your shareholders.

• 1:24David Rosenthal?

  Okay.

• 1:25Ben Gilbert?

  This sounds almost impossible, but what ideas could you possibly dream up to give it your best shot?

• 1:32David Rosenthal?

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

• 1:43Ben Gilbert?

  That certainly helps. So to build this giant valuable company, the first thing you need to know is you're not going to get there with something generic. 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.

• 2:09Ben Gilbert?

  Yes. 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 you should throw in some brain stimulants like caffeine and sugar. That's sort of the ideal product mix. Among other things, yeah. 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.

• 2:53Ben Gilbert?

  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. 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.

• 3:37Ben Gilbert?

  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.

• 4:08David Rosenthal?

  Ooh. We were doing great there.

• 4:12Ben Gilbert?

  We were doing great.

• 4:13David Rosenthal?

  But you know, this might be why Coca-Cola is not a $2 trillion company today.

• 4:18Ben Gilbert?

  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.

• 4:54David Rosenthal?

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

• 5:01Ben Gilbert?

  Can't wait to dive into it. Well, listeners, this episode was selected by you. Last month, we asked our email subscribers to vote on what company we should cover next, and Coca-Cola was the overwhelming favorite. So thank you to all of you who participated. You can join that email list at acquired.fm/email to get in on the next round of voting. 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/email or clicking the link in the show notes. So with that, this show is not investment advice.

• 5:43Ben Gilbert?

  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?

• 5:53David Rosenthal?

  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 Pendergrass, in his great book For God, Country, and Coca-Cola, that was a main source for this episode, has a great quote. 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,

• 6:33David Rosenthal?

  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 of years ago, one of the biggest industries in post-Civil War America was oil of a certain kind. But it wasn't the same kind of oil as standard oil. It was snake oil. Ah, good hook. 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,

• 7:17David Rosenthal?

  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.

• 8:02David Rosenthal?

  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.

• 8:21David Rosenthal?

  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. Which actually did work. 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

• 9:04David Rosenthal?

  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. Yep. 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,

• 9:45David Rosenthal?

  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. Yes. 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

• 10:28David Rosenthal?

  were talking about in your great Charlie thought experiment from the intro, what are these patent medicines? It's just commodities, like leaves and like nuts and water and stuff that go into these things.

• 10:40Ben Gilbert?

  Extracts, David.

• 10:41David Rosenthal?

  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 vapor rub, Vaseline, Listerine, the mouthwash, all patent medicines.

• 11:25David Rosenthal?

  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.

• 11:41Ben Gilbert?

  Really?

• 11:42David Rosenthal?

  Grape nuts, the cereal.

• 11:43Ben Gilbert?

  Neither grape nor nuts.

• 11:45David Rosenthal?

  Angostura bitters, you know, the bitters that you get in like old fashioned and stuff? That was a patent medicine.

• 11:49Ben Gilbert?

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

• 11:53David Rosenthal?

  Yep. And then a couple of things you might be familiar with. Dr. Pepper.

• 11:59Ben Gilbert?

  Really? I didn't know Dr. Pepper was that old.

• 12:02David Rosenthal?

  Yep. Dr. Pepper predates Coca-Cola.

• 12:04Ben Gilbert?

  Huh.

• 12:06David Rosenthal?

  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 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.

• 12:49David Rosenthal?

  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.

• 13:15Ben Gilbert?

  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.

• 13:26David Rosenthal?

  It was like caffeine today.

• 13:28Ben Gilbert?

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

• 13:34David Rosenthal?

  Yep. Or the side effects, et cetera, et cetera. So, pretty quickly, cocaine becomes the most popular patent medicine ingredient out there.

• 13:44Ben Gilbert?

  It's probably the only ingredient that actually did anything.

• 13:47David Rosenthal?

  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.

• 14:05Ben Gilbert?

  It's like the most extreme Four Loko you could ever dream up.

• 14:08David Rosenthal?

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

• 14:44Ben Gilbert?

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

• 14:49David Rosenthal?

  So entrepreneurial Pemberton in Atlanta sees Vin Mariani's success and is like, hmm, 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.

• 15:06Ben Gilbert?

  Why not?

• 15:06David Rosenthal?

  Yeah, why not? He decides that he's going to get the caffeine from African cola nuts. K O L A, cola nuts.

• 15:14Ben Gilbert?

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

• 15:24David Rosenthal?

  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 cola nuts for the caffeine. And it's a hit.

• 15:50Ben Gilbert?

  This could not have tasted good.

• 15:52David Rosenthal?

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

• 16:03Ben Gilbert?

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

• 16:10David Rosenthal?

  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.

• 16:40Ben Gilbert?

  So then prohibition hits. Party's over.

• 16:43David Rosenthal?

  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.

• 16:55David Rosenthal?

  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.

• 17:02Ben Gilbert?

  Oh.

• 17:03David Rosenthal?

  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.

• 17:18Ben Gilbert?

  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.

• 17:51David Rosenthal?

  We're now 20 years from the Civil War, so a new generation is coming up.

• 17:55Ben Gilbert?

  Yes.

• 17:55David Rosenthal?

  Yeah, that doesn't have army disease.

• 17:57Ben Gilbert?

  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.

• 18:25David Rosenthal?

  Pick me up.

• 18:27Ben Gilbert?

  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 cola seed that's got this natural caffeine in it. Fun story. In the original Coca-Cola, for the first, I don't know, a couple decades, it actually had four times the amount of caffeine that Coke does today. So it was effectively an energy drink, even leaving the cocaine aside. However, the cola seed, it tastes really bitter. It's absolutely horrible, which was not a big deal previously because he was mixing it with wine. People were drinking it for medicinal purposes, just kind of slugging

• 19:12Ben Gilbert?

  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 cola seeds. 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 cola seed, just kind of to say that it's in there. He's gonna call this thing Coca-Cola. But the caffeine actually comes from a synthetic extract.

• 19:48David Rosenthal?

  Yeah, interesting. It's always been synthetic. Huh.

• 19:50Ben Gilbert?

  That's right.

• 19:51David Rosenthal?

  I didn't know that. That's amazing.

• 19:53Ben Gilbert?

  So there'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."

• 20:12David Rosenthal?

  Right. Sugar because of the extreme bitterness of the cola nut.

• 20:15Ben Gilbert?

  Yes. And actually, the cocoa plant was also bitter. So sugar was to offset it.

• 20:20David Rosenthal?

  Yeah, yeah.

• 20:21Ben Gilbert?

  "Next he added caramel for coloring, giving the syrup its dark, distinctive, port wine color. To balance the sweetness of the sugar and give the syrup its tang, he added lime juice, citric acid, and phosphoric acid. Then, as the basic blend cooled, Pemberton turned to the question of flavor. Into the mix went vanilla extract, elixir of orange, and several pungent oils refined from various fruits, herbs, and trees. Lemon, nutmeg, spice brush, coriander, and neroli, the last ingredient in perfumes distilled from a flower of the orange tree. The most exotic was oil of ca- Also known as Chinese cinnamon, made from the bark of a tree found in the tropical regions of Asia.

• 21:04Ben Gilbert?

  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.

• 21:26David Rosenthal?

  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.

• 21:43Ben Gilbert?

  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.

• 22:02David Rosenthal?

  That's a good point. Regardless, you're gonna get hype when you drink this.

• 22:07Ben Gilbert?

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

• 22:12David Rosenthal?

  Yes, 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.

• 22:29Ben Gilbert?

  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 cola seed. 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.

• 22:50David Rosenthal?

  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-

• 23:17Ben Gilbert?

  Oh, it was fresh.

• 23:17David Rosenthal?

  -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.

• 23:41Ben Gilbert?

  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.

• 24:08David Rosenthal?

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

• 24:15Ben Gilbert?

  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.

• 24:21David Rosenthal?

  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.

• 24:52Ben Gilbert?

  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 Spencarian script, the logo Coca-Cola, which has been unchanged other than just tightening it up a little bit since he created it in 1887.

• 25:08David Rosenthal?

  Yes. It is true that he was his bookkeeper, but he was also his business partner. It was like-

• 25:13Ben Gilbert?

  It's like I'm your bookkeeper type thing.

• 25:14David Rosenthal?

  Yeah. 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.

• 25:57David Rosenthal?

  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.

• 26:06Ben Gilbert?

  And this is the very first manufacturer's coupon redeemable at a retailer?

• 26:12David Rosenthal?

  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.

• 26:39Ben Gilbert?

  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, so 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.

• 27:18David Rosenthal?

  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.

• 27:37Ben Gilbert?

  Yep.

• 27:37David Rosenthal?

  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

• 28:19David Rosenthal?

  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 and 30 cents per gallon. The soda fountains then sold drinks to customers at five cents a drink. They're 128 drinks per gallon. They're making $6.40 of revenue for a product that cost them a buck 30 to buy. I'm not a retailer, but I'm pretty sure those are good margins.

• 28:55Ben Gilbert?

  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.

• 29:03David Rosenthal?

  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.

• 29:32Ben Gilbert?

  Which he generally was slowly over all these years.

• 29:36David Rosenthal?

  Yes. And he secretly decides that he is going to sell off

• 29:42David Rosenthal?

  The rights to the formula.

• 29:43Ben Gilbert?

  Without telling Robinson.

• 29:45David Rosenthal?

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

• 30:28David Rosenthal?

  the modern Coca-Cola Company with Frank Robinson's help in 1892, which he incorporates as the definitive Coca-Cola Company.

• 30:38Ben Gilbert?

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• 30:58David Rosenthal?

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• 31:18Ben Gilbert?

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• 31:40David Rosenthal?

  In half? Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor and Snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 31:59Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. All right. So David, this is the first professionally run version of the Coca-Cola company.

• 32:33David Rosenthal?

  Yes. But to give you a sense of just how much of a hit this product becomes how quickly, even in the couple of years before the professionalization and the founding of the Coca-Cola company, in 1887, so the first year that Coke, the product is on the market, Pemberton and Robinson sells 600 gallons of Coca-Cola syrup to soda fountains, which equates to about 75,000 glasses of Coke served. By 1889, two years later, that 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.

• 33:17Ben Gilbert?

  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.

• 33:35David Rosenthal?

  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.

• 33:45Ben Gilbert?

  Unbelievable.

• 33:46David Rosenthal?

  It is a cash flow bonanza since like day one.

• 33:49Ben Gilbert?

  It's crazy.

• 33:50David Rosenthal?

  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. There's only like three people working in the business here.

• 34:10David Rosenthal?

  They spend just over $10,000 on advertising.

• 34:13Ben Gilbert?

  Okay.

• 34:14David Rosenthal?

  And with those costs, they sell 35,360 gallons of syrup at an average price of a buck 30 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.

• 34:49Ben Gilbert?

  So that's each person at the company, if they were paid equally, is making 8x the average household income.

• 34:54David Rosenthal?

  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.

• 35:15Ben Gilbert?

  That's a quarter million dollars on, what'd you say, a little over $20,000 of ingredients and manufacturing?

• 35:22David Rosenthal?

  Yes. And then another $10,000 in advertising.

• 35:26Ben Gilbert?

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

• 35:37David Rosenthal?

  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.

• 36:21David Rosenthal?

  Coca-Cola is the ideal brain tonic and sovereign remedy for headache and nervousness. It makes the sad glad and the weak strong.

• 36:30Ben Gilbert?

  Yeah, it feels patent medicine-y.

• 36:32David Rosenthal?

  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 presents. 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 street cars, they print posters for all the soda fountains to display. Then they're like, why stop at posters? Let's make calendars, let's make cabinets, let's make serving trays, let's make glasses, let's make clocks, all with the big Coca-Cola logo.

• 37:15Ben Gilbert?

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

• 37:24David Rosenthal?

  Incredible.

• 37:25Ben Gilbert?

  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 their store? And Coca-Cola would design, pay for, fabricate and deliver signs for drugstores that had the store name in big letters and Coca-Cola's name just as big. 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.

• 38:00David Rosenthal?

  Oh, they're beautiful. Yeah.

• 38:01Ben Gilbert?

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

• 38:07David Rosenthal?

  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.

• 38:23Ben Gilbert?

  They want a big advertisement that says, "We have Coke."

• 38:26David Rosenthal?

  Yes. So by 1898, Coca-Cola is distributing over 1 million branded promotional items per year. This is before the year 1900.

• 38:37Ben Gilbert?

  Yeah.

• 38:38David Rosenthal?

  Nuts. They also start expanding geographically.

• 38:43David Rosenthal?

  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.

• 39:22Ben Gilbert?

  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.

• 40:05David Rosenthal?

  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.

• 40:50David Rosenthal?

  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.

• 40:59Ben Gilbert?

  Yep.

• 40:59David Rosenthal?

  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, et cetera, et cetera.

• 41:16Ben Gilbert?

  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, while 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.

• 41:34David Rosenthal?

  Yes.

• 41:34Ben Gilbert?

  And the anti cocaine sentiment is coming.

• 41:37David Rosenthal?

  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.

• 41:58Ben Gilbert?

  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.

• 42:10David Rosenthal?

  So in 1889, two guys from Chattanooga, Tennessee, named Benjamin Thomas and Joseph Whitehead, come to Candler with a proposal. They want to bottle Coca-Cola. They're convinced that bottling technology has matured enough at this point, that they can now bottle fully mixed Coca-Cola beverages. 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.

• 42:44Ben Gilbert?

  And Candler's like very anti bottling, right?

• 42:46David Rosenthal?

  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.

• 43:30David Rosenthal?

  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 it's 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.

• 44:15Ben Gilbert?

  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.

• 44:25David Rosenthal?

  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.

• 45:09David Rosenthal?

  There is no term length on the contract.

• 45:13Ben Gilbert?

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

• 45:20David Rosenthal?

  Nope. No, there is not.

• 45:23Ben Gilbert?

  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.

• 45:38David Rosenthal?

  Yes.

• 45:38Ben Gilbert?

  To the bottler.

• 45:39David Rosenthal?

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

• 45:45Ben Gilbert?

  Fascinating. So let it be written.

• 45:49David Rosenthal?

  Obviously, there are so many things wrong with this, but also so many things right with this.

• 45:57David Rosenthal?

  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.

• 46:14Ben Gilbert?

  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.

• 46:26David Rosenthal?

  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, et cetera, et cetera.

• 46:55Ben Gilbert?

  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. It's a small head office.

• 47:10David Rosenthal?

  High margin product, baby.

• 47:12Ben Gilbert?

  Yep.

• 47:13David Rosenthal?

  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, et cetera.

• 47:54Ben Gilbert?

  It's a kind of low margin, very upfront, capital intensive thing to bottle Coca-Cola.

• 48:01David Rosenthal?

  And operationally very intensive, too, of course. We've realized we can just assign the rights that we have here. Well, why don't we keep assigning the rights? They start subcontracting out little sub-territories to other entrepreneurs and small bottling operations across the country. 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.

• 48:34Ben Gilbert?

  That have no contractual relationship with the Coca-Cola company. They have a relationship with this quote-unquote "parent bottler."

• 48:43David Rosenthal?

  Either Thomas or Whitehead.

• 48:45Ben Gilbert?

  Yes.

• 48:45David Rosenthal?

  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.

• 48:58Ben Gilbert?

  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.

• 49:18David Rosenthal?

  But hey, Candler and Robinson weren't going to do this, so like, more power to them.

• 49:23Ben Gilbert?

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

• 49:30David Rosenthal?

  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.

• 49:40Ben Gilbert?

  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.

• 49:57David Rosenthal?

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

• 50:22Ben Gilbert?

  Huge deal.

• 50:23David Rosenthal?

  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.

• 50:40Ben Gilbert?

  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.

• 51:23David Rosenthal?

  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.

• 51:49Ben Gilbert?

  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.

• 52:28David Rosenthal?

  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 processors were going to look like and what the machines were going to look like.

• 52:43Ben Gilbert?

  It's funny, the thing that it made me think of was, 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's hard, but you do want the control over the retail experience. And Rolex managed to have their cake and eat it too. Like, we 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.

• 53:17David Rosenthal?

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

• 53:25Ben Gilbert?

  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.

• 53:46David Rosenthal?

  Especially if you're a small town entrepreneur in, you know, turn of the century America, like, hell, yeah.

• 53:52Ben Gilbert?

  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.

• 54:06David Rosenthal?

  I'm going to make money. Yes. So, once things turbocharge with the bottlers and scaling across America, a lot of imitators and copycats start popping up, trying to make another cola drink, use the same model, go to other bottlers, or maybe other aspiring entrepreneurs who didn't get the Coca-Cola franchise, might want to open a competitive franchise in their local town, et cetera, et cetera. By the mid 1900s, there are hundreds of Coca-Cola competitors out there. There's Africola, Charcola, Carbo Cola, Coca and Cola, Fig Cola, Ca Cola, King Cola, Standard Cola, on and on and on and on and on.

• 54:49Ben Gilbert?

  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.

• 55:19David Rosenthal?

  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.

• 55:38Ben Gilbert?

  Yep.

• 55:39David Rosenthal?

  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.

• 55:51Ben Gilbert?

  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.

• 55:59David Rosenthal?

  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.

• 56:31Ben Gilbert?

  Yep. And there is a famous 1920 case that went all the way to the Supreme Court. There was a company called The Coke 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.

• 56:58David Rosenthal?

  Yeah, it's actually an amazing story. In 1903, they contract with a company called The Schaefer Alkaloid Works of Maywood, New Jersey, that has developed a process to decocaineize coca leaves. And this company, which still exists to today and is still the sole supplier of decocaineized 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.

