"Buffett would tell Forbes magazine that a key reason he bought Coke was that its stock price did not reflect the all-but-guaranteed growth in international sales in a world that is increasingly uniform in its tastes."
Buffett viewed Coke’s brand and product as universal, a theme echoed by then CEO Robert Goizueta in Coke’s 1993 Annual Report when he presented the three simple facts about the growth prospects of Coke. “First, every day, every single one of the world’s 5.6 billion people will get thirsty. Second, only in the last few years have world events allowed us true access to more than half of those people. And third, as the world’s foremost beverage company, we are in the best position to satisfy their need for refreshment.”
That seems like a pretty compelling total addressable market analysis.
But unlocking the true value of Coca-Cola the company took an important realization, one that sometimes is easy for even the best run companies in the world to lose sight of, especially in today’s world of competitive accumulation. To understand what I’m talking about we have to travel back in time.
There was a period of time when conglomerates were all the rage and in the early 1980’s Coke was not immune to the siren call of expanding its business lines. Most of us don’t remember Coke owning a stake in movie studio Columbia Pictures, it even owned a shrimp farm, all because as then CEO Robert Goizueta said, “There’s a perception in this country that you’re better off if you’re in two lousy businesses than if you’re in one good one - that you’re spreading the risk. It’s crazy.” So it was during the conglomerate era. An era where executives often operated as their pseudo-selves, seeking to align their business practices to the consensus of others opinions.
Sleep and Zakarais, the Nomad Investment Partners, remind us that, “There is normally a jewel at the heart of most companies that has often been used to fund new ventures or is taken for granted by impatient management.” Perhaps this sentiment rings true for the business you work in or a business you frequent, a place where the “cash cow” seems to get milked for every imaginable reason, often as part of some managerial quest to increase shareholder value. In the 1980s it was often the case that management greatness was signalled by running a sprawling enterprise, even if much of that enterprise were capital-intensive distractions that were generating mediocre returns at best.
Reportedly Michaelangelo’s own account of creating the statue of David was that he simply “removed everything that is not David.” So it was for Coke, they reclaimed their corporate identity and integrity by removing the things that were not Coke.
Coca-Cola’s greatness came from the realization that it was necessary to cut away the non core to reveal the jewel that is the syrup manufacturing and marketing operation. After all, there is a reason that the ingredients to Coke’s syrup are a guarded secret. Coke shed their non-core businesses and narrowed their focus to their greatest moat, which Nick Sleep described as a “mindshare moat”. Buffett posited that there is something in the taste of a Coke that was universal, or at least could be made to be universal.
Whether or not finding refreshment in a Coke is innately human is debatable, but what is not debatable is that Coke’s century-long advertising program has established a very valuable brand.
If you’re familiar with Luke Burgis’ work on mimetic desire, a work derived from Rene Girad, then you can likely appreciate how Coca-Cola has crafted a brand that operates like psychological gravity. In short, we learn through imitation to want what others want, what is modeled to us. Provide the right model, endowing a feeling of the right social values and next thing you know you’ve got brand value, everyone wants a Coke.
Don’t believe me? Remember the series finale of the television series Mad Men? It captures this mimetic desire perfectly. Fictional ad man Don Draper meditating on some California hilltop at some hippie commune, apparently experiencing a moment of spiritual peace. A moment the show implies inspires the iconic 1971 Coca-Cola “Hilltop” commercial.
You’re too young to have seen it live, but even today you know the lyrics used in the commercial, “I’d like to buy the world a Coke”. Well before Buffett’s thesis of guaranteed growth in international sales, the ad shows a diverse group of people singing in harmony, holding bottles of Coke.
The sales aren’t of flavored syrup, the sales are of desire, the desire for belonging, harmony, real connection. Give the consumer the model, let them see it and consumers look to copy that, to mimic that behavior. Coke becomes the mediator, it is associated with the way to satisfy that desire. At some level I believe it’s engineered uniformity.
Buffett recognized the compounding power inherent in a brand that could dominate the globe.
I find it somewhat ironic that Coke’s own management had to resist the mimetic desire that was pulling them to conform to the conglomerate era, the same force they were engineering to propel the growth of Coke. Buffett was no different, he had to resist the uniformity of most investment gurus who said you have to worry about the Federal Reserve, the deficit, the next headline, and follow his own beliefs that those factors are irrelevant when you buy a wonderful business like Coke.
These lessons extend well beyond business and investing. We can learn a lot from the art of subtraction and not chasing every socially contagious idea.