CHAPTER 24 Inflation and Money
Timeless advertising indeed.
Inflation nearly destroyed Coca-Cola. It’s a story that begins over a century ago, when Coke was a fledgling company selling most of its product through soda fountains. A couple of sharp Tennessee lawyers thought that they could make money selling Coke in bottles, instead. The owner of Coca-Cola wasn’t interested in bottling Coke, but he was willing to let them do it as long as they bought the Coke syrup from him. He wrote a contract committing Coke to sell them this secret syrup at 92 cents per gallon, which at the time included a hefty profit margin. Coke committed to sell the bottlers syrup at this price forever.
That commitment was a costly mistake. Over time, prices tend to rise on average, a process known as inflation. And over time the price of sugar, rent, transportation, labor, and all the other stuff that goes into making Coke rose. That meant the cost of producing the syrup kept rising, even as Coke had to keep selling it for 92 cents a gallon. By 1920, Coca-Cola was losing $29,000 per day.
Faced with these financial pressures, Coca-Cola found a way to renegotiate its syrup contract. But Coke’s executives quickly forgot the broader lesson—that it’s important to pay attention to inflation. A few decades later, Coke took another financial beating due to its failure to consider how its costs of production will rise over time due to inflation. This time the problem was that the vending machines would only accept one coin: a nickel. Even as inflation kept pushing other beverage prices higher, Coke was stuck charging a nickel. Some vending machines could be converted to take a dime instead, but Coke’s executives knew its customers would never stand for a 100 percent price increase. Things got so dire that the head of Coke wrote to his hunting pal, President Eisenhower, asking the government to create a 7½ cent coin. (Eisenhower refused.)
Coke misjudged the influence of inflation, and it led to two very costly mistakes. They’re the mistakes you should learn from, which is why the rest of this chapter will analyze inflation. We’ll explore how inflation is measured, how it affects you, and why it’s costly. And hopefully along the way, you’ll gain some insights that will help you make better choices than Coke’s executives did.