The Coca-Cola Company

In 1899, two young lawyers from Chattanooga, Benjamin Franklin Thomas and Joseph Brown Whitehead, arranged a meeting with Asa Candler to make a pitch for the rights to put the Coca-Cola soft drink in bottles and sell them. Before that meeting, the Coca-Cola Company was selling its product as syrup into barrels and kegs for soda fountain vendors, who would then mix them with carbonated water – add ice since a warm Coca-Cola soft drink was a sin – and serve it in a glass.

The company was indeed small because its functionality was limited. All it needed was resources to produce the syrup and salespersons to deal with soda fountains as its sole clients. The problem, however, was that a glass of Coke could be sold only at the soda fountains, limiting its potential to expand the business. There were not enough soda fountains to expand drastically. However, a Coke bottle could be shipped, sold, and consumed anywhere. Its potential was vast.

Therefore, the meeting with Thomas and Whitehead proved to be an opportunity for Coca-Cola to expand. Candler was concerned about ceding his power to independent bottlers because there was a danger that his organisation’s reputation might suffer. But as Candler said, “We have neither the money, nor brains, nor time to embark in the bottling business.” Rightly so, the Coca-Cola Company’s business was the production of syrup and sales as a wholesaler rather than a retailer for the final consumer.

Candler was concerned about ceding his power to independent bottlers because there was a danger that his organisation’s reputation might suffer. But as Candler said, “We have neither the money, nor brains, nor time to embark in the bottling business.” Rightly so, the Coca-Cola Company’s business was the production of syrup and sales as a wholesaler rather than a retailer for the final consumer.

Thus, an agreement was formed: Thomas and Whitehead would guarantee the quality of the product, with the Coca-Cola Company retaining the right to cancel the contract if the quality proved to be poor. In exchange, it would sell them syrup and give them the nationwide rights to bottle Coca-Cola for free. Thus, these two independent vendors were given the right to put and sell the Coca-Cola soft drink in bottles.

Astounded at the offer, Thomas and Whitehead quickly accepted. However, they soon realised there was no way they could afford the time and money it would take to open plants across the country one by one by themselves. Their only hope, they concluded, was to become “parent” bottlers, recruiting other men and giving them franchises to build the actual facilities and sell Coca-Cola in the surrounding territories. These two “parents” began working their separate sides of the national street, searching for prospects willing to become Coca-Cola bottlers. Thomas took the Northeast, Atlantic states, and West Coast, and Whitehead picked the South. Furthermore, Whitehead partnered with John Thomas Lupton to help him financially.

In 1902 alone, the Whitehead-Lupton parent company opened plants in nearly two dozen Southern cities while the Thomas company dotted the rest of the country. The parent bottlers opened 32 plants in 1903, 47 in 1904, and a record 80 in 1905. They took on new partners, divided the country into smaller regions, and hastened to fill the grid with a bottler in every city and town. Bottled Coca-Cola went on sale in markets across most of the country. Vendors would roll a “dope wagon” with an ice-water tank through the aisles past the looms and slubbers, and the sweating, lint-covered workers would pay their nickels and steal a minute to gulp down a cold Coke. Many bottlers found demand so heavy they divided their territories and assigned their rights to a new genus of sub-bottlers who built smaller, more efficient plants.

The Coca-Cola bottling system was passed to a new generation. Whitehead and his partner Lupton turned over responsibility for the day-to-day operations of their parent company in Atlanta to a twenty-four-year-old bookkeeper named Veazey Rainwater. Thomas, who died childless, left control of his company in the hands of a twenty-seven-year-old nephew, George Hunter, in Chattanooga.

However, the parent companies were left without a clearly defined role. The syrup was shipped directly from the Coca-Cola Company’s factories to the bottlers, so the parents were not acting as genuine middlemen. They sat back and took a royalty on every gallon, even though they never handled a drop. The parents paid the Coca-Cola Company 92 cents a gallon for syrup, then turned around and “resold” it to the actual bottlers at a generous markup, usually $1.20 a gallon. It was all done on paper. Supervising the operations of the actual bottlers required some effort, but frankly, not that much.

