Business Stripped Bare (23 page)

If something catastrophic happens to a company, and the chairman actually appointed that person who caused this systemic failure of the business, then the chairman certainly needs to consider his or her position. If a major bank does not have the security systems in place to protect itself from a rogue trader, and that trader does immense damage to the company, then, yes, the chairman or chief executive should probably consider resigning their position. They are ultimately responsible.

In most other cases, managers should stay where they are and sort their messes out. It's what they're paid for, after all. Most importantly, someone should apologise for the mess happening in the first place.

You definitely should get the best people around you when confronted with a serious problem. Don't try to deal with it all by yourself. Don't be afraid to seek help and advice. If someone else is better than you at dealing with it, then for goodness' sake delegate it. And equally for goodness' sake, don't jump down their throats if they fail.

My management team reckon 2003 wasn't exactly a vintage year. That was the year Apple's first iPod personal music player was emerging. We had a couple of very bright people from Palm who came over with their own funky version of the MP3 and a range of accessories. The analysis didn't truly stack up according to the management team but I insisted we push on with it: our very own MP3 player, Virgin Pulse! We had to make some heroic assumptions about how to scale up because we were buying the devices from China and Taiwan. We spent $20 million on designing and bringing it to market – and our products were critically acclaimed in the United States – but it didn't have the simplicity of the iPod and the cost of manufacturing just throttled us out of the marketplace. Apple had taken a leaf from Texas Instruments, the pocket-calculator experts who dominated their market for many years. If you drive down the retail price fast enough when you are the dominant player, you never allow anyone else to catch up because they can't make enough money. It requires the dominant player to be brave, because it can mean cannibalising your existing sales by dropping the retail price. That's what happened when iPod introduced the cheaper and smaller iPod nano – it slammed the door on anyone else trying to build significant market share beneath them. The Virgin Pulse bombed and we had to write off $20 million.

It's often hard when you're focusing on the day-to-day in business to admit that what you thought was right becomes wrong. For example, we put a truly innovative upper-class seat on Virgin Atlantic's planes in 2000. However, we took too long to develop them and did not keep the project secret enough. British Airways got wind of what we were up to (and even got hold of our plans) and out-innovated us with a better seat. Customer feedback was swift and brutal. People were voting with their credit cards and travelling with other airlines – and our airline began to suffer. We could have kept the seats until they depreciated, but we decided the mistake was just too ghastly to live with. We cut our losses and dumped them. The cost to us? £100 million. The benefit to us? We now have the best business-class flat beds in the world, designed by our own team, and we have created a product our rivals cannot match. We have easily recouped our losses with this decision.

It's embarrassing to admit this stuff, and I think it's a fear of embarrassment that discourages many chairmen and bosses from doing their jobs properly. It's all very well sitting there wondering why your business is disappearing, but it's only by getting out from behind your desk and sampling the products that you will ever see what's going wrong. When you have found out what is going wrong, the next step is to get the team involved to fix it rather than fire them. That way, you can keep your team together and close the door on rivals who might benefit from your mistakes by hiring the very people who have just learned the lesson the hard way.

Starting a soft-drinks war with Coca-Cola was crazy. It was one of our highest profile business mistakes, though it was also one of the things that raised the profile of the Virgin name in America. Launching Virgin Cola in 1994, we were having fun and revelling in underdog bravado, so pleased to be snapping at the heels of the biggest dog in town. Taking on Coke taught us two things: how to make a great cola with a different taste; and how to antagonise a global business that brought in $28 billion in 2007, with profits of $5 billion.

It was only several years later that I learned how Coca-Cola eventually set up a SWAT team to ensure that Virgin Cola never got a proper foothold in the soft-drinks market. Yes, we somehow contrived to blind ourselves completely to the power and the influence of a global brand that epitomises the strength and reach of American capitalism.

Here's how we did it – and, whatever you do, don't try this at home.

