Rationalisation has left Coca-Cola with a shortage of talent and lacking in confidence, quite a challenge for its recently appointed CEO and chairman, Neville Isdell. Chris Brook-Carter examines the company's current travails and how Isdell plans to turn things round.

It's been quite a baptism for Coke's new CEO and chairman Neville Isdell since he took the reigns of the troubled soft drinks giant earlier this year. It was a controversial appointment in the first place, which eventually led to his potential number two resigning, and has been made all the tougher by a weak market performance this year - resulting in a profit warning - and the comparative success of Coke's great rival PepsiCo.

Coke's woes were bought into stark focus by Isdell himself last week when he admitted that morale at the soft drinks company was at a low, partly because his predecessor's cost-cutting policy had left the group desperately short of talent below the main board.

Previous CEO Douglas Daft axed 5,000 jobs during his tenure, making cost reductions the priority over sales growth as the means to boost earnings. The result has been a serious loss of talent and the stagnation of innovation.

The casualty list included two board executives, two chief marketing officers, the heads of the North American and European operations, as well as thousands of lower-ranking workers, all let go in a string of restructurings.

Talking to reporters last week, Isdell said the upheaval "breeds an organisation which lacks confidence, a/ in itself, b/ in the leadership and c/ in the direction of the company." He described the blows to morale as significant.

Some analysts believe the staff cuts bred a lack of innovation by creating a culture of fear at the group. In short, people were afraid to try things that might fail. Certainly, Coke in the last five years has been slow to respond to consumer demands and to beverage opportunities outside of its traditional carbonated confines. It instead focused on the main carbonate brands, despite the evidence they were falling out of favour with consumers.

As one analyst said in the US press last week: "People in the company were afraid to come out with things that might not work. In the end, you can't succeed unless you're willing to accept the chance that you might fail."

The results of this policy were seen in the profit warning issued earlier this month, which effectively said there would be little volume growth this year. Worldwide unit case volumes are expected to increase by between 1% and 2% for the full year 2004, with volume growth for the third quarter in the range of flat to 1% and continuing challenging conditions in the fourth quarter, the company said.

By contrast, Coke's arch-rival PepsiCo has been on a roll. It has pursued with far greater vigour the fast growing functional beverage category, through acquisitions and NPD and has been rewarded handsomely. Thanks to brands such as SoBe and Gatorade, Pepsi has achieved an average sales growth of 7.1% over the last five years.

Coke by comparison has seen sales growth average at just 1.3% between 1996 and 2001. In 2002, it leapt by 11.5% and in 2003 jumped by a further 7.6%, but these figures were greatly aided by a weak dollar. The comparative performances are reflected on Wall Street where Coke's falling fortunes contrast starkly with those of its rival. While Coca-Cola's stock price has fallen by 20% so far this year, the value of Pepsi's shares has increased 22%.

The question therefore that analysts are asking themselves is, "has Coke gone flat for good?" Fortunately for Coca-Cola, the answer that seems to be coming back is "no".

The first ray of hope for investors is Isdell himself, whose candid approach indicates he is fully aware of the problems that beset Coca-Cola.

Speaking to reporters on Tuesday (21 September), Neville Isdell said: "I understand that rightsizing the organisation was the right thing to do, but it has left scars. No doubt about it, and that is really what I am addressing." He has already indicated that getting the right people in the right places is a priority.

"I pretty well knew what I was getting into coming back," Isdell told reporters. "But obviously, one of the challenges is the whole area of the motivation of our people and also the training of our people."

He added later on:  "We've got a pretty thin bench. I'm actually very comfortable that we've got a very strong management team, but we don't have a strong bench. That's the major piece I'm addressing."

And if Isdell can get his team selection right then the tools are still there to take Coke back to more profitable days. The brands it owns, including the eponymous cola itself, are still fantastically strong, and cash flow is good.

If the company can successfully tweak its marketing, which has been lacklustre recently, to find a way to boost sales of its carbonated brands, while at the same time exploring alternative beverage options, the ship can be righted. Last week, one analyst forecast an advertising and promotion increase of US$200m to US$300m over the next two years. "New images for its tried and tested brands may help the company climb out of its slump," said the consumer goods analyst Datamonitor.

However, investors will need to be patient as there will be no quick fix. Goldman Sachs analyst Marc Cohen said in a research note: "We believe that those who are looking for a quick turnaround have misplaced expectations."
But patience could have its rewards.