Why has Coca-Cola been so successful in the past?
The DuPont system of analysis is based on three components: (net income/sales) x (sales/assets) x (assets/equity). These components can be separately categorized into operating efficiency, asset use efficiency, and financial leverage. When they are put together, the resulting ROE is a strong measure of how well management creates value for shareholders. Coca-Cola (CC), under both Woodruff and Goizueta, undertook management decisions that would positively affect ROE. Compared to the average US Corporation, CC has had stellar ROE performance over the past 10 years (See Figure 1).
Woodruff took CC out of debt and effectively allowed for an increased retention ratio (income retained/income), which increased CC’s sustainable growth. Woodruff was then able to form a subsidiary company for international export, which would lead to increased market share, and thereby increase the asset turnover lever. Market share would further increase with his advertising acumen (Norman Rockwell paintings). He got the government to build factories and then turn them over to CC, and thereby increase CC’s assets without considerable cost, which would increase the profit margin lever. His standardization of production and marketing would further increase the profit margin lever. Yet his firm resolutions to never take on debt while paying generous dividends would limit the financial leverage to potentially take CC to the next level of success. This is where Goizueta came in.
Goizueta came to CC as a technician, and his initial contributions reflected it. Without explicitly knowing the operating efficiency lever, this was what he improved though instituting corporation-wide operations standards, benchmarks, and analytical management methods. Operations efficiency was evidenced with increasing sales despite reductions in COGS. Once he became CEO, he effectively improved the second lever of ROE by investing in bottlers...
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