As 1998 ended, such destinations appeared to be a mirage on the horizon, however. When Ivester abruptly summoned securities analysts for a meeting on December 11, with only a few hours’ notice, they wondered whether it was to announce a new disaster. Indeed, Ivester disclosed that the Company’s fourth-quarter performance would be even more dismal than he had estimated a few weeks before, because of currency devaluations, higher marketing expenses, and continuing economic turmoil. Yet Ivester underscored his determination to continue Coke’s world domination by announcing, at the same meeting, that Coca-Cola would purchase most of Cadbury Schweppes’ overseas soft drinks—Dr Pepper, Crush, Schweppes, Canada Dry, and a range of juice drinks and bottled water—for $1.85 billion. The deal excluded Cadbury products in the United States, France, and South Africa. Despite this news, Coke stock immediately tumbled 5 percent to become the day’s worst performing Dow stock. Even the imperturbable Ivester admitted during the meeting that Russia was “just a mess.” The Cadbury deal was not earth-shattering, and besides, there was no guarantee that regulatory agencies in various countries would allow the sale. French authorities were, after all, still holding up the Orangina purchase of the previous year.
After some wild ups and downs during the year, Coke’s share price ended 1998 precisely where it had started, at $67. Operating income for the year had dropped a percentage point, but net income was off 14 percent. With most of the bottling consolidations completed in 1997, Coke could no longer rely on reselling bottlers to boost earnings per share, which fell 13 percent. Nonetheless, even with an atrocious fourth quarter, Coke grew its case volume by 6 percent worldwide—just slightly below its goal of 7 percent.
PEPSI BOUNCES BACK
To make matters worse for Coke, Roger Enrico was leading a recharged PepsiCo. In October 1997, Enrico spun off Pepsi’s restaurants, including Taco Bell, Kentucky Fried Chicken, and Pizza Hut, as Tricon Global Restaurants, allowing Pepsi to focus only on soft drinks and snack foods. Until then, Coke fountain salesmen could stymie Pepsi sales by asking fast food chains, “Why would you want to buy from a competitor?” Pepsi soon struck deals with Pizza Inn, Hard Rock Cafe, Planet Hollywood, and Warner Brothers theaters. Nonetheless, Coke owned 65 percent of the U.S. fountain business, compared with Pepsi’s 22 percent. Coke countered by cementing a multiyear contract with Burger King and Wendy’s and adding other outlets.
In frustration, Pepsi sued Coke in 1998, alleging that Coca-Cola violated the Sherman Antitrust Act by threatening to cut off supplies to food-service distributors if they carried Pepsi, too. * Coke freely admitted dumping distributors that carried Pepsi. Indeed, its contracts specified that offering Pepsi was a “conflict of interest.” But Coke asserted that its archenemy could always sell its soda directly to customers and that its distributors were “an extension of Coca-Cola.”
In 1998, as it celebrated its centennial, Pepsi also moved aggressively to offer or acquire new drinks. When acesulfame potassium (Ace-K), a new sugar-free sweetener with a longer shelf-life than aspartame, was approved by the FDA, Pepsi came out with Pepsi One, a new one-calorie diet drink. Pepsi’s Mountain Dew continued to grab chunks of market share with teenagers, hardly disturbed by Coke’s Surge, which wasn’t surging and would sputter out a few years later. To counter Coke’s highly successful Sprite, Pepsi now introduced Storm, its own caffeinated lemon-lime effort. Finally, Pepsi bought Tropicana for $3.3 billion, giving it the market-leading premium orange juice to counter Coke’s Minute Maid.
The Pepsi Stuff campaign, in which consumers could redeem purchase points for clothing or mountain bikes, fueled a 6 percent sales hike in supermarkets. Still, Pepsi was playing catch-up. In 1997, Pepsi paid $50 million to become the official sponsor of Major League Baseball for five years, even though Coke was sold exclusively in most ballparks. At Shea Stadium, the Pepsi Party Patrol used a shoulder-mounted air cannon to launch Pepsi T-shirts into the upper decks.
