Coke's new CEO needs to keep the fizz
Neville Isdell turned around a troubled company. Now his announced successor faces a separate challenge: how to create organic, sustainable growth.
(Fortune) -- Coca-Cola's announcement that its president and COO Muhtar Kent will succeed Neville Isdell as CEO on July 1 isn't exactly news. It is more like a rite of passage, a huge collective sigh of relief. It is the surest sign yet that Isdell's turnaround is complete and Coke is back on track. It is the first seamless, graceful, really hopeful transition the company has been able to pull off in four CEO handoffs - dating back to a decade ago when Roberto C. Goizueta died in October, 1997. More than anything else, though, this transition is also a painful reminder of just how long it takes to fix a screwed- up company.
Coke (Charts, Fortune 500) is fixed - for now. The stock is at $63, up from $51 when Isdell took the helm in June, 2004. The company is hitting its targets of revenue growth of 5 percent to 6 percent (year to date, it's up 8 percent) and operating net of 6 percent to 8 percent (year to date, it's up 12 percent). In each of the last three quarters, it has exceeded its 3 to 4 percent volume growth targets. So far this year, volume is up 6 percent.
Isdell has solved a lot of the company's problems - dealt with its meddling board, made peace with bottlers and ramped up the rate of the annual marketing spend - which rose by $400 million the first year alone. He got the company to face the awful truth: that U.S. consumers were turning away from carbonated soft drinks and the company had to diversify its beverage portfolio.
For years, Coke had been deeply divided by internal struggles over the need to kick - or at least moderate - its dependence on carbonated soft drinks, which have been declining in the U.S. Isdell has managed to straddle the divide. Carbonated soft drinks are growing again outside the U.S. and Coke Zero, the new diet drink, is gaining traction in the difficult North American market -- proving that there is growth yet in the soft drink business. Earlier this year, however, Coke also strayed way outside its comfort zone with the $4.1 billion acquisition (its biggest ever) of Energy Brands, maker of Glaceau's Vitaminwater, proving it can get with the times.
Muhtar Kent, 55, is a safe, conservative choice to succeed Isdell, 64, and also a logical one. He is nothing if not an insider, having begun his Coke career in Atlanta in 1978. He knows international and he knows operations, having been manager or executive in Turkey, Central Asia, and East Central Europe. He can speak bottler-speak, having served first as an inside Coke bottler - as managing director of Amatil-Europe from 1995 to 1998 and later leaving, as Isdell did, to become an outside bottler. He was the president and CEO of Efes Beverage Corp., the majority shareholder in Coke's Turkish bottler, until his return to Coke in May, 2005.
Kent has lots of experience in boosting per capita consumption around the world. Much of the time, he was working closely with Isdell, while Isdell was a top contender for the CEO job. So there's no question that Kent got lots of training.
But Kent's record is not unblemished. He comes with the taint of an insider trading scandal that ended in a settlement with the Australian Securities Commission in December, 1997 and cost him his job - nearly his Coke career. According to the commission, Kent's financial advisor sold short 100,000 shares of Coca-Cola Amatil Ltd on November 15, 1996, in advance of negative news released later the same day that caused the bottler's stock price to drop considerably.
Kent, who was managing director of Amatil's European division, said the sale was a mistake - that it had been made on the advice of his investment advisor according to a predetermined investment strategy, and had not been influenced by any insider information. He resigned during the inquiry and relinquished $280,000 in profits as a result of the settlement. Coke retained independent counsel to investigate the matter and confirm for itself that the transaction "was the result of an honest mistake" before rehiring Kent two years ago, according to a Coke spokesman.
Still, the cloud hangs over the succession news, perhaps because even the thought of it is so incongruous with the brand that evokes Have a Coke and a Smile or It's the Real Thing. "We would expect another round of questions/comments about Kent's involvement in an insider stock sale while serving as a Managing Director at Coca-Cola Amatil," said a JP Morgan Alert issued in response to the news.
Though Kent cooperated with authorities and settled the charges, the report noted, "the issue remains on investors' minds and given Kent's increasing role at the company, we think Coke will need to continue trying to get investors comfortable with the situation."
The other big question about Kent is how committed he'll stay to Coke's rebirth as an innovator. Can he get Coke to create its own growth organically again - from cool new products, advertising and precise execution rather than from complicated balance sheet transactions and bottling deals? Coke was a full decade behind Pepsi (Charts, Fortune 500) in understanding that consumers were serious about health and wellness. It was slower than that to give up the deeply held belief that mass marketing high-volume, low-cost brand Coke, or slight variations on that theme, could sustain it forever.
Right now, in that respect, the company seems like a recovering alcoholic that could fall off the wagon at any moment, especially since favorable foreign currency rates will boost fourth quarter operating income by a percent in the-mid single digits. (Foreign exchange added 3 percent to operating net in the latest quarter.) Coke could coast on those foreign currency tailwinds for quite some time.
The question is whether Kent will use that period to push Coke to broaden and revamp its product portfolio, which some competitors believe is critical to the company's future, by developing healthier, more interesting beverages and way more variety for fickle, ever-changing consumer tastes, especially in North America. He'll have to do it in a period of rising commodity costs, too. But if Kent wants to leave a real legacy at Coke, it will be to force Coke away from its old addictions and back to the healthy business of truly sustainable growth.