Not surprisingly, perhaps, the growing wealth of the parent companies kindled a fair degree of resentment at the Coca-Cola Company’s headquarters in Atlanta. Over the years, it has become an article of faith at the Coca-Cola Company that Asa Candler’s seemingly mindless giveaway of his bottling rights was an act of genius since it spurred a quick profusion of plants that otherwise might have taken decades to develop. But the truth is, Candler did throw away something of tremendous value. He and his family could quickly have acted as parent bottlers themselves, recruiting the actual bottlers and providing them with financing. Or they could have built plants independently, skipping the parent stage entirely. Candler had more money than Thomas, Whitehead, and Lupton put together. He didn’t believe in bottling. Some of his associates—Frank Robinson, Dobbs, Harold Hirsch—ached to get into the bottling business and pleaded for the chance, but Candler refused to let them, leaving them to watch sullenly as others grew rich. The problem was not just that the parents were making more money on bottled Coca-Cola than the Coca-Cola Company itself, but that they were doing so without lifting a finger.

However, when new leadership was formed in the parent companies, its position in the spectrum began to change. Rainwater, the new chief of the Southern parent company, invented a fresh job as a hardworking liaison between the actual bottlers, as retailers, and the Coca-Cola Company, as the supplier. He could see that the business was changing, and he believed the most significant challenges in the future would be legal and political. Remember that at that time, Coca-Cola was facing legal issues with the federal government, arguing that some of Coca-Cola’s ingredients, especially caffeine, were health hazards.

Thus, state legislatures have forever taken up bills to tax soft drinks or outlaw various ingredients. Rainwater organised his bottlers into a potent lobbying battalion that fought back, most of the time successfully. He and Hunter, his counterpart in Chattanooga, formed a close alliance with Harold Hirsch and agreed to split the expenses of these statehouse skirmishes. These parent companies were becoming a legal shield for their bottlers.

Furthermore, Rainwater earned the company’s gratitude by working to improve the standards of its bottlers. A stickler for quality control, he sent teams of inspectors around to check sanitary conditions in the plants in his region. If a bottler made an inferior product, he would threaten to shut him down unless he made improvements. Some of the bottlers bridled at the interference, but Rainwater was smart enough to ally himself with the most successful operators in his region, and they backed him up.

The growing sense of unity between the company and the bottlers culminated with the success of a project Rainwater and Hirsch spearheaded to design a distinctive Coca-Cola bottle. At most retail outlets of the period, bottled soft drinks were sold in large tubs filled with ice water. Coca-Cola’s bottlers used the same ordinary, straight-sided bottles everyone else used, and thirsty customers had to roll up a sleeve and fish around in the murky depths without knowing what brand they were grabbing. Even when they pulled a bottle into the daylight, the confusion continued because the labels typically came unglued and slid down to the bottom of the tub. Putting Coca-Cola in a specially shaped bottle would help tremendously with marketing. It would also give Hirsch another tool—a trademarked package—to use in fighting the competition in court.

Bottling carbonated soft drinks was a landmark that The Coca-Cola Company reached a new level of success, thanks to the two young lawyers Benjamin Franklin Thomas and Joseph Brown Whitehead, who wanted to expand the organisation from selling syrup to soda fountain vendors who would serve in a glass. Establishing what is described as a Federal Organisation and franchising seemed like a revolutionary move to expand the business within the organisation’s reach, especially in the beverage industry. Coca-Cola historians have treated the subsequent success of Thomas and Whitehead’s business venture as if it were the real genesis of bottled soft drinks. Yet, the bottling business was booming even when its founder, Pemberton, experimented with the Coca-Cola formula in 1885.

What was needed were bottles, and a method to seal them that soon became known as a stopper – an elaborate wire-and-cork contraption. Some bottlers also used internal balls held in place by the carbonation pressure. The industry standard throughout the late 1880s was the Hutchinson stopper, a cumbersome and unpredictable seal with an internal rubber disk pulled up into place by a wire loop. A consumer knocked the loop down to open the bottle, releasing the pressure with a sudden “pop,” which gave soda pop its name.

The Hutchinson stopper was relatively inexpensive, but workers or consumers often jarred the loop accidentally, spilling the bottle’s sticky contents. In addition, the Hutchinson bottles were difficult to clean because of their internal mechanism, and the acidified drinks ate away at the rubber gasket.

Nonetheless, by 1890, over three thousand American bottlers used Hutchinson stoppers. Within an industry that large, the question was not why two lawyers got the notion to bottle Coca-Cola in 1899 but why no one had thought of it sooner. They had. Sam Dobbs remembered that there were at least a dozen pre-1899 Coca-Cola bottlers in Florida, Colorado, and other states. However, describing their experience, the Hutchinson bottles caused trouble. “The rubber washer on the stopper caused a not-too-wholesome odour in the drink after it had been bottled for a period of ten days,” recalled one partner.

