When you look through the history of Warren Buffett’s career, you see a few key decisions that fueled so much compounding of capital: GEICO, American Express, the Washington Post… and of course, Coca Cola. In fact, Warren Buffett’s Coca Cola investment represented up to 40% of his portfolio in 1990, and so to say it contributed to Berkshire’s success is an understatement.
Everybody likes to postulate about why Buffett picked Coca Cola, but I wanted to dig deeper. Like with researching stocks and their financials, I like to go to the source.
So I picked up a fantastic book that chronicled the CEO of Coca Cola and his (and the company’s) journey to success when Buffett first picked up Coke stock. That CEO was named Roberto Goizueta, and the book called I’d Like to Buy the World a Coke by David Greising chronicles it all.
To be more specific, I’d Like to Buy the World a Coke covers CEO Goizueta’s life from his upbring in Cuba, to his dramatic escape to the United States, to his rising up the ranks from engineer all the way up to the top, and to the fantastic results he led Coca Cola through until his death in 1997.
Roberto Goizueta drew large fanfare during his reign as Coca Cola’s CEO, after all, in a few short years after taking over the CEO spot and then Chairman, he led the company to such success that shares of its stock quadrupled.
Goizueta managed this while also both continuing to grow the dividend consistently and allocate more earnings to be reinvested into the business, which helped Coca Cola achieve absolute global dominance in the soft drink space, especially over rival Pepsi.
Being Innovative, Failing Fast, Cutting Losses Short
The Pepsi vs Coke rivalry had always been a chief concern around Coke executives, for obvious reasons. There’s quite an advantage to holding the #1 market share position in any market. But during Goizueta’s time as leader this intensified.
Pepsi had success in the 1970’s with what was called the Pepsi Challenge, which helped the company steal market share from Coca Cola in the critical United States region.
Goizueta was not happy with those developments and completely shook up the business in order to fight back against Pepsi. He ruthlessly cut parts of the business that were not earning sufficient returns on capital, such as the unprofitable wine and beer business, and wasn’t shy about trying lots of new ideas to create the next catalyst for the company’s growth.
He launched failures like “Tab” and “New Coke”, yet within those failures were other launches that had massive success– such as Diet Coke.
Goizueta tried buying Columbia Pictures to get a common sense synergy and big Hollywood prestige behind Coca Cola advertising, only to see that action create many more headaches and less efficient returns than expected… so he cut his losses on something that wasn’t working superbly and sold it (at a decent profit, I might add).
A Coca Cola Secret to Success: The Bottler Renovation Model
However, other investments turned out fantastically for the company, such as buying ownership interests in the bottlers that take the Coca Cola secret formula and create the physical product out of it.
But it wasn’t the actual investments in the bottlers that created the great success, it was the model.
Goizueta would buy substantial ownership investments in these bottlers, and then use Coke’s expertise to vastly improve the efficiency and quality of the products, and then would effectively re-sell many of these investments at a profit. This had many side benefits associated with it, such as providing pressure to the low quality bottlers that were dragging down the rest.
Goizueta took this great and innovating bottling model and expanded the company’s global reach immensely, until the international segment provided as much as 80% of the company’s overall profits by 1996 and fueled much of the growth behind the company’s earnings (with the weakness of the dollar in the late 80’s only adding to this great capital compounding I might add).
Overall, Warren Buffett found Coca Cola’s stock and though it traded at much higher valuations than he was used to investing with (with a price to book of around 4, for starters), Buffett achieved superior performance from this investment while riding the unstoppable coattails of Roberto Goizueta and the dominant Coca Cola brand.
Buffett bought Coca Cola right after the 1987 crash, after the market as a whole lost around 25% (much of it in a single day, Black Monday), and I think he saw the superior ROIC and consistent earnings growth as a justification that it was okay to pay 4x book.
Note: To be more specific, much of Buffett’s initial Coca Cola investment was added in the 1st quarter of 1988, and the stock hadn’t appreciated much since the crash of ‘87 (also called Black Monday). I’d also like to note that Goizueta had been CEO for about 7 years by now.
However, if I’d Like to Buy the World a Coke teaches investor anything, it’s that the company had many opportunities to grow both domestically and internationally, and they just needed a fierce and innovative leader like Goizueta to aggressively chase high returns on capital and growth, which was done in so many ways that you’d need to read the book entirely to really get it all.
$KO: It’s Always Been a Great Investment
What I found so interesting while reading this book, as an investor, is that Coca Cola was long considered a dominant player and stock long before Warren Buffett got into the picture. In fact, their ticker symbol, $KO, was labeled so in the early 1900’s because the stock was such a knockout performer back then that it was considered a “KO” to buy, because you couldn’t lose by buying it.
I loved reading about the Fortune magazine clipping that Goizueta kept inside his desk for motivation. It reads:
“Several times every year a weighty and serious investor looks long and with profound respect at Coca-Cola’s record but comes regretfully to the conclusion that he is looking too late. The specters of saturation and competition rise before him. He hears dire rumors of the inroads made by Pepsi-Cola and some new up-and-coming soft drinks– and he reluctantly passes Coca-Cola by.
But Coca-Cola steadily sweeps on.”
What’s great about that quote was that it was from a Fortune magazine issue from 1938, long before Goizueta and Buffett were in the picture. And, incredibly, the stock rose to even higher astronomical heights as the decades continued.
It might be one of the most valuable lessons of the book, and that’s that you don’t have to reinvent the wheel when it comes to investing.
Warren Buffett bought Coca Cola knowing that it was one of the best businesses around at his time and for many decades before, and just because the stock and business had already grown so much didn’t mean that it couldn’t be a great investment for years to come.
What a Story
As the book concludes, you find out that Goizuetta continued to focus on building Coke’s incredibly strong brand and the way it emotionally connected with its customers.
From having a huge, behind the scences influence in attracting the 1996 Olympics in the Coca Cola hometown (city of Atlanta), to their willinness to shake up their advertising agency, to their inclusion of top celebrities to promote the brand for decades and decades…
It was clear that Coca Cola wasn’t afraid to spend big money to make big money and compound returns for investors.
Behind it all was CEO Roberto Goizueta, who spent lavishly while at the same time masterfully honed down on expenses and low ROIC projects and businesses that Coca Cola was involved in. That worked out great for Buffett, who brings in over $600 million per year in dividends alone from his 1988 investment in Coke.
That’s my kind of party.