• 57:31Ben Gilbert?

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

• 57:34David Rosenthal?

  Yes, and then they have a process to take the cocaine out of the coca leaves. They sell the decocaineized coca leaves to Coca-Cola.

• 57:41Ben Gilbert?

  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.

• 58:02David Rosenthal?

  Yeah, which is also another piece of protecting Coca-Cola. Nobody else has access to coca leaves. You want that taste? You ain't gonna get it.

• 58:10Ben Gilbert?

  Because 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 Coke, 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.

• 58:38David Rosenthal?

  False advertising.

• 58:40Ben Gilbert?

  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.

• 59:16David Rosenthal?

  So this is the first biggest front of the war that Coca-Cola wages on the imitators through the courts.

• 59:26Ben Gilbert?

  It goes to the Supreme Court.

• 59:28David Rosenthal?

  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

• 1:00:09David Rosenthal?

  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 Ben 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.

• 1:00:32Ben Gilbert?

  Yes.

• 1:00:33David Rosenthal?

  Because its proportions look like the famous actress Mae West.

• 1:00:37Ben Gilbert?

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• 1:00:51David Rosenthal?

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• 1:01:05Ben Gilbert?

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• 1:01:15David Rosenthal?

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• 1:01:32Ben Gilbert?

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• 1:01:49David Rosenthal?

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• 1:02:05Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 1:02:14David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 1:02:25Ben Gilbert?

  Okay, David, so the bottle.

• 1:02:29David Rosenthal?

  The Mae West bottle.

• 1:02:31Ben Gilbert?

  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.

• 1:03:04David Rosenthal?

  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 Hirsch, 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 interests. 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.

• 1:03:49David Rosenthal?

  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.

• 1:04:09Ben Gilbert?

  Wow.

• 1:04:11David Rosenthal?

  Isn't that amazing? What an orator.

• 1:04:13Ben Gilbert?

  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, as one of the books put it, "a snatched waist," which is why they call it the Mae West Bottle.

• 1:04:57Ben Gilbert?

  It's this Georgia green color.

• 1:05:00David Rosenthal?

  That's right.

• 1:05:01Ben Gilbert?

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

• 1:05:06David Rosenthal?

  Yeah, it was almost like a cartoon version of the bottle you know today.

• 1:05:09Ben Gilbert?

  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 cocoa plant.

• 1:05:23David Rosenthal?

  [laughing]

• 1:05:24Ben Gilbert?

  The cocoa pod that you smash open to get out cocoa beans? This is a whole different thing called the coca plant, not the cocoa plant. C-O-C-A versus C-O-C-O-A.

• 1:05:36David Rosenthal?

  Yeah, I read about this too.

• 1:05:38Ben Gilbert?

  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

• 1:06:23Ben Gilbert?

  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.

• 1:06:47David Rosenthal?

  It's an integral part of the product, the brand.

• 1:06:49Ben Gilbert?

  Yes.

• 1:06:49David Rosenthal?

  There you go.

• 1:06:50Ben Gilbert?

  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.

• 1:07:00David Rosenthal?

  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.

• 1:07:16Ben Gilbert?

  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.

• 1:07:34David Rosenthal?

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

• 1:07:54Ben Gilbert?

  In fact, it probably helps.

• 1:07:55David Rosenthal?

  It probably helps. Yes. Makes it more of a wholesome beverage.

• 1:07:58Ben Gilbert?

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

• 1:08:02David Rosenthal?

  Okay. So 1916, everybody's doing great. Nobody's doing better than the Coca-Cola company. Asa Handler 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 of years later, in 1919, a local banker named Ernest Woodruff puts together an investor syndicate and basically stages a takeover of the company

• 1:08:47David Rosenthal?

  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 certainly, they didn't need to raise capital by going public.

• 1:09:08Ben Gilbert?

  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. There's 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,

• 1:09:51Ben Gilbert?

  they wrote down the formula and placed it in a vault at the Guaranty Bank of New York.

• 1:09:58David Rosenthal?

  Hmm.

• 1:09:59Ben Gilbert?

  Because 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

• 1:10:40Ben Gilbert?

  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 head 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.

• 1:11:15David Rosenthal?

  Yeah. And it's still part of the lore of 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, like you can find it on the internet.

• 1:11:26Ben Gilbert?

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

• 1:11:30David Rosenthal?

  Well, the original formula is out. It's in the appendix of Forgot Country and Coca-Cola.

• 1:11:34Ben Gilbert?

  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.

• 1:11:58David Rosenthal?

  So Ernest, when he takes over, he's a banker. He's an investor. This was 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 plods along for a couple of years with the existing management team. Ernest really doesn't like this perpetual contract thing with the parent bond. He's like, what are you two guys doing? As far as I can tell, you're not doing anything.

• 1:12:27David Rosenthal?

  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.

• 1:12:41Ben Gilbert?

  This is just four years after he buys it.

• 1:12:44David Rosenthal?

  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?

• 1:13:00Ben Gilbert?

  He's the protagonist of this story. I mean, for all the John Pemberton lore and all the Ace Candler lore, Coca-Cola, as we know it today, is Robert Woodruff's Coca-Cola.

• 1:13:11David Rosenthal?

  The boss, as he would come to be known.

• 1:13:13Ben Gilbert?

  Yes.

• 1:13:14David Rosenthal?

  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.

• 1:13:30Ben Gilbert?

  Yep.

• 1:13:31David Rosenthal?

  Which I think was one of, if not the largest, truck manufacturer in the US at the time.

• 1:13:36Ben Gilbert?

  Yep.

• 1:13:37David Rosenthal?

  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.

• 1:14:06Ben Gilbert?

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

• 1:14:09David Rosenthal?

  Uh, SO, right?

• 1:14:12Ben Gilbert?

  Exxon. It's ExxonMobil.

• 1:14:14David Rosenthal?

  Oh, Exxon. That's right. That's right.

• 1:14:17Ben Gilbert?

  Yep.

• 1:14:18David Rosenthal?

  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.

• 1:14:24Ben Gilbert?

  Exxon, yeah.

• 1:14:26David Rosenthal?

  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 Coke makes Ernest consider his son. Ernest finally says, all right, fine. His first offer to Robert to come be the new president of Coca-Cola is a salary less than half of what he's making at White Motor Company. Robert rejects that. They negotiate back and forth. And finally, they reach a deal with Robert saying, "One condition that I absolutely must have is you, Dad, you are out. You are

• 1:15:07David Rosenthal?

  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

• 1:15:48David Rosenthal?

  the head ad man at Coke's ad agency at the time, a firm in St. Louis called the Darcy Ad Agency. And Coca-Cola's main creative account man there is a guy named Archie Lee. Lee had already created a hit slogan for Coca-Cola in Christmas of 1922 with his "Thirst Knows No Season" campaign, which is a great phrase with a great ring to it, but was particularly good because Coke had a legacy of primarily being enjoyed in the summer.

• 1:16:20Ben Gilbert?

  Yeah, you drink it in the hot southern summers of Georgia.

• 1:16:24David Rosenthal?

  Yeah. So they're like, "Wintertime 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.

• 1:16:46David Rosenthal?

  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.

• 1:17:11Ben Gilbert?

  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.

• 1:17:27David Rosenthal?

  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.

• 1:17:50Ben Gilbert?

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

• 1:17:55David Rosenthal?

  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.

• 1:18:16Ben Gilbert?

  So many words.

• 1:18:17David Rosenthal?

  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 come back to that a couple of years later in 1929, with the grand slam, mother of them all. The pause that refreshes Coca-Cola.

• 1:19:01Ben Gilbert?

  Which is so funny because I know this is the winner. The pause that refreshes is the most successful campaign of this era. I actually didn't hear about that at all until doing this research. I associate all these other campaigns delicious, refreshing, or always delightful. But god, did that take off. 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.

• 1:19:31David Rosenthal?

  Yep, genius.

• 1:19:32Ben Gilbert?

  But by today's standards of language, it's a little bit klugey, I think.

• 1:19:36David Rosenthal?

  I think there was a 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 shit. I think it really resonated.

• 1:20:04Ben Gilbert?

  Yeah.

• 1:20:05David Rosenthal?

  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 tableaus for the visual aspects of the Coke ads.

• 1:20:33Ben Gilbert?

  Yeah, it should be like a Coca-Cola advertisement that says.

• 1:20:38David Rosenthal?

  Idyllic as a Norman Rockwell painting, you might say.

• 1:20:40Ben Gilbert?

  Yes, yes.

• 1:20:41David Rosenthal?

  Because they actually go get Norman Rockwell.

• 1:20:46David Rosenthal?

  Along with N.C. Wyatt and Haddon Sunbloom 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.

• 1:21:01Ben Gilbert?

  And they're partnering with the most looked up to athletes and celebrities. You know, these athletes promoting health. It must be part of why they're so great at athletics. They have Cary Grant, Gene Harlow, just associating with wholesomeness and Americana.

• 1:21:17David Rosenthal?

  Archie Lee would describe the function of the imagery aspect of the campaigns. 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 Darcy 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."

• 1:21:59David Rosenthal?

  "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."

• 1:22:16Ben Gilbert?

  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.

• 1:22:39David Rosenthal?

  Well, speaking of the most American of things, how about the commercialization of Christmas and Santa Claus?

• 1:22:50David Rosenthal?

  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 managed to associate Santa Claus with Coca-Cola.

• 1:23:10Ben Gilbert?

  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.

• 1:23:22David Rosenthal?

  Yes. Okay. So what happens? Coke does not invent Santa as a, you know, common urban legend.

• 1:23:28Ben Gilbert?

  Right. First, let's bust that myth.

• 1:23:30David Rosenthal?

  The concept of Santa Claus existed long before 1931 and Coke. The famous Night Before Christmas poem was written in 1823, so it's been around for a long time. And of course, there was Saint Nicholas. It goes back many, many hundreds of years.

• 1:23:43Ben Gilbert?

  And there was a very popular Santa, which was Thomas Nast's Santa, who was 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.

• 1:24:03David Rosenthal?

  Big fat dude. Yeah.

• 1:24:04Ben Gilbert?

  Yeah.

• 1:24:05David Rosenthal?

  Yeah. I mean, that's the thing, you know, you read the Night Before Christmas poem, Santa's an elf. He's little.

• 1:24:09Ben Gilbert?

  Yes.

• 1:24:11David Rosenthal?

  Or he was before Coca-Cola. So in 1931, Coke commissions the artist Hadnson Bloom to create Christmas ad imagery for Coca-Cola featuring Santa Claus. And so this being a Coke ad, Hadnson Bloom 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.

• 1:24:49David Rosenthal?

  And it debuts at Christmas time in a full color advertisement in the Saturday Evening Post. And people absolutely love it. You gotta 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.

• 1:25:25Ben Gilbert?

  That's right, because sometimes Santa was red, sometimes Santa was green.

• 1:25:29David Rosenthal?

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

• 1:25:54Ben Gilbert?

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

• 1:26:04David Rosenthal?

  Yep.

• 1:26:05Ben Gilbert?

  David, do you know who Hadn Sunblum also created, or created the most famous illustration of?

• 1:26:11David Rosenthal?

  I don't, I should know.

• 1:26:13Ben Gilbert?

  There's two. One is Quaker Oats, the Quaker Oats man.

• 1:26:17David Rosenthal?

  Oh, yes, I did read that.

• 1:26:19Ben Gilbert?

  Which, interestingly, is owned by Pepsi today.

• 1:26:22David Rosenthal?

  Oh, we will get into Quaker Oats.

• 1:26:24Ben Gilbert?

  And the other is Aunt Jemima.

• 1:26:26David Rosenthal?

  Ah, I did not know that.

• 1:26:28Ben Gilbert?

  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.

• 1:26:41David Rosenthal?

  For the hot Atlanta summers, yeah.

• 1:26:43Ben Gilbert?

  Unbelievable. They also, during this time period, get into partnerships, big, giant landmark brand partnerships, the first of which is the Olympics. Coca-Cola was a sponsor of the 1928 Olympics in Amsterdam, which makes them the longest-running Olympic sponsor, and at the LA 28 Games, that will make 100 years of Coca-Cola partnering with the Olympics.

• 1:27:12David Rosenthal?

  Yeah, I was gonna say, the 1928 Games in Amsterdam, were there any other sponsors? Like, the Olympics probably weren't a commercial thing yet.

• 1:27:19Ben Gilbert?

  I think that's right. I think it was really innovative.

• 1:27:22David Rosenthal?

  Yeah, man, no Coca-Cola, no Visa.

• 1:27:25Ben Gilbert?

  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.

• 1:27:33David Rosenthal?

  Hmm, interesting.

• 1:27:35Ben Gilbert?

  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 1920-ish, all the way until 1985, there was no changes to the Coca-Cola formula. Woodruff's Coca-Cola was that 65-year unchanged formula.

• 1:28:02David Rosenthal?

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

• 1:28:08Ben Gilbert?

  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.

• 1:28:48David Rosenthal?

  And is now in a world of Coca-Cola, right?

• 1:28:51Ben Gilbert?

  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.

• 1:29:01David Rosenthal?

  The Coca-Cola version of Hershey Park.

• 1:29:02Ben Gilbert?

  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.

• 1:29:40David Rosenthal?

  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 realized 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.

• 1:30:24David Rosenthal?

  He's like, guys, we need to get Coca-Cola into gas stations.

• 1:30:30David Rosenthal?

  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. Cause 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.

• 1:31:02Ben Gilbert?

  And giant signs, right? That say Coca-Cola sold here or drink Coca-Cola or Coca-Cola always refreshing.

• 1:31:08David Rosenthal?

  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.

• 1:31:19Ben Gilbert?

  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.

• 1:31:44David Rosenthal?

  Yep.

• 1:31:45Ben Gilbert?

  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.

• 1:31:53David Rosenthal?

  Totally. You don't make money on the gas. You make money on the convenience store, starting with Coke, though. 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.

• 1:32:37David Rosenthal?

  And so he changes course for the Coca-Cola company and says, I'm now willing to buy and own and operate bottlers.

• 1:32:44Ben Gilbert?

  Oh.

• 1:32:45David Rosenthal?

  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.

• 1:32:56Ben Gilbert?

  I didn't realize that started that early.

• 1:32:58David Rosenthal?

  Yeah, he started that in the 20s.

• 1:33:00Ben Gilbert?

  Wow.

• 1:33:01David Rosenthal?

  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.

• 1:33:26Ben Gilbert?

  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,

• 1:34:11Ben Gilbert?

  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.

• 1:34:40David Rosenthal?

  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 five cents a Coke.

• 1:34:50Ben Gilbert?

  Right.

• 1:34:51David Rosenthal?

  And as we get into the depression, that becomes a huge lever against potential competitors.

• 1:34:59Ben Gilbert?

  Hmm. How's that?

• 1:35:00David Rosenthal?

  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.

• 1:35:24David Rosenthal?

  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.

• 1:35:43Ben Gilbert?

  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.

• 1:35:50David Rosenthal?

  Hmm. Yes, but I think the competition was having to hit the nickel price.

• 1:35:54Ben Gilbert?

  Yes.

• 1:35:55David Rosenthal?

  To try and compete with Coke and their margins, because they were subscale, would be much, much, much worse.

• 1:35:59Ben Gilbert?

  Yep. Coke can be profitable at way lower end consumer prices than the other subscale companies.

• 1:36:07David Rosenthal?

  Yes.

• 1:36:08Ben Gilbert?

  It's like they actually have pricing power that they're not using.

• 1:36:11David Rosenthal?

  Yes, they have latent pricing power.

• 1:36:13Ben Gilbert?

  It's like more strategic to them to not raise prices.

• 1:36:16David Rosenthal?

  Yes. So not good news for any competitors out there. And they basically all, except for a small handful, get steamrolled. Except for one, Pepsi.

• 1:36:30Ben Gilbert?

  Which amazingly started way back when Coca-Cola started.

• 1:36:34David Rosenthal?

  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.

• 1:36:55Ben Gilbert?

  Three? I didn't know that.

• 1:36:57David Rosenthal?

  Three times.

• 1:36:58Ben Gilbert?

  Wow.

• 1:36:59David Rosenthal?

  And Coca-Cola, you know, the various owners over the years turned it down three times.

• 1:37:05Ben Gilbert?

  Amazing.

• 1:37:06David Rosenthal?

  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.

• 1:37:42Ben Gilbert?

  Let's see, I got one right here. The mini can's very popular today. That's been a shift. Seven and a half. Yeah, it's crazy. The original bottles were smaller than this.

• 1:37:51David Rosenthal?

  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.

• 1:38:17Ben Gilbert?

  Mmm.

• 1:38:18David Rosenthal?

  To sell Pepsi, also for a nickel.

• 1:38:22Ben Gilbert?

  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 has been approximately one company all the way through. Pepsi's been bankrupt two, three times and sold to new owners and completely new companies started with the word Pepsi in it. This has been a rocky road for them.

• 1:38:47David Rosenthal?

  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.

• 1:39:09Ben Gilbert?

  Oh, there's two expenses. There's sugar and there's the bottle and then everything else is approximately free.

• 1:39:14David Rosenthal?

  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.

• 1:39:27Ben Gilbert?

  Yep.

• 1:39:28David Rosenthal?

  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.

• 1:40:02Ben Gilbert?

  Yep. And that is the first real punch that anyone's been able to land on Coca-Cola.

• 1:40:09David Rosenthal?