In 1892, the same time as The Coca-Cola Company, Crown Cork and Seal Company was incorporated. Though the crimped crown bottle cap solved all of the Hutchinson problems, its acceptance was glacially slow because it required a new stock of bottles and a particular machine to attach the crown caps. By 1900, however, the change was well underway. Thomas and Whitehead were entering the business at the right time. In the next few years, other innovations, such as fridges in people’s homes and automobiles for the masses, made mass-produced bottled soft drinks an increasingly attractive field.

When the Coca-Cola Company revolutionised the soft drink beverage industry with its bottling approach, it seemed that Candler received more than it had bargained for. If Thomas and Whitehead succeeded, Candler stood to sell more syrup. If they failed, he would not have put up any capital or had to spend time on the fruitless venture. Why not let them have a go at it? He agreed to sell them syrup at a dollar a gallon and to provide their advertising needs. Candler was correct that the contract would result in his selling more syrup, though he didn’t realise the enormous implications. This simple contract was to revolutionise the Coca-Cola business, giving birth to one of the most innovative, dynamic franchising systems in the world.

Until the Candler family sold the Coca-Cola Company in 1919, the bottling company’s successors, Rainwater and Hunter, were accustomed to doing business with the organisation on a handshake. They trusted Hirsch, so much so that they had him serve as their lawyer. At the same time, he was the organisation’s general counsel. They saw no conflict of interest because there was a sense of community. When Ernest Woodruff took over Candler’s throne, Hirsch assured them the organisation’s old management would remain in place when the sale went through.

That also meant that their contract with the Coca-Cola Company, the old document signed by Candler twenty years earlier, was perpetual and unbreakable. The organisation was obliged to sell them syrup at 92 cents a gallon, which they were then free to sell to their actual bottlers at whatever price they could command. They believed Hirsch concurred with their interpretation. In November 1919, when the cost of sugar began soaring, Rainwater and Hunter agreed to two minor, temporary increases in syrup prices during the war when the government fixed sugar prices at 9 cents a pound, and they were willing to help out again. Only this time, they were dealing with Woodruff.

Woodruff refused to compromise or negotiate with the bottling parent companies. Instead, his lawyers announced that Coca-Cola Company could cancel the contract whenever it wanted, so the bottling companies could either submit to whatever Woodruff says or pack up and leave.

During a bitter, all-night session in February 1920, Woodruff made it clear once and for all that he was in charge. All decisions would be made by the executive committee, which he controlled. The compromise drawn up by Hirsch and Rainwater was unacceptable. Dobbs, Candler, and Bradley convened a negotiating session in Atlanta with Rainwater, Hunter, and Lupton and laid out the Coca-Cola Company’s final offer. The parent companies could have a royalty of 7½ cents a gallon, period, take it or leave it.

Lupton and Rainwater withdrew their acceptance and prepared for war. Hearings in the case began just a week after the suit was filed. For a time, it appeared the company’s fortunes might be improving. Once the plaintiffs got through presenting their case, Hirsch had a chance to fight back. While there was little he could do to repair the damage to the company’s reputation, he scored several sharp points in assailing the parent companies’ legal position. He discovered evidence suggesting that hundreds of bottlers operated directly under an “exclusive license” with the Coca-Cola Company. Dobbs observed gleefully that “when this fourteen-inch shell fell into the ranks of Hunter and Rainwater, they were certainly panic-stricken.”

Dobbs exaggerated, but it was true that the parent bottlers were growing nervous about the trial's outcome. Despite their success in embarrassing the company and winning the allegiance of the actual bottlers, Hunter and Rainwater had no assurance of prevailing on the legal issues. Asa Candler had testified on the company’s behalf, swearing that he never intended the bottling contract to be permanent, and his word had clout. Thomas and Whitehead were no longer alive to contradict him.

The judge, John Pendleton, began dropping hints that he planned to rule in favour of the company, which was, after all, the most powerful and influential business in town. Rather than wait for a verdict, the parent bottlers staged a strategic retreat. On the last day of May 1920, they abruptly withdrew their suit, pulled out of Georgia, and refiled their petition in a federal district court in Delaware, guaranteeing that the dispute would drag on for many more weeks. The prospect of delay was intensely disheartening to the company. All during the spring of 1920, the sugar problem kept worsening until finally, the price reached a record high of 28 cents a pound in the first week of May, amid the trial.

