1. Why has Coca Cola has been so successful in the past? Coca-Cola has been so successful from 1987 to 1997 because of the following major factors: * Selling bottling rights to independent business and shifting heavy capital investment to them via creation of Coca-Cola Enterprise (CCE), dumping $3.1B of debt from its balance sheet while still retained 49% minority control, accounted as investment to boost its ROTC * Successfully replicating “anchor bottlers” strategy in the Philippines internationally to go from a trailing market share position to a 2-to-1 market share advantage over Pepsi, earning greater than 20% rates of return (see Exhibit 3) * Goizueta taking control of the board and finance committee, leveraging its excellent balance sheet for growth in recognizing that cost of debt was 16% less than cost of equity, and having specific need for the money that the leverage could provide * Implementing “The Spanish Inquisition” , demanding ROI for all expansion greater than cost of capital – Average 20% more than cost of capital over 10 years (see Exhibit 3) * Convincing Keough to stay and to take controls of marketing & brand management and to support the bottlers, preventing them from falling into the wrong hands and quickly refurbishing weak franchises and putting them back out for sale to stronger members of Coca-Cola system 2. Has Coca Cola made the mistake of ‘putting all their eggs in one basket’? Through the 1987 market crash and the 1991-1992 recession, Cola-Cola recognized that diversification did not reduce its financial risks, but instead took time away from its core soft-drink business which produced far better ROI than the sub-10% return by diversified investments between 1987 and 1997. The average 25.8% ROTC would have been better without diversification during this period (see Exhibit 3). Therefore, the company created CCE to offload $3.1B of debt from its balance sheet and sold Columbia picture to focus on its core soft drink business and to implement its international bottling strategy for growth. By and large, it was a very successful strategy. So, ‘putting all their eggs in soft drink business might not be a mistake as it might have been for other type of business. 3. What are the most important issue facing Coca Cola in the future? Coca Cola Company has created tremendous value for its shareholders between 1987 and 1997 –Economic Profit increased more than 500%, MVA increased more than 1,600%, MV-to-BV increased from 4.5 to 22.6 times (400%), shareholders’ equity increased from $3.2B to $7.3B (129%), income retention rate increased from 54% to 66.4%. Also during this period, the stock price appreciated 1,298%, EPS increased 444%, and PE Ratio increased from 15.8 to 40.6 times (See Exhibit 1). All these indicated that investors expected continuing of this fast-pace growth in the future. Even though sustainable growth rate increased from 15.5% to 37.5% during this period, revenue growth rate reduced from an average 9.6% to only 1% in 1997 (see Exhibit 4). Domestically, the company has lost its market share to Pepsi, only 42% over Pepsi’s 31% as of October 1996 (see Exhibit 5). However, it has increased its global market share to 50% by 1997 (see Exhibit 6). Given the competitiveness of North America market, its already sizable 50% global market share, and the difficulty in expanding into water, coffee & tea, mild & diary, and fruit drink markets (see Exhibit 6), it’s very challenging to sustain it unmatched value creation in the future without an effective top-line revenue growing strategy.