Coca-Cola: A Strong Stock in Shaky Times

Not many stocks were left standing when the Dow Jones industrial average crashed by 504 points on Sept. 15—the worst drop since the September 11 terrorist attacks. One stock that did stand firmly was Coca-Cola (KO), the world's largest soft drink company. When the tsunami-like wave of selling was done on that frenzied day, Coca-Cola's stock stood at 54.75, up from the previous session's closing price of 54.50.

True, it was a razor-thin rise, but considering the devastation in the marketplace that day, just staying upright was a mighty accomplishment, as the financial giants lost some 20% to 94% of their value. Nonfinancials also got ravaged, including General Electric (GE), which tumbled 8.04%, ExxonMobil (XOM) 5.48%, Sprint Nextel (S) 5.70%, Intel (INTC) 3.97%, and Merck (MRK) 3.25%.

For a while there, Coke seemed to have lost its fizz. From 2003 through 2006, its shares traversed a narrow range, meandering between 37 to 50. In 2007, the stock came back, trading up to a high of 65 by early January 2008. But then the stock got caught in the market's subprime-mortgage-driven decline in July, which yanked Coke down to a 52-week low of 49.60. Since then, it's eased back to the mid-50s.

Buffett's Beverage

That's because Wall Street appears to have rediscovered Coca-Cola. Of the 17 analysts who follow Coke, not one recommends selling the stock, and all but two tag the stock a buy. Two analysts rate it a hold. (It's also reassuring that Coke's largest stakeholder is Warren Buffett's Berkshire Hathaway (BRKA), which owns an 8.6% stake.)

One Coca-Cola bull is Esther Kwon, an analyst at Standard & Poor's Equity Research who rates Coke a strong buy, with a 12-month price target of 62, based on her analysis of its historical price-earnings ratio. (S&P, like BusinessWeek, is owned by McGraw-Hill (MHP).)

Coke’s New Design Direction

Coke’s New Design Direction

The 65 mpg Ford the U.S. Can't Have

If ever there was a car made for the times, this would seem to be it: a sporty subcompact that seats five, offers a navigation system, and gets a whopping 65 miles to the gallon. Oh yes, and the car is made by Ford Motor (F), known widely for lumbering gas hogs.

Ford's 2009 Fiesta ECOnetic goes on sale in November. But here's the catch: Despite the car's potential to transform Ford's image and help it compete with Toyota Motor (TM) and Honda Motor (HMC) in its home market, the company will sell the little fuel sipper only in Europe. "We know it's an awesome vehicle," says Ford America President Mark Fields. "But there are business reasons why we can't sell it in the U.S." The main one: The Fiesta ECOnetic runs on diesel.

Automakers such as Volkswagen (VLKAY) and Mercedes-Benz (DAI) have predicted for years that a technology called "clean diesel" would overcome many Americans' antipathy to a fuel still often thought of as the smelly stuff that powers tractor trailers. Diesel vehicles now hitting the market with pollution-fighting technology are as clean or cleaner than gasoline and at least 30% more fuel-efficient.

Yet while half of all cars sold in Europe last year ran on diesel, the U.S. market remains relatively unfriendly to the fuel. Taxes aimed at commercial trucks mean diesel costs anywhere from 40 cents to $1 more per gallon than gasoline. Add to this the success of the Toyota Prius, and you can see why only 3% of cars in the U.S. use diesel. "Americans see hybrids as the darling," says Global Insight auto analyst Philip Gott, "and diesel as old-tech."

None of this is stopping European and Japanese automakers, which are betting they can jump-start the U.S. market with new diesel models. Mercedes-Benz by next year will have three cars it markets as "BlueTec." Even Nissan (NSANY) and Honda, which long opposed building diesel cars in Europe, plan to introduce them in the U.S. in 2010. But Ford, whose Fiesta ECOnetic compares favorably with European diesels, can't make a business case for bringing the car to the U.S.

TOO PRICEY TO IMPORT

First of all, the engines are built in Britain, so labor costs are high. Plus the pound remains stronger than the greenback. At prevailing exchange rates, the Fiesta ECOnetic would sell for about $25,700 in the U.S. By contrast, the Prius typically goes for about $24,000. A $1,300 tax deduction available to buyers of new diesel cars could bring the price of the Fiesta to around $24,400. But Ford doesn't believe it could charge enough to make money on an imported ECOnetic.