  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 a half ounce Contour bottle. They can't react.

• 1:40:27Ben Gilbert?

  Yeah. Genius.

• 1:40:29David Rosenthal?

  Truly genius. I mean, it was like back against the wall genius, but genius.

• 1:40:33Ben Gilbert?

  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

• 1:40:53David Rosenthal?

  Yep.

• 1:40:53Ben Gilbert?

  The best flavor, but like. We're also here and you can get a lot of us for cheap.

• 1:40:58David Rosenthal?

  Well, are they the best flavor or are they not? We'll come back to that.

• 1:41:01Ben Gilbert?

  Well, that's all subjective.

• 1:41:02David Rosenthal?

  There's a discount promise to the brand.

• 1:41:05Ben Gilbert?

  Yes.

• 1:41:05David Rosenthal?

  Which in 1934 is kind of all that matters with consumers.

• 1:41:10Ben Gilbert?

  Went over real well. Yeah.

• 1:41:12David Rosenthal?

  So Coke can't fight them on the amount of liquid in the bottle because they're locked into the six and a half ounce.

• 1:41:17Ben Gilbert?

  And they don't want to cheapen their brand.

• 1:41:19David Rosenthal?

  So instead they pull out another, uh, 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.

• 1:42:00David Rosenthal?

  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. I'm a good southern gentleman. Uh, I don't know anything about this, but you know what? Why don't we just settle all of this trademark stuff?

• 1:42:31Ben Gilbert?

  You can still use the word cola? Is that what he's offering him?

• 1:42:35David Rosenthal?

  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.

• 1:42:44Ben Gilbert?

  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.

• 1:42:55David Rosenthal?

  Woodruff, apparently, uh, despite this conciliation.

• 1:42:59David Rosenthal?

  Hadn't learned his lesson and was still not above trying to bribe his competitors. He tries to bribe Mac 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 Mac's like, absolutely not. I'm giving Pepsi. Thank you for settling the trademark litigation.

• 1:43:23Ben Gilbert?

  And doesn't Coca-Cola's general counsel quit over this too?

• 1:43:27David Rosenthal?

  Yes, yes, that's right.

• 1:43:28Ben Gilbert?

  I think the idea is like, come on, we gotta fight this. We can't just like be giving up our trademarks.

• 1:43:33David Rosenthal?

  Yes.

• 1:43:34Ben Gilbert?

  But Woodruff, this is one of the few times where I feel like he put an idealistic approach aside and said, we gotta be pragmatic here. We gotta settle with these guys.

• 1:43:43David Rosenthal?

  So the result of this is that Pepsi becomes Coke's first real legitimate competitor. And by August 1941, so it's at 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.

• 1:44:04Ben Gilbert?

  Hmm.

• 1:44:05David Rosenthal?

  It's a major chicken in the arm. It was basically 100% Coke before this happened. And Pepsi establishes a pretty meaningful foothold.

• 1:44:15Ben Gilbert?

  Yep.

• 1:44:16David Rosenthal?

  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.

• 1:44:47Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:45:01David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Legora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:45:18Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:45:33David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:45:57Ben Gilbert?

  And they recently launched Legora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:46:16David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:46:46Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you.

• 1:47:11Ben Gilbert?

  Okay, David, World War II.

• 1:47:13David Rosenthal?

  All right.

• 1:47:13Ben Gilbert?

  Gee, how did Coke end up all over the world? Hmm.

• 1:47:18David Rosenthal?

  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.

• 1:47:59David Rosenthal?

  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.

• 1:48:12Ben Gilbert?

  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.

• 1:48:19David Rosenthal?

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

• 1:48:24Ben Gilbert?

  Yep.

• 1:48:25David Rosenthal?

  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.

• 1:49:04Ben Gilbert?

  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.

• 1:49:20David Rosenthal?

  I believe the way it ends up coming down is technically, yes, what you said, Ben, but it applies to any bottler that serves.

• 1:49:32David Rosenthal?

  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.

• 1:49:47Ben Gilbert?

  Wow.

• 1:49:47David Rosenthal?

  None of Coca-Cola's competitors, including Pepsi, get anything like this.

• 1:49:52Ben Gilbert?

  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 Cola's do. And the response back from the government is 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, our boys are requesting, including General, soon to be President Eisenhower.

• 1:50:13David Rosenthal?

  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 build out 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.

• 1:50:49Ben Gilbert?

  And documenting the absolute crap out of it to use in their advertising.

• 1:50:54David Rosenthal?

  Yes.

• 1:50:55Ben Gilbert?

  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.

• 1:51:08David Rosenthal?

  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."

• 1:51:35Ben Gilbert?

  Wow.

• 1:51:36David Rosenthal?

  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.

• 1:51:49Ben Gilbert?

  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.

• 1:52:05David Rosenthal?

  Wow, I saw an estimate that it was 10 billion.

• 1:52:07Ben Gilbert?

  Wow.

• 1:52:08David Rosenthal?

  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?

• 1:52:22Ben Gilbert?

  Yep.

• 1:52:22David Rosenthal?

  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.

• 1:52:44Ben Gilbert?

  Wow.

• 1:52:45David Rosenthal?

  To say it accelerated Coke's international rollout is like understatement of the century.

• 1:52:50Ben Gilbert?

  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.

• 1:53:04David Rosenthal?

  So after the war in 1950, a third of Coke's profits are already coming from abroad, from all these

• 1:53:11Ben Gilbert?

  Whoa.

• 1:53:12David Rosenthal?

  that they got set up. And Time Magazine features Coca-Cola on the cover of Time Magazine. Have you seen this?

• 1:53:20Ben Gilbert?

  Oh, wasn't it the first product ever on the cover of the magazine?

• 1:53:23David Rosenthal?

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

• 1:53:26Ben Gilbert?

  No.

• 1:53:27David Rosenthal?

  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.

• 1:53:44Ben Gilbert?

  Oh, my God.

• 1:53:45David Rosenthal?

  And the caption on the cover of Time Magazine says, "World and Friend."

• 1:53:52David Rosenthal?

  The implication being that Coca-Cola is a friend to the world.

• 1:53:55Ben Gilbert?

  Wow.

• 1:53:56David Rosenthal?

  Crazy, right?

• 1:53:57Ben Gilbert?

  So it's funny, before World War II, there was a presence for Coca-Cola in pre-Nazi Germany.

• 1:54:04David Rosenthal?

  Oh, yes, I know what story you're about to tell.

• 1:54:07Ben Gilbert?

  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.

• 1:54:31David Rosenthal?

  Yup.

• 1:54:31Ben Gilbert?

  That drink is Fanta.

• 1:54:34David Rosenthal?

  Yup.

• 1:54:36David Rosenthal?

  Yeah. Fanta, owned by Coca-Cola, was the brainchild of Nazi Germany Coca-Cola bottling entrepreneurs.

• 1:54:47Ben Gilbert?

  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 it all. Fanta is the name they came up with.

• 1:55:04David Rosenthal?

  Yeah. Parts of history that most people don't know.

• 1:55:06Ben Gilbert?

  Don't you want a Fanta Fanta?

• 1:55:08David Rosenthal?

  Yeah.

• 1:55:10Ben Gilbert?

  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.

• 1:55:25David Rosenthal?

  Yup. 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.

• 1:56:09David Rosenthal?

  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.

• 1:56:28Ben Gilbert?

  That's how they refer to it in internal communications. They don't write Pepsi, they say the imitator.

• 1:56:33David Rosenthal?

  The imitator. So Steele had been an ad man at the Darcy 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 a, 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."

• 1:57:18David Rosenthal?

  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."

• 1:57:33David Rosenthal?

  This is Alfred Steele.

• 1:57:37David Rosenthal?

  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.

• 1:58:09Ben Gilbert?

  Nothing to lose.

• 1:58:10David Rosenthal?

  So Steele, when he gets to Pepsi, says, "All right, we're gonna 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.

• 1:58:29Ben Gilbert?

  Hmm.

• 1:58:30David Rosenthal?

  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.

• 1:59:07Ben Gilbert?

  And Woodruff would later radically flip on that, right?

• 1:59:10David Rosenthal?

  Yes.

• 1:59:10Ben Gilbert?

  Wasn't he a big part of with Mayor Hertz's field of desegregating a lot of stuff in Atlanta? I mean, he eventually really came around, but-

• 1:59:20David Rosenthal?

  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 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?

• 2:00:04Ben Gilbert?

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

• 2:00:09David Rosenthal?

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

• 2:00:15Ben Gilbert?

  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.

• 2:00:30David Rosenthal?

  You're assuming that consumers back in the 40s and 50s were

• 2:00:33Ben Gilbert?

  That's true.

• 2:00:34David Rosenthal?

  thoughtful about such things.

• 2:00:35Ben Gilbert?

  That's true. It's a great point.

• 2:00:37David Rosenthal?

  Yep. 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 know, like the actor, James Dean?

• 2:01:11Ben Gilbert?

  Really?

• 2:01:12David Rosenthal?

  Yep. His very first acting job is in a 19, either 49 or 50 Pepsi commercial.

• 2:01:20Ben Gilbert?

  Wow, I had no idea.

• 2:01:21David Rosenthal?

  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.

• 2:01:38Ben Gilbert?

  Hmm.

• 2:01:39David Rosenthal?

  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.

• 2:01:58Ben Gilbert?

  Cause Pepsi had a similar, or today even still has a similar bottling system, right? Where they have bottlers outside the company?

• 2:02:05David Rosenthal?

  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.

• 2:02:21Ben Gilbert?

  Fair.

• 2:02:21David Rosenthal?

  That's what Steele's working with here when he gets to Pepsi.

• 2:02:26David Rosenthal?

  So on the back of this, Pepsi's US market share jumps pretty astronomically. It's in the low twenties 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. Coke hasn't embraced television yet. And Coke hasn't even, thought hasn't even crossed their minds about anything diet yet.

• 2:03:06Ben Gilbert?

  That's true. And they're starting to be thought of a little bit. I mean, this would happen much more in the seventies and eighties, but they're starting to be thought of a little bit as the soda for your parents. Not our soda, the cool new soda.

• 2:03:17David Rosenthal?

  Not the choice of a new generation, Ben.

• 2:03:19Ben Gilbert?

  That's right.

• 2:03:20David Rosenthal?

  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 Coke's ad agency from Darcy, you know, Archie Lee, the whole legacy of everything that they built from the twenties, thirties through the war, to McCann Erickson.

• 2:03:42Ben Gilbert?

  The most premium ad agency in America.

• 2:03:45David Rosenthal?

  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.

• 2:04:06Ben Gilbert?

  No way Coke runs this first internally?

• 2:04:09David Rosenthal?

  Coke runs this first in the late 1950s, or McCann does for Coke. And guess what they find?

• 2:04:15Ben Gilbert?

  That people prefer Pepsi?

• 2:04:18David Rosenthal?

  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.

• 2:04:30Ben Gilbert?

  Wow.

• 2:04:31David Rosenthal?

  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.

• 2:04:56David Rosenthal?

  Ah, for Coke and Bob Woodruff, would that that have stayed the case?

• 2:05:04David Rosenthal?

  It's crazy that it really doesn't bite them for 30 years. Yeah, no, they're, 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 gotta take TV way more seriously. This is not just the future, this is the present. Is this, uh, Things Go Bad or With Coke? Yup, they start doing TV campaigns, jingles. Coke starts sponsoring the Mickey Mouse Club show, starting in 1955. Ultimately, what McCann decides, they say, we need to unify our marketing collateral and messaging across all of Coca-Cola's channels.

• 2:05:46David Rosenthal?

  We can't be having different messaging and different imagery for TV and for a point of sale and for newspapers and magazines or for our radio ads. The idea is we need to have one Coca-Cola site, 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. I see. 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.

• 2:06:28David Rosenthal?

  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.

• 2:07:02David Rosenthal?

  Which is their new diet drink product that they had considered naming Diet Coke, but Bob Woodruff rejected it. Now, the given reason is supposedly, he says, if God had wanted Coca-Cola to have saccharin in it, he would have made it that way in the first place.

• 2:07:19Ben Gilbert?

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

• 2:07:24David Rosenthal?

  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.

• 2:07:57Ben Gilbert?

  Hmm.

• 2:07:58David Rosenthal?

  And supposedly, that is actually the real reason why they didn't call Tab Diet Coke. Whatever the reason, they launched Tab in 1962.

• 2:08:06Ben Gilbert?

  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...

• 2:08:14David Rosenthal?

  A fad diet product.

• 2:08:16Ben Gilbert?

  Yes, exactly.

• 2:08:18David Rosenthal?

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

• 2:08:24Ben Gilbert?

  Also, I got it, listeners, we'll put a link in the show notes to this. There is an astonishing ad for Tab.

• 2:08:32David Rosenthal?

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

• 2:08:38Ben Gilbert?

  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."

• 2:09:15David Rosenthal?

  Yeah, the 1960s.

• 2:09:16Ben Gilbert?

  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.

• 2:09:32David Rosenthal?

  Well, leave it at that.

• 2:09:34Ben Gilbert?

  Yes.

• 2:09:35David Rosenthal?

  Yeah. So, you know, they do enter the diet market.

• 2:09:39Ben Gilbert?

  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.

• 2:09:53David Rosenthal?

  Yep.

• 2:09:54Ben Gilbert?

  Tab. Recently killed, actually.

• 2:09:58David Rosenthal?

  Yeah.

• 2:09:58Ben Gilbert?

  It was one of the brands that they sunset a couple of years ago.

• 2:10:01David Rosenthal?

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

• 2:10:04Ben Gilbert?

  Yeah. When they winnowed from like 600 brands to 200 in 2020, that was one of the ones that caught the axe.

• 2:10:10David Rosenthal?

  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.

• 2:10:22Ben Gilbert?

  Yes.

• 2:10:23David Rosenthal?

  I know you have the story on this one.

• 2:10:24Ben Gilbert?

  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.

• 2:11:04Ben Gilbert?

  And he calls up Coca-Cola and does a handshake deal, meets in person, and does a handshake deal with Waddy Pratt, who ran Coke's fountain division. And from that point forward, for like 40 years, they built this deeply entrenched relationship purely on a handshake deal.

• 2:11:26David Rosenthal?

  Wow. There's no contract, no terms?

• 2:11:28Ben Gilbert?

  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?

• 2:11:48David Rosenthal?

  No, but I would believe it.

• 2:11:50Ben Gilbert?

  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, or and they're like, no, it's actually better at McDonald's. It is better at McDonald's.

• 2:12:06David Rosenthal?

  No way.

• 2:12:07Ben Gilbert?

  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.

• 2:12:37David Rosenthal?

  Oh, yeah, because this is the fountain business.

• 2:12:40Ben Gilbert?

  Yeah. Coke doesn't actually deliver the syrup to all these restaurants. The bottlers do it on behalf of them, even though there's no bottles involved. So Coke is quote unquote, selling directly when they sell syrup to fountain owners.

• 2:12:53David Rosenthal?

  But the bottlers are doing the delivery.

• 2:12:55Ben Gilbert?

  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.

• 2:13:19David Rosenthal?

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

• 2:13:25Ben Gilbert?

  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.

• 2:13:47David Rosenthal?

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

• 2:13:53Ben Gilbert?

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

• 2:14:32David Rosenthal?

  Well, it's good for both sides.

• 2:14:34Ben Gilbert?

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

• 2:14:50David Rosenthal?

  Wow. Big customer.

• 2:14:52Ben Gilbert?

  So back to the 60s. In 1960, a few other things happen. The first 12-ounce aluminum cans are introduced of Coca-Cola in the United States.

• 2:15:01David Rosenthal?

  They also buy Minute Maid, right? Coca-Cola buys Minute Maid?

• 2:15:04Ben Gilbert?

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

• 2:15:15David Rosenthal?

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

• 2:15:24Ben Gilbert?

  Famously, where they're still one company today at PepsiCo.

• 2:15:28David Rosenthal?

  Yep. Ben, you found out Coke had the chance to buy it, right?

• 2:15:31Ben Gilbert?

  Yes, they did. Made a giant mistake not buying it. The company's headquarters, I think the original Lay Company, is an Atlanta company. So in many ways, Coca-Cola is sort of the preferred buyer, and Coke turns it down.

• 2:15:46David Rosenthal?

  Wow.

• 2:15:47Ben Gilbert?

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

• 2:16:08Ben Gilbert?

  That's a good one to own.

• 2:16:09David Rosenthal?

  Yeah, big miss from Coke.

• 2:16:12Ben Gilbert?

  Yep.

• 2:16:13David Rosenthal?

  On the opposite end of the spectrum, toward the end of the 60s, McCann and Coke really start hitting their stride. Ben, you mentioned in the intro about co-opting the hippie and counterculture movement.

• 2:16:27Ben Gilbert?

  Oh, yeah.

• 2:16:28David Rosenthal?

  In 1968, McCann and Coke launch their latest unified marketing campaign, The Real Thing, which is an enormous success. And at first subtly tries to co-opt the, you know, counterculture movement. It's real, the hippies like little things.

• 2:16:50Ben Gilbert?

  I mean, it doesn't have high fructose corn syrup yet, so ostensibly it is the real thing.

• 2:16:54David Rosenthal?

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

• 2:17:04Ben Gilbert?

  Yes.

• 2:17:05David Rosenthal?

  And Don Draper's greatest work. I was so funny, like, I know this ad from Mad Men.

• 2:17:11Ben Gilbert?

  Yes.

• 2:17:12David Rosenthal?