Overseas, Pepsi sharpened its focus to markets where it had a chance, forming an alliance with Brahma, Brazil’s largest brewer, and signing a franchise bottling agreement in Norway. Pepsi built new bottling plants in Venezuela, Russia, Greece, India, China, and elsewhere. From a huge international deficit in 1996, Pepsi International came back the following year with a modest $17 million in positive operating income. As Coke stumbled following its 1993 return to India, Pepsi made inroads there. In Venezuela, in the wake of the Cisneros switch to Coca-Cola, Pepsi came roaring back, teaming up with Polar, a local bottler, and offering deep discounts, heavy advertising, and numerous vending machines. Coke’s Venezuelan market share dropped from 81 percent to 70 percent.
On the domestic front, marketing chief Brian Swette resigned amidst complaints from bottlers about ineffective ads and declining Pepsi share. During the 1990s, Pepsi’s ad campaigns and slogans had been uncharacteristically lame. “Gotta Have It” implied that people bought the caffeinated beverage only because it was addictive. “Be Young, Have Fun, Drink Pepsi” sounded like a bland fifties’ throwback, while “Nothing Else Is a Pepsi” lacked fire. “Generation Next,” introduced in 1997, was a wordplay on Generation X, though the ads targeted an even younger cohort (one ad featured a teen with multiple piercings in ears, nose, and eyelids), and they alienated older consumers. In 1999, new marketing chief Dawn Hudson (with input from Pepsi veteran Alan Pottasch) introduced the “Joy of Cola” campaign, in which a cherubic little girl turned nasty when given a Coke instead of a Pepsi, her voice suddenly deepening to a man’s. The ads were funny and appealed to a broader audience.
After ignoring the high-margin vending machine market for years, Pepsi threw itself into cooler placement, increasing the number by 240 percent in two years. In the marketplace, Roger Enrico stressed the synergies of Pepsi-Cola, Frito-Lay, and Tropicana, which accounted for $11 billion in annual supermarket sales. Following Coke’s lead, Pepsi spun off its company-owned bottlers as the publicly-owned Pepsi Bottling Group, while also arranging other bottler consolidations. The cover of the 1998 PepsiCo annual report featured a line of its products headed by a duckling. “You get your ducks in a row,” Enrico wrote in his message to shareholders, “then put some real money behind them.” That appeared to be exactly what Pepsi was doing.
HARD EDGE TO A SOFT DRINK
Despite Pepsi’s new feistiness, Coke continued to dominate Pepsi outside the United States by a 3.6-to-1 margin. Although it would take a miracle for Coke to reach its goal of 50 percent of the U.S. market share by the year 2001, it had snared 45 percent by 1999, versus Pepsi’s 31 percent. The Big Red Machine may have been slowed by global economic woes, but it still appeared unstoppable in the long run. And under Doug Ivester it was indeed more of a machine. As Fortune reporter Betsy Morris put it, Ivester seemed the model CEO for the twenty-first century. “He marshals data and manages people in a way no pre–Information Age executive ever did or could.” Ivester was the driving force behind Project Infinity, a computerized Coke information network to supply real-time financial and marketing data to the worldwide Coca-Cola system, and he had hired a “chief learning officer” to institutionalize the Coke mantra.
Like Robert Woodruff, who used to root in the trash to ascertain the proportion of Coke bottle caps, Doug Ivester liked to prowl the back alleys of the world to see where Coke was or was not. He spent a third of his time on the road. In a 1998 visit to Shanghai, he was annoyed to find no ice-cold Coke on an impromptu foray. “Why wouldn’t you put Coke in here?” he asked a manager as they popped into a tiny cosmetics store. As chief Coke investor Warren Buffett put it, “He looks at any time anyone swigs any beverage other than a Coke as a personal insult.”
Like his predecessors, Ivester stressed the need to “do the right thing.” Coke employees should always obey the law while helping communities where the Company sold drinks. Even in philanthropy, however, everything had to contribute to the bottom line. “It’s the right thing to do, and it’s very right for business, too,” he stressed. “Use your imagination to
leverage community-relations activities against marketing activities,” a Coke memo urged. “Make sure the project is measurable.” Also, Coke should be assured that it was the “signature” partner that would get public credit for do-gooding.