Ford plans to make a gas-powered version of the Fiesta in Mexico for the U.S. So why not manufacture diesel engines there, too? Building a plant would cost at least $350 million at a time when Ford has been burning through more than $1 billion a month in cash reserves. Besides, the automaker would have to produce at least 350,000 engines a year to make such a venture profitable. "We just don't think North and South America would buy that many diesel cars," says Fields.

The question, of course, is whether the U.S. ever will embrace diesel fuel and allow automakers to achieve sufficient scale to make money on such vehicles. California certified VW and Mercedes diesel cars earlier this year, after a four-year ban. James N. Hall, of auto researcher 293 Analysts, says that bellwether state and the Northeast remain "hostile to diesel." But the risk to Ford is that the fuel takes off, and the carmaker finds itself playing catch-up—despite having a serious diesel contender in its arsenal.

Why American Savers Have Drawn the Short Straw

American savers, take a bow. This is your moment of vindication. Your hour of glory. And you earned it (in a manner of speaking).

You resisted the siren call of plastic teaser APRs, dutifully living within your means to store money for a rainy day. You never took out an interest-only mortgage. Never had to pawn the copper pipes from your exurban McMansion to pay the reset on your liar loan. Your credit score would have gotten you into Harvard at age 12.

Good for you! Your reward: injurious savings yields, inflationary rot, and election-season neglect, all served up with a dollop of institutional insecurity.

Even with a current account deficit that, starved of domestic savings, requires $2 billion a day in foreign financing, economic policymakers are fixated on propping up credit and giving the participants in the housing bubble second chances. In order to do so, they are stripping the hides off of net savers.

Since August of last year, the Federal Reserve has slashed interest rates from 5.25% to 2.00%—wielding a blunt instrument that was swung enough to bend the yield curve in favor of suffering banks. You know, the institutions that screwed up but were too big and important to be deprived of an inalienable right to cheap deposits that they can loan out at several points higher.

Indeed, a year ago, a six-month certificate of deposit earned, on average, 3.53%, according to Bankrate.com (RATE). Today, that's down to 2.03%. A one-year CD that earned 3.75% at this point in 2007 was offered for as little as 1.92% in April, before inching up to its present 2.38%. It's hardly a secret that banks are only able to pay out such pittances thanks to depositors' knee-jerk desire for security: "Hey, I might be earning crumbs on my cash, but at least I'm not losing money."

Sure you are. Wholesale inflation has soared 9.8% in the past 12 months, the highest clip since 1981. The more widely cited consumer price index jumped to 5.6%. In other words, while your saved buck was adding 2 cents or so on one end (and even less after taxes), three times as much was getting singed off the other end of that dollar bill. "Inflation is just deadly to savings," says David Gitlitz, chief economist at TrendMacrolytics, an investment adviser. Gitlitz observes that, taking into account the hit from inflation, rates haven't been this negative since the dreary 1970s. (That, in turn, gave way to an early '80s that saw the worst inflation in U.S. history since the Civil War.) "It steals your purchasing power and sets less and less of an incentive to keep money in the bank."

You're telling me. My trusty Manhattan pizza guy recently hiked the cost of a slice for the second time in the past year, from $2 to $2.50 to $3. "Why you mad?" he blurted, pounding a ball of dough. "Prices are nuts; you can't even buy a glass of milk no more." ("We're paying 128% more for a bag of flour," added his grandson-apprentice, with startling accuracy.) Even my barber justified taking up the cost of a standard trim and buzz by 20%. "Fuel surcharge," he deadpanned in his Uzbeki accent. (As it turns out, he rides the subway.)

In a perfect world, the Fed's rate-cutting campaign would have shored up real estate and the stock market. Instead, investors have been running for inflationary cover in hard assets like crude oil, gold, and even fertilizer. Oil, we all know, went from $70 to more than $140 in one year flat, sending gasoline and utility costs soaring and counteracting the lift from monetary and fiscal stimulus. Still comforted by that 2% savings yield? (Your mattress and piggy bank are in stitches.)

Commodity inflation has also been exacerbated by concurrent weakness in the dollar, which is stuck between a Europe that is loath to cut interest rates and a Washington that is too scared to hike them. Even with its recent rally, the greenback is only worth two-thirds of a euro. You practically have to wheelbarrow dollars to places like Madrid and Berlin.