  Even though it's considered one of, if not the greatest television commercial of all time.

• 2:17:16Ben Gilbert?

  Yes.

• 2:17:16David Rosenthal?

  I didn't know anything about it until the Mad Men series finale.

• 2:17:19Ben Gilbert?

  So listeners, if you don't know.

• 2:17:21David Rosenthal?

  The Hilltop ad.

• 2:17:22Ben Gilbert?

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

• 2:17:37David Rosenthal?

  It's so cool. Doing the research for this episode, I always thought that Mad Men was one of the greatest works of media ever created. I have even more appreciation. They set the whole thing up all the way back in the first season of.

• 2:17:54Ben Gilbert?

  Really?

• 2:17:54David Rosenthal?

  The show by introducing McCann Erickson. Like McCann Erickson comes in as the foil to Sterling Cooper in the beginning, and then they're running throughout the whole series. I didn't realize that McCann Erickson, the reason they're so big and the reason that it's such a big thing is the Coke account.

• 2:18:11Ben Gilbert?

  Pretty amazing.

• 2:18:12David Rosenthal?

  And then it all pays off in the Hilltop ad.

• 2:18:14Ben Gilbert?

  I think it's given him a little bit too much credit. If you're going to do a show about advertising in this era, you kind of have to do McCann Erickson.

• 2:18:21David Rosenthal?

  But I didn't realize the deep connection between McCann and Coke and how like integral that was. And so now, understanding this makes me appreciate this series finale just even more. Like, it's so great.

• 2:18:32Ben Gilbert?

  For sure. So the story behind this ad is awesome. So Bill Backer at McCann Erickson, who was sort of the big partner of Coca Cola's there.

• 2:18:40David Rosenthal?

  The Archie Lee of his day.

• 2:18:42Ben Gilbert?

  Yes, for a long time, said that he was on a flight that was grounded at an airport in Ireland, and he noticed a diverse crowd of passengers, and everyone's upset that this flight isn't happening. And they're chatting and they're joking with each other, and it's over bottles of Coca Cola. And he's like, man, Coca Cola really brings people together across borders, across languages. And he jots down on a napkin, I'd like to buy the world a Coke. And they conceptualize this ad, and there's this whole great story of finding the songwriters and the musicians who performed it and all this stuff. And they want to film it at the Cliffs of Dover in the UK. They got the budget greenlit from

• 2:19:24Ben Gilbert?

  the head of advertising at Coca Cola to do the most expensive ad of all time, $100,000 budget.

• 2:19:32David Rosenthal?

  How quaint.

• 2:19:33Ben Gilbert?

  And they're gonna film it over the course of three days. And they got there with the full cast, who were gonna stand on the hillside and sing.

• 2:19:43David Rosenthal?

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

• 2:19:50Ben Gilbert?

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

• 2:19:59David Rosenthal?

  I was gonna say, like, Cliffs of Dover, it rains a lot there.

• 2:20:03Ben Gilbert?

  They burned through the entire budget. And so they're like, where are we gonna go? That it won't rain? Let's go to Rome. And so they get approval to go all the way up to $250,000. It rains in Rome.

• 2:20:16David Rosenthal?

  No.

• 2:20:16Ben Gilbert?

  In the hills outside of Rome. And so they actually have no usable footage from everything they shot, because by the time they actually caught the actors, they were also covered in rain and looked like crap, and no one looked happy. And so it's this hilariously cobbled together thing, where the third time's the charm, they have to go wander around Rome looking for new actors. They find a new leading lady, that woman that the commercial opens on. They actually have to film it. Two separate locations, the hillside is different from the close ups, but they ultimately release it, it becomes absolutely beloved. It's the catchiest tune. I've had it in my head the entire time doing research. They start getting calls at radio stations to play the Coca-Cola ad song.

• 2:21:01Ben Gilbert?

  So then the band goes and re-records it as a real song to release on an album that has different lyrics than I'd like to buy the world a Coke. And it turns out to become a bestselling song also.

• 2:21:12David Rosenthal?

  So great. The lyrics are just, uh, great. They're great. And it's so 1971 and Coca-Cola.

• 2:21:19Ben Gilbert?

  It's the real thing.

• 2:21:21David Rosenthal?

  Yep. I'd like to teach the world to sing in perfect harmony. I'd like to buy the world a Coke and keep it company. That's the real thing. What the world wants today is the real thing.

• 2:21:32Ben Gilbert?

  And you're watching it and it does actually stir up emotions. You're like, this is really beautiful. Look at this. There's all these people that are all here together. They're all getting along and then you realize this is a giant corporation selling sugar water. And they managed to borrow the hippie movement to create one of the most successful commercials of all time.

• 2:21:54David Rosenthal?

  It's Mad Men.

• 2:21:55Ben Gilbert?

  Unbelievable.

• 2:21:57David Rosenthal?

  Don Draper, baby.

• 2:22:00Ben Gilbert?

  Yep.

• 2:22:00David Rosenthal?

  So great. Well, so the end of the sixties and the early seventies going pretty well for Coca-Cola. And then in 1975, that deep, dark, deeply embarrassing secret that McCann had discovered 20 years earlier in 1955, and Robert Woodruff had tried to bury as far down as he possibly could, comes out. The Pepsi Challenge. All right, listeners, now is a great time to talk about one of our favorite companies, Statsig.

• 2:22:40Ben Gilbert?

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• 2:22:51David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers, and how fast you can use that signal to guide what you ship next.

• 2:23:11Ben Gilbert?

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• 2:23:23David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:23:34Ben Gilbert?

  All right, David, the Pepsi challenge.

• 2:23:36David Rosenthal?

  I've been so stoked all episode just to get to this. And to start it off.

• 2:23:42Ben Gilbert?

  Are you about to do a Pepsi challenge?

• 2:23:44David Rosenthal?

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

• 2:23:54Ben Gilbert?

  What temperature are they, though? Because I hear that plays a big role.

• 2:23:58David Rosenthal?

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

• 2:24:06Ben Gilbert?

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

• 2:24:19David Rosenthal?

  Well, let's see.

• 2:24:21Ben Gilbert?

  All right, that's the real thing, seeing right now.

• 2:24:23David Rosenthal?

  All right, the real thing. It's good.

• 2:24:27David Rosenthal?

  Oh, Pepsi. Oh, it's got that lemony little zest to it.

• 2:24:31Ben Gilbert?

  Pepsi's a little lemony, a little sweeter.

• 2:24:35David Rosenthal?

  Hmm. I think I'm with the majority on this one.

• 2:24:40Ben Gilbert?

  That Pepsi's better?

• 2:24:41David Rosenthal?

  I think Pepsi tastes a little better.

• 2:24:43Ben Gilbert?

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

• 2:24:49David Rosenthal?

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

• 2:24:56Ben Gilbert?

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

• 2:25:00David Rosenthal?

  Indeed. All right. The Pepsi challenge. So back in 1967, a young Wharton MBA graduate joins Pepsi. After a few years of working at IPG, the big ad agency which owned, and I believe still owns, McCann Erickson, parent company of McCann.

• 2:25:25Ben Gilbert?

  Yep, they do. Interpublic Group.

• 2:25:28David Rosenthal?

  Now, Ben, I know you know who we're talking about here, but listeners, you all are in for a real fun surprise when we reveal who this person is in a minute. So Pepsi, as we've discussed, up until Alfred Steele came in, had always been kind of a seat of the pants, school of hard knocks management type company. This person who joins, I think might have been the first MBA to join the company. And he was one of the very few, even like college graduates. So he comes in as the Director of New Product Development. And the first new product that he develops and hits the market

• 2:26:09David Rosenthal?

  isn't a new drink, but rather a new bottle, a really, really big bottle. 64 ounces. He realizes in doing market research that, hey, supermarkets are becoming more and more of a thing. We're now in the late 60s, early 70s here. There's a really underserved part of the soft drink market, which is large families and parties for at home consumption. Buying a whole bunch of pretty heavy breakable glass bottles and lugging them home for your large family or a party that you're throwing.

• 2:26:44Ben Gilbert?

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

• 2:26:48David Rosenthal?

  Totally. And again, remember we talked about the cost scaling element of soda is not volume of soda. So it doesn't actually cost that much to go from six and a half ounces to 12 ounces to, you know, a whole lot of ounces.

• 2:27:05Ben Gilbert?

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

• 2:27:10David Rosenthal?

  Yep. So he and Pepsi start working on a big bottle and they pretty quickly realize like, oh, glass is not going to work. It would be a really heavy bottle and really breakable as you're porting around this big bottle. So they go to DuPont.

• 2:27:28Ben Gilbert?

  Hmm, I had no idea.

• 2:27:30David Rosenthal?

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

• 2:28:13Ben Gilbert?

  Have you ever seen them inflate? It's like the coolest thing ever, watching a two liter bottle inflate.

• 2:28:17David Rosenthal?

  The 64 ounce or now two liter bottle is born. Pepsi gets a big jump on this against Coke. It takes Coke another three and a half years to come out with their own big party bottle. So on the back of this success for this young executive.

• 2:28:33Ben Gilbert?

  And you talked to him, right? This person you're talking about?

• 2:28:36David Rosenthal?

  Oh, yes. All these stories are firsthand.

• 2:28:37Ben Gilbert?

  Okay.

• 2:28:38David Rosenthal?

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

• 2:28:47Ben Gilbert?

  And this is the first time that plastic is used, right? In soft drinks.

• 2:28:51David Rosenthal?

  Oh, yes. Missed the punchline there. This is the first plastic bottle.

• 2:28:55Ben Gilbert?

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

• 2:29:27David Rosenthal?

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

• 2:29:45Ben Gilbert?

  It's funny, I've like accidentally started doing that anyway. Cause whenever I travel now, I use those Path water bottles that they sell in airports and you can just refill them. I'm not like going out of my way to be like, oh my gosh, I need the metal over the plastic. But like, now it just feels weird to buy plastic bottles. Now that I'm so much more attuned to microplastics, I'm also never gonna drink fluid that was sitting in a plastic bottle for a long time after I opened it or like refill it. I used to refill plastic water bottles and now I'm like, ugh, who knows what's degrading in my beverage? So, but yeah, this is the start of the plastification.

• 2:30:21David Rosenthal?

  Yes. So, back to the timeline. Don Kendall, the CEO is like, okay, you passed the test. You are now gonna take over all of marketing for Pepsi. And I want you to figure out how we're gonna dethrone Coke. So the executive takes over marketing. He's getting settled in. He's surveying the current state of things. And he notices that the local Pepsi bottler down in Dallas, Texas is doing something really interesting. The local ad agency for the bottler there had accidentally discovered the secret that Coke and McCann has known for 20 years. The consumers prefer Pepsi to Coke. And the way they figure it out is that

• 2:31:05David Rosenthal?

  they're doing research for 7-Eleven in Dallas.

• 2:31:09Ben Gilbert?

  No way.

• 2:31:11David Rosenthal?

  And 7-Eleven is selling a generic cola at the time. And they run a taste test with both Coke and Pepsi as the controls for the 7-Eleven.

• 2:31:20Ben Gilbert?

  Wow.

• 2:31:21David Rosenthal?

  Generic cola. And so this local agency happens to also be the agency of the Pepsi bottler in Dallas. And so they go to the Pepsi bottler and they're like, hey, guess what we discovered?

• 2:31:33Ben Gilbert?

  Wow.

• 2:31:35David Rosenthal?

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

• 2:32:01Ben Gilbert?

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

• 2:32:07David Rosenthal?

  Well, we'll get to that. Now, yeah, at first, this is just the local Dallas bottler that's doing it. It's a huge success. Pepsi's market share in Dallas jumps by 14% thanks to these ads. Like, it really, really resonates with consumers.

• 2:32:23Ben Gilbert?

  Hmm.

• 2:32:23David Rosenthal?

  So the new VP of Marketing sees this and he's like, oh, okay, we gotta blow this out. But we're not gonna do what Coke would do. We're not gonna turn this into like a big corporate one site, one sound, one sell, national campaign.

• 2:32:40David Rosenthal?

  We gotta keep this grassroots. We gotta go market by market. This is working so well in Dallas because it's grassroots, because it's real people who are living in Dallas, taking this challenge. And the technology that can enable this has just come out. VCRs have come out and early home video camcorders are just starting to hit the market.

• 2:33:04Ben Gilbert?

  Hmm.

• 2:33:04David Rosenthal?

  So he says, okay, here's what we're gonna do. We're gonna go buy a ton of home video camcorders.

• 2:33:12Ben Gilbert?

  Oh, that's awesome.

• 2:33:14David Rosenthal?

  And card tables. We're gonna distribute them to all of Pepsi's local bottlers all around the country. We're gonna inform them about the Pepsi Challenge and we're gonna say, go run your own versions of the Pepsi Challenge.

• 2:33:27Ben Gilbert?

  Oh, wow.

• 2:33:29David Rosenthal?

  Film them with the camcorders of real people in your markets taking the Pepsi Challenge and put them on local television. Like local ad spots on local TV channels. And this is like, maybe the most successful grassroots marketing campaign in history.

• 2:33:47Ben Gilbert?

  I didn't even realize it was grassroots. I mean, everyone knows that. The Pepsi Challenge is almost like a descriptive way to describe a form of marketing. Like, do you remember when Microsoft did Bing it on? It was like, oh, I see the Pepsi Challenge for search.

• 2:34:00David Rosenthal?

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

• 2:34:21Ben Gilbert?

  Which is funny, being our age, David, I knew what the Pepsi Challenge was, but of course, I've never actually seen it.

• 2:34:27David Rosenthal?

  Right, I hadn't seen it either.

• 2:34:28Ben Gilbert?

  And it's funny to now actually go watch it and see how that meets my expectations of what I thought it was gonna be.

• 2:34:32David Rosenthal?

  Yes, same as you. I had the same expectations of, oh, this must have been like a BBDO national campaign, you know, blah, blah, blah. Total opposite. This is probably the first quote unquote reality television commercial that's ever produced. Like, nobody was doing this back in the day. So it just hits all these local markets around the country like a bomb. And Coke is so poorly set up to react to this. Their whole marketing and ad strategy with McCann, they're all national. One site, one sound, you know, one sell. They're not set up to go buy local TV ad slots.

• 2:35:13Ben Gilbert?

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

• 2:35:22David Rosenthal?

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

• 2:35:36Ben Gilbert?

  Yes. Oh, absolutely. I agree.

• 2:35:39David Rosenthal?

  And I think it was also important, it's happening in my community.

• 2:35:42Ben Gilbert?

  Right.

• 2:35:42David Rosenthal?

  So they blow this out like all across the country. In 1977, Pepsi outspends Coke in advertising for the first time in history. And Pepsi actually passes Coke in market share in the bottled market. So Coke still has a overall market share lead in the country because of the fountain business and like McDonald's.

• 2:36:06Ben Gilbert?

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

• 2:36:17David Rosenthal?

  So it's interesting, in the late 70s Pepsi does try to break in. They buy Taco Bell and Pizza Hut and KFC and then install Pepsi. But yeah, it never approaches Coke.

• 2:36:28Ben Gilbert?

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

• 2:36:49David Rosenthal?

  Yep. So on the back of this huge nationally known, obvious success with the Pepsi Challenge, the young marketing executive starts to become, you know, pretty known in the business community.

• 2:37:04Ben Gilbert?

  And David, we should say who it is now.

• 2:37:06David Rosenthal?

  His name. Is John Sculley.

• 2:37:10Ben Gilbert?

  Yep. And for some of you, that will mean a lot. And for most of you, that will mean a lot in about 30 seconds.

• 2:37:17David Rosenthal?

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

• 2:37:59Ben Gilbert?

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

• 2:38:04David Rosenthal?

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

• 2:38:24Ben Gilbert?

  Ah, well, Tim Cook before Tim Cook.

• 2:38:27David Rosenthal?

  And then there would be two more CEOs, I think, before Jobs came back.

• 2:38:31Ben Gilbert?

  Yeah.

• 2:38:32David Rosenthal?

  Gilemilo and.

• 2:38:33Ben Gilbert?

  Michael Spindler.

• 2:38:34David Rosenthal?

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

• 2:38:45Ben Gilbert?

  Also, thank you to Arvind Navarathna, I'm a friend of the show, for introducing us. That was a fun email to get of like, wait, John Sculley listens to acquired?

• 2:38:53David Rosenthal?

  Yeah, so cool. He's currently on the board of three different companies that he's helped start over the last couple of years. And he's responsible for the Pepsi Challenge. So.

• 2:39:03David Rosenthal?

  Obviously, Coke eventually, after years and years of bleeding, thanks to the Pepsi challenge, decides that they need to respond.

• 2:39:13Ben Gilbert?

  And the response ends up happening a full decade later. The response comes in 1985 and the Pepsi challenge was in 75. And Pepsi had already been taking share from Coke, starting in like 1970. Meaningful chunks.

• 2:39:29David Rosenthal?

  Yep. So why is Coke so slow to respond to the Pepsi challenge? Well, in addition to just plain getting their ass kicked,

• 2:39:39David Rosenthal?

  they have another problem. So Woodruff is still the ultimate decision maker and chairman of the board, but he's getting pretty old at this point in time. He's already in his 80s, approaching his 90s.

• 2:39:53Ben Gilbert?

  He has strong opinions about what Coca-Cola is and isn't.

• 2:39:56David Rosenthal?

  But there's also another management problem at Coca-Cola, which is that the CEO, Paul Austin, has gotten Alzheimer's and stays in the CEO position. And so Coke, for the back half of the 70s, is just paralyzed. Like basically, no decisions can get through between Woodruff being set in his ways.

