Buffett Tells the History of Coca-Cola

Warren Buffett: Asa Canver back in the late 1880′s essentially bought the whole Coca-Cola company for $2,000, and that may be the smartest purchase in the history of the world. Then in 1889, a couple of guys from Chattanooga came along, and in those days soft drinks were sold over the counter, and they said bottling’s got a future and you’re busy with the pump side of the business, so why don’t you let us develop the bottling side of the business. And I guess Mr. Canver didn’t think much of bottling, so he gave them a contract that gave them the rights, in perpetuity for almost all of the United States, and gave them the right to buy Coca-Cola syrup at a fixed price forever. (audience groans) So Asa, who had scored with his $2,000 in a major way, seems to have made one of the dumbest contracts in history.

And the Coca-Cola company was faced over the years with the problem of having this bottling system which soon became the dominant system of distribution for Coke, being subject to a contract where there was no price flexibility and where the contract ran for perpetuity. And of course every bottler on his deathbed would call his children and grandchildren around, and he would prop himself up, and he would croak out in his last breath, “Don’t let ‘em screw with the bottling contract.” (laughter)

So the Coca-Cola company faced this for decades, and they couldn’t really do anything about the bottling system for a long time, and Roberto and Don Keough and some other people spent 20, 25 years getting that rationalized …it was a huge, huge project, but it made an enormous difference over time, and that’s what I mean when I talk about intellectual capital. You know you’re not going to get results on that in a day or a month or a year, but they decided that to get the job done they had to do this, and they used capital to get that job done, but they used capital beyond that to repurchase shares, and it’s been very smart, and they’re probably repurchasing shares even as we talk.

[Charlie Munger: I do think the Coca-Cola company is one of the most interesting cases in the history of business, and it ought to be way more studied than it is. There’s just lesson after lesson after lesson in the history of the Coca-Cola company. But it’s too long a story for today.]

Source: BRK Annual Meeting 1997