Coca-Cola Plant

Kennon-Green & Co. Fiduciary Financial Advisor, Wealth Management, Global Value Investing

In the late 19th century, a man named Benjamin Franklin Thomas decided he wanted to be rich.  He became obsessed with business, investing, and finding a single opportunity that would set him up for life, allowing him to live off his capital.  According to Constance L. Hays in her book The Real Thing: Truth and Power at the Coca-Cola Company, Thomas defined success as “something inexpensive that appealed strongly to the general public,” that “could be used up quickly and then repurchased.”

He tried everything – becoming a lawyer, working in a bank, becoming employed at a rock quarry, operating in real estate, and even doing time in a hosiery mill.  While his capital grew, true wealth eluded him until he came up with an idea during military service at the time of the Spanish-American War.  He saw Cubans walking around with bottled carbonated pineapple drinks and realized that people in the United States would want something as convenient.  Being from Chattanooga, Tennessee, he immediately thought of a relatively young American soda company called Coca-Cola, which extended throughout the south from its home base in Georgia.

[mainbodyad]Rounding up his friend, a lawyer named Joseph Brown Whitehead, the two made their way to the office of Asa Candler in Georgia, who had acquired the entire Coca-Cola Company from its inventor, John Pemperton, for $2,300; a transaction that very well may be the single greatest financial investment ever made in all of recorded human history.  Candler transformed this little operation into a brand, making Coke the first dominant national sparkling beverage company.  The men convinced Candler to write them a perpetual contract that gave them the right to buy Coca-Cola syrup concentrate at $1.00 a gallon and rebottle it throughout almost all of the United States (the few areas they didn’t control belonged to other Coca-Cola customers who had begun bottling as an experiment or had other unusual circumstances).  With the technology in place at the time, every gallon would produce about 400 Coca-Cola servings when reconstituted with carbonated water and sugar.

Candler thought the two would go bust, and couldn’t imagine bottling individual servings would be successful.  Coca-Cola was so closely identified with crisp, clean soda fountains and nice pharmacists in blindly white coats that it was hard for him to see past what had already made him a very rich man.  He agreed, signed the contract, and didn’t think much about it because even with his resources, bottling had proved too expensive, too technically difficult, and too messy.  Failure, Candler presumably thought, was all but guaranteed, but he still decided to support his new clients with marketing.

Setting Up Their First Bottler, Thomas and Whitehead Realized They Didn’t Have Enough Equity to Maximize the Potential of Their Coca-Cola Bottling Business

Thomas and Whitehead went back to Chattanooga and setup their bottling company.  They realized very quickly that Candler was right – bottling was a hard business that required a lot of money.  They knew they could never make the most of their opportunity due to a lack of equity capital but an idea occurred to them: They would seek out motivated businessmen throughout the United States and license exclusive territories under their master contract, controlling these terms.  That way, they could retain ownership of their Coca-Cola distribution coup without having to sell stock, while still benefiting from the equity of others.

(Note: This synthetic equity approach is one of the easiest ways for those who don’t have a lot of money to become rich in a short amount of time.)

Coca-Cola Bottling Contracts

The Coca-Cola master bottling agreement fundamentally reshaped the business for more than a century, and resulted in explosive growth as the company was able to expand using the equity and debt capital of thousands of entrepreneurs who risked their own family’s fortunes to sell Coke in local territories.
From VistaVision Under Attribution-NonCommercial-NoDerivs 2.0 Generic (CC BY-NC-ND 2.0)

The two began to sell licenses over exclusive territories to motivated business-savvy people, who setup their own corporations and partnerships that raised money, built plants, and hired employees to distribute the goods.  The new licensees had all the benefits of being an entrepreneur as they got to keep every penny of profit they could create by selling Coke in their territory.  It was a goldmine and everyone got rich from it.  Back in Atlanta, Asa Candler was selling a lot more syrup to the boys in Tennessee, who were now selling it to a wide range of independent companies that bought from them as a distributor, who were putting it on store shelves in tiny farm towns and major metropolitan areas, alike.

The bottlers who had acquired contracts from Thomas and Whitehead became “Coca-Cola Kings”, with their children and grandchildren inheriting the often privately-held common stock in the local bottling companies they created.  As school teachers and bank presidents alike demanded the convenience of bottled Coca-Cola, these Coke Kings built mansions in their communities, employed locals, and became huge presences in their counties, funding everything from little league teams to helping pay for the new library.  Even in the most unexpected of places, you can still find these estates on established streets, not realizing their bricks were acquired with cash made by the dark sugar water.  There’s a Flickr group dedicated to pictures of these individual Coca-Cola bottling companies.

This three-tiered system meant that there were many ways to become rich from Coca-Cola; literally hundreds of companies or partnerships through which one could do it.  Even today, there are several families that hold staggering fortunes from their “Coke” stock, that isn’t actually the Coca-Cola you buy on the New York Stock Exchange.  Take Coca-Cola Bottling Company UNITED, Inc., which traces its roots to 1902.  It was originally started by a man from Chattanooga named Crawford Johnson.  He bought a license for Birmingham, Alabama from Thomas and Whitehead.  The family kept buying more territories, and pouring their profits back in for expansion, to the point that it is now the largest privately owned Coca-Cola bottler in the United States.  You can hardly buy a Coke product in certain parts of the south without putting money in the owners’ pockets.  The descendants of Crawford Johnson hold the non-traded shares of CCBCU, and collect millions of dollars a year in dividends.

Other families took their bottlers public.  The Coca-Cola Bottling Company Consolidated is one example.  It was started when J.B. Harrison got his licensing contract in 1902.  Today, some of the shares are in the public’s hands and it trades under ticker symbol COKE with a $641 million market capitalization.

