Coke: an opportunity lost
July 5, 1999: 1:38 p.m. ET
European health scare failed to showcase Coke's leadership, critics say
By Staff Writer Shelly K. Schwartz
NEW YORK (CNNfn) - When you're the world's largest soft drink maker, you don't get much in the way of public sympathy.
And when you wait one week to issue a formal apology for selling contaminated products to consumers -- no matter what you're doing behind the scenes -- you might just find that a century of brand building and acts of goodwill are forgotten pretty quickly in the critic's corner.
Such were the lessons learned by executives at Coca-Cola Co., who have been lambasted for weeks over their slow initial response to the European health scare that began mid-June.
"It took a little longer for them to [communicate with consumers] than some people would have liked," said Jeffrey Caponigro, president of Caponigro Public Relations in Southfield, Mich. and author of the "The Crisis Counselor."
"In a crisis," he said, "you have to prove to people early on that you have the crisis managed well. That's really critical."
In Coke's case, many believe that didn't happen. The reason (or reasons) why, will no doubt become fodder for business school professors for years to come.
Coke products were pulled from the shelves in Belgium, France, the Netherlands and Luxembourg after more than 200 people in Belgium and France reported vomiting, stomach cramps and dizziness after consuming Coke drinks.
The company blamed the symptoms on poor quality carbon dioxide used to put fizz in drinks bottled in Antwerp, Belgium, and a chemical that contaminated the outside of cans at its plant in Dunkirk, France.
Although unfamiliar with the details of the Coke health scare, which resulted in the biggest recall in the company's 113 year history, David Margulies, president of crisis management firm Margulies Communications Group, said slow response patterns by top management are often the result of internal communication gaps.
"It's very difficult for someone to go to their boss and say we've screwed up," he said. "Very often, the information doesn't filter up within the organization fast enough do something about it."
So far, the bulk of the criticism has centered around Coke Chairman and Chief Executive Douglas Ivester and his slow initial response to the health scare, in which several hundred consumers fell ill after drinking Coca-Cola products. It took him seven days to issue a formal apology to Belgian consumers.
The written statement, published in 15 French and Flemish newspapers, read as follows:
"I should have spoken to you earlier, and I apologize for that," he acknowledged. "To all Belgian people, I want to say that I'm personally very sorry for any discomfort or inconvenience. My colleagues and I will be working very hard to earn your trust again."
He later told reporters he'd buy each Belgian consumer a can of Coke to begin the process of restoring loyalty.
But some consumers and public relations experts said it was too little, too late. They argued his predecessor, Roberto Goizueta, a widely respected brand advocate who had hand-picked Ivester for the job before dying of lung cancer in 1997, might have handled the situation with a touch more finesse.
Coke refused repeated requests for interviews on this story.
Caponigro said Ivester, in essence, missed a once-in-a-lifetime opportunity to shine.
"For a CEO, managing a crisis well is really among the most important things that he or she can do because it really symbolizes the competency and preparedness of the company," he said.
"If they don't handle it well, [investors and consumers] begin to doubt whether they are prepared to manage the company's growth and future strategy well," he added.
While Coke's (KO) share price is up about 18 percent since Ivester took over, the stock has certainly lost some of its fizz over the last year when it traded closer to $90 a share. However, since the crisis began in mid-June, the company's stock price has barely budged, a sign that investors believe the company will rebound from its problems in Europe.
Over the last few months, Coke's stock price has slipped from its peak and underperformed the Dow Jones industrial average.
Caponigro also said a well-managed crisis "can certainly be a great leadership opportunity and a chance to showcase the leadership of your CEO or business owner."
Making legends out of leaders
Had Ivester acted sooner and communicated more effectively with the public, some say he might have been inducted into the "corporate executive Hall of Fame."
Indeed, crisis situations in years past have made legends out of leaders.
Perhaps the most famous "Hall of Famer" is former Chrysler Chairman Lee Iacocca, who orchestrated the wildly successful government-assisted turnaround of Chrysler Corp. in 1979.
The automaker, which was flirting with financial ruin, got costs under control and paid off its federal loans in four years - years ahead of schedule. Its rapid recovery, attributed to Iacocca alone, is widely considered one of the greatest turnaround success stories of all time. (Chrysler merged with Daimler last year to create DaimlerChrysler (DCX).
Iacocca, known for his common-sense management style, also won praise for reacting quickly to reports that the odometers on some Chrysler cars were reset after the cars had been driven, effectively turning the "new cars" into used vehicles.
Iacocca quickly gave customers the opportunity to trade the cars in for new models, averting a public relations fiasco.
Tylenol is now a textbook study
Also on the list of executive superstars: one-time Chairman of Johnson & Johnson (JNJ) James Burke, who's aggressive recall of Tylenol painkillers following several deaths from cyanide tampering is considered the definitive guide to managing public relations disasters.
Experts say that's because management acted early.
"I think Tylenol became the classic textbook example, because the company began communicating [with the public] almost immediately - really even before they knew the scope of the problem," said Jim Lukaszewski, spokesman for the Public Relations Society of America and head of The Lukaszewski Group.
In that case, the company is credited with initiating the recall against a backdrop of federal disapproval. The Food and Drug Administration reportedly feared the company's withdrawal would produce a series of copycat crimes and the Federal Bureau of Investigation reportedly feared the recall would prevent them from finding the criminal involved.
"This was the backdrop against which Tylenol decided to make a nationwide recall," Lukaszewski said. "We had a different world then."
In a move credited with restoring consumer confidence in Tylenol almost immediately, Johnson & Johnson met its promise to put tamper-resistