Date: 10.5.98
IT IS 98 SWELTERING DEGREES in Bay Town, Tex. when I meet Henry Schimberg, chief executive of Atlanta-based Coca-Cola Enterprises. He is standing in the middle of a Kroger's parking lot with ten men in black. Mostly Texas CCE managers, the ten look like cartoon characters with the heat making wavy, radiating lines off their wool suits.
Schimberg, I've heard everywhere, is Coke's other secret formula.
This was a guy I had to meet. He said okay, but at a price: I had to accompany him on one of the 5,000 store visits he makes each year. This fellow moves lots of soda water. CCE is the company formed by the Coca-Cola Co. to own its principal bottling operations. With $13 billion in sales, it distributes through more than 1 million outlets -- almost 70% of all the Coke sold in the U.S. and in Canada's ten provinces, plus in Belgium, most of France, Great Britain, Luxembourg and the Netherlands.
This CCE is a marketing juggernaut, and Pepsi people fear it. After southern California became CCE territory six years ago, a population that had been drinking 140 eight-ouncers of Coke per capita annually stepped up to 210. In Wichita, Kans., from 134 to 195 in two years. In France, from 72 to 100 in two years. In every case, Pepsi lost market share. After 12 years of taking this kind of beating, Pepsi sort of got the message. It is thinking about spinning off its bottling operations into a separate entity.
Even if it does, it won't have Henry Schimberg, 65, who was named CCE chief executive in April. If you can help it, don't get into a contest with this man. He was playing tennis in a doubles match recently when his partner stumbled and had a bad fall. Schimberg saw that his partner was in pain, but scored the point before ambling over to help his friend to his feet.
When I met Schimberg at 11 a.m., he had already visited 15 stores. Since he averages 100 visits a week and presides over vast territories, he virtually lives on his Gulfstream-3.
Perspiration flows off the faces of the men in black, but Schimberg is cool and effervescent in the parking lot. "This is blue-collar country, which has historically been Pepsi's stronghold," says Schimberg proudly as he strides into the store.
Obviously it's not Pepsi country anymore. A floor plan of the Kroger store we are visiting is thrust into my hand. It has red marks indicating "points of interruption," or places where Coke products are displayed, interrupting traffic flow. This map has 34 points of interruption. By the looks of it, only a totally blind customer could avoid being confronted by Coke. That is what Schimberg calls "pervasive presence."
Schimberg leads the way, turning every point into a military inspection. The black suits shuffle into a crescent around him scribbling rapidly into their notepads. At an open-air soda cooler Schimberg decrees there should be a sign on top that says "ice cold" because that's an attractive proposition on a hot day like this.
In the ice cream aisle, there is another display of Coke, but Schimberg asks for a sign to be added picturing an ice cream float so that consumers don't miss the point that these two products -- ice cream and Coke -- complement each other.
Such potential tie-ins to other foods abound. Schimberg makes sure every pizza freezer case has a sticker suggesting that "Coke completes the meal." Ditto the display cases for TV dinners, even fresh vegetables. "Coke goes with celery?" I inquire incredulously. "Yes, fresh vegetables -- Coke is refreshing," Schimberg explains a bit impatiently. Hey, is this lady dumb or something?
While trying to absorb the celery tie-in, I see Schimberg charging over to the live lobsters. My god, not lobsters! Yep -- Schimberg wants a cooler next to the lobster tank.
Whether Coke goes with lobster or not is open to argument. There's no argument that Schimberg and his men have captured this store and the store has surrendered. There isn't a place you can stand without seeing some pitch for Coke products and the cans or bottles within easy reach. This is the way Schimberg thinks every retail outlet should be.
Thirteen years ago Business Week magazine pronounced the soft drink party over; with America aging, soft drinks had reached their peak at an annual 38.8 gallons per capita. Today the figure is 51 gallons, according to Beverage Digest, and Schimberg is convinced he will boost it to 75 -- just make that presence pervasive enough. In decades past, soft drink consumption started declining when people reached age 30. Thanks to smart marketing, the Coke folks have turned this around. "Now, as people age, they carry the habit with them," says Schimberg.