Coca-Cola Plant

Some of the independent bottlers who acquired the rights to territories went on to expand over the generations, eventually having IPOs for their own companies.  This building is owned by a company called Coca-Cola Bottling Company Consolidated, which began in 1902 when J.B. Harrison got his hands on a licensing contract for North Carolina and began manufacturing in Greensboro. Today, it trades under ticker symbol COKE, and has a $641 million market capitalization.

Thomas and Whitehead Split Their Company In Two and Go Their Separate Ways After a Disagreement on the Bottling Contracts for Their Licensees

In short order, Thomas and Whitehead, who had been earning enormous sums on the equity capital of others (Candler’s investment in The Coca-Cola Company supplying the syrup, and the thousands of bottlers beneath them who had built the factors), had a disagreement.  Whitehead wanted his bottlers to get the same deal Candler had given them – the right to buy at a fixed price in perpetuity.  Thomas, however, was a much smarter businessman.  He knew that they had locked Coca-Cola into a $1.00 a gallon price, regardless of Coke’s cost, with no way to end the contract.  As time went on and retail prices were raised, Thomas could keep charging his sub-bottlers more while they passed on those price increases to the retail customer, both of them getting richer.  Thomas also wanted to grant only 2-year contracts so he could get rid of bottlers who weren’t up to snuff and / or raise prices depending on the environment.

[mainbodyad]The two friends decided to go their separate ways, dividing their master Coca-Cola bottling contract into two businesses.  Whitehead took on a new partner, J.T. Lupton, and setup the (southern) Coca-Cola Bottling Company, which had ownership over almost all of the Southern United States along with a new plant they had built in Atlanta.  Thomas setup his own (northern) Coca-Cola Bottling Company and had ownership of Chattanooga, plus fifteen Northern and Western states.  Both companies operated on different models, with each man getting what he wanted.

Later, Candler sold The Coca-Cola Company in Atlanta, the parent business with the rights to the name and concentrate syrup supplying the entire empire, to a group of bankers who couldn’t stand these contracts.  They took the company public in an IPO, with JP Morgan and SunTrust bank underwriting the deal.  JP Morgan took its $100,000 fee in cash, while Sun Trust took its $100,000 fee in Coke stock (almost a century later, in 2010, the executives at SunTrust committed a transgression so great they deserve to burn in capitalism hell.  They sold the position, which was worth more than $1,700,000,000 and produced $52,800,000 per year in cash dividends for the bank stockholders, because they were more interested in how the accounting looked than the well-being of the owners).  A war erupted between the now-public Coke and the bottlers, causing the $40.00 per share offering price to collapse to $19.00 shortly thereafter as investors worried over the sustainability of Coca-Cola’s profits.  Court case after court case was filed for many years, explosive fights were had, and wise bottlers who benefited from them would indoctrinate their children to never agree to any change in the Coke bottling agreement because as long as they could pay only $1.00 per gallon, they could continue “printing money” for the family, which held the stock in these private bottling groups.

Meanwhile, average Americans began buying the public shares of the parent Coca-Cola Company, with towns like Quincy, Florida, creating hidden caches of Coca-Cola millionaires, many of whom never set foot in a bottling plant.  This was the era of the legendary Coke president Robert W. Woodruff, which deserves its own post at some point in the future.

The Candler Family Loses Its Coca-Cola Fortune

The Candler family took their proceeds from the sale of parent company Coca-Cola to the bankers – $25,000,000 in cash on that $2,300 cost basis – and expanded Asa’s existing real estate and banking empire.  He built office buildings in New York and Atlanta, gave to charity, and put what amounted to almost $338 million in today’s inflation-adjusted dollars to work so his children and grandchildren could live very well.

Unfortunately, they were not good at business.  Though some branches prospered, a big chunk of the large fortune Candler left his heirs was lost in the Great Recession of 2009 as a result of mismanagement, too much leverage, and personal failings.  According to Elizabeth Candler Graham, “Ten of Candler’s 22 grandchildren became alcoholics, and six died over their addiction.”  The leading heir blamed their losses on America’s “ruthless economy” and insisted that the banks didn’t have to lend him the money on which he defaulted, wiping out one of America’s greatest empires.

And yet, that is why standards of living keep rising – that ruthlessness rips capital out of the hands of those who can’t use it productivity and flows to the most efficient uses.  It’s why the Candler family is wiped out and new fortunes have been made in Silicon Valley, which is now providing more value to the civilization.  It’s a virtue, not something that deserves castigation.

Today, according to management’s most recent conference call, the average cost of a serving of 8 ounce Coca-Cola at retail in the world is $0.25.  That is up over 5% from two years ago, and over 10% from three years ago, which is better than the domestic inflation rate.  It’s this pricing power that is the secret to Coke’s compounding rate.  People always want to know what the “next” Coke is, and the answer is simple: There is no “next” Coke.  There is only Coca-Cola.  If I were to go into a coma for 50 years, it is one of the only businesses I’d entrust with my entire net worth (Nestlé being one of others on the very short list).  Every generation, it mints more millionaires, but it happens so slowly that no one notices, thinking that the ship has already sailed.

I’d go so far as to say that anytime it is even within striking distance of intrinsic value, a person who is thinking about inter-generational wealth for children and grandchildren, and who is capable of holding for 25+ years, should consider writing checks.  I expect it to be around long after behemoths like General Electric and Berkshire Hathaway have disappeared.  It’s simplicity is its strength.  It hides in plain site because everyone knows about it, and people grow tired of hearing the name when blue chips are discussed.  It’s one of the few things in life where the odds of winning are overwhelming; where market crashes should make you dance as you are able to pick up more as even slightly overpaying for Coke is probably going to work out better in the long-run than getting a huge discount on another stock.