"Our product is quite healthy. Fluid replenishment is a key to health.

Coke does a great service

because it encourages people to take in more and more liquids." - Michael Douglas Ivester,
Coke's Chairman and CEO.

"Public schools are funded by the public to educate the children as provided by state law. It is
totally inappropriate that its facilities and employees are being used by corporations to increase
their own profits on public time and with public dollars." - Dr. Brita Butler-Wall, Executive
Director, Citizens' Campaign for Commercial-Free Schools, US.

Coke - Ethical Issues: The Recall

On June 13, 1999, Coca-Cola1 (Coke) recalled over 15 million cans and bottles after the Belgian
Health Ministry announced a ban on Coke's drinks, which were suspected of making more than
100 school children ill in the preceding six days. This recall was in addition to the 2.5 million
bottles that had already been recalled in the previous week. The company's products namely
Coke, Diet Coke and Fanta had been bottled2 in Antwerp, Ghent and Wilrijk, Belgium while
some batches of Coke, Diet Coke, Fanta and Sprite were also produced in Dunkirk, France.

Children at six schools in Belgium had complained of headache, nausea, vomiting and shivering
which ultimately led to hospitalization after drinking Coke's beverages. Most of them reported an
'unusual odor' and an 'off-taste' in the drink. In a statement to Reuters, Marc Pattin, a spokesman
for the Belgian Health Ministry explained the seriousness of the issue: "Another 44 children had
become ill with stomach pains, 42 of them at a school in Lochristi, near Ghent, northwest
Belgium. We have had five or six cases of poisoning of young people who had stomach pain
after drinking (the suspect beverages)." In the same week, the governments of France, Spain and
Luxembourg also banned Coke's products while Coke's Dutch arm recalled all products that had
come from its Belgium plant. The entire episode left more than 200 Belgians and French, mostly
school children, ill after drinking the Coke produced at Antwerp and Dunkirk.

The company had to assure its British customers that the products made in its UK factories were
safe. By June 15, 1999, Coke had recalled about 30 million cans and bottles, the largest ever
product recall in its 113-year history. For the first time, the entire inventory of Coke's products
from one country were banned from sale. As part of a damage control exercise, Coke sent a team
of scientists to Europe. During its visit to Europe after a week of these incidents, Coke's
chairman and CEO Michael Douglas Ivester said, "We deeply regret any problems encountered
by our European consumers in the past few days." Coke Belgium even announced that it would
reimburse the medical costs for people who had become ill after consuming its products.

1] Coca-Cola, based in Atlanta, US, is the world's largest soft drinks company.

2] These soft drinks were bottled by Coke's bottlers which were not owned directly by the parent
company.

1
The Recall Contd...

The recall had a significant negative impact on Coke's financial performance with its second-
quarter net income coming down by 21% to $942 million. Moreover, the entire operation cost
Coke $103m (£66m) while its European bottling venture showed a 5% fall in revenues. Analysts
felt that the Belgium recall was one of the worst public relations problems in Coke's history. One
analyst3 alleged that the company had information about people who had become ill weeks prior
to the above incidents. Coke had an opportunity to disclose this information but it did not do so.

He blamed Coke for being unethical in not disclosing the information, "The instinct is to pull
information in, and that is almost always wrong. The right move is to focus on the health of the
customer. Even though you don't think this information is relevant, you should get it out -
because that allows people who might think it is relevant to go through whatever process they
want to go through. Coke might have done a lot more than it did in the opening days of the
crisis." Another issue, which worried analysts, was the illness caused to the innocent school
children. They blamed Coke's promotion strategy to sell soft drinks to school children which had
raised lot of controversies in the US.

Background Note

Dr. John Pemberton, an Atlanta-based pharmacist, developed the original formula of Coke in
1886. It was based on a combination of oils, extracts from coca leaves (cola nut) and various
other additives. The ingredients were refined to create a refreshing carbonated soda. Pemberton's
bookkeeper, Frank Robinson, suggested that the product be named 'Coca-Cola'. He even
developed a way of lettering Coca-Cola in a distinctively flowing script. On May 8, 1886, Coke
went on sale for the first time in the Joe Jacobs Drug Store. The first Coke advertisement
appeared in 'The Atlanta Journal' on May 29, 1886. Pemberton, with modest help from several
investors, spent $73.96 on advertising, but was able to sell only 50 gallons of syrup at $1 per
gallon. The product slowly gained acceptance after a heavy outpouring of free sample drinks.