• 2:40:23Ben Gilbert?

  And it's hard for him to see, read, hear. I mean, he's hard to communicate with, in addition with having strong opinions and control of the company.

• 2:40:33David Rosenthal?

  Yep. And then you have a CEO suffering from Alzheimer's and Woodruff probably doesn't recognize what's happening. It's a real mess.

• 2:40:41Ben Gilbert?

  Yep.

• 2:40:43David Rosenthal?

  All of this finally resolves in May of 1980, when the board appoints a young chemical engineer named Roberto Gosweta as CEO.

• 2:40:56David Rosenthal?

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

• 2:41:09Ben Gilbert?

  Hmm, that's right, because he was a chemical engineer. I mean, he was on the product formulation side of things.

• 2:41:16David Rosenthal?

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

• 2:41:28Ben Gilbert?

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

• 2:41:51David Rosenthal?

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

• 2:42:23Ben Gilbert?

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

• 2:42:38David Rosenthal?

  I could see that.

• 2:42:39Ben Gilbert?

  Yep.

• 2:42:40David Rosenthal?

  So they go on to have a great run. One of the early things they do is they buy Columbia Pictures, the movie studio.

• 2:42:49Ben Gilbert?

  Which I always thought this was stupid. Like, whenever you hear stories of, "Oh, and at one point in the coked-out 1980s where everyone was doing crazy stuff, Coke even went and bought Columbia Pictures."

• 2:43:03David Rosenthal?

  A movie studio.

• 2:43:05Ben Gilbert?

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

• 2:43:17David Rosenthal?

  Well, not only was it financially pretty good for them when they ultimately sold the business to Sony a few years later. It leads to a lot of really good stuff for Coca-Cola because this is how they get to know Herb Allen Jr. And Allen and Company, who was one of the principal shareholders of Columbia Pictures before Coke bought it. And so he ends up joining the board of Coca-Cola after the transaction. And actually, this relationship continues right through to this day. Herb Allen III, who in the early 2000s took over for Herb Jr., running Allen and Company, is still on the board of Coca-Cola.

• 2:43:58Ben Gilbert?

  Amazing.

• 2:43:58David Rosenthal?

  So this is how Coca-Cola executives start going to Sun Valley.

• 2:44:05Ben Gilbert?

  Mmm.

• 2:44:05David Rosenthal?

  Where Don Keough reconnects from his old neighbor, from his early, young professional days when he was working in his first job in Omaha, Nebraska.

• 2:44:20Ben Gilbert?

  This is insane.

• 2:44:20David Rosenthal?

  Living on Farnham Street in Omaha, where he was neighbors with Warren Buffett.

• 2:44:27Ben Gilbert?

  Warren Buffett is like this real life Forrest Gump. I mean, the number of things that he invested in that would become these unbelievable Bonanza investments, like greatest of all time investments. Oh, it was a guy who lived in my street. Oh, it was the woman that ran the furniture store in my town growing up. Like, it happens over and over and over again. Are you kidding me? Don Keough was Warren Buffett's old neighbor?

• 2:44:55David Rosenthal?

  Don's first job out of college, he worked for, I believe, a coffee company that ended up getting acquired by Coca-Cola. And that's how he came into Coca-Cola. But yeah, he was just living in Omaha on Farnham Street.

• 2:45:09Ben Gilbert?

  Crazy. And so this is how the Berkshire Coca-Cola relationship starts.

• 2:45:14David Rosenthal?

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

• 2:45:44Ben Gilbert?

  And Warren reportedly drinks five Cherry Cokes a day.

• 2:45:47David Rosenthal?

  Yeah. He is perhaps single-handedly supporting his investment these days.

• 2:45:53David Rosenthal?

  Later on, at Sun Valley, Bill Gates lets it slip on a panel with Warren and Roberto and Don Quixote, that Warren has always told Bill that Coca-Cola could be run by a ham sandwich.

• 2:46:10Ben Gilbert?

  While Roberto is sitting right there.

• 2:46:12David Rosenthal?

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

• 2:46:24Ben Gilbert?

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

• 2:46:37David Rosenthal?

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

• 2:46:49Ben Gilbert?

  Yes.

• 2:46:50David Rosenthal?

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

• 2:47:04Ben Gilbert?

  You're a Diet Coke man, not a Coke Zero man.

• 2:47:06David Rosenthal?

  I'm a Diet Coke guy. Yeah, I know Coke Zero was sort of marketed as the Diet Coke for men, but I like Diet Coke.

• 2:47:14Ben Gilbert?

  And not just for men, but also the one that's closer to the original Coca-Cola formula. Diet Coke is sort of meant to be its own thing.

• 2:47:21David Rosenthal?

  Yep. They did those great ads of the taste infringement ads. Do you remember those?

• 2:47:25Ben Gilbert?

  Oh, I don't remember them.

• 2:47:27David Rosenthal?

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

• 2:47:35Ben Gilbert?

  Great premise.

• 2:47:37David Rosenthal?

  Great sort of self-reflective advertising from Coca-Cola there.

• 2:47:42Ben Gilbert?

  So Diet Coke is fascinating because they did start work on it earlier in the 70s. It didn't come out till 1982, but they're kind of in the lab tinkering with the flavor because the Pepsi challenge has basically thrown down the conlet that Americans prefer the taste of Pepsi. And they're starting to play with this idea of like, okay, obviously, we're not going to replace Coke, but like, is there a way that we can make something that does compete with Pepsi, that tastes a little bit more like Pepsi, that tastes... Lighter or sweeter, or they're in the lab. They're working on it. And eventually they do land on this formula that they think is great. And it's artificially sweetened, as you're talking about.

• 2:48:25Ben Gilbert?

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

• 2:48:54David Rosenthal?

  You need a win.

• 2:48:56Ben Gilbert?

  A, you need a win. B, it is so clear that diet is going to be a gigantic market and that's the way the world is going. And we're just holding ourselves back from competing with our best foot forward by not using our big brand.

• 2:49:09David Rosenthal?

  Yep. There was one other reason why they finally decided in the late 70s to start work on Diet Coke.

• 2:49:18Ben Gilbert?

  Hmm.

• 2:49:19David Rosenthal?

  In 1975, the Coca-Cola Company acquired the Thomas Company.

• 2:49:25Ben Gilbert?

  Oh.

• 2:49:26David Rosenthal?

  So to the extent that the Thomas Company and the parent bottlers, if it is true that they had a right to a 10 cent royalty on other Coca-Cola drinks, that is no longer a problem.

• 2:49:36Ben Gilbert?

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

• 2:49:41David Rosenthal?

  Oh, I was gonna ask you the same thing. I thought I was gonna get you. Of course I do.

• 2:49:47Ben Gilbert?

  I'd be surprised if any listeners know, but listeners, you are gonna delight in learning this with us.

• 2:49:54David Rosenthal?

  They announced Diet Coke in the summer of 1982.

• 2:49:58Ben Gilbert?

  In July of 1982.

• 2:50:00David Rosenthal?

  The same month.

• 2:50:01Ben Gilbert?

  That's right. Forty-three years before.

• 2:50:04David Rosenthal?

  Forty-three years before us. At a very special location in the acquired cinematic universe.

• 2:50:12David Rosenthal?

  Radio City Music Hall.

• 2:50:14Ben Gilbert?

  That's right. Diet Coke was announced onstage with the Rockettes performing to celebrate the new beverage.

• 2:50:22David Rosenthal?

  That's right. To say it works is quite the understatement. By the end of 1983, the first full year on the market, Diet Coke is the number one diet drink in America. And unlike TAB, which clearly, from that commercial that you talked about earlier, was exclusively marketed to women, 30% of Diet Coke drinkers, even in the early days, are men. And by 1984, Diet Coke becomes the third best-selling soft drink in America, period, behind Coke and Pepsi. And Diet Coke costs significantly less for Coke to produce because it doesn't have sugar.

• 2:51:06Ben Gilbert?

  Yeah. You know what's not as expensive? Artificial sweeteners.

• 2:51:10David Rosenthal?

  Yes. So Diet Coke is, goes Suetta is like, huge, huge grand slam win.

• 2:51:17Ben Gilbert?

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

• 2:51:29David Rosenthal?

  This is Coca-Cola playing offense.

• 2:51:32Ben Gilbert?

  Win-win.

• 2:51:33David Rosenthal?

  And it works incredibly well.

• 2:51:35Ben Gilbert?

  You can have your Coke and drink it too.

• 2:51:38David Rosenthal?

  That's right. And then GoSweata decides to play defense.

• 2:51:46Ben Gilbert?

  Yeah.

• 2:51:47David Rosenthal?

  With New Coke. So despite all the success of Diet Coke, and it was a huge success, even in 1982, 83, 84, 10-ish years into the Pepsi challenge, it's still kicking Coca-Cola's ass.

• 2:52:09David Rosenthal?

  Coke in 1982 brought in Bill Cosby as their main celebrity endorser.

• 2:52:15Ben Gilbert?

  That's right.

• 2:52:16David Rosenthal?

  And we'll also link to these in the show notes. The spots that they have him do in 82, 83, 84 are directly addressing the Pepsi challenge. It's unbelievable. Coca-Cola is a singular N of one product. Coca-Cola does not exist in a universe with other competitors. And here's Bill Cosby directly talking about Pepsi and the challenge. It's the worst thing that Coca-Cola could possibly do.

• 2:52:42Ben Gilbert?

  They were in bad shape.

• 2:52:43David Rosenthal?

  They are bleeding. And Pepsi, of course, in typical Pepsi fashion says, oh, you just signed Bill Cosby and you're talking about the Pepsi challenge in your spots? We're gonna sign Michael Jackson.

• 2:52:57Ben Gilbert?

  Just brutal.

• 2:52:58David Rosenthal?

  Obviously, both of those men, the world would later find out, are deeply problematic. But at the time, I think they had among, if not the highest, Q ratings of any celebrity in the world, Q rating being percentage of people surveyed who are familiar with the person and think highly of them.

• 2:53:19Ben Gilbert?

  Hmm.

• 2:53:20David Rosenthal?

  Yeah. But from the time that Pepsi launched the Pepsi challenge in 1975 until the new Coke disaster in 1985, the share of Pepsi grew every single year in America, while the share of Coca-Cola declined every single year.

• 2:53:35Ben Gilbert?

  And so the question is, if you're Coca-Cola, what do you do here?

• 2:53:37David Rosenthal?

  Yep.

• 2:53:38Ben Gilbert?

  What they decided to do was, after 99 years with the same formula, carefully building a brand around that logo, the taste, the secret formula, and defining this cultural object to the world, stupidity struck.

• 2:53:59David Rosenthal?

  And yes, we can't downplay how stupid this really was. But somewhat in their defense, if you're going to introduce a new taste to try and counter the Pepsi taste, which you believe is the reason why you're losing market share. It has to be a full replacement. There actually is no logical path to adding a new flavor. So a bunch of people are like, well, why didn't they just release Coke 2 or something like that? Remember Coke is a singular product. There cannot be two Cokes. It would destroy the brand. I mean, this destroys the brand too, but.

• 2:54:36Ben Gilbert?

  I don't know, David. There's Coke Zero, there's Diet Coke, there's.

• 2:54:39David Rosenthal?

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

• 2:55:04Ben Gilbert?

  But who cares? What, what, the base, like, it's just pure bragging rights.

• 2:55:09David Rosenthal?

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

• 2:55:17Ben Gilbert?

  So what did they actually do? There's a lot of people that probably aren't terribly familiar with new Coke and what actually happened.

• 2:55:23David Rosenthal?

  So Christmas of 1984, the executive team makes the decision. They're gonna do it. They're gonna replace the original Coca-Cola formula with new Coke.

• 2:55:36Ben Gilbert?

  And they've all tasted it, as has 200,000 people?

• 2:55:41David Rosenthal?

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

• 2:56:10David Rosenthal?

  So, New Year's Day, 1985, Roberto goes to see Robert Woodruff at his home. Robert can barely hear, barely speak. And according to Roberto, who is the only other person present in the room with him, it was just the two of them in the room. Woodruff gives his blessing to change the formula. However, the very next morning, Woodruff stops eating. He's hospitalized a few days later, and he ends up passing away on March 7th, 1985, one month before the new Coke announcement.

• 2:56:52Ben Gilbert?

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

• 2:56:56David Rosenthal?

  Nope, no, it was not. So, six weeks later, Friday, April 19th, Coca-Cola sends out a press invitation for the, quote, "most significant development in the company's nearly 100-year history" that they are going to hold the following Tuesday. Well, news of what is about to happen leaks over the weekend. And Pepsi takes out a full-page ad in newspapers across the country on Monday morning with the announcement reading, "The Other Guy Just Blinked."

• 2:57:36Ben Gilbert?

  After 87 years of going at it eyeball to eyeball, "The Other Guy Just Blinked." And they gave all their employees the day off to celebrate.

• 2:57:47David Rosenthal?

  Yep.

• 2:57:48Ben Gilbert?

  Which, by the way, this couldn't have been sequenced any worse because Pepsi does that. Pepsi starts giving interviews to everyone they can in the press before the announcement actually happens. And so the press all comes in, no one's tried it yet, so the executives can't even get their message out about it because everyone's just preloaded with like, "How bad are you losing that this is the case? Does it taste like Pepsi?" Because Pepsi's sort of seeded, hey, you should ask them, like, is it meant to copy Pepsi? And the message that the Coke executives have is that they're trying not to say too much. They're trying not to describe the flavor. They're trying not to compare it to Pepsi. So they're up there just looking like complete idiots with no answers that are substantive

• 2:58:33Ben Gilbert?

  while everyone is just attacking them.

• 2:58:36David Rosenthal?

  It is a unmitigated disaster. So at one point, the questioning gets so tough that Don Keough says, quote, "There's a lot of things I'd rather be doing than being here right now." This is at a press conference.

• 2:58:50Ben Gilbert?

  At a new product launch.

• 2:58:52David Rosenthal?

  Launching the biggest product in the company's history. And then the final question of the day, a reporter asks whether, assuming this new Coke thing is a success, if Diet Coke will also be reformulated. And Roberto responds, "No, and I don't assume that this is a success." It is a success.

• 2:59:15Ben Gilbert?

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

• 2:59:28David Rosenthal?

  Oh.

• 2:59:28Ben Gilbert?

  Then-

• 2:59:29David Rosenthal?

  Oh, my goodness.

• 2:59:30Ben Gilbert?

  Don Keough follows up, "I've never been as confident about a decision as I am about the one we're announcing today."

• 2:59:36David Rosenthal?

  Wow. This is so bad.

• 2:59:40Ben Gilbert?

  Which I don't think either of those things are true. That can't be true.

• 2:59:45David Rosenthal?

  No.

• 2:59:46Ben Gilbert?

  Just based on how timid they were in the messaging.

• 2:59:49David Rosenthal?

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

• 3:00:09Ben Gilbert?

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

• 3:00:27David Rosenthal?

  They would have learned something if they'd asked that question.

• 3:00:30Ben Gilbert?

  Yeah.

• 3:00:31David Rosenthal?

  So the company immediately starts getting thousands of letters and phone calls every single day. One of my favorites is a letter that reads, "My dearest Coke, you have betrayed me. We went out just last week, as we had so often, and when we kissed, I knew our love affair was over. I remember walks across campus with you discussing life and love and all that matters. I remember the southern summer nights we shared with breezes leaving beads of water hanging delicately from your body. But last week, I tasted betrayal on your lips. You had the smooth, seductive, sweet taste of a lie. You have become corrupted by money, denying your ideals."

• 3:01:15David Rosenthal?

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

• 3:01:34Ben Gilbert?

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

• 3:01:43David Rosenthal?

  Yes. They're taking away America.

• 3:01:45Ben Gilbert?

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

• 3:01:55David Rosenthal?

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

• 3:02:01Ben Gilbert?

  Well, because here's the craziest thing is they were prepared for a vocal minority to be very mad. So you're sort of in denial about all the feedback at first. You're like, yep, this is just what we thought. And then like, you get a couple of months in and you're like, wait.

• 3:02:14David Rosenthal?

  This isn't ending.

• 3:02:14Ben Gilbert?

  Does everyone hate this?

• 3:02:16David Rosenthal?

  Yes. The answer is yes.

• 3:02:20Ben Gilbert?

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

• 3:02:36David Rosenthal?

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

• 3:03:05Ben Gilbert?

  Really?

• 3:03:06David Rosenthal?

  Yeah, this is part of why they bring it back in this way.

• 3:03:10Ben Gilbert?

  Because there was an opportunity to renegotiate, hey, actually, the rights that you own are to New Coke, and then more advantageous deal that we're going to cut.

• 3:03:19David Rosenthal?

  Is Coca-Cola Classic, yeah.

• 3:03:21Ben Gilbert?

  Interesting.

• 3:03:22David Rosenthal?

  So on July 10, 1985, they announced that Old Coke is coming back as Coca-Cola Classic, and New Coke will remain on the market. And in the press conference, Don Keough says, "Some critics will say that Coca-Cola made a marketing mistake. Some cynic will say that we planned the whole thing. The truth is, we are not that dumb, and we are not that smart." I don't know, it all seems pretty dumb to me.

• 3:03:48Ben Gilbert?

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

• 3:04:08David Rosenthal?

  Yeah, it plummeted.

• 3:04:10Ben Gilbert?

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

• 3:04:23David Rosenthal?