All of which might be tolerable to the lonely and beleaguered saver if he weren't taunted daily by lopsidedly pro-spending, pro-creditor news stories. Forget about moral hazard. Forget about rewarding profligacy. Washington is hell bent on putting a floor beneath the housing market. And subtlety got vetoed out of the process. Consider some recent news reports:

"President Bush Signs $300 Billion Housing Rescue Bill" (AP)—increasing to $625,500 from $417,000 the size of home loans in high-cost areas that Fannie Mae (FNM) and Freddie Mac (FRE) are allowed to buy.

The number of Chapter 7 filings—designed to give individual debtors a "fresh start" by discharging many of their debts—recently rose by 36% (CNNMoney.com).

"The FDIC may lower mortgage rates for delinquent IndyMac borrowers after suspending foreclosures..." (Bloomberg).

Maybe savers' ultimate vindication will arrive when and if every asset is so deflated, credit is so choked off, and misery is so prevalent that only those with cold hard cash can lob in lowball offers for homes, cars, and everything else. Assuming, of course, they didn't stash all their money in one of the many banks that is about to go under; the feds are closely watching 117 of them—and counting. The phone lines have never been so jammed with nervous clients.

Oh, the joys of saving.

U.S. Cybersecurity Is Weak, GAO Says

The federal government cybersecurity team with primary responsibility for protecting the computer networks of government and private enterprise isn't up to the job, according to a draft Government Accountability Office report obtained by BusinessWeek.

The U.S. Computer Emergency Readiness Team, known as US-CERT, mans the front line in any cyber-attack. The group monitors computer networks for hacker threats, investigates suspicious activity online, and is supposed to issue timely alerts to information technology security professionals from the White House to corporations and electric utilities. But the GAO draft report describes US-CERT as bedeviled by frequent management turnover, bureaucratic challenges that prevent timely sounding of alarms, a lack of access to networks across wide swaths of critical terrain, and an inability to fill large numbers of positions with qualified workers.

Five years after the Homeland Security Dept. took charge of the team as a critical safeguard against threats to national security, US-CERT "still does not exhibit aspects of the attributes essential to having a truly national capability," according to the draft report.

Vulnerable to Foreign Adversaries

Privately, many within government and industry have grown increasingly concerned about the lack of such a capability. Without being able to effectively monitor a wide variety of computer networks across the country and quickly issue warnings of possible attacks, the government is, in effect, flying blind, or at least partially blind, despite the best of intentions. As BusinessWeek reported in April (BusinessWeek, 4/10/08), the concern these days is not merely that a pimply teenager in Bratislava will hack a corporate network or that Russian hackers will shut down a retailer's Web site with a so-called "denial-of-service attack." Rather, it's that there could be a sophisticated intrusion of sensitive computer networks by a potential foreign adversary such as China.

An independent bipartisan commission of corporate executives, network security specialists, and military and intelligence officials plans to go public with its concerns about the issue. "The central problems," James Lewis, a technology analyst at the Center for Strategic & International Studies, plans to tell Congress in testimony prepared for hearings on Sept. 16, "are the lack of a strategic focus, overlapping missions, poor coordination and collaboration, and diffuse responsibility."

A series of troubling intrusions in recent years, grouped under code names such as Byzantine Foothold and Titan Rain, were not initially recognized as being connected. They caused anxiety at major agencies of the federal government and among big defense contractors such as Boeing (BA) and Lockheed Martin (LMT).

Goals Not Being Met

The importance of recognizing patterns of attack across a broad swath of cyberspace is now accepted at the highest levels of the military, intelligence, political, financial, and industrial communities. Worries range from attacks on electric power plants to the potential for using computer networks to undermine a financial institution's viability. Thefts of funds by sophisticated hackers are now routine occurrences around the world.

But recognizing the larger pattern requires the people, technology, and access to sift through huge amounts of suspicious activity, and in its draft report the GAO has evidently concluded the envisioned goal is not being met.

Fannie and Freddie's Open-Ended Future

Treasury Secretary Henry Paulson's surprisingly aggressive move to essentially nationalize (if only temporarily) struggling mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) has been well received overall. But big questions remain as to how the two entities should be restructured once the immediate solvency crisis is past.

