Coca Cola Capitalism

BRIAN: We’re back, with BackStory. I’m Brian Balogh.

ED: I’m Ed Ayers.

PETER: And I’m Peter Onuf. Today on the show we’re reflecting on the roll that corporations have played throughout our history. Before the break, we were hearing about the 19th century legal drama that resulted in corporations getting the constitutional protections they enjoy today.

And we’re going to turn now to a case study of one corporation that came into being right around the same time, when all those big railroad companies were flexing their corporate muscle. But this company took a pretty different approach to consolidating its power.

BRIAN: Bart Elmore is a historian at the University of Alabama. He says that at same time other big companies were pursuing the model of vertical integration– that’s where they set out to own each of the links in their production and distribution chains– the Coca-Cola Company was making a point of owning as little as possible. Elmore calls this approach Coca-Cola capitalism. And he told me that it’s perhaps best illustrated by contrasting Coke with another turn of the century purveyor of sweet things– the Hershey corporation.

BART ELMORE: They– in the nineteen-teens and early 1900s– they decided that the smart thing to do would be to buy up plantations– sugar plantations in Cuba– to source their own sugar. Be our own supplier, control our own price, kind of ideology. Coke did not. Coke ended up trying to source their sugar from any possible source they could get it from. Their goal was to try and diversify their buying contracts as much as they could. If Cuban sugar, for example, became too pricey– “well, we’ll get our sugar from Brazil.”

BRIAN: Which model wins out?

BART ELMORE: Well, in this story it’s very interesting. The sugar market crashes. Global sugar prices plummet in 1920. And Hershey’s sitting here holding all these sugar plantations, unable to sell its sugar for a profit. And they end up losing a ton of money. In fact they go into receivership. Meanwhile, Coca Cola, well, they’re able to thrive ultimately. Because they can source their sugar from wherever they want. And hey, if high fructose corn syrup comes along, a new sweetener that’s even cheaper than sugar by the end of the 20th century– well, we don’t own any plantations. So why not make the switch?

BRIAN: So what else did Coke offload, or outsource, that most big corporations at the time would have tried to own. What about water? Coke’s mainly water, as far as I can tell.

BART ELMORE: Coke depended on public water supplies in order to hydrate its beverages. And it didn’t own bottling plants in the United States or anywhere else around the world. It basically depended on local businessmen to build bottling plants that tapped into public water supplies all around the globe. And, again, there’s a way in which they embedded themselves not only in private capital and private businesses, but also in public infrastructure as well.

BRIAN: So they outsourced their main ingredient.

BART ELMORE: Absolutely. And their heaviest ingredient– and that was the whole point. You don’t want to ship these heavy, water dense goods all around the country. Get other people to do that. The key was not getting tied down in any specific locale with factories or plants, remaining nimble, lean. A company that would channel natural resources through its corporate system, and make money off the transaction between producers and distributors, but actually never really make stuff, or really hold onto it for very long.

BRIAN: What made Coke do things differently? Vertical integration was all the rage. The whole idea of corporations in many ways was to control as much as possible.

BART ELMORE: Well you got to remember the context of when Coca-Cola comes out. It’s coming out in Atlanta in Reconstruction, a city that has just suffered many years of war and rebuilding. And its founder, John Pemberton, is actually a struggling guy. He doesn’t have a lot of money. In the 1870s he actually goes bankrupt, in part because his businesses had been burned down.

But he was also physically suffering. He had suffered a series of wounds during the Civil War. While defending the city of Columbus– he was a Confederate– he ended up becoming addicted to morphine. And interestingly that’s kind of how Coke came about. He was trying to find a drug that would get him off morphine. And while we might find this a little surprising, he chose cocaine as his elixir that would get him off of this addiction to morphine.

BRIAN: It was his methadone.

BART ELMORE: It was his methadone. And he actually tried to copy this drink that was very popular in France, called Vin Mariani– basically Bordeaux wine mixed with cocaine. Only problem was, prohibition was taking hold in Atlanta in the South in the 1880s. And he was forced to take out the wine. And now we have the carbonated water that we have today– 1886.

