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Coke's Recent Divestment Can Tell Us A Lot About American Capitalism

The Huffington Post The Huffington Post 31/03/2016 Bartow J. Elmore
COCA COLA © kasinv via Getty Images COCA COLA

Last week, the Coca-Cola Company announced that it was slimming down. Reeling from a dramatic 25-percent decline in US consumption of sugary soft drinks over the past two decades, a trend in part stimulated by consumer concerns about the link between soft drinks and obesity, Coke decided it was time to trim the fat.
No, Coke was not abandoning its full-calorie beverages; rather, the Atlanta-based firm was eliminating costly overhead. As the Wall Street Journal reported last week, Coke planned to reduce its workforce from 123,000 to 39,000 worldwide employees. The firm would refranchise much of its bottling and manufacturing plants to others as Coke corporate got back to basics: producing Coke concentrate.
If Asa Candler, the Atlanta pharmacist who incorporated the Coca-Cola Company in the 1890s, were around today, he'd likely quip: welcome back. After all, Coke had perfected this form of corporate capitalism beginning in the Gilded Age.
From its founding, the Coca-Cola Company's secret formula for success had always been to get others to do work for it. Despite being the largest industrial consumer of sugar on the planet by the mid-1910s (shuttling over 100 million pounds of sweetener a year into consumers' bodies), Coke shunned ownership of expensive sugar plantations. Instead, it purchased sugar from other firms, such as the Hershey Chocolate Company, which did invest in Cuban sugarcane fields and supplied much of Coke's sugar in the early twentieth century.
So too did Coke rely on others to get its caffeine. The Monsanto Company of St. Louis, Missouri, invested large amounts of capital in decaffeination plants that could turn waste tea leaves--broken and damaged tea leaves considered garbage by the tea industry--into the potent drug Coke needed for its products. Coke never owned these facilities, letting Monsanto bear the expense of building large factories.
Distribution worked the same way. For most of the twentieth century, Coca-Cola turned to hundreds of independent businessmen to build the bottling network that made the brand a household name the world over. By the 1920s, there were over 1,200 independent Coke bottlers operating in the United States.
In short, Coca-Cola executives always knew there was money to be made by outsourcing the majority of the costs associated with making its products. The firm was at its best when it eschewed owning expensive machinery and equipment. It made the most money when it served as a kind of broker between producers and distributors. Coke corporate did not manufacture things; it was a trader of goods extracted, processed, and distributed by others.
Unfortunately for Coke, this tradition of staying out of the business of making stuff did not last. As the Wall Street Journal noted, in 1986 a new cadre of business managers in the firm decided that vertical integration would allow Coke to achieve economies of scale by cutting out inefficiencies in the firm's distended bottling network. The company created Coca-Cola Enterprises (CCE) that year and got into the business of bottling its products itself.
This was a radical departure from the past and it had radical consequences for Coke. In 2006, Fortune listed CCE in its Top 10 list of money losers. That year CCE posted losses totaling more than $1.1 billion. As Coke corporate found out, making Coca-Cola was actually hard and expensive work.
So what we're seeing today is a return to the past, as Coke hopes to regain the profit margins it once enjoyed when it was a slimmer firm. This is nothing new. Coca-Cola made money for a very long time by sticking to this strategy of outsourcing, and there's no reason to think that it can't do this again in the future.
Because, after all, history shows us that this is what twenty-first-century capitalism rewards: not the doers and makers in our economy, but the brokers.
Just look at the difference between the Fortune 500 list of most profitable firms in 1955 versus 2015. General Motors topped the list in 1955, with capital-intensive US Steel coming in seventh. Chemical company DuPont, a company with large investments in plants and facilities, ranked third in 1955.
We see a very different story in 2015. Sort the 2015 Fortune 500 list by profitability and you certainly see Big Oil in the mix (with Exxon Mobile remaining at the number two spot), but most of the firms in the top ten look nothing like their 1955 counterparts. Banks feature prominently, with Wells Fargo and JP Morgan Chase holding the three and five spot respectively. Companies like Apple and Microsoft, which outsource the majority of their productive infrastructure to China, placed first and fourth.
Businesses that physically make their own products are no longer the titans of the corporate world.
I think this should give us all pause. Seeing this history should make us ask important questions about macroeconomic trends. Who does our capitalist economic system reward? Do those who actually make the products we consume accumulate capital as compensation for their toil? Or is it the brokers that reap the cash windfalls? The history offered here suggests that The Real Thing may not be the maker of the real thing after all.
Bart Elmore is assistant professor of environmental history at the University of Alabama and the author of Citizen Coke: The Making of Coca-Cola Capitalism (W. W. Norton, 2015).

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