The Virgin Trading Company, a wholly owned Virgin subsidiary, was our beverage start-up division. Virgin Spirits, a joint venture with Scottish whisky distiller William Grant, had been established to market and distribute Virgin Vodka. You can still enjoy a bottle of Virgin Vodka – it's available on Virgin Atlantic flights, along with our special Glenfiddich Scotch whisky.

The Virgin Cola Company was a joint venture with the Canadian soft-drink company Cott Corporation, the world's largest supplier of retailer own-brand soda drinks. Cott bottled own-brand products for such chains as A&P, Loblaw's and Safeway in Canada and Albertson's, K Mart, Safeway, 7-Eleven and Wal-Mart stores in the United States. Virgin Cola was introduced in the UK in 1994 and we originally achieved success in the pub and restaurant trade. I was convinced by the late Gerry Pencer, the chief executive of Cott Corporation, that we were in a position to make a strong bid for a portion of the global market. After all, Cott had customers in Australia, Britain, Hong Kong, Israel and Japan, and these were key markets for us. But Cott baulked at taking on Coke directly. We should have listened.

We knew there was a lot going on behind the scenes. One of Tesco's main buying team, John Gildersleeve, a senior director who was a non-executive of several companies, had indicated that they would take one million cases of Virgin Cola. The next we heard, he had told Simon Lester at Cott that they wouldn't be supporting us after all. This was three weeks before the launch – and the invitations had gone out for the event at Planet Hollywood in London.

I phoned John to ask why the change of heart. He said: 'It was a very fine decision – the door's not completely closed.' He knew I wanted to make a press announcement, and he knew I needed the confidence of having a major retailer on board. 'But we have two concerns. First, there are some commercial considerations. They can be resolved. But second, there's this whole question of the brand positioning and what it might do for us.'

He explained to me that a solus arrangement – an exclusive deal with Tesco – is a two-edged sword. He said Tesco would be identified with the product whether it was good or bad. If I got fed up with it in three months' time, it would reflect on Tesco – good or bad. He said when Sainsbury's launched their own Classic Cola, Tesco adopted a position that they would only sell 'The Real Thing'.

John said that he was worried that we might be a bit inflammatory in the way we attacked Coca-Cola. He pointed out that Coke had been very good customers for Tesco and the last thing he wanted was Coke being taken out of his stores. This was an honest opinion that I respected. I could see Tesco's position, but it was very important for Virgin Cola to be on the supermarket shelves – preferably on offer at the end of the aisles.

I explained that every company we start, we stick with; that we wanted to give the public more choice; and our campaign was focused on defending our position and explaining why we were better – we weren't interested in merely slagging off a competitor. I told him this applied to all our campaigns – even to Virgin Atlantic's battle with British Airways. I pointed out our reputation among consumers was very good. (A NOP market research survey in a recent edition of
PR Week
was conveniently to hand to back this up!) Both David Sainsbury of Sainsbury's and Archie Norman at ASDA had also told me they would stock Virgin Cola.

The next day John came to see me in person. As a consequence of the call and our meeting, Tesco changed its mind and decided to stock our cola. It was a wonderful boost for us. In December, sales of cola went up 36 per cent in Tesco stores – and 75 per cent of these were sales of Virgin Cola.

Then Coke started to make life more difficult for us.

I was in a Virgin Trains meeting when one of the former British Rail executives told me he had been on a management away-day at an assault course, and he had met some Coca-Cola managers. He'd asked them what they were doing on the assault course. They replied: 'We're getting ready for action with Virgin Cola.'

I thought the story was over the top at the time, but with hindsight I can see that, once Coke had woken up, of course they had read the launch of Virgin Cola as a declaration of war.

Coke's commandos went into action. Coca-Cola's secret recipe is a syrup essence shipped to hundreds of independent bottlers around the world and they are responsible for producing, packaging, distributing and merchandising. Coke visited every bottling business and said they didn't want Virgin Cola to be produced by their bottlers. It wasn't simply the cola – the bottlers also depended on their livelihoods for the other soft drinks in the Coke portfolio, such as Sprite, Fanta, Diet Coke and Minute Maid: all highly lucrative business for the bottlers.

