The Very, Very Worst Business Decision in the History of Bad Business Decisions

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Check out this almost unbelievable, but true story.

Coca-Cola first appeared in Atlanta, Georgia when Dr. John Pemberton used a three-legged brass pot to concoct a little medicinal elixir in 1886 using cocaine, among other ingredients at the time, and creating what became known as Coca-Cola. In the ensuing 100 years Coca-Cola grew from a small, little regional drink too, of course, a worldwide behemoth. It easily became the most recognizable, if not the most, recognizable brand in the world, on the whole planet.

By 1985, on the eve of its centennial anniversary, Coke and its chairman Roberto Goizueta had witnessed a remarkable set of new accomplishments, chief among those was the buying of Columbia Pictures in January of 1982 and the introduction of Diet Coke that year. Yes, Diet Coke was only from 1982. So, in the face of things, the companies 1985 decision to change the formulation of Coca-Cola, of its flagship product, its bread and butter, the king of the hill, the heavyweight champion product of the world, Coca Cola, is inexplicable. It’s inconceivable. But they did it. Why did they do it? Well, if you dig a little deeper you would see that in the 1980’s Coke actually faced some really incredible problems.

Another front in the cola wars was the so called ‘Pepsi Challenge' which was a head-to-head taste test whereby cola drinkers are asked to compare the taste of two colas.

Despite its worldwide reputation the baby boom generation is a group that likes to hold on to its collective youth and in the 1980’s Coke’s biggest competitor, then as now, was Pepsi. Pepsi had tapped into this sentiment with an advertising campaign touting Pepsi as “The choice of a new generation.” And it worked. Coke’s hold on the top spot in the 1980’s had begun to slip. The battle between Coca-Cola and Pepsi-Cola was called the Cola Wars and Coke was in fact losing. Another front in this war was the so called Pepsi Challenge, which was a head-to-head taste test whereby cola drinkers are asked to compare the taste of two colas, not knowing which was which, and of course it was put on by Pepsi and needless to say the ones that everyone saw on television were taste tests where Pepsi came out as the winner. It was very effective advertising and more troubling for Coke was the fact that the tests were real. People did in fact enjoy the taste of Pepsi more in blind taste tests.

People did in fact enjoy the taste of Pepsi more

Then, on top of that, in November of 1983 Pepsi paid Michael Jackson an unheard of sum at the time of five million dollars to make two commercials for Pepsi. So Pepsi really did seem to be, at the time, the choice of a new generation. And for Coke, you know what? The data confirmed it. Coke was losing market share. Its lead had dropped from a better than two-to-one margin to only 5% by 1984 and it was even smaller in supermarkets. As Pepsi President Roger Enrico later boasted for 20 years, “We used the Pepsi generation campaign to reach out not just to the young people who wanted to look forward but to all who are curious about the next thing.” A little self serving? Yeah, I think so, but it was true and as a result here’s how we know it wasn’t just self-serving. By the mid 1980’s Coke was looking kind of stodgy. It represented nostalgia, picnics, and small towns, and parades but it didn’t look hip or edgy and Pepsi did. That was working for Pepsi.

It was kind of remarkable if you think about it. Like the stars and the moon, Coca-Cola is and was a fact of life. Probably, I would say, in all likelihood, it was the greatest brand in history. An institution and its formula called 7X is famously locked up in a safe and no one gets to know what it is, maybe, maybe not. But the fact of the matter is, despite Coca-Cola being Coca-Cola it was slowly losing ground to Pepsi. And this is true, even though it was far easier at that time to find Coca-Cola than it was to find Pepsi. If you went to McDonalds you would find Coca-Cola, if you went to the market more often than not you would find Coca-Cola rather than Pepsi. As one Coca-Cola bottler put it, “If we have twice as many vending machines dominate the fountains, have more shelf space, spend more on advertising, and are competitively priced, why are we losing share?”

You look at the Pepsi Challenge and you have to begin asking about taste. Yes, Coke decided that something was wrong with the taste of its product. Now, it’s a radical idea, changing the taste of Coca-Cola, right? You might as well ban baseball and outlaw mom and apple pie while you’re at it, I think. But sometimes in business even the craziest ideas seem to make sense. Maybe you’re in a vacuum and you don’t hear the other stories, other voices, maybe it is like it was for Coke. A well thought out, if misguided, business decision. What did Brian Dyson say, who was the President of Coca-Cola USA at the time? “Maybe the principal characteristics that make Coke distinctive, like its bite and its taste, aren’t as right anymore. Maybe the way we assuage our thirst has changed.” And so, they decided that they were going to do what? Make a new Coke.