We finally settle in for lunch at a downtown Houston restaurant. No sooner do we sit down at our quiet table in the wine cellar than an eerie hissing sound emanates from the walls and ceiling. It is raining noxious chemicals. We flee. A Pepsi ambush? No, there was a fire next door, and it had set off the restaurant's fire control system. But you never know with this guy.
As we sit down at another table upstairs, it's time to talk about the enemy. "I have the greatest respect for Pepsi's p.r. ability," Schimberg begins, and immediately bursts out laughing. Meaning that's about the only thing about the competition he does respect. While Coke has always led in soda fountain sales, Pepsi had scored better in the large food stores. That was pre-Schimberg. According to a recent Nielsen survey, Coca-Cola has a 37.4% share in large food stores compared with PepsiCo's 30.5%.
In retreat Pepsi has pursued a sort of scorched-earth policy. To hold market share it has continually trimmed wholesale prices. Coke has had to follow suit, with the result that an 8-ounce bottle of either soft drink costs no more today than it did in 1982. Schimberg: "They are concerned about the widening market share gap in North America because globally Pepsi's becoming a virtual company."
He's scarcely kidding. Internationally, Coke has wiped the floor with Pepsi. Coke generates 80% of its earnings outside the U.S. Pepsi generates less than 5% of earnings outside America.
There's not much Schimberg doesn't know about the bottling business. He started as a truck driver with the Royal Crown Bottling Co. of Chicago in 1958 and worked his way up to president. In 1982 he jumped ship for the Johnston Coca-Cola Bottling Group, Chattanooga, Tenn. There he joined Summerfield Johnston, grandson of the first licensed Coke bottler. He and Johnston formed a team that took the company from $100 million to $1.1 billion in sales. Nine years later Johnston was sold to CCE.
At the time CCE was a dud. Its stock came out at $5.50 (adjusted for splits) in 1986 and was at $5 (adjusted) when Schimberg became chief operating officer in 1991.
"We found a completely centralized organization where all decisions were run out of 11 floors in Atlanta," he says. "All markets were treated the same. One thing is certain -- the bottling business is absolutely a local business." He moved a lot of people to the field and "got headquarters down to 2 floors pretty quickly."
Schimberg spent millions to get real-time sales information and millions more on training. "A mantra to all our people is that their skills today are not adequate for tomorrow," he says, sounding almost like management consultant Peter Drucker.
Obviously it has all worked. Operating income has risen by 8% to 10% each year since Johnston and Schimberg took over. From 1991 the stock climbed tenfold, reaching a high of $41 early this spring.
What the stock market giveth, the stock market taketh away. In July, Schimberg announced his plan to spend $5 billion over the next 31/2 years. The stock spiraled down to $32. The late summer stock market nastiness nicked it by another nine points. CCE management owns 15% of the company's stock, and Schimberg personally owns 6.3 million shares, almost 2%.
On paper Schimberg is nearly $90 million poorer, and Johnston and his other colleagues are down by close to $900 million. Why was CCE hit so much harder than the market? Probably because investors who had already had a big run figured it was a good excuse to take profits. The market loves free cash flow, and that announcement meant that there wouldn't be much free cash flow for a few years.
Though hardly pleased at the paper loss, what really irks Schimberg is that the market has treated CCE "like we don't know what we're doing." Schimberg believes the market ought to have applauded him for a gutsy move that will keep the company in a strong lead. "I would -- and ought to be -- taken to task if I managed this business in one-year windows," he says, testily.
He points out that although capital spending will trim earnings in 1999 and 2000, it will produce favorable results after that. Or there will be hell to pay.
Eyeing a vending machine in the store, I fed a dollar into the soft drink slot and waited for my elixir. Nothing happened. Schimberg glowered. The ten suits fanned around me. I heard one suit joke, "I wonder who gets it over this one."
And someone will. Schimberg revealed to me the secret of his victories over Pepsi. It is devastatingly simple. In his words: "attention to details and execution."
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