2002: Has Coke’s vision changed and has the domestic fountain division lost its way?

AUDIENCE MEMBER: Yes. Steve Pattice (PH), shareholder from Los Angeles. Good morning, Warren and Charlie.

I’d like to address the domestic Coke business.

It seems to me that Coke has been pulling back from what former great CEO Roberto Goizueta often said, and I paraphrase, we can’t control what soft drinks people buy at retail. But in public venues, including food service, we can control that.

We’ve all heard about the marquee lawsuits that Coca-Cola has had, such as the NFL, United Airlines, and emerging restaurant brands like Baja Fresh Mexican Grill.

But they’re also losing contracts with major — or minor — league baseball, college, and high school vendors.

Furthermore, it’s my understanding that our competitor PepsiCo has been the fastest-growing domestic beverage company for three consecutive years.

My question is has Coke’s vision changed, and is my perception that the domestic fountain division has lost their way correct?

WARREN BUFFETT: No, I would not say that’s correct, but I understand the reason for the question. Because there is the question, always, of the marquee-type accounts.

I mean, the truth is, either of the two major colas that are going to be sold and associated with, say, the Olympics or Disney World, or whatever it is, is going to lose a lot of money, if only directly thought of in terms of those contracts.

But there is that association over years. I mean, Coke wants to be where people are happy, and they want that in people’s minds.

And that tends to be, you know, sporting events, it’s the Disneylands, Disney Worlds, of the world.

But, in the end, can you have a determination to be at every one of them at any price? And the answer, obviously, is no.

It was sort of interesting, about five years ago, or thereabouts, Coke took Venezuela, essentially, away from Pepsi.

Pepsi — Venezuela was one of the few countries in the world in which Pepsi was the leader, and that was because the Cisneros family had developed the business down there very early.

So, Pepsi had 70 percent or 80 percent of the business. And in sort of a midnight raid, Coke bought the Cisneros operation, converted it all to Coke overnight, flew 747s in because they didn’t want to have — they wanted it to be a surprise, and they just reversed the whole situation in Venezuela.

And, it actually — whether that is going to turn out to be smart or not is another question, because they paid a lot of money to do it.

But in any event, Pepsi was very upset.

And so, the University of Nebraska pouring rights came up, very shortly thereafter. And the universities, as you know, bid out these things to give sort of an exclusive to a given university.

And Pepsi came in and bid about twice as much for the Nebraska pouring — the University of Nebraska — pouring rights, as was the sort of the standard, in terms of per-student at universities throughout the country, at Penn State or something.

And I like to think that they were trying to stick it in the eye of Coke by doing that in Nebraska. And I feel that the University of Nebraska really should give me credit for about 5 million a year of contribution to the university, because I don’t think Pepsi would have done it if it hadn’t been Nebraska.

Now, the question is, people at Coke called me, and they said, you know, “Do you want us to go up against this?” And I said, you know, no.

I mean, it’s nice to have everybody at University of Nebraska drinking Coke, but if we’ve got everybody at Penn State drinking Coke, I mean, it’s probably worth as much, as potential Coke customers.

So, there is this bit where one organization or the other, particularly if they’ve lost one in the immediate past, may overbid a little for the next one.

And you know, for United Airlines, the question is how far do you let United, or whomever it is, drive you, in terms of making that specific deal.

I would say that in something like the Olympics, you know, I think Eastman Kodak made a huge mistake when they let Fuji take away the Los Angeles Olympics 20 years ago or so, because it allowed Fuji to get put on a mental parity, to a degree, with Kodak, whereas Kodak had always owned that.

And now Fuji was there with Coca-Cola and IBM and a few premier companies. And it was a mistake.

So, in the end you end up overpaying, in any kind of an objective quantitative sense, for most of these marquee properties. But you can’t — it’d be foolish to think that you had to have them all.

Coca-Cola, actually Pepsi-Cola — colas have generally declined, somewhat, as a percentage of per capita consumption in the United States. And Pepsi-Cola has lost considerably more than Coke.

What has kept Pepsi doing well, basically, is Mountain Dew. Mountain Dew has been a very successful product for Pepsi, and that has gained share in carbonated soft drinks.

Carbonated soft drinks — the average person in this room drinks 64 ounces of liquid a year. Carbonated soft drinks are just under 30 percent of that. And beer and milk are each about 11 or 12 percent. They’re both down from 10 years ago. Carbonated soft drinks are up substantially.

Bottled water is up somewhat, but the only two categories that are really up are carbonated soft drinks, from ten years ago, and bottled water.

Coffee is down significantly. You think Starbucks has done a lot, but coffee just keeps going down and down and down.

If you look at Coke, of the almost 30 percent of the liquids consumed in the United States, they have about 43 percent of the 30, in their arenas.

So you’re talking 13 percent of all liquids, you know, tap water, everything else that the American water — the American people — drink, is a Coca-Cola product.

And it’s off a couple tenths of 1 percent from the high, but it’s higher than five years ago, it’s higher than 10 years ago. And, actually, in the first quarter, it did quite well, too.

So, I think there’s been no — I mean, I’m sure there’s been no loss of marketing vigor.

Doug Daft is a marketer at heart. He’s a, you know, he comes from the same — he’s put together the same way as — along the same lines — as Don Keough. There’ll never be another Don Keough.

But Doug is the same type of guy. He’s in tune with the product.

And I would — if I had to bet, I would bet the market share of Coke, in terms of both carbonated soft drinks and in terms — actually in terms of water.

I mean, the Dasani — the gains in Dasani last year were like 95 percent, in the first quarter they were about 60 percent. Those were huge gains. And Pepsi got an earlier start with Aquafina. But Coke has almost closed that gap.

Coke is a very, very powerful marketing organization. So 18, I think, point-seven billion cases, there’s nothing like it in the world.

And I do not think they’ve lost their focus or drive in any way whatsoever.

Charlie?

CHARLIE MUNGER: I’ve got nothing to add.

WARREN BUFFETT: You might try Vanilla Coke, too. It’ll be out next month.