But many Coke veterans wondered whether a warm heart really beat deep inside Ivester’s well-oiled machine. “It is not that Ivester is a brute,” wrote Fortune’s admiring Betsy Morris, “so much as a relentless force.” Tell that to longtime Coke employees such as Ray Morgan, who was forced out of the Company at Christmas 1998 after a thirty-year career that included spearheading innovative vending machines and the return of the Coke contour bottle. While still based in Atlanta, Morgan had been assigned to the Greater European Group and spent most of his time jet-lagged, trying to care for his eighty-seven-year-old mother and seven-year-old daughter. When he asked for a reassignment, he was refused. His story was not unique. “A lot of people have left Coke in the last few years,” he said in a 1999 interview.
One former CCE manager commented: “Doug is a very calculating, brilliant guy. He’s quietly aggressive. He’ll cut your legs off and you won’t know it.” To his credit, however, Ivester initiated an internal audit of Coke, asking employees to answer the question, “Is The Coca-Cola Company arrogant?” Few people dared to respond, but one anonymous contract worker answered with an emphatic Yes. “There is grave cause for concern in a company that has high turnover in any given department and no one bothers to understand why, cause for concern when people are fired because they did not say what others wanted to hear.”
Even during Goizueta’s last few years as CEO, Doug Ivester’s imprint was on Company policy, particularly at giant bottler CCE, where he was chairman. Although Ivester was unfailingly soft-spoken and polite in person, he demanded a no-holds-barred business style, and, in such a fierce competitive environment, unpleasant allegations began to surface. Jeffrey Wright, a former CCE driver, claimed that two managers tried to bribe him in August 1994 in order to defeat a union and he had taped phone conversations to prove it. U.S. Attorney James Deichert portrayed the CCE corporate culture as a “pressure cooker.” The government eventually lost the 1997 federal bribery trial, however, despite Wright’s testimony, because he had edited the tapes and no longer had the originals. In another case, Coke allegedly advertised a Minute Maid apple juice as containing 100 percent apple juice, when in fact it had added sweeteners from nonapple sources. Coke settled out of court for $1.5 million.
Even as Coke was claiming in the Pepsi lawsuit that its distributors were an extension of the Company, CCE aggressively competed against its own distributors for lucrative vending machine profits. One morning when a California distributor stopped to inspect his coolers on a college campus, he found a CCE machine right next to it, undercutting his price by ten cents a can. “There’s just no way I can compete,” he complained. Across the country, traditional soft drink distributors found themselves in the same situation. They could buy product cheaper from a Walmart Sam’s Club than they could from CCE, but the Coke bottler asked Walmart to limit the amounts it would sell to distributors. Because of the 1980 Soft Drink Interbrand Competition Act, distributors were forbidden to “transship” cheaper product from outside their territories. Ironically, the law had been passed to protect small bottlers, an endangered species twenty years later.* When desperate Maryland distributor B. K. Miller Company sued CCE, accusing it of fraud, wiretapping, and charging discriminatory prices in an effort to drive the distributor out of business, the big bottler countersued, accusing the distributor of transshipment. The case was settled out of court.
Meanwhile, two issues from Coke’s past reappeared to haunt Ivester. Coca-Cola had sold its Florida orange groves in 1996, and protesters outside Atlanta’s World of Coca-Cola complained that the new Brazilian owners were using child labor.
The orange juice protest fizzled, but in April 1999 four African Americans brought a class action suit against The Coca-Cola Company for discrimination in pay, promotions, and performance evaluations. Cyrus Mehri, the lawyer representing the plaintiffs, had made his name as part of the legal team that won a $176 million discrimination settlement against Texaco in 1998. The complaint alleged that there were “dramatic differences in pay” at Coke’s corporate headquarters, such that the average black employee was paid nearly $27,000 less than the average white employee. A “glass ceiling” allegedly prevented most African Americans from advancing upwards, and “glass walls” kept them out of powerful areas such as marketing and finance. If the suit were granted class action status, it would be open to any black employee who had worked at Coca-Cola since April 22, 1995.