In 1888, after Pemberton's death, Asa Candler, Pemberton's friend and a wholesaler druggist
purchased a stake in the company. Coke sales soared even without much advertising and as many
as 61,000 servings (8 ounces) was sold during 1889. Sensing the potential of the business,
Candler decided to wind up his drug business and be associated with the Coke full time. As the
business expanded, Candler also increased the advertising outlay. By 1891, Candler had
complete control of Coke for $2,300. In 1892, Candler formed 'The Coca-Cola Company' and, a
year later, registered 'Coca-Cola' as a trademark. Only Candler and associate Robinson knew the
formula. It was then passed on by word of mouth and became known as the 'most closely
guarded secret in the American industry'. Despite occasional rumors, company sources
maintained that cocaine was not an ingredient in Coke's formula.

3] Thomas Donaldson, professor of legal studies at Wharton and Director of the Wharton Ethics
Program, in an interview with Knowledge@Wharton.

2
Background Note Contd...

By 1895, Coke was sold in all parts of the US, primarily through distributors and fountain
owners. When it was first launched, Coke had been advertised as a drink, which relieved mental
and physical exhaustion, and cured headache. Later, Candler and Robinson repositioned Coke as
a refreshment drink. In the beginning of the 20th century, corporations in the US drew flak for
promoting adulterated products and resorting to misleading advertising. Coke was an ideal target
for such attacks. The US government passed the Pure Food and Drugs Act in June 1906. A case
was registered against Coke and the trial, which opened in March 1911, attracted widespread
attention. Coke, eventually, won the case. The decision, however, was reversed in the Supreme
Court. Finally, the case was settled out of court in 1917 with Coke agreeing to reduce the
caffeine content by 50%.

In 1919, Coke was sold to an investment group headed by Ernest Woodruff for $25 million - $10
million in cash and $15 million in preferred stock. Woodruff's major decision after taking over
was the establishment of a Foreign Department to make Coke popular overseas. While
expanding in foreign markets, Coke faced several problems. Initially, it had to rely on local
bottlers who did not promote the product aggressively, or on wealthy entrepreneurs who were
unfamiliar with the beverages business. The company also faced problems regarding government
regulations, trademarks registration, languages, and culture.

By 1927, Coke's sales climbed to nearly 23 million gallons. Even though Pepsi Cola emerged as
a major competitor to Coke in the 1930s, Coke continued to do well and flourished during the
war. By the time the US entered the Second World War, Coke was over fifty years old and well
established. In 1962, Paul Austin (Austin) became Coke's tenth president and four years later,
became the chairman and CEO of the company. One of Austin's first initiatives was the launch of
a diet drink. By 1965, soft drink sales in the US had risen to the level of 200 drinks per capita
and Coke's market share had risen to 41% against Pepsi's 24%. In 1964, Coke also acquired a
coffee business. The company developed drinks with new flavors and also targeted food chains,
which were fast gaining popularity.

In the 1970s, Coke faced stiff competition from Pepsi. Pepsi's advertising budget exceeded that
of Coke. In 1978, figures also revealed that Pepsi had beaten Coke in terms of supermarket sales
with its dominance of the vending machine and fountain outlets. Coke also faced problems in the
1970s when the Food and Drug Administration (FDA) ruled that saccharin, an important
ingredient in Coke, was harmful and a potential source of cancer. Coke's performance continued
to decline in the late 1970s as Austin led the company into new businesses such as shrimp
farming, water projects and viniculture. The political and social unrest in countries like Iran,
Nicaragua and Guatemala also affected Coke's market share. The company's poor performance
and the increasing discontent among its employees, led to Austin's exit and the nomination of
Roberto Goizueta, a 48-year-old chemical engineer, as the new CEO in 1980.

3
Background Note Contd...

Goizueta quickly concluded that the obsession with market share was doing little good to the
company, and in certain businesses, the Return on Capital Employed (ROCE) was actually less
than the cost of capital. Goizueta drafted a strategic statement, which made it clear that the
company had to earn profits at 'a rate substantially in excess of inflation', in order to give
shareholders an above average return on their investment. He sold the non-performing businesses
such as wine, coffee, tea, industrial water treatment, and aquaculture. Coke faced a major scare
in 1993, when the markets reacted violently and the stocks of big companies, including Coke,
tumbled. The event popularly referred to as Marlboro Friday, involved a drastic price cut by
Philip Morris in response to price undercutting by private cigarette brands. Coke stock fell by
about 10% in the weeks following Marlboro Friday.

