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Coke mops up the mess
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June 24, 1999: 11:33 a.m. ET
As Europe lifts sales bans, world's biggest brand assesses the damage
By Staff Writer Douglas Herbert
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LONDON (CNNfn) - As Coca-Cola products begin to appear again on European store shelves following the biggest recall in the company's 113-year history, investors may wonder: is Coke still it?
The answer is a qualified "yes", say brand consultants who have watched the world's largest soft drink maker struggle to reassure Europeans that its products are safe to drink after more than 200 people fell ill in Belgium and France after consuming them.
Qualified because the economic impact of the recalls on Coke is far from negligible in the short term. Long term, however, analysts believe Coca-Cola will be able to tap into its enormous reserve of consumer loyalty and ride out its troubles.
Coca-Cola Enterprises, Coke's primary bottler, which is 40 percent owned by Coca-Cola Co., estimated Thursday that 14 million unit cases of its products, or less than 1 percent of the company's annual global volume, were affected by the recalls. Coke defines a unit as eight ounces.
The bottler's non-recurring costs associated with the recall are expected to be around $60 million in the second quarter of this year.
The company also said it expects a "negative impact" on sales, cash operating profit, and earnings per share in the second quarter of this year.
'Difficult to determine' costs
"The extent of the loss of sales and profits in the second quarter of 1999 is difficult to determine until the company can assess the effect of product reintroduction campaigns in Europe," Henry Schimberg, Coke Enterprises' president and CEO, said in a statement from the company's Atlanta headquarters.
Schimberg added: "We believe that we can minimize the short-term impact on sales and we are confident that this situation will not materially affect financial results in the year 2000 and beyond."
Schimberg's comments marked a sharp reversal from Coke's initial foot-dragging in its response when reports of contamination in its soft drinks first emerged, analysts say.
Douglas Ivester, the chairman of Coca-Cola Co., ultimately struck the right chord of consumer-friendly contrition in a blitz of personal newspaper appeals earlier this week that he followed up with an offer to "buy everyone in Belgium a Coke."
That contrition could go a long way to redeeming public confidence in the world's most famous brand at a time when companies are building increasingly personal relationships between their products and the consumers who buy them.
"Coke is an enduring brand. It's got quite a lot of goodwill among consumers, so it can probably ride things like this," said Ian Bellhouse, a senior consultant at Fitch, a branding adviser based in London. "But then there's the question of short-term damage. They probably could have minimized it further."
Bellhouse said Coke's optimal response to the health scare, which resulted in some or all of its products being banned in France, Luxembourg, the Netherlands and Belgium, would have been to acknowledge the problem and explain to consumers what the company was doing to address it.
Instead, he and others said, the company remained virtually silent in the initial phases of the mounting crisis.
Subsequently, toxicology tests conducted by Coke traced the problem to sub-standard carbon dioxide in bottled drinks at a factory in Antwerp, Belgium, and to contamination from a fungicide used to treat wooden shipping pallets at a plant in Dunkirk, France.
The reassurances, coupled with safety tests by health authorities in Belgium and France that showed no health risks, have resulted in the lifting of the sales bans in both countries.
Yet despite the sales resumption, questions persist over the exact cause of the illnesses that may continue to dog Coca-Cola as it seeks to put the health scare behind it.
Quick response to crisis vital
French mineral water giant Perrier took months to fully recover from a tainted-water crisis in the early 1990s that forced a worldwide recall of Perrier products. The episode is estimated to have cost Perrier more than $100 million.
Most public relations advisers recommend a very quick response by companies whenever the integrity of their products comes into doubt.
"Even if there's no absolute answer at that stage, being seen to be doing something about it is a very positive thing," said Bellhouse.
He added that companies and consumers tend to be closer than ever these days, making it especially vital for a company to have a quick-response strategy in times of crisis.
"Brand relationships have become a lot more personal," Bellhouse said. "People consider brands almost like personal friends. They have a fairly personal relationship with the brands they buy on a regular basis. If one of your friends upsets you, or does something you are not happy about, you might tolerate it for a little while. But there is sort of an elastic limit to that."
Whether Coke breached the trust of its consumer "friends" is a matter that remains open to debate.
Doug Lane, a beverage analyst at Merrill Lynch, told CNN Thursday that he believes the long-term impact from the recalls "will probably be minimal."
"I mean clearly near term, we have quality issues with a brand like Coca-Cola that really go to the heart of the brand. So that, near term they need to reassure consumers about the product quality and build the consumer's trust again back on the Coca-Cola brand."
On a price-earnings basis, Lane said, based on Merrill Lynch's estimate for next year, Coca-Cola is trading at a 50 percent premium to the market. Coke stock was up 7/16 at 62-3/16 in New York Thursday morning.
"If you go back to when the Berlin Wall fell 10 years ago, it's ranged from a 50 percent to a 100 percent premium plus. So, we're back to the low end, which is where Coke's stock will be at times when they're growing below trend, particularly below trend volume growth."
Sales are likely to pick up in the future and the multiples will improve over the next 12 to 18 months, Lane said. "So, we like it here, particularly at the low end of this $60 to $70 trading range that the stock's been in for the last couple of months."
Alex Batchelor, a consultant with Interbrand in London, said Coke topped his company's most recent list of the world's most valuable brands. He doesn't see this supremacy as being jeopardized.
"Do I still think that Coke is the number one brand in the world?" he asked. "Absolutely. Will it take some time for Coke to recover [from this crisis]? Yes."
Batchelor cautioned against the type of "scare-mongering" that sometimes accompanies brand crises. Like Lane, Batchelor sees the short-term impact on Coke as limited.
"But if the perception [of stigma] lingers, it may be that [the company] won't grow as fast as it would have done. Maybe there's a section of the market that they can no longer quite as easily sell to." 
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