  So there's a delicious, one might say, coda to this whole thing.

• 3:04:28Ben Gilbert?

  Well, wait, we didn't say the best part of how this ends. Within a year, Coca-Cola Classic surged past the heights of where Coca-Cola was before the whole debacle started. So the whole thing worked as an accidental publicity stunt. No advertising campaign could have ever gotten people to pay this much attention to Coke. In many ways, this actually did save Coca-Cola. After this, they started building back share. What's the song? "You don't know what you got till it's gone." This made people realize, oh, my God, I do love Coca-Cola.

• 3:05:03David Rosenthal?

  Yes, you're right. That is the most important takeaway from this. This is what finally stopped the Pepsi Challenge.

• 3:05:11David Rosenthal?

  Is Pepsi won and then after Pepsi winning and Coke losing, Coke was able to come back. But yes, they had to literally kill Coca-Cola in order to resurrect from the ashes and survive the Pepsi challenge.

• 3:05:27Ben Gilbert?

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

• 3:05:37David Rosenthal?

  Oh, no, I don't.

• 3:05:40Ben Gilbert?

  They renamed it Coke Two.

• 3:05:42David Rosenthal?

  Ah.

• 3:05:44Ben Gilbert?

  And it was not fully abandoned until 2002.

• 3:05:48David Rosenthal?

  Wow, that's how long they stuck with it.

• 3:05:51Ben Gilbert?

  Yep. So I don't know who the Coke Two fans were, but it was available for you at some point for a while.

• 3:05:57David Rosenthal?

  Somebody has hoarded a whole stash of Coke Two somewhere. It's in some bunker somewhere.

• 3:06:06David Rosenthal?

  All right. So the delicious coda to this whole thing.

• 3:06:08Ben Gilbert?

  Please.

• 3:06:09David Rosenthal?

  Remember how I set up the Warren Buffett ham sandwich thing? And I think this whole episode is probably where he decides, Jesus Coca-Cola could be run by a ham sandwich.

• 3:06:19Ben Gilbert?

  Would have been better off. But actually not, right? This whole thing was so stupid that it was actually amazing.

• 3:06:26David Rosenthal?

  What's the Bernard Arnault quote? Even when he loses, he wins?

• 3:06:29Ben Gilbert?

  Yes.

• 3:06:32David Rosenthal?

  So after this whole New Coke disaster, Coca-Cola Company's stock is in the dumps. And who comes in but Warren Buffett?

• 3:06:43Ben Gilbert?

  Perfect.

• 3:06:44David Rosenthal?

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

• 3:07:02Ben Gilbert?

  He owns about 9.5% of Coca-Cola today.

• 3:07:04David Rosenthal?

  Yep. Berkshire owns about 9.5% of Coca-Cola today. That stake is worth about $28 billion, which is a 22, 23x gross return on the $1.3 billion investment.

• 3:07:19David Rosenthal?

  Over the course of 40 years, which equates to only just over about a 8% IRR. But Coca-Cola stock kicks off these days about $1 billion a year in dividends to Berkshire. So in total Berkshire has received about $12 billion in Coca-Cola dividends. So a $40 billion total return on 1.3 billion invested. Good, but again, this is over 40 years, so that only bumps it up to about a 10% IRR on the investment.

• 3:07:56Ben Gilbert?

  Which I imagine he would have been better buying Berkshire Hathaway stock.

• 3:07:58David Rosenthal?

  He would have been better off buying the S and P 500 over that same time period.

• 3:08:04Ben Gilbert?

  That's brutal.

• 3:08:05David Rosenthal?

  Including dividends over that same time period, the S and P 500 is up about 11% annually. So the famous Berkshire Hathaway Coca-Cola investment today is actually underperforming the market. Crazy, right?

• 3:08:22Ben Gilbert?

  When I did some math on this, my first glance at it was this has been an unbelievable investment. Cause even though the equity value is, you know, it's gone up, would you say 20 something X? But over a long period of time, it's been fine.

• 3:08:34David Rosenthal?

  22, 23, yep.

• 3:08:35Ben Gilbert?

  The dividend yield is insane. They get 800 million to a billion out every year and their principal was 1.3 billion. That's like 60 to 80% dividend yield on their original investment. I'd love to park a dollar somewhere so that I could pull out 60, 70, 80 cents every single year on that dollar. That's amazing, but when you frame it the way you did.

• 3:08:56David Rosenthal?

  But 40 years is a long time.

• 3:08:59Ben Gilbert?

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

• 3:09:06David Rosenthal?

  Yep. And you know, the thing about the S and P 500, right? Is it's a rotating set.

• 3:09:10Ben Gilbert?

  Right. That's not really fair.

• 3:09:12David Rosenthal?

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

• 3:09:21Ben Gilbert?

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

• 3:09:37David Rosenthal?

  Yep.

• 3:09:37Ben Gilbert?

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

• 3:09:55David Rosenthal?

  Yep. Well, speaking of the good initial few years of the run there, there's one more fruit, shall we say, to be harvested of the Columbia Pictures acquisition that Gozetta and Kio did in the early 80s.

• 3:10:12Ben Gilbert?

  The relationship with CAA.

• 3:10:14David Rosenthal?

  Yes, and super agent Michael Ovitz.

• 3:10:18Ben Gilbert?

  Past acquired guest.

• 3:10:19David Rosenthal?

  Indeed, part of the acquired cinematic universe. So when Coca-Cola sells Columbia to Sony, Ovitz and CAA are official advisors on the deal.

• 3:10:32Ben Gilbert?

  That's right. When Ovitz tried to take it from a talent agency and movie packaging into also doing investment banking.

• 3:10:38David Rosenthal?

  Yes. And on the back of that success, expanding CAA into investment banking, Ovitz is like, why stop there? Why don't we expand?

• 3:10:49Ben Gilbert?

  Become an ad agency.

• 3:10:50David Rosenthal?

  Into ad agency land, too. So he comes back to Gozetta and Kio and says, hey, I want to pitch you guys on taking over as your ad agency from McCann Erickson.

• 3:11:04Ben Gilbert?

  Which is crazy. This is Coca-Cola.

• 3:11:06David Rosenthal?

  But Ovitz's pitch is pretty good. He's like, hey, McCann Erickson has been great for you guys. And of course, you know, there was the Hilltop ad and the Real Thing and everything over the past set of years. But hey, this one site, one sound, one sell thing is not going to work in the new media landscape. I mean, look at how badly you got your butt kicked by the Pepsi challenge in grassroots marketing. What you need are different messages that are going to resonate on different mediums. You know, we've got the cable network landscape these days. We've got ESPN, we've got sitcoms, we've got kids' shows. We've got all this different media. It's not just the whole family watching I Love Lucy anymore. You need a whole new approach for the new media landscape.

• 3:11:51David Rosenthal?

  And so you shouldn't have just one television ad. You should have a whole suite of different television ads for different audiences in different times of the year.

• 3:12:00Ben Gilbert?

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

• 3:12:20David Rosenthal?

  So he pitches Coke that CAA can make 40 ads a year for them for the same cost that McCann Erickson is making seven. And they can all stay unified under the new Coke slogan of Always Coca-Cola. So in 1992, CAA wins the business, dethrones McCann Erickson. And among the many ads that they create for Coke is a new Christmas Coca-Cola motif, not featuring Santa Claus, but instead the polar bears.

• 3:12:58Ben Gilbert?

  Yep.

• 3:12:59David Rosenthal?

  Ovitz makes the polar bears. Amazing.

• 3:13:01Ben Gilbert?

  Well.

• 3:13:03David Rosenthal?

  Yeah, I mean, he didn't make the polar bears, but.

• 3:13:05Ben Gilbert?

  Ovitz found the talent through the CAA network to make the polar bears. So I think this is basically the climax of our story. New Coke, what happens afterwards, the polar bears, these beloved ads. The rest of the 90s and 2000s, there's a lot of company building that happens, but it's just not that romantic of a story as much as Coca-Cola's first century was.

• 3:13:33David Rosenthal?

  Well, the thing that really started to happen in the 90s and then accelerated in the 2000s.

• 3:13:41David Rosenthal?

  Is the beverage market just moved away from colas and towards a whole variety of other drinks? The first battleground for this is sports drinks and Gatorade.

• 3:13:55Ben Gilbert?

  Yep.

• 3:13:55David Rosenthal?

  So in the eighties, Gatorade really came on the scene and established the market for sports drinks and Gatorade was part of Quaker Oats.

• 3:14:05Ben Gilbert?

  That's right. I forgot Quaker Oats ended up owning it.

• 3:14:08David Rosenthal?

  Yeah, way back in the day. So Coca-Cola, in response to Gatorade's success, launches Powerade in 1988. Powerade is a homegrown product at Coca-Cola. It never achieves anywhere near the same success as Gatorade. I think it maxes out market share in like the teens or low twenties. Finally, in the year 2000, this is crazy. The then CEO of Coca-Cola, Gossetta, had tragically died of lung cancer in 1997. In 2000, the CEO of Coke announces publicly a $16 billion deal to acquire Quaker Oats and Gatorade. This would have been a great deal for the company.

• 3:14:53Ben Gilbert?

  Whoa, yeah, that didn't happen.

• 3:14:55David Rosenthal?

  So he announced it without board approval. The board rejected it.

• 3:15:01Ben Gilbert?

  What?

• 3:15:01David Rosenthal?

  After the public announcement, the deal falls through and the next year Pepsi ends up swooping in, buying Quaker Oats and Gatorade. And Gatorade is like a home run for Pepsi ever since.

• 3:15:14Ben Gilbert?

  I had no idea. Wow.

• 3:15:16David Rosenthal?

  Wild, right? It's total echoes of the Frito-Lay disaster. Coke could have owned Frito-Lay's and Gatorade.

• 3:15:25Ben Gilbert?

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

• 3:15:48David Rosenthal?

  Yep.

• 3:15:48Ben Gilbert?

  The thing that is extremely clear that David you touched on is they had to diversify into what they call a total beverage company, really prompted by this backlash against soft drinks. The world sort of lost interest in first full sugar colas and then colas. And the thing that was kind of driving it, not really in the 90s, but in the 2000s and certainly the 2010s, obesity. It was clear that America was only going in one direction and sugar and processed foods, coupled with the sedentary lifestyle that a lot of Americans live, is a giant culprit of obesity. And so Coke's sort of trapped figuring out what

• 3:16:29Ben Gilbert?

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

• 3:16:47David Rosenthal?

  Yep, 39 grams.

• 3:16:49Ben Gilbert?

  So you've got this sort of hard problem where Coca-Cola itself, just that one product, that one product line, is this unbelievable business. Super high margin, low capital investment, brand is built and established all over the world. Like, it's hard to want to invest in anything else when that's your current business. And at the same time, they need to. It's existential. This product is probably going to only go downhill from here. Maybe it's got a few more years, maybe another decade of success. But 50 years from now, will this be your cash cow? No. And so how do you start diversifying without admitting that your current main product, that is the company's namesake, is bad for you? It's just bad for you.

• 3:17:34David Rosenthal?

  Yep. Tough spot to be in.

• 3:17:36Ben Gilbert?

  Not an enviable position to be in, and you can sort of see how that churns CEOs pretty quickly.

• 3:17:42David Rosenthal?

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

• 3:18:02Ben Gilbert?

  Yeah, they were pretty late to the game in waters. I mean, I think the story of the last 25 years is they sit there in a privileged position and look around and wait and see. And then when something really starts happening, then they go become active in it. And they just have to sort of hope that all the assets they have, including the Coke distribution system, makes it okay that they're not first to market on some of these things. But I don't know, sometimes it's really cost them. And the biggest, most interesting one is Monster Energy. Do you know the story behind Monster Energy?

• 3:18:34David Rosenthal?

  Well, I know what happened, but I don't know the story. I mean, they started acquiring and investing in a lot of other beverage companies through the 2000s. There was Onwalla, there was Vitamin Water, there was Fuse, and then I know Monster comes along.

• 3:18:50Ben Gilbert?

  Yep. So Monster started, do you remember Hanson's Juice?

• 3:18:56David Rosenthal?

  Yes.

• 3:18:57Ben Gilbert?

  That is Monster.

• 3:18:59David Rosenthal?

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

• 3:19:02Ben Gilbert?

  I don't have the entire story because this is the Coke episode, not the Monster episode. But at some point, the Hanson leadership realized that they did want to get into energy drinks, but their current brand was not going to be effective in doing so. And so they came up with this really crazy brand that felt dark and dangerous to counter position the cleaner aesthetic of Red Bull and ends up going great, better than they ever could have imagined. So. There were various times early in the transition from Hanson's Natural to Monster, where Coke could have bought it, but it was subscale and then there were sort of lulls in growth and it was sort of false starts in it becoming the big giant thing that it became. And also, energy drinks as a category, people weren't sure how durable it was. You

• 3:19:46Ben Gilbert?

  know, is this really going to be the thing that it became or is it a fad? So in 2012, Monster reached out to potential buyers, including Coca-Cola and Pepsi, but Coke decided against pursuing it because the price was high. Monster's market cap was $11 billion at the time.

• 3:20:04David Rosenthal?

  Oh, goodness. Wow. And what is Monster's market cap today?

• 3:20:09Ben Gilbert?

  $70 billion.

• 3:20:11David Rosenthal?

  Yeah. I'd say these energy drinks are not a fad.

• 3:20:15Ben Gilbert?

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

• 3:20:47David Rosenthal?

  Amazing.

• 3:20:48Ben Gilbert?

  Over to Coca-Cola. Coca-Cola becomes Monster's preferred global distribution partner and Monster becomes Coca-Cola's exclusive energy drink play.

• 3:20:58David Rosenthal?

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

• 3:21:02Ben Gilbert?

  Well, yeah, but Coke had to buy it. So Coke had the privilege of investing in Monster. In 2015, Coke puts in over $2 billion. At least they're getting on the train. So Coke is the largest shareholder now in Monster Energy. And you know, that deal looks pretty good. That two-ish billion that they put in is worth almost $12 billion today. So nice investment, but gosh, if you're the global total beverage company, what has the trend been of the last 15 years in beverages?

• 3:21:35David Rosenthal?

  I bet they sure wish they owned Monster.

• 3:21:38Ben Gilbert?

  Yeah. It is funny, though, like I'm talking out of both sides of my mouth here. If you think that Coca-Cola is bad for you.

• 3:21:47David Rosenthal?

  Wait till you see the energy drinks.

• 3:21:49Ben Gilbert?

  So it's not just the obesity thing. There's a trend into energy drinks that has nothing to do with health.

• 3:21:55David Rosenthal?

  Yep, it's interesting. The energy drinks are almost a call back to the original patent medicine.

• 3:22:02Ben Gilbert?

  Yes.

• 3:22:02David Rosenthal?

  It's like, yeah, this is really bad for you, but you're going in eyes wide open to that.

• 3:22:08Ben Gilbert?

  Yes, that's exactly right.

• 3:22:10David Rosenthal?

  It is serving a function for you.

• 3:22:12Ben Gilbert?

  Yep. The other funny thing that happens is Coca-Cola buys Glasse, which makes vitamin water and smart water in sort of yet another, oh, we should also be in water play. They pay about $4 billion for that. The founder then goes on to leave Coca-Cola and starts Body Armor, a sports drink that I think is coconut water based, a little bit more sugary, turns around, sells that back to Coca-Cola for $5 billion.

• 3:22:42David Rosenthal?

  For a startup, Body Armor did great. Gatorade still has 60% plus of the market share of sports drinks. Doesn't make a dent in PepsiCo's number one position in sports drinks.

• 3:22:56Ben Gilbert?

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

• 3:23:12David Rosenthal?

  Yep. Coke Zero, 2005, taste infringement.

• 3:23:16Ben Gilbert?

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

• 3:23:24David Rosenthal?

  Yeah, it is sort of ironic that the last 20 years have been about a metamorphosis into a total beverage company. And it's Coca-Cola, Diet Coke, and Coke Zero that are leading the way.

• 3:23:38Ben Gilbert?

  Yes. So that was a lot of stuff that happened in the 2000s. The 2010s, they did acquire more brands. They continue to grow the total beverage company's portfolio. They did a whole bunch of stuff that we're not going to spend too much time on in this episode, rehabbing their bottler operations, bringing a lot of it back in-house, making sure the quality and the efficiency was up to where they wanted to have it, and then spinning it back out. And so a lot of these bottlers came on balance sheet, then went back off balance sheet to new owners. They encouraged consolidation among their bottlers. They finally got rid of the last little element of the parent bottlers. And so the story for people who follow Coke as a company or a stock is a lot around

• 3:24:24Ben Gilbert?

  how good of a job are they doing restructuring all the bottlers? And it seems like they're mostly through this whole refranchising thing that they're doing. So that brings us to the business today.

• 3:24:35David Rosenthal?

  Yeah. And the business today, the biggest piece is a part of the story that we basically haven't talked about since World War II, is international. Coke is a global company.

• 3:24:47Ben Gilbert?

  Yeah.

• 3:24:47David Rosenthal?

  Most of the revenue and profits do not come from the United States, even though all the storylines that we've been talking about are the United States.

• 3:24:56Ben Gilbert?

  But I think when people look at the Coca-Cola that they're holding, they think about the United States.

• 3:25:02David Rosenthal?

  Right.

• 3:25:03Ben Gilbert?

  Maybe that's not true. Maybe I'm, I live here and so I'm ethnocentric about that, but I'd be curious if Coke feels like America to you, if you're a listener and you don't live here.