The complaint offered juicy hearsay anecdotes, including the allegation that the marketing director for an Alabama Coke bottler introduced himself in 1996 or 1997 as the “Grand Cyclops,” a clear reference to the Ku Klux Klan. It also quoted Doug Ivester as saying a few years earlier that it would take fifteen or twenty years before African American employees were well represented at senior management levels. The Company emphatically denied that it practiced any form of racial discrimination, while it hastily created a council on racial diversity.†
MASS HYSTERIA IN BELGIUM
Even as Coke struggled to recover from the global recession, it suffered a catastrophic health scare in Europe. On June 8, 1999, thirty-nine students in Bornem, Belgium, collecting bottle caps for a contest, complained of nausea and headaches and attributed it to their Cokes. They were sent to a health clinic. The media reported it. Two days later, Belgian students in another city reported dizziness and stomachaches after drinking canned Cokes from a vending machine. The media reported it, and concern spread.
Coca-Cola Enterprises, the U.S.-based megabottler partially owned by the Coca-Cola Company, supplied the questionable Coke, although the bottles came from an Antwerp plant and the cans from the mammoth Dunkirk facility. Scrambling to determine the possible cause, Company investigators found that some of the bottled drinks had a faint rotten egg smell because a batch of carbon dioxide had been contaminated with hydrogen sulfide. At the canning plant, some wooden pallets had been disinfected with phenol, another chemical with an unpleasant odor. Although neither problem should have caused any illness, taken together they were embarrassment enough for Coke, which had always prided itself on stringent quality standards.
As fears mounted, Coke officials explained what they had discovered. CCE voluntarily recalled affected bottles and began to seal off its vending machines. Then, on June 14, more students fell ill after buying vended Cokes, and the panicked Belgian government ordered a complete recall while banning all of the Company’s products. Word of the purportedly poisoned soft drinks spread rapidly, along with consumers claiming to have imbibed company products that made them ill, too. Eventually, some 250 European imbibers came down with the mysterious Coca-Cola bug. France, the Netherlands, and Luxembourg banned Coke products, too.
Clearly, the Coke brass was caught off guard by how rapidly the crisis escalated. On June 16, two days after the ban, Doug Ivester issued his first public statement, a bland bit of bureaucratese saying that the Company was “taking all necessary steps” to ensure its beverages’ quality. But the next day, Ivester flew to Europe to exercise personal damage control. He penned an apology that ran in full-page ads in European newspapers, he appeared in a ninety-second TV spot, and he offered to buy every Belgian—all ten million of them—a free Coke. Even that offer fizzled when the Belgian government called a halt to this “Restore” marketing campaign, claiming it violated anti-trust laws.
Finally, by June 24, both Belgium and France had rescinded their bans, though Coke still had to destroy its surviving stock before it could gear up again. The massive recall cost the company and its major bottler over $100 million, not to mention a severely tarnished image.
Just as the Belgian crisis was finally winding down, the French media publicized rumors that rat poison had somehow contaminated Coke. Then a Polish consumer found some mold in BonAqa, Co
ke’s European bottled water. The mold was not a health problem, but some reusable bottles hadn’t been properly cleaned. As a result, Coke spent another $1.8 million to withdraw and destroy the product.
Yet, in all these incidents, Coke probably didn’t make anyone sick, as every scientist who studied the Belgian scare concluded. Perhaps there was an off odor (even that much was unclear), but nothing to account for the panic, the nausea, the dizziness. Those are the classic vague symptoms of psychosomatic illness. Coke found itself embroiled in a case of mass hysteria, or what psychiatrists call mass sociogenic illness.* Belgians were already spooked by the recent revelation of dioxin in their meat and poultry, which itself had come in the wake of “mad cow disease.” They were ready for another food scare, and what better victim than a gigantic American company that corporation-bashers loved to vilify? It was because of Coke’s size, ubiquity, power, and popularity that the rumors spread so quickly. The media reported it, with insufficient explanations and a great deal of sensationalism and credulity. Caught in a catch-22 bind, Coke had no choice but to apologize for something it probably didn’t do. Nonetheless, the Company’s slow, ambiguous response troubled analysts, and some observers questioned whether Ivester should try to manage such problems single-handedly—wasn’t it time to appoint a second in command?
Meanwhile, egged on by Pepsi, the European Union raided Coca-Cola offices in four countries, seizing documents it hoped would prove that Coke illegally tried to force competitors out of the market. Jumping on the Coke-bashing bandwagon, Australian regulators announced an investigation of Coca-Cola Amatil for possible marketing abuses.
For God, Country, and Coca-Cola Page 67