And so, with these problems looming, in September of 1984 the marketing geniuses at Coke thought they had found the answer. The technical division had brewed a formula of Coke that beat Pepsi in blind taste tests by up to eight points. Now, previously Pepsi had beaten Coke by up to anywhere from eight to 15 points in these taste tests. But in this new formulation of Coke this new Coke, at a minimum, met a 16 point swing. According to Dyson, “The minute that we saw we had a potential new product, Coca-Cola USA set it in motion.” So I have to say, there’s just no gentle way to put this, this really is the stupidest business decision in the annals of stupid business decisions. I mean, Coca-Cola is the most successful product in history. The undisputed leader of a $25 billion soft drink industry, and while little adjustments had been made over the years no one really had ever thought to change Coca-Cola. But all of a sudden here we have it. We’re going to have a new Coca-Cola.

Lets digress here and tell you a little story about Frito-Lay. Now, Frito-Lay once had a similar problem. Years ago sales of Fritos took a sudden dive. And there was no apparent reason. Frito-Lay hired a slew of experts and consultants to do the analysis and file reports and figure out what had gone wrong. Advertising was changed, heads rolled, nothing changed though. Sales still continued to go down. Finally it was discovered that some middle management executive had slightly changed the Fritos recipe. Right? They changed the Fritos recipe! And when top management found out that the original recipe had been changed they of course restored it. The crisis was solved and sales went back up. Now the stories interesting in that the moral of the story is what happened thereafter at Frito- Lay. Frito-Lay ended up having a maxim thereafter, and what was the maxim? What did they learn? What was the moral of the story? Inside Frito-Lay they say, I’ll be gentle about this, “Don’t F—- With Fritos!” So it’s a lesson that the Coca-Cola people would have to learn the hard way because they f—– with Coca-Cola.

The other guy blinked.

Now, it is true that Coke did not go into this decision willy-nilly. They did a lot of market research, they did a lot of taste testing, but one thing Coke never did was actually take new Coke, which did test well as we have seen, out into the market and tell people in stores that if you buy new Coke you’re not going to get old Coke. It seemed that it tested well but they never did there market research. How could you not know what your market wanted and how could you not know what they didn’t want? Especially if you’re Coca-Cola. But on April 23rd, 1985 Coca-Cola released new coke, with a great deal of fanfare. Announcing the new formula Coca-Cola President Goizueta called the decision, “The surest move ever made.” I think a more apt decision came from Pepsi chairman Roger Enrico who said, “The other guy blinked.”

The reaction to New Coke was swift and strong and horrible and terrible. People hated this stuff, hated it. It became the butt of late night jokes, people had pangs of desire for their old stawary, and a Beverly Hills wine merchant bought 500 cases of old coke and started selling them for $50 a case and he sold out in a few days. Coke-a-holics began stockpiling coke in the homes and a Hollywood producer rented a $1,200 a month wine cellar to hold a hundred cases of old coke. Seattleite Gary Mullins started the old coke drinkers of America, and 8,500 people joined. By mid-June 1985 the Coke consumer hotline was taking 1,500 irate calls a day saying, “What the heck are you doing?” Coke learned very quickly the hard way that you don’t f— with coke and learned a hard lesson.

A mere two months after its disastrous innovation the company was already planning to reintroduce old coke and on July 10th, 1985 coke executives made the remarkable announcement, “We want people to know that we are sorry for any discontent we have caused them for almost three months we have hurt you and for that we are very sorry.” Then it announced that old coke would be coming back as Coca-Cola Classic and eventually new Coke would go away and what happened? Did heads role? Did everyone who decided to create New Coke get fired?

An interesting footnote is that no one at Coca-Cola was fired. In fact, that same management team that created New Coke were all promoted. And why is that? Well, Coke didn’t lose any money as a result of the fiasco. In fact, the stock price jumped from $61 to $84. And by 1986 it had reached an all time high of $110 for the time. So the President Goizueta got a $1.7 million bonus, his team all got bonuses, and according to Coca-Cola’s 1986 proxy statement these awards were given for “singular courage, wisdom, and commitment in making certain decisions in 1985 which entailed considerable business risks the net result which has been and will continue to be extremely beneficial to the shareholders of the company.”

Is that true?

Yes.

The most amazing thing that resulted from Coca-Cola’s huge mistake is that in the end the debacle ended up helping Coca-Cola, so maybe it’s not the worst decision ever but only by accident it got them a lot of press. For one surprising, glorious, albeit painful summer, Coke made headlines across the country and people clamored for old Coke.

And Coca-Cola became the leader, has stayed the leader.