• 3:25:12David Rosenthal?

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

• 3:25:23Ben Gilbert?

  Produces a lot of profits locally.

• 3:25:25David Rosenthal?

  Yep. So, yeah, it is a local business wherever it is.

• 3:25:30Ben Gilbert?

  All right. So let's walk through that. Here's Coca-Cola by the numbers today. So first of all, brands. For a long time, the thought was just build the total beverage company and more brands is better. So let's just keep going. They got over 500. Around 2020, they did a big slimming and went down to about 200. And ones that they got rid of were Tab, Zico, Adwalla, Honest Tea, Vault. Those are probably some of the ones you know that they got rid of. They do have 30 brands that do over a billion dollars in revenue. It's kind of crazy that it's a house of brands that has that many billion dollar brands. 15 of them were created organically, like Fanta and Sprite that we didn't talk about in this episode.

• 3:26:14David Rosenthal?

  That's right. Ah, we didn't talk about Sprite. Do you know the history behind Sprite? Do you know what Sprite really is?

• 3:26:21Ben Gilbert?

  No, not really.

• 3:26:22David Rosenthal?

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

• 3:26:33Ben Gilbert?

  Really?

• 3:26:34David Rosenthal?

  Yep, that they brought over to America and rebranded it as Sprite.

• 3:26:37Ben Gilbert?

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

• 3:26:47David Rosenthal?

  Yep, that's right.

• 3:26:48Ben Gilbert?

  All right. Those are two of the 15 that were created organically in-house. Three of them they bought that were already doing over a billion in acquisition. And then the remaining 12 of the $30 billion brands that they have were small and Coke grew them to over a billion in revenue underneath their umbrella. So think Minute Maid, Fair Life, and Vitamin Water. And just to share some of the other brands they do own, Powerade, Minute Maid, Dasani, Vitamin Water, Coke Zero, Schweppes,

• 3:27:15David Rosenthal?

  Ah!

• 3:27:16Ben Gilbert?

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

• 3:27:39David Rosenthal?

  Hmm, Fanta Clear Lemon alcoholic. All right. Has a real ring to it.

• 3:27:44Ben Gilbert?

  Fresca, Body Armor, Fairlife and Core Power, the dairy products, and Fuse Tea. And here's one that is a little bit of a head scratcher. Costa Coffee.

• 3:27:58David Rosenthal?

  Yes, that they bought for quite a few billion dollars a couple of years ago, right?

• 3:28:03Ben Gilbert?

  And it's a physical retail. It's a coffee house in the UK.

• 3:28:07David Rosenthal?

  Yeah, it's like a Starbucks competitor.

• 3:28:08Ben Gilbert?

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

• 3:28:21David Rosenthal?

  Wow.

• 3:28:23Ben Gilbert?

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

• 3:28:28David Rosenthal?

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

• 3:28:38Ben Gilbert?

  That's right, that Pepsi was the bottler that made the CPG version of the Frappuccino.

• 3:28:43David Rosenthal?

  Yep, huge success for both companies.

• 3:28:45Ben Gilbert?

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

• 3:28:57David Rosenthal?

  Wild.

• 3:28:59David Rosenthal?

  That is, what, like a quarter of the world's population? If everybody were having just one?

• 3:29:04Ben Gilbert?

  Isn't that crazy?

• 3:29:06David Rosenthal?

  Definitely not evenly spread.

• 3:29:07Ben Gilbert?

  Yes.

• 3:29:08David Rosenthal?

  There are a lot of power users of Coke products out there.

• 3:29:11Ben Gilbert?

  Yes, but Coca-Cola's estimate is that there are 65 billion servings of beverages consumed every day.

• 3:29:19David Rosenthal?

  Does that include water or no?

• 3:29:20Ben Gilbert?

  Yeah, the human race takes 65 billion drinks a day of something.

• 3:29:26David Rosenthal?

  So what's that? I guess that's eight drinks per person per day?

• 3:29:30Ben Gilbert?

  Yes. So, you know, by that calculation, they've got a long way to go. Huge market ahead of them, even if they stay just in beverages.

• 3:29:36David Rosenthal?

  There you go.

• 3:29:37Ben Gilbert?

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

• 3:29:57David Rosenthal?

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

• 3:30:00Ben Gilbert?

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

• 3:30:05David Rosenthal?

  Hmm, that's actually bigger than I would have thought in the US.

• 3:30:08Ben Gilbert?

  Yeah. Still very meaningful.

• 3:30:11David Rosenthal?

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

• 3:30:15Ben Gilbert?

  Yep, I bet that's totally right. Okay, so the interesting thing is if you start to look at employees, so revenue $47 billion at Coca-Cola Company out of $175 billion in total revenue by the system. And this is as reported by Coca-Cola in their proxy statement. There are 70,000 employees of Coca-Cola. But again, if you look at the system, there are 700,000 employees. So let's look at those last two numbers together because that's a 10x difference in employee count. A full 47 of the $175 billion in revenue goes to the Coca-Cola Company. 27% of the revenue with just 10% of the total employees.

• 3:30:58Ben Gilbert?

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

• 3:31:15David Rosenthal?

  Yep. And then there's the fountain customers, the retail partners, the McDonald's of the world. Definitely Coca-Cola is at a better return on invested capital standpoint than running restaurants.

• 3:31:29Ben Gilbert?

  The Coca-Cola Company just needs to sell syrup and spend marketing dollars to sell the dream. It's a beautiful position to be in.

• 3:31:38David Rosenthal?

  Yes, it is.

• 3:31:39Ben Gilbert?

  Earnings on that $47 billion, they generate $10.6 billion of net income. The net income margins tend to average around 23%. Gross margins average about 60%. Historically, it was as high as 70%. So almost as good as a software business, but not quite. But for a physical goods business, it's kind of unbelievable that they have 60% gross margins. Then when you look at the revenue mix on products, this kind of gets to like, what is the company today? 69% of revenue comes from sparkling soft drinks. So as much as they are in water and milk and tea and juice and sports drinks, the bulk of this business is selling soda.

• 3:32:24Ben Gilbert?

  40% of all volume is trademark Coca-Cola.

• 3:32:29Ben Gilbert?

  Which is just Coke, Diet Coke, Coke Zero and the caffeine-free and flavored variants. Forty-seven percent of the volume is the Coke family.

• 3:32:39David Rosenthal?

  Wow.

• 3:32:40Ben Gilbert?

  So I kind of continue to maintain this mentality of they keep trying to get into other stuff, but then they're always a little bit like, geez, I know we should be getting into this other stuff, but it's not as good as our original thing. It's not as good of a business. It's not as unique of a brand. And I also think they're kind of like limping in to a lot of these other categories. They're not making a giant early bet on things that become the next big beverage fad. They're trying to watch and see how it plays out and then jump in.

• 3:33:12David Rosenthal?

  Yeah, whether it's sports drinks or energy drinks.

• 3:33:14Ben Gilbert?

  Exactly. Market cap is $300 billion, so huge company, not by Mag7 tech standards, but massive, very valuable company. You'll note, David, they did not achieve Charlie Munger's thought experiment of $2 trillion, and they are very unlikely to get there by the 150th birthday in 2036, which is the timeframe that Charlie used.

• 3:33:36David Rosenthal?

  Indeed.

• 3:33:38Ben Gilbert?

  Growth is only 3% or 4% a year. If you look since 1998, in the post-Gosweta years, it averages out to about 3% to 4% growth. So I think fair to say anemic when you're describing their growth in recent years. Yeah, I think that's why we focused the bulk of the episode on the pre-1998 Coca-Cola, because that's really where they built this unbelievable thing that frankly saturated the world.

• 3:34:03David Rosenthal?

  Yeah, this incredible business with all these innovations and sort of pillars of what became one of, if not the greatest, brand in American history. But yeah, as we said, back starting at the Pepsi Challenge days, I think there's a strong argument that Pepsi was the more interesting company.

• 3:34:21Ben Gilbert?

  And over the last 50 years, soft drinks as a category have just gotten a lot more competitive. A stat that I saw was back in 1948, Coca-Cola said that they had 60% market share of US soft drinks. 60% in post-World War II America. In soft drinks today, they have 21%. Pepsi has 10%. And I think there's a lot of things in soft drinks. So if you just look at carbonated, Coca-Cola does have 47% market share and Pepsi has 19%. But in soft drinks, I mean, that category has just gotten a lot more competitive and Coke has lost share.

• 3:34:56David Rosenthal?

  Yeah.

• 3:34:57Ben Gilbert?

  All right. Should we move into analysis?

• 3:34:58David Rosenthal?

  Yes, let's do it.

• 3:35:00Ben Gilbert?

  All right. So instead of playbook this time, because I had just something kind of funny written down for playbook, which is this company really only does two things. Manufacture syrup out of some unique intellectual property that they own and spend money on marketing.

• 3:35:16David Rosenthal?

  Correct.

• 3:35:17Ben Gilbert?

  I think the more interesting playbook this time is a brief review of why Coca-Cola worked.

• 3:35:22David Rosenthal?

  Yes. Love it. Let's do it. Well, first, you were talking about it a minute ago with the 64 billion daily thirst-quenching occasions around the globe.

• 3:35:35Ben Gilbert?

  Nice market to get to play in.

• 3:35:37David Rosenthal?

  Yeah, they're just in a giant market. Everybody in the world gets thirsty and everybody in the world likes to have some variety in what they drink besides just water.

• 3:35:48Ben Gilbert?

  Yep.

• 3:35:48David Rosenthal?

  Full stop.

• 3:35:49Ben Gilbert?

  Full stop. And in that category, they built something that for many years, the better part of a century, people felt was N of one.

• 3:35:57David Rosenthal?

  Yes.

• 3:35:58Ben Gilbert?

  They were the original. They were the real thing. And it took a long time for that to get eroded. And honestly, if I'm looking at sodas, it's still the real thing. It's just that there's a lot of other things, too.

• 3:36:10David Rosenthal?

  And that's due to both a multi-decade, 100-year-plus investment in building the brand and some of the greatest brand marketing of all time.

• 3:36:22Ben Gilbert?

  Yep. Three, World War II and having a unbelievably paved path for them to expand globally and then also kind of shut the door behind them on global expansion.

• 3:36:33David Rosenthal?

  Yep. And I really do think continuing the second-party, locally, entrepreneurially-owned franchise bottling system internationally was a huge contributor to that.

• 3:36:46Ben Gilbert?

  Yeah, so much of Coke's success. I mean, I keep going back to that moment earlier where bottlers enabled them to scale so much faster than not having bottlers. And even if you look at all the beautiful business dynamics of you don't have to deal with that lower margin stuff, you don't have to deal with the high headcount stuff, the high complexity stuff, the high overhead, the lower returns on invested capital, even if it's just about speed to market.

• 3:37:10David Rosenthal?

  Yes.

• 3:37:10Ben Gilbert?

  They got to blanket America and then blanket the world very quickly.

• 3:37:15David Rosenthal?

  Before anyone else.

• 3:37:16Ben Gilbert?

  With the thing that people pick a supplier once, whether the restaurant's picking the supplier or people are picking their favorite beverage, they pick it and then it's over. And they sort of had this unbelievably fast way to saturate in something that was a race. It turned out soft drinks were a category that was a race and who's going to get to global scale first.

• 3:37:37David Rosenthal?

  Yes. And it was all figured out by accident because of the worst business deal in history.

• 3:37:42Ben Gilbert?

  As Steve Jobs always says, you can only connect the dots looking backwards.

• 3:37:46David Rosenthal?

  That's right. The $1 contract.

• 3:37:48Ben Gilbert?

  Of course, it is a highly addictive substance that is also super enjoyable to drink and triggers every reward center you have, not nearly as much as when it had cocaine in it, but plenty of reward centers from the bubbles, the sugar, the caffeine, the cold refreshment, everything about it.

• 3:38:06David Rosenthal?

  I've been fired up doing this episode.

• 3:38:08Ben Gilbert?

  The extrinsic marketing capability of associating it with everything good in your life, with happiness, with Christmas, with your family, with your favorite athletes. It's just amazing lifestyle marketing.

• 3:38:20David Rosenthal?

  Yep.

• 3:38:21Ben Gilbert?

  And then lastly, I will say, New Coke. It taught us to love again. I mean, it made us fall back in love with Coca-Cola. I think Coca-Cola would be worse off today if they didn't go through the New Coke moment, which is crazy to say, but I guess we don't have the counterfactual. But if you just look at the data on the resurgence in Coke afterwards, you couldn't have come up with a better marketing stunt.

• 3:38:44David Rosenthal?

  Totally agree. I disagree with both sides of the Don Keough statement that we weren't that dumb and we weren't that smart. They absolutely were that dumb and they absolutely were that smart.

• 3:38:55Ben Gilbert?

  Yep. Yep.

• 3:38:57David Rosenthal?

  I've got two more that I would add.

• 3:38:59Ben Gilbert?

  Great.

• 3:39:00David Rosenthal?

  One, I think Pepsi was great for Coke. I think neither Pepsi nor Coke would be what they are today or be as great a product and company as they are today if it weren't for the other one.

• 3:39:12Ben Gilbert?

  Definitely.

• 3:39:12David Rosenthal?

  I mean, the Pepsi challenge is what made Pepsi, because there was a challenge to Coke. And then all of Coke's response, they made each other better.

• 3:39:21Ben Gilbert?

  Yep.

• 3:39:22David Rosenthal?

  And then the last one I would add is that other than software and technology products, this is the first real, physical product I think we've ever studied on Acquired, where you can have both a low selling price and high margins.

• 3:39:43Ben Gilbert?

  Oh, that's interesting.

• 3:39:45David Rosenthal?

  And that's super important when it's also a game of scale and global scale, because it lets you sell this affordable luxury or pause that refreshes to everybody in the world. More or less, everybody in the world can afford a Coca-Cola. And also, the Coca-Cola company makes great margins on those selling prices.

• 3:40:10Ben Gilbert?

  It's a lot of volume, and that's incredibly cheap ingredients. That's the other.

• 3:40:15David Rosenthal?

  Yes.

• 3:40:18Ben Gilbert?

  That's our why Coke worked.

• 3:40:19David Rosenthal?

  That's our tableau of why Coke worked so well.

• 3:40:22Ben Gilbert?

  Yes.

• 3:40:23David Rosenthal?

  All right, powers.

• 3:40:24Ben Gilbert?

  For new listeners to the show, and there are many of you, thank you so much to all of you who shared the Trader Joe's episode with friends and family. We saw tens of thousands of new listeners come and join us, so welcome to the party. This section, power, is gleefully ripped from a book called Seven Powers by our friend, Hamilton Helmer. And in it, he examines what of these seven possible powers is it that enables a business to achieve persistent differential returns, or put another way, to become more profitable than their nearest competitor and do so on a durable, sustainable basis? And the seven are counterpositioning, scale economies, switching costs, network economies, process power, branding, and cornered resource.

• 3:41:09David Rosenthal?

  Well, it definitely wasn't counterpositioning, because Coke is the real thing.

• 3:41:14Ben Gilbert?

  Was the first.

• 3:41:15David Rosenthal?

  Pepsi, master of counterpositioning. Coke is the incumbent.

• 3:41:18Ben Gilbert?

  Yeah. Coke was mostly getting counterpositioned.

• 3:41:22David Rosenthal?

  Yes.

• 3:41:23Ben Gilbert?

  So this is a business of scale economies. Everything about this business is scale economies. The amount that they can amortize their advertising over, it's just an amortization scale economies business, period. They can manufacture and distribute things cheaper than you can to way more people than you can, and good luck catching up. And like, they're going to have another 100 years in them because of that advantage that they've built up.

• 3:41:47David Rosenthal?

  Yep, all of the things.

• 3:41:49Ben Gilbert?

  Yep.

• 3:41:49David Rosenthal?

  And perhaps the most important might be the first thing you said of amortizing their advertising spend over the life of the company. They can afford to just pour massive, massive, massive sums into marketing. This is why it was such a big deal when in the 70s, with the Pepsi challenge, Pepsi started outspending Coke in marketing. If you were really astutely paying attention to the dynamic, that should have tipped you off of like, oh, Coke is in big trouble relative to Pepsi. Like, if Pepsi can afford now to make the investment to spend the same or more in marketing dollars, they're going to catch up.

• 3:42:24Ben Gilbert?

  All right, so while we're there, let's do branding. Because I think this is so interesting. Normally, brand power is measured by the amount, if you provide someone with two identical things, how much more are they willing to pay you? And that delta, you know, the Tiffany over the generic piece of jewelry is how you quantify their brand power. Coke doesn't sell things in general that are more expensive. Pricing power isn't really a thing that's exercised in this industry, if it exists at all. Coke clearly has branding power, but rather than taking price, they keep price low and use their latent brand power in other ways.

• 3:43:06David Rosenthal?

  Yeah.

• 3:43:08Ben Gilbert?

  I mean, the funny thing is when they sell a Coke, they're selling a billboard. And so there's this flywheel element too, where they want to sell as much Coke as possible, not just to keep their manufacturing costs low, because it's a economies of scale thing, but also because one more Coca-Cola floating around in the world just reinforces the brand.

• 3:43:27David Rosenthal?

  Yeah. I would say, not that I disagree with anything you're saying, this just reinforces for me, this business is all about scale economies. It's all the pursuit of scale.

• 3:43:38Ben Gilbert?

  I think this is the best interplay we've ever seen between branding power and scale economies, where the way that they've built a lot of the brand that they have is through their scale economies and they sort of go back and forth.