But he was down on his luck, so he decided that the best way to go about expanding his empire was to rely on others, to not own stuff. Because he simply couldn’t. He had to find ways to get local capital from local bottlers, local soda fountain operators– basically to tap into other people’s infrastructure to make money.

BRIAN: Would you say that, in this Coca-Cola capitalism model, Coke was forward looking? Did other companies eventually come to embrace this model?

BART ELMORE: I think so. And I should be clear, I don’t think that John Pemberton, or Asa Candler, who becomes president of Coca-Cola soon after Pemberton, ever envisioned that they were developing this unique model. They were just doing it kind of out of necessity.

I mean Asa Candler, for example, he didn’t want to have bottlers. He actually signed away the rights to bottle Coca-Cola, legend has it, for about $1. Saying to these guys, “sure, if you want to bottle it, go ahead. Who’s going to drink bottled Coca-Cola?” Because the whole idea at this time was Coke is fun to drink at soda fountains. It’s a social activity. It’s where you go to the bar. It’s where you hang out with people.

So I think in many ways it was luck that Coke ended up the way it did. But once they realized– wow, this is actually pretty smart– using this local capital, tapping into municipal water supply systems– hey, this saves us money. I think long term they begin to see the value of this. And I do. I think other businesses ultimately look at this and say– “wow, why make stuff when people are making stuff for cheap? And we can simply repackage this stuff, and sell it at mark-up, and make lots of money.”

BRIAN: What are some of the other companies that begin to emulate Coca-Cola capitalism. I know they didn’t call it that.

BART ELMORE: You know, some of the ones that I’ve been most struck by would include McDonald’s. A company that, when you look at it, at first you say– “Wow, this is a company that sells hamburgers.” But, you know, the executives at McDonald’s would totally disagree with you. They would say– “We don’t sell hamburgers. We collect rent.”

And in fact this is exactly the wording of one of the top executives in the 1950s. He says– “We are not essentially in the food business. We are in the real estate business.” And by that he meant– “Look, all we really do is we buy up cheap properties along highways–” Which, by the ’50s, we’re developing all these interstate highways thanks Eisenhower and others. “And we’ve got this land, and we’re just going to rent it out to franchisees. Lease this land.” And guess what? It’s the franchisee who has to pay for the laborers, who has to pay for building all the restaurants, and doing all this.

BRIAN: So you’ve talked about McDonald’s. Coke, McDonald’s, they seem to go together– like a Coke and a Big Mac. But what that outside the food industry?

BART ELMORE: Well when you look at the biggest winners, you could say, of the 21st century– the profit titans– a lot of them are software companies, which we don’t actually make the bulky machines and have to own all that stuff. Same thing with Google. A company that, if you looked at their SEC filings, would say– “We made most of our money off advertising.” Essentially making a kind of fee for promoting various wears on its websites. Again, making money off the transaction, not necessarily off making stuff.

BRIAN: I’m impressed by this Coca-Cola capitalism model. But I wonder about companies that seem to be following really the Standard Oil model of vertical integration. Comcast, for instance, seems to be buying up every part of its production and distribution system available for sale.

BART ELMORE: Well, we’re always on shaky ground as historians talking about the future. I would say that there are some lessons. You know, what we see is not that vertically integrated empires always fail. We saw US Steel do very well. We saw auto industries do very well. We’ve seen vertically integrated enterprise do well in the short term. The question is, how did they do in the long term?

And I think what you see with Coke is that it seems to just continually grow in terms of its profits, while US Steel fails, and other vertically integrated enterprises fail. It’s its nimbleness that allows it to perpetuate itself into new eras of economic realities, and ecological realities.

And the question for Comcast then is simply that. Will be able to? Once it buys up these things that are time specific, and place specific in many ways, will these things prove valuable investments 50 years from now?

BRIAN: Bart, thanks very much for joining us on BackStory today.

BART ELMORE: Thanks a lot, Brian.

BRIAN: Bart Elmore is a history professor at the University of Alabama. His forthcoming book is Citizen Coke: The Making of Coca-Cola Capitalism.

[MUSIC – “RUM & COCA-COLA”]