In 1998, we acquired Cott's share of the business and relaunched Virgin Cola with a further $25 million investment. Our goal: to take on Coke on their home territory. Coke wanted war. So we drove a British tank into Times Square in New York and fired a mock round at the Coca-Cola sign (we'd secretly had it wired up the night before by a pyrotechnical team and it looked like it had gone up in smoke) before ploughing through a massive wall of cola tins. Sightseers ran wailing from the square and we nearly ended up in jail.

In Britain, Virgin Cola was flying off the shelves. In France, we were closing in on Pepsi, doing well in Belgium and Switzerland and negotiating a franchise in Japan and Italy. We thought we might be able to pull it off.

In 2004, I was invited to meet my new corporate bank boss, Diana Brightmore-Armour, a very bright woman working in London for Lloyds TSB. We were enjoying a fun evening when she revealed to me: 'Richard, you don't know this, but I was working for Coca-Cola in Atlanta when you launched Virgin Cola – I knew what an impact you would have so I persuaded the senior management to set up a SWAT team to ensure that Virgin Cola failed.'

I was quite amazed. In 1997, we knew that Coca-Cola were keen to drive us out of business but we didn't realise to what extreme.

'I was at a senior executive meeting when it was reported that you were preparing to launch the cola into America. Most people at the headquarters were rather blasé. They didn't really know about Virgin and thought it just another local soft-drink brand.' But she garnered support from one or two Brits at the meeting and they helped her warn the bosses: 'This isn't just anyone – this is Richard Branson, who has a lot of clout and can build a major brand. We need to stop this as soon as possible,' she told them.

While Coca-Cola had few worries about a regional brand competing in a local marketplace with Coke and its other products, it didn't want to face another competitor such as Pepsi. My dining companion revealed how a team came to England to set up another team to ensure that distributors and shops were all given extra incentives to sell Coke – and keep us off the shelves. I heard later that the number of Coke people trying to stop us was bigger than the whole of our team in Virgin Cola! We truly were the underdogs.

After gaining a peak of 75 per cent of sales at Tesco and over 10 per cent of total UK market sales, sales started to decline. Coca Cola's SWAT teams were beginning to punish us. Coke started discounting cola more cheaply than bottled water – an offer we couldn't match: we simply didn't have the money. The only way to make money on a commodity where the price is so low is to ensure that you sell huge volumes – that's what the Coca-Cola company does. Coca-Cola threatened small retailers that they would take out their fridges if they continued to stock us. They also hinted that they would withdraw Coke altogether from the same retailers.

Our Coke escapade led to a number of articles asking whether Virgin had a proper strategy in place. A
Business Week
cover article questioned whether we had the ability to manage Virgin's 'chaotic' empire. Well, of course we had. We were a way-of-life brand, offering a consistent and enjoyable experience to our customers whether they were flying the Atlantic or making a mobile phone call. Virgin wasn't chaotic – it was utterly focused on the job of realising its core values in many diverse sectors.

Colas are a drink young people enjoy, so we figured a Virgin Cola would be a good idea. Coca-Cola is a huge corporation, and since Virgin is all about outfoxing the big guy, we leapt at the opportunity to take them on. Colas are pretty much indistinguishable as drinks, and much of the customer's enjoyment comes from brandishing their favourite brand; the Virgin brand was popular, so how could we lose?

We lost by ignoring the gaping hole in this otherwise rather solid-sounding proposition: as a cola manufacturer, we weren't the people's champion. They already were.
They
were getting their product into people's hands, every day, everywhere.
They
were offering their product at an unbeatable price because they had the biggest economies of scale on the planet.
They
were offering their customers a rather nice soft drink into the bargain. And their brand name was so ingrained in people's minds that when they asked for a Cola, they'd call it a 'Coke'.