That decision ultimately will be made by a new Administration and Congress, but the battle lines are being drawn. Critics have long argued that Fannie and Freddie were doomed by their hybrid nature: They were expected to achieve public goals such as affordable housing while earning rich profits for shareholders. While both of the Presidential candidates pronounced themselves in support of the emergency bailout, the two men have very different views of the long-term role the mortgage companies will play. Republican contender John McCain was quick to argue that they should be downsized and privatized once they return to health. His rival, Democrat Barack Obama, has stressed that the government must move carefully to ensure that any changes won't cause further disruption to the housing and financial markets. Here's a look at options being discussed in policy and financial circles, and what each would mean.

SELL THEM OFF

BACKERS: Republican Presidential nominee John McCain and other conservatives. Former Federal Reserve Chairman Alan Greenspan.

BASICS: This camp believes that Fannie and Freddie should be shrunk down and recapitalized through a combination of asset sales and an infusion of federal funds. Then the entities should be broken up and sold off.

DETAILS: The privatized lenders would be profit-driven, answer only to shareholders, and keep the right to buy mortgage-backed securities for their own portfolios.

FANNIE FREDDIE 2.0

BACKERS: Representative Barney Frank (D-Mass.) and senators Charles Schumer (D-N.Y.) and Christopher Dodd (D-Conn.)

BASICS: This group wants to see Fannie and Freddie's public and private functions more clearly delineated. The two would be downsized but would likely remain publicly traded. Some in Treasury point to public utilities as a model.

DETAILS: Shareholder returns could be capped, and each lender's freedom to develop new products or invest for its own portfolio would be limited.

NATIONALIZE THEM

BACKERS: There are no prominent supporters of this option, but most acknowledge that it's too soon to write it off.

BASICS: Under this scenario, Fannie and Freddie would officially become government agencies focused solely on their public mission of providing liquidity to the housing market and promoting home ownership for low-income Americans.

DETAILS: Fannie and Freddie would no longer have shareholders to satisfy. Also, they would not be permitted to invest in mortgage-backed securities.

What the Freddie-Fannie Bailout Means for Asia

Coke's New Design Direction

When David Butler joined Coca-Cola (KO) almost five years ago, he was given, as he tells it, "the Post-it Note mandate: We need to do more with design. Go figure it out." Butler, who had come from a gig as director of brand strategy at the interactive marketing and consulting firm Sapient, had soon written up a 30-page manifesto laying out a design strategy for the company. But if Butler, who's now vice-president for design, has made an impact at the beverage giant, it's not because of some heady proclamation. Instead it's because he has learned the most effective way to implement design strategy at a company as large and complex as Coca-Cola: avoid the word "design" as much as possible.

"If I'm at a meeting with manufacturing people, I'll say: 'How can we make the can feel colder, longer?'," he says as an example. "Or, 'How can we make the cup easier to hold?'" In other words, he talks about the benefits of smart design in a language to which those he's talking to can relate. Based on several recent brand redesigns—including the new Coke identity work that won the Grand Prix at the Cannes Lions awards program in June—and innovations such as an aluminum bottle and a new family of coolers, this surreptitious approach seems to be working. Butler leads a team of 60 designers—a mix of graphic and industrial designers, some poached from companies such as Apple (AAPL), Nike (NKE), MTV (VIA), Target (TGT), and Electrolux—at four centers around the world. All are focused on what Butler describes as a "fix the basics" strategy.

The Old Simplicity Gone

While there are few companies with a richer design heritage than Coca-Cola, in recent years the company seemed to have lost its design savvy. The iconic Coke "contour" bottle, adorned with the globally recognized script and the simple ribbon graphic, for instance, had given way to a plastic bottle or aluminum can on which the logo had to compete against random bubble graphics, extraneous marketing messages, or seasonal images. When Butler reviewed the state of design at Coca-Cola on his arrival, evaluating everything from the branding created for the then-recent 2004 Olympics in Athens to the process that the company's 300-plus bottling partners went through to get approval for new bottle designs to the customer experience of buying a Coke from a vending machine, he found a lot that needed fixing. Coca-Cola was a global company with 450 brands, more than 300 different models of vending machines, innumerable bottling and retail partners, and no consistent global design standards.