Candler figured the company was losing nearly $200,000 a month selling syrup to the bottlers at the old contract price, and the bottlers reluctantly agreed that they couldn’t go on indefinitely paying only 92 cents a gallon for syrup that now cost more than $1.50 a gallon to manufacture. After all, rainwater and Hunter did not wish to bankrupt the company. On June 10, 1920, under the supervision of U.S. District Judge Hugh Morris in Delaware, the two sides agreed to a temporary compromise. For the next five months, which figured to be the period it would take to try the case, the parent bottlers would pay the company $1.57 a gallon, which Howard Candler certified was the actual cost of manufacture.

In 1923, the Coca-Cola Company was like a patient recovering quickly after a terrible accident. Despite the bruised feelings and distrust between the company and its bottlers, there was a grudging realisation on everyone’s part that the smart course would be to return to business as usual because business as usual meant profits.

For over a decade, the playing field had belonged to Coca-Cola almost exclusively. The U.S. Supreme Court frightened off most of the manufacturers of copycat soft drinks in 1920 with its decision against the Koke Company of America, and the collapse of sugar prices that same year drove many of the rest into bankruptcy. In the years since, Harold Hirsch had assembled a team of lawyers in the company’s Legal Department who scoured the land protecting Coca-Cola’s trademark, hunting down violators, and filing hundreds of lawsuits that produced a blizzard of orders, injunctions, decrees, and judgments against defendants big and small. By 1935, the recovery was complete. But by then, the company had another problem: Pepsi.

Intense competition between Pepsi and Coca-Cola has characterised the soft drink industry for decades. In this chess game of giant firms, Coca-Cola ruled the soft drink market throughout the 1950s, 1960s, and early 1970s. It outsold Pepsi two to one.

By the mid-1970s, the Coca-Cola Company was a lumbering giant. Performance reflected this. Between 1976 and 1978, the growth rate of Coca-Cola soft drinks dropped from 13 per cent annually to a meagre 2 per cent. As the giant stumbled, Pepsi-Cola was finding heady triumphs. First came the “Pepsi Generation.” This advertising campaign captured the imagination of the baby boomers with its idealism and youth. This association with youth and vitality greatly enhanced the image of Pepsi and firmly associated it with the largest consumer market for soft drinks. Then came another management coup, the “Pepsi Challenge,” in which comparative taste tests with consumers showed a clear preference for Pepsi.

With the market-share erosion of the late 1970s and early 1980s, despite strong advertising and superior distribution, the company began to look at the soft drink product itself. Taste was suspected as the chief culprit in Coke’s decline, and marketing research seemed to confirm this. In September 1984, the technical division developed a sweeter flavour. In perhaps the biggest taste test ever, costing $4 million, 55 per cent of 191,000 people approved it over Pepsi and the original formula of Coke. Top executives unanimously agreed to change the taste and take the old Coke off the market.

It was a flop. On July 11th, company officials capitulated to the outcry. They apologised to the public and brought back the original taste of Coke. Unfortunately for Pepsi, the euphoria of a major blunder by Coca-Cola was short-lived. The two-cola strategy of Coca-Cola—it kept the new flavour and brought back the old classic—seemed to be stimulating sales far more than ever expected. While Coke Classic was outselling New Coke by more than two to one nationwide, for the full year of 1985, sales from all operations rose 10 percent and profits nine percent.

The Cola Wars, a term used to describe the intense rivalry between Coca-Cola and PepsiCo, was a phenomenon that had a significant impact on the soft drink industry. One of the most well-known battles was the Pepsi Challenge, which involved a blind taste test that compared Pepsi to Coca-Cola. This competition was good for business for both companies, as it sparked consumer interest and ultimately increased sales for both brands.

Despite the image of fierce competition, both companies often did not win at each other's expense. Instead, they both benefited from the increased consumer interest and market growth. The catch, however, was that these Cola Wars had to be fun. If the competition appeared too serious or negative, consumers would be put off, and both companies would suffer.

In essence, Pepsi would have had a tough time competing without Coca-Cola. The more intense and engaging these Cola Wars were, the more they caught consumers' attention. This led to increased brand awareness and loyalty, resulting in higher sales for both companies. In conclusion, the Cola Wars were about competition and creating a fun and engaging experience for consumers.