Assessing the Damage to Coke After Health Scare
Trucks carrying Coca-Cola Co. products to market today will resume deliveries in Belgium and Luxembourg, ending one chapter in the recent health scare that eventually spread to a handful of other European markets.
As the world’s largest soft drink company begins the weeks-long process of restocking store shelves and vending machines in Belgium and Luxembourg, industry observers are weighing costs associated with the public relations nightmare that broke early in June when hundreds of Belgium schoolchildren fell ill after consuming Coke products.
Immediate expenses generated by the recall of 14 million cases of cans and bottles, estimated at $60 million, are being carried by Coca-Cola Enterprises, a bottling company in which Atlanta-based Coke holds a 42% share. Coke executives in Atlanta today will report on the financial impact of the European scare, but analysts predict the short-term impact on the world’s largest soft drink company will be minimal.
“We estimate it would take 35 million cases in lost sales, or about 15% of total annual volume in Belgium, Luxembourg, Netherlands and France combined to take 1 cent per share out of Coca-Cola’s earnings per share,” said Merrill Lynch & Co. soft drink industry analyst Douglas M. Lane.
Less certain, observers say, are the costs associated with restoring Coke’s image in the wake of the health scare that forced the company to pull some of its products in France, the Netherlands and Spain. Health officials in each of the countries have cleared Coke products for sale. Regulators acted after Coca-Cola Enterprises remedied two unrelated production problems at plants in Antwerp, Belgium, and Dunkirk, France, the company said.
“The short-term costs to Coke are incidental,” said Leonard Berry, director of the Center for Retailing Studies at Texas A&M; University, and author of “Discovering the Soul of Service.” “The real issue is the impact on the Coke brand, which is the most precious asset that Coca-Cola has.”
Coke has drawn criticism from some observers for not moving quickly to calm customers in Belgium, where many consumers already were concerned with reports that poultry products were tainted by dioxins. Chairman E. Douglas Ivester did not go to Belgium until 10 days after the first reports of illness.
“I always talk about the need to be swift and sincere in times of crisis,” said Kevin Lane Keller, a marketing professor at Dartmouth College in Hanover, N.H. “That means you respond quickly and you come across as sincerely caring about what happened. You don’t necessarily need to say you’re wrong, but you do need to be seen as caring.”
Coke spokesman Rob Baskin defended the company’s response, noting that “what was important to us is that when we spoke to consumers, we had all the facts . . . and we obviously were conservative and cautious.”
Coke’s nightmare began June 8, when Belgium schoolchildren reported falling ill after drinking Coke products. More than 200 consumers in Belgium and France eventually complained of becoming ill after consuming Coke beverages.
On June 9, Baskin said, Coca-Cola Enterprises voluntarily recalled and destroyed 100,000 cases, or 2.5 million bottles and cans, after determining that its Antwerp plant used a bad batch of carbon dioxide to carbonate the beverages. The company said the accident resulted in sodas with an unpleasant odor.
On June 15, the Belgium government reacted to growing public concern by ordering Coke to recall its products from stores and vending machines. A day later, French regulators ordered Coke to stop distributing cans from a plant in Dunkirk, where regulators speculated that bottling problems were causing illness among Coke customers.
Coke’s investigation tied the company’s woes to two unrelated production problems, but the company maintains that neither represented a serious health threat. The company said a bad batch of CO2 used at the Antwerp plant was an isolated incident and that a substance used to treat wooden shipping pallets at a plant in Dunkirk had caused an unpleasant odor on some cans shipped to Belgium.
Ivester waited until June 16 to issue his first public statement on the European crisis. In mid-June, Ivester made back-to-back trips to Belgium from Atlanta. On June 23, he held a press conference, and on the next day, Coke took out newspaper ads apologizing for “letting the people of Belgium down,” Baskin said.
Berry, who was traveling in Europe as the health scare unfolded, credited Ivester with making the right move by hopping on a plane. “Ivester was over there personally, which was absolutely the right thing to do,” Berry said. “He was there; he was very visible. For him not to have been there would have been bad, bad marketing.”
With regulators clearing Coke for sale across Europe, Coke plans to begin advertising in Belgium and Luxembourg--the two countries where its products disappeared--that tells consumers the brand is coming back. Coke plans to step up its product sampling and later this week will “announce how it’s going, to make good on Doug Ivester’s promise to buy everyone in Belgium a Coke,” Baskin said. Coke also plans to modify packaging in Belgium and Luxembourg so consumers will know they’re getting new product.
The company estimates it will take two weeks to get the shelves fully stocked in Belgium and Luxembourg; analysts say it could be several months before sales fully rebound to pre-scare levels.
Some marketers argue that Coke should ignore the last few weeks and pump up the volume on its regular brand advertising. Berry, though, advised Coke executives to “be very forthcoming, to spend marketing dollars to explain to the public what happened and the steps that have been taken to keep it from happening again.”
Observers say the European scare probably won’t translate into substantive gains for Coke arch-rival PepsiCo Inc. “It is not in [Pepsi’s] best interest to seek to take advantage of the situation,” according to a report by Dun & Bradstreet Corp. “Given the very strong market shares of Coca-Cola products in the key affected countries, Pepsi would have to boost sales and production tremendously to take a significant bite out of Coke’s piece of the pie.”
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Coca-Cola’s soft drink brands are the market leaders in Europe, and most observers say Coke’s stumble there won’t generate long-term gains for Pepsi-Cola. Selected European market share for the first quarter of 1999:
Coca-Cola Pepsi-Cola Belgium 63.7% 2.2% Britain 33.7 12.5 France 55.0 6.8 Germany 56.6 4.9 The Netherlands 43.4 15.6
Source: Beverage Digest