It wasn't that the company had forgotten about design altogether. Former president Steven Heyer, who resigned in 2004 after being passed over for the CEO job, helped start Studio Red, a collaboration with hip New York design and architecture firm, Rockwell Group. As Tucker Viemeister, then creative director of Studio Red says: "Our mission was to be innovative in any aspect that we could. We had this gigantic canvas." Studio Red came up with lots of interesting projects: the Coke Cruiser (a scooter with a cooler at its front conceived as a mobile vendor at festivals or concerts) as well as a tasting salon, a retail environment where people could sample a new drink like Coke Zero. But many of them never made it beyond the concept stage.

Coca-Cola: A Strong Stock in Shaky Times

Coke’s New Design Direction

The U.S. Closes the Mobile Innovation Gap

It was a familiar refrain: The U.S., the birthplace of the Internet, was a wireless backwater. Even early in this decade, many viewed the U.S. as a developing market, fit mostly for hand-me-downs from the more advanced Europeans and Asians. Unlike unified Europe, the U.S. market was fractured by warring radio standards and dotted with dead zones. Long after cellular was a way of life elsewhere, Americans still carried beepers and left messages saying to call cell phones only in emergencies. America was to be pitied, and the competitive upshot was huge: The next great innovations in wireless, including the mobile Internet, were likely to arrive from outside the U.S.

Yet the competitive balance is shifting. As the focus of the wireless world moves toward Internet communications, the U.S. strength in software, most notably at Google (GOOG) and Apple (AAPL), is pushing the U.S. ahead as a laboratory for wireless development. American users are catching up, too. In the past year, the U.S. surpassed Western Europe in the number of subscribers to the high-speed networks known as 3G, according to consultancy comScore M:Metrics (SCOR). "The industry needs to stop talking about the gap between the U.S. and Europe," says Kanishka Agarwal, vice-president of mobile media at Nielsen. "We have caught up, and we have already passed."

The change has been dramatic. While a year ago 6% of Americans who bought phones purchased smartphones, capable of Web access and application downloads, their ranks rose to 16% in early 2008, according to consultancy Nielsen Mobile's survey of 70,000 U.S. wireless subscribers. Over the same time, in Western Europe, the jump in recent smartphone buyers was smaller, from 11% to 17%, according to Nielsen.

Stride for Stride With Europe

The U.S. is now neck and neck with Western Europe in use of short text messages (SMS), multimedia messaging, and mobile games. More Americans, meanwhile, use mobile e-mail and instant messaging, according to Nielsen Mobile. Mobile Web browsing in the U.S. is also on a tear, but it's still a few percentage points behind the Europeans. Some 17% of Americans browse on the mobile Web, compared to 20% of Western Europeans, according to Nielsen.

True, both regions lag behind the hottest Asian markets in data speed and mobile Internet usage. But the progress in the U.S. has boosted the country as an advanced wireless market and laboratory for Europeans as well as Asians. "It used to be the biggest sandbox they could play in was outside the U.S.," says Mark Donovan, senior analyst at comScore. "Now it turns out this is a big market."

At a new Nokia (NOK) lab in San Diego, 400 employees are tailoring Nokia's products to AT&T's needs. Japan's NTT DoCoMo (DCM) and other Asian carriers are scouting Silicon Valley looking for local mobile startups to fund. European mobile software makers like Nokia-controlled Symbian are expanding their U.S. offices. The U.S. is fast becoming a fulcrum for mobile advertising, games, and other applications, says John Forsyth, vice-president for strategy at Symbian in London. "Our head turned westward completely in terms of talking to developers."

Apple Changes the Game

The biggest game-changers are Apple and Google. In July, Apple debuted its iTunes App Store, offering hundreds of applications from third-party developers in many countries worldwide. Easier to use than most previously available mobile stores, Apple's effort has attracted scores of programmers who've already created more than 3,000 innovative applications (BusinessWeek.com, 9/5/08). After 10 years of efforts, Symbian has released fewer than 10,000 third-party applications. "Apple has fundamentally changed the industry from a focus on hardware to a focus on software and content," says Ken Dulaney, an analyst at consultancy Gartner (IT). "We can drive innovation for sure."

The U.S. Closes the Mobile Innovation Gap

The U.S. Closes the Mobile Innovation Gap