The Ten Commandments for Business Failure - Don Keough [43]
The problem was, well, there were several problems. Mainly, though, all of a sudden we were losing money!
To begin with in the late 1960s, the fountain department put a strange allocation system in place based on the salesperson’s projection of what an outlet would sell in a calendar year. Most good salespeople are by their nature optimists. Now the issue was that the outlets received all of the promotional moneys at the beginning of the year based on the salesperson’s projection. The problem showed up in December, when the fountain outlet’s sales were dramatically less than the estimate.
One doesn’t need to be a mathematician to determine that the company paid cash for sales that did not take place and gross margins disappeared. That in itself was a mixed message to the fountain outlet and to the company.
In addition to this rather bizarre arrangement, we kept absorbing the inflated costs of the ingredients in the syrup because it seemed to be etched in stone that the price of Coca-Cola syrup to the retail customer was fixed. Over the years costs had increased and margins narrowed, and the management at the time refused to deal with the issue, fearing that a price increase would jeopardize our business and make it vulnerable to a competitive attack. The truth was that while our costs were going up, so were our competitors’ and I believed they could ill afford not to follow suit.
It was then that Charles Duncan asked me to come to Atlanta and work with the president of Coca-Cola USA, Luke Smith. My first assignment was to deal with this fountain department problem. After reviewing the situation, it became obvious that we had no alternative but to raise the price. One after another of the fountain department managers came to me and carefully explained that we could not raise prices. After listening to them, we still made the decision one Friday to raise the price about twenty cents a gallon.
The next Monday competition did not kill us. They raised their price too.
It just shows you how an idea can become so entrenched that it’s immovable. My view from the outside was to look at the furniture a little bit differently from those who’d been living with it. I moved the sofa! And the house did not collapse.
I’ve mentioned the wonderful invention of money. Over my many years in business, I’ve thought a lot about how to recognize cash in real terms. Cash or money is the great abstraction that makes all commerce possible.
But I always used to worry that we were moving to such levels of abstraction in our company that we could no longer keep track of the score.
At the Foods Division in Houston in 1971, I realized that it was possible for people to graduate with a bachelor’s degree or an MBA, go to work for the company, stay there forty years handling day-to-day operations, and never see a dollar in cash. Not a dollar in cash is paid to employees, to suppliers, to the media for advertising, to the ad agency itself, to the travel agents, and so on. In the headquarters, staff executives are just dealing with budgets that are nothing more than black-and-white numbers. It’s very deceptive. It’s so abstract that there is no meaning.
In Las Vegas they’ll fire a croupier if money appears on a table and doesn’t disappear in a second. They don’t want people to think about real dollars and cents, so they use colorful chips. Gamblers will tip a fifty-dollar chip for a free drink because they aren’t thinking “fifty dollars.” They’re