• 3:43:51David Rosenthal?

  Yep.

• 3:43:52Ben Gilbert?

  I'll tell you, you can't measure their brand power through how much more expensive it is than Pepsi, because that doesn't exist. You can sure measure it, though, with the outcry against New Coke.

• 3:44:04David Rosenthal?

  Yes. That was a one-time experiment that most brands never run, with good reason.

• 3:44:12Ben Gilbert?

  Switching costs? I don't think I have any real switching costs. Sometimes I do have to drink a Diet Pepsi or a Pepsi Max and like, it's fine. It's not my preferred drink, but it's fine.

• 3:44:22David Rosenthal?

  Yep.

• 3:44:23Ben Gilbert?

  Network economies? None?

• 3:44:25David Rosenthal?

  No.

• 3:44:26Ben Gilbert?

  Process power? Maybe, but it's hard to discern from the outside.

• 3:44:31David Rosenthal?

  And then the last one, cornered resource. Okay, what's your opinion?

• 3:44:36Ben Gilbert?

  Of course, it's the formula.

• 3:44:40David Rosenthal?

  You really think yes?

• 3:44:41Ben Gilbert?

  But I'll tell you, it's not the formula itself. It is all of the meaning imbued into the formula that is actually a part of their branding power.

• 3:44:52David Rosenthal?

  Yeah.

• 3:44:52Ben Gilbert?

  But if Pepsi said, "We broke into the vault and we got the Coca-Cola formula and we're releasing something called Pepsi C and that is identical to Coke," something would go with it. There would be some amount of value transferred from Coke to Pepsi.

• 3:45:07David Rosenthal?

  Okay, yeah, some.

• 3:45:08Ben Gilbert?

  The public gives meaning to the formula, even if you can synthetically create something that tastes exactly the same as Coca-Cola.

• 3:45:16David Rosenthal?

  Yep. Okay, so I'm gonna take the exact opposite position on this argument.

• 3:45:21Ben Gilbert?

  I know. You've been texting me all week that you think that the whole secret formula thing is a red herring.

• 3:45:26David Rosenthal?

  Yeah, I think there is, today, absolutely no value to the formula. There's a, not just a thought exercise, there's an actual conversation in the appendix of For God Country and Coca-Cola. Mark Pendergrass, in his research, found John Pemberton's original formula from 1886 for Coca-Cola. He found it, he took it to his contacts at the Coca-Cola company and said, "I've got it. What do you guys think?" And they said, "Well..." Okay, you publish it. Let's say somebody gets a hold of this formula. What are they gonna do with it?

• 3:46:02David Rosenthal?

  Make a drink? Okay, great. How are you gonna distribute it? Okay, well, but let's say you can figure out distribution. Well, what are you gonna call it? Are you gonna call it Coca-Cola? Well, of course, we'll sue you for that. How are you gonna brand it? How are you gonna invest in marketing? Basically, how are you gonna get the scale economies to do what we do? And the answer is, you're not going to. And to your point about Pepsi.

• 3:46:25Ben Gilbert?

  Pepsi's got a better formula.

• 3:46:28David Rosenthal?

  Well, Pepsi has a better Formula One, but there actually was a case. Somebody, a former Coca-Cola employee, stole the formula and tried to sell it to Pepsi. This actually happened, and Pepsi turned them into the FBI. What is Pepsi gonna do with the formula? Pepsi's not gonna market the Coca-Cola formula. These are big multinational corporations.

• 3:46:49Ben Gilbert?

  Yep. You know, if anything, what you've convinced me of is that the bottlers are actually a cornered resource.

• 3:46:54David Rosenthal?

  Hmm.

• 3:46:55Ben Gilbert?

  Those bottlers have great distribution, and they're not bottling for anyone else.

• 3:46:59David Rosenthal?

  Yep, great point.

• 3:47:00Ben Gilbert?

  Coke handed them a license to print money, and they're doing it.

• 3:47:03David Rosenthal?

  Yep.

• 3:47:04Ben Gilbert?

  I actually, I'm very curious. Can you switch teams as a bottler? Probably not.

• 3:47:08David Rosenthal?

  I guess it's probably legal, but I bet nobody does.

• 3:47:11Ben Gilbert?

  Yeah, fascinating.

• 3:47:13David Rosenthal?

  All right, quintessence.

• 3:47:16Ben Gilbert?

  So, listeners, this is something we added earlier this year where we really try to come up with something to land the plane. What is our takeaway from the episode? And, you know, we already laid out, why did Coca-Cola work? So this is just David and my opportunity to kind of come up with a quippy sentence or three that is the thing that's on our mind as we're leaving the episode. But first, David, we have to come back to the question. Could Coca-Cola be run by a ham sandwich?

• 3:47:45David Rosenthal?

  I think after studying all this history, I have to agree with Warren.

• 3:47:52Ben Gilbert?

  Whoa, really?

• 3:47:54David Rosenthal?

  And Bill, I think it could be. Now, there have been great, incredible CEOs in Coca-Cola's history, Candler, Woodruff, Gosweta. All of them have added on to what the Coca-Cola company is, I think. But if you took just Coca-Cola, yeah, a ham sandwich could run it. And in fact, it's proven by the new Coke debacle.

• 3:48:21Ben Gilbert?

  All right. So I disagree. I think there were definitely periods in history, yes, but in 1985, no. I mean, Coke had been losing share to Pepsi for 15 straight years. They did actually need active management to do something. And sort of the same thing with the obesity crisis in the 2000s. I mean, Coke effectively bumped up against the edge of the market of humans that it could possibly expand to. And they did actually need a different company strategy. Now, whether that has been executed well is a different thing. I mean, it's only grown 3%, 4% over whatever, the last 27 years. So if the criteria is run a high-growth, successful, great place to put money versus all the other places you could

• 3:49:04Ben Gilbert?

  put money, company, no, they haven't succeeded in doing that. But I mean, you do have to do something rather than just be flat to anemic growth or decline.

• 3:49:13David Rosenthal?

  Those are very fair points. Points taken. I would still pose the question to you. What is the single biggest revenue driver within the Coca-Cola company today?

• 3:49:25Ben Gilbert?

  Trademark Coca-Cola.

• 3:49:27David Rosenthal?

  The real thing, baby.

• 3:49:28Ben Gilbert?

  Yep. Okay. But on to quintessence. I have two.

• 3:49:33David Rosenthal?

  Great.

• 3:49:33Ben Gilbert?

  One is, it's a system, not a company.

• 3:49:36David Rosenthal?

  Yep.

• 3:49:37Ben Gilbert?

  That's new for us. I know franchises exist, but this is sort of a different thing. And I'm interested in studying more sort of systems where it's multiple companies interrelated. And two is if you really boil it down, the Coca-Cola company in a nutshell, it is figuring out how to incentivize partners to sell your product. And everyone is incentivized. The bottlers are massively incentivized, the retailers, there's great margin there for you. The soda fountain operators, the restaurant, the billboard owners, we didn't talk about this, but in the Great Depression, when no one was buying billboard space, the billboard owners didn't want empty, blank, sad billboards.

• 3:50:21Ben Gilbert?

  So for free, they put Coca-Cola ads up on it. They were the preferred thing to a white wall to have there. I mean, just everyone in the entire ecosystem is incentivized to sell Coca-Cola on behalf of the Coca-Cola company. And that is durable.

• 3:50:40David Rosenthal?

  Yes, Robert Woodruff had a mantra, an official motto within the company during his reign as company boss, that everyone who has anything to do with Coca-Cola should make money. And there you go. That is a great quintessence.

• 3:50:57Ben Gilbert?

  Yep.

• 3:50:58David Rosenthal?

  Mine that I would add, repetition works. We've studied a lot of brands on acquired. It's become a core part of what we do, especially with the luxury industry. But in the luxury industry, they're always looking for the new spin and changing. And there are elements of repetition. Hermes is always Hermes, but it's always whimsical. It's always something new. Pierre Alexi always has a new theme every year. With Coke, it's a story of 150 years of always delicious, always refreshing. And yes, they change it up, but it's the same core thing.

• 3:51:38Ben Gilbert?

  It's a core human need. You want something delicious and refreshing, no matter who you are or when you are.

• 3:51:44David Rosenthal?

  Yep, that's my quintessence.

• 3:51:46Ben Gilbert?

  Great.

• 3:51:47David Rosenthal?

  All right. Well, cheers.

• 3:51:50Ben Gilbert?

  It's a sugar water company, David. They make a drink of sugar water that's not good for you. And they built one of the most incredible brands of all time.

• 3:52:00David Rosenthal?

  But it's always delicious and always refreshing.

• 3:52:02Ben Gilbert?

  It's not good for us. It's not good for the planet. And it's delicious and refreshing.

• 3:52:08David Rosenthal?

  Are you trying to tell me that I could sell sugar water for the rest of my life, or I could come with you and change the world?

• 3:52:15Ben Gilbert?

  I promise no world changing, but I do have some trivia.

• 3:52:19David Rosenthal?

  Great.

• 3:52:20Ben Gilbert?

  A thing we didn't cover on the episode, in addition to rising to the Supreme Court and generals, soon to be presidents, you know, helping the success of the company. In 1980, the government passed an amendment to federal antitrust law that exempted the soft drink industry. So Coke and Pepsi could actually grant exclusive territories to their bottlers, which you might have been wondering, how do you get this local monopoly?

• 3:52:45David Rosenthal?

  Oh yeah. How is this legal?

• 3:52:46Ben Gilbert?

  It's like, I get to serve all of New York and all of New Jersey or whatever. Yeah, they actually have a federal exemption from antitrust law to be able to grant monopolies.

• 3:52:55David Rosenthal?

  Wow.

• 3:52:56Ben Gilbert?

  Trivia number two, the Hartsfield-Jackson Airport in Atlanta.

• 3:53:02David Rosenthal?

  Yep.

• 3:53:02Ben Gilbert?

  Huge airport for anyone who's ever been there. That land was once owned by the Coca-Cola Company. Same actually with the Atlanta Zoo.

• 3:53:10David Rosenthal?

  I mean, the Coca-Cola Company does a lot of international business, so they need a big airport there.

• 3:53:16Ben Gilbert?

  Yes, very true. And here's my last fun piece of trivia. Around 1930, when they were really freaked out about whether or not they'd have the ability to import the coca leaves to the United States to do the refining here, they actually leased a secret cocaine refining facility in Peru.

• 3:53:32David Rosenthal?

  Yes, in Peru.

• 3:53:34Ben Gilbert?

  They spun the factory up. It was working. The employee manufactured Coca-Cola there and the extracted cocaine that came off as a byproduct, they had a big amount of it and they were trying to be a good employee to the company and earn some money with it. So they sold 42 pounds of cocaine to a narcotics broker in Paris and the sale proceeds went in the Coca-Cola bank account. And so there's this crazy period where Coca-Cola is freaking out, like, we gotta hide this. This is not good.

• 3:54:02David Rosenthal?

  So this employee wasn't trying to like steal cocaine and sell it on the black market and make money. He was trying to be a good employee and increase profits for the company.

• 3:54:13Ben Gilbert?

  That's right. And the Hoover administration would eventually grant that exception so they could refine the cocoa leaves here in the US. But that was just before.

• 3:54:22David Rosenthal?

  Wow. I have one piece of trivia. Do you know what other very large American company Coca-Cola helped put into business and was their primary and I think sole customer for the first few years of their life?

• 3:54:39Ben Gilbert?

  No.

• 3:54:40David Rosenthal?

  Monsanto.

• 3:54:41Ben Gilbert?

  Really?

• 3:54:42David Rosenthal?

  So Monsanto started as a saccharin manufacturer.

• 3:54:47Ben Gilbert?

  Ah.

• 3:54:48David Rosenthal?

  And Coca-Cola was their first major customer and bought their entire saccharin supply.

• 3:54:55Ben Gilbert?

  Was TAB saccharin sweetened?

• 3:54:57David Rosenthal?

  No, this is way before. I think it was just that Coca-Cola was probably experimenting with saccharin. I don't know that they actually used it, which is odd, but yeah, this is right around the turn of the century, early 1900s. Coca-Cola was Monsanto's very first customer.

• 3:55:14Ben Gilbert?

  Trying to create some mind stickers out there.

• 3:55:18David Rosenthal?

  Oh, God.

• 3:55:20Ben Gilbert?

  All right. Carve outs?

• 3:55:22David Rosenthal?

  All right. Carve outs.

• 3:55:24Ben Gilbert?

  Great.

• 3:55:25David Rosenthal?

  Oh, boy. Well, on that theme, I guess, of diets, I recently redid my home gym and I got a new piece of workout gear that I'm really enjoying. Have you ever heard of a ski erg?

• 3:55:43Ben Gilbert?

  Oh, yeah.

• 3:55:44David Rosenthal?

  This thing is great. I'm neither a skier nor a rower, but it is a vertical rowing machine made by Concept2, which is the main like rowing erg machine manufacturer, but it's vertical. It's attached to your wall. It takes up no space and the movement that you do is like cross-country skiing. You reach above you, you grab the handles and then you pull down like you're cross-country skiing. It's great because my primary form of exercise these days is running. And on my off days, I've been looking for like, okay, I want another thing I can do that's not my lower body. So I was looking at a rowing machine, but like, oh, it takes up a lot of space. I don't have a lot of space down in my gym. I went with the ski. I'm very happy with it.

• 3:56:24Ben Gilbert?

  I'm with you for multiple days ahead of the Super Bowl, so I'll have to give it a shot when I'm staying at your house.

• 3:56:29David Rosenthal?

  And then one more bonus carve out in my ongoing video gaming saga with my older daughter. I downloaded Smash Brothers Ultimate to her Switch, and so we've been playing that. She really likes to be a princess, of course, and to quote unquote, "fight the bunny." She calls Pikachu the bunny. So she's always like, "I want to fight the bunny."

• 3:56:52Ben Gilbert?

  Pikachu is bouncy.

• 3:56:53David Rosenthal?

  He kind of looks like a bunny. You know, I get it.

• 3:56:57Ben Gilbert?

  Awesome. I've got three. Friend of the show Claude for reading leases.

• 3:57:03David Rosenthal?

  Oh, nice.

• 3:57:05Ben Gilbert?

  I just signed a lease on Acquired North, moving out of the basement and getting a studio next year.

• 3:57:13David Rosenthal?

  And big news.

• 3:57:14Ben Gilbert?

  It didn't warrant real lawyers looking at it, and so I gave it a pass and I asked Claude, is there anything that's wrong in here? And it flagged a few things for me that I found quite helpful. So I don't know if anyone's told you this yet, but I think AI is the future and it was quite helpful for me.

• 3:57:29David Rosenthal?

  Do you want to sell sugar water for the rest of your life or do you want to?

• 3:57:33Ben Gilbert?

  That's right. Two is my current favorite running shoes are the Nike Vomero Plus, which seems to be the replacement for my previous favorite, the Invincible line. So big fan of the Vomero Plus. And then the music I'm digging right now is an artist called Hermanos Gutierrez. My good friend Andy Sparks recently stayed at my house and put this on while we were hanging out one morning and it is fantastic chill music. So I highly recommend it.

• 3:58:01David Rosenthal?

  Excellent.

• 3:58:02Ben Gilbert?

  Well, with that, we've got some thank yous for folks who helped us with this episode. So first, as always, to Arvind Navarathnam at Worldly Partners for his great write-up on Coca-Cola, which is linked in the show notes. And actually, Arvind was very close with Charlie Munger when he was alive. And so he is the one who brought out that thought experiment that I did not know about, or I guess remember from the first time I read Poor Charlie's Almanack.

• 3:58:26David Rosenthal?

  Yeah, when you brought it up, I remembered it, but I had completely forgotten.

• 3:58:30Ben Gilbert?

  Same. To Bill Combs, who is the past president of the Coca-Cola Collectors Club, the largest collectors' club in the world. But it's great. I talked to Bill and he had all this amazing old Coca-Cola memorabilia on the wall behind him, drugstore signs and stuff. To Simeon Segal from Guggenheim Partners, a retail and consumer brands analyst who helped me think through the nuances of how brand power shows up in financials. And of course, to all the other past Coca-Cola folks who spent time with us, helping to make sure that we got the story right.

• 3:59:00David Rosenthal?

  Yes. And one more big thank you from my end to John Sculley, steward of the Pepsi Challenge.

• 3:59:08Ben Gilbert?

  That's right.

• 3:59:09David Rosenthal?

  Thank you so much, John, for giving us those wonderful stories.

• 3:59:14Ben Gilbert?

  If you like this episode, go check out our episodes on Berkshire Hathaway, Standard Oil, Rolex, or Trader Joe's. And as we head into the holiday season, feel free to share this with anyone who wants to understand the origin behind the modern Santa Claus.

• 3:59:30David Rosenthal?

  Of course.

• 3:59:31Ben Gilbert?

  After this episode, go check out ACQ2, our other podcast feed, available in any podcast player if you're Jones & For More Acquired. And if you're not already on it, seriously, join our email list. This episode was selected by folks who are on our email list, and we can't wait to ask you to vote again for episodes in our spring season. You can join at acquired.fm/email and see the new overhaul that we just did. So each monthly email will now have episode summaries, our big takeaways, and exclusive photos from the research process. Come join the Slack, acquired.fm/slash/Slack, hang out and discuss it with all the other smart people who listen to Acquired. And with that, listeners, we'll see you next time.

• 4:00:13David Rosenthal?

  We'll see you next time.