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The Science of Hitting
The Science of Hitting
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The Coca-Cola Company: 1930-1934

March 29, 2012 | About:

This article is the third piece in a series reliving the story of the Coca-Cola Company (KO), and highlighting how it became the steward of the world’s most valuable brand:

When we last left off (1929), the company had sold nearly 27 million gallons of syrup, an increase of more than 150% from the volume sold in 1920 (the introduction of the six pack in 1928 made it convenient to enjoy Coca-Cola anywhere); sales and net profits also increased noticeably for the year, at a rate of 12% and 25%, respectively. Just months after the Dow Jones Industrial Average crashed more than 20% in two days, management wrote these timely words in the early days of 1930:

“Of deeper significance, especially for the future, is the policy on which the management endeavors to operate the business. Sustained growth, together with the distinctive place the business occupies, has long since made Coca-Cola an industry within itself. And the policy of the management is one of broadening and strengthening the foundation of this industry—to maintain normal, sound development and as security against flurries in economic conditions.”

When looking at the balance sheet, the foundation was clearly rock solid: At the time, the company had $6.5 million in cash and no debt, with a current ratio of 18:1.

In 1930, the unemployment rate jumped to 8.7% from 3.2% just a year earlier. Despite the macroeconomic struggles, the Coca-Cola Company generated yet another year of sales, gallons sold, and profits, at $41.3 million, 27.8 million, and $13.5 million, respectively; without missing a beat, the company continued its dividend, paying out nearly 45% ($6 million) of the year’s profit to shareholders.

While it wasn’t known at the time, another historic event happened that year: a boy was born in Omaha, Nebraska – but it would be nearly 60 years before he became part of Coca-Cola history.

In 1931, the Great Depression continued to sink its teeth into the economy, with unemployment plummeting to the mid-teens; even the Coca-Cola Company couldn’t buck the trend, with sales falling marginally to $40.2 million and gallons sold decreased to 26.7 million. Net profit continued higher, hitting $14 million due to lower raw material costs (demand had fallen off a cliff) and a reduction in operating costs.

However, the company had built up a strong balance sheet for a reason, and didn’t dare cut costs in one key area: marketing (most noteworthy is the Coca-Cola Santa Claus, which appeared for the first time that year): “There was also a reduction in general operating expense with the exception of advertising. This item was appreciably increased.

This should jump off the page at you as extraordinary; this dedication to long-term brand equity (rather than short-term profits) in the depths of the Great Depression is an integral part of the moat that the Coca-Cola Company has built over the past century.

In 1932, unemployment had crossed 20%, and both sales and volume declined at Coca-Cola; the company was still profitable, but saw the bottom decline materially to $8.7 million. Oddly, the report for the year never provides an actual sales figure (simply starts with gross operating profit), and gives little/no description of the operating environment, a practice that would continue for the most part until the 1950s. Without any help from the report, it’s still safe to say that this was an extremely difficult period of time to be running a global business (at this point, the company was selling in 76 countries around the world).

1933 marked the bottom of the depression, with Coca-Cola noticing this in their results for the year: “Of special interest is the sustained upward sales trend which began in the middle of the year.” Net profit was up slightly from 1932 to $8.8 million, with more than $6 million being paid in common dividends and $2 million being distributed to holders of preferred shares (the cost for the preferred shares is already accounted for in the net profit figure).

In that same year, the company acquired the Coca-Cola Bottling Company, which had been responsible for operations in nine southern states under independent bottlers until that point.

1934 saw the tides turning, with net profit after taxes and preferred dividends exceeding $12 million, an increase of roughly 40% year over year. With the worst of the Depression now behind it, Coca-Cola emerged from the depths of the worst economic crisis of the 20th century stronger than it had been at its inception; as we will see, the company would continue to plow forward, endlessly striving to build a brand and company unrivaled in the soft drink industry.

About the author:

The Science of Hitting
I desire to own high-quality businesses for the long-term. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with the top five positions accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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