Coke executives embarked upon a major public relations exercise to undo the damage. They
stressed that brands were more profitable than private labels at retail stores and that branded soft
drinks were far less vulnerable than branded cigarettes. In mid-1998, health experts and CCFPE
in the US criticized Coke for targeting school children through exclusive contracts. The
controversy intensified further when a district administrator4 of Coke in Colorado Springs,
Colorado, sent a memo to all the school principals in the district. The memo asked the principals
to encourage the sale of Coke products because the district risked failing to meet its contractual
obligation to sell at least 70,000 cases of Coke products. Falling short of target would
significantly reduce payments from Coke to these schools over the next seven years. Several
newspapers and journals, including Denver Post, Harper's Magazine, The Washington Post
(Post), and The New York Times criticized the memo.

Exclusive School Contracts

The exclusive school contracts allowed Coke exclusive rights to sell its products - soda, juices,
and bottled water - in all the public schools of a district. Under the plan, the schools got
$350,000 as an "up front" money5 and a percentage which ranged from 50 percent to 65 percent
of total sales. The exclusive contract with Coke represented one of the fastest growing areas of
commercialism of school houses. According to the Center for Commercial-Free Public
Education (CCFPE) in April 1998, there were 46 exclusive contracts between school districts
and soft drink bottlers in 16 states in the US. By July 1999, it increased to 150 contracts across
29 states.

Critics said that these contracts represented the growing trend of commercialization on school
campuses. When students saw products advertised in their schools, they frequently thought that it
was something that the schools were endorsing. By displaying its logos prominently in public
schools, Coke hoped to re-establish brand loyalty and brand recognition. A study found that the
average American teenager could identify some 1,000 corporate logos, but could not name even
ten plants and animals in the area where he or she lived.

4
Parents were concerned about the proliferation of logos on school scoreboards, walls, buses and
textbooks. Some groups opposed the commercialization in schools saying that it was unethical,
immoral and exploitative. They criticized the education community for encouraging
commercialization in schools. Alex Molnar, Professor of Education, University of Wisconsin,
Milwaukee said, "It is an erosion in our culture between what is public and what is private. It
represents a subversion of the idea that the school is for the public welfare."

4] He was responsible for the district signing an exclusive contract with Coke.

5] The funds raised were used to buying new library books, textbooks, sports equipment and
computers.

Exclusive School Contracts Contd...

Health experts expressed concerns about the increase in consumption of soft drinks by young
people consume, and the consequent harm to their health. In less than 30 years, the annual
consumption of soda per person had more than doubled from 22.4 gallons in 1970 to 56.1 gallons
in 19986. The Post reported that Coke's exclusive contract with the District of Columbia's public
schools allowed for nearly twice as many beverage vending machines in high schools, middle
schools and elementary schools as were there before the contract.

In a Post article, Andrew Hagelshaw of the CCFPE said, "What we have seen in just about every
exclusive contract around the country is a resulting increase in the amount of soda consumed by
students ... There's almost always an increase in the number of vending machines and they're put
into schools that previously didn't have them." Another report titled Liquid Candy7 said that
compared to 20 years ago, the teenagers today drank twice as much soda as milk. According to
Colleen Dermody, communication director, Center for Science in the Public Interest (CSPI)
"Vending machines in schools created a preference for soda over milk, juice, and water."

In 1994-96, CSPI's analysis of teenagers between the age of 12 and 19 showed that about 5
percent of male soft drink consumers drank at least 19 ounces per day and 5 percent of female
consumers drank at least 12 ounces per day. Richard Troiano8 said that the data on soda
consumption suggested a link with childhood obesity. According to Troiano, overweight children
tend to consume more calories from soda than those who were not. Childhood obesity rates in
the US had increased by 100 percent in the past 20 years. Studies had also shown the negative
effect of caffeine9 on children, an additive present in most of the cola drinks. Analysts10
concluded that soft drink makers were encouraging teenagers to consume more drinks, which
would cause serious health problems for a whole generation.

Another analyst 11 suggested, "If the schools must have vending machines, they should
concentrate on healthy choices, like bottled water." However, the exclusive contracts put
pressure on schools to increase the number of vending machines to increase sales of soft drinks.
Post reported that prior to signing an exclusive contract with Coke, few schools had vending

5
machines. After signing the contract, most high schools had four machines, middle schools had
three, and elementary schools one. Another study12 said that in the last 20 years in the US,
school enrolment had increased 6.8 percent, while participation in school meal programs had
surprisingly declined by 1.2 percent. One major factor was that vending machines filled mostly
with junk food competed with school meal programs. The school meal program provided
nutritious meals for nearly 27 million children in US schools. The US government had allocated
$5.46 billion in 1999 for the school meal programs. A traditional school meal included two
ounces of protein, three-fourths cup of fruit and vegetables, approximately two servings of grain
products and a half-a-pint of milk. In 2000, the American Federation of Teachers denounced the
sale of competitive foods, 13 calling them detrimental to students' health and development of
sound eating habits. The Seattle Education Association adopted similar resolutions against
commercialization in Seattle's public schools.

6] According to the statistics from the Beverage Marketing Corporation in the US.

7] Report by Michael F. Jacobson, executive director, Center for Science in the Public Interest, a
non-profit consumer-advocacy organization that focuses on food safety and nutrition in the US.

8] A senior scientist at the National Cancer Institute in the US.

9] Caffeine is an addictive drug. Regular users often develop a strong attachment to it and they
may suffer withdrawal symptoms, including headache, drowsiness, and irritability, if they do not
consume it for a long time.

10] According to freelance journalist Helen Cordes in The Nation, dated April 27, 1998.

11] William Dietz, director of the nutrition division at the US Center for Disease Control and
Prevention.

12] Study conducted by the US Department of Agriculture (USDA).

13] Competitive foods are defined by the USDA as any food or drink offered at schools, other
than meals served through the USDA school meal programs.

Exclusive School Contracts Contd...

By mid-2001, 240 district schools in 31 states had entered into an exclusive contract with Coke.
According to the National Soft Drinks Association (NSDA), sixty percent of all public and
private middle schools and high schools sold soda in the US. The NSDA challenged the
information presented by health advocates, calling it "an insult to consumer intelligence." They
said that any attempt to link soft drinks to health problems was not supported by facts. According
to the association, no direct connection had been established between increased soda
consumption and obesity.

6
The Explanation

While Coke faced a lot of criticism from health experts and public agencies for targeting school
children during 1998-1999, the company received a major setback during the European crisis in
which school children were the major victims. After the crisis, Coke investigated the problem by
testing the suspect batches for chemicals. The company claimed that the tests showed nothing
toxic in the beverages. However, to explain the whole crisis, Philippe Lenfant, general manager
of Coke Belgium, said that there had been separate errors at two plants. The products from the
Antwerp plant had a strange odor due as some fungicide had accidentally fallen on the exterior of
the cans. In addition, Coke had determined that the strange taste was the result of a sub-standard
gas used to carbonate the products.

The plant in Dunkirk had some cans which had been contaminated with a wood preservative
during shipping. In the last week of June 1999, the Belgium government lifted the ban on all
Coke products, with the exception of Coke and Sprite. France allowed one of the two Coke
plants to reopen, but the ban remained on all Coke products imported from Belgium. In late June
1999, after inconclusive tests and review of procedures by Coke and European health inspectors,
Belgium and France lifted the ban on Coke completely. By the end of June 1999, the second
French plant was back in business. In a letter to shareholders dated July 12, 1999, almost a
month after the incidents, Ivester said that there was never a problem with the actual Coke
products. The letter said, "In the space of a few days, our system experienced two very limited
quality problems at bottling/canning plants in Belgium and France. At no point was any health
hazard present in our products.

However, these problems resulted in an off taste and off smell of products and packages, and
some consumers reported feeling ill after drinking our beverages. Any quality issue, of course, is
unacceptable. Nothing is more important to us than the integrity of our products, and I have
apologized to our consumers for any discomfort or inconvenience. Many outstanding Coke
people responded quickly to the situation, working diligently to recall the products, determine
the causes and share our findings." Analysts said that Coke had not handled the situation well
and its media message was confusing, inconsistent and muddled. Coke alternately claimed that
pesticide residue on the can or bottle, or a bad batch of carbon dioxide, was to be blamed for the
"off" taste. On the other hand, the company also insisted that there was never any health threat. A
company spokesman assured consumers, "It may make you feel sick, but it is not harmful."

In August 1999, the European Commission reprimanded Coke, asserting that the company had
not cooperated adequately and its explanations were "not entirely satisfactory." It also suggested
that while Coke blamed suppliers outside its sphere of influence, "One cannot exclude that errors
were committed in the selection of plants or the dosage of extracts in Coke's own concentrate."
While no deaths were linked to the Coke problems, it had a significant negative impact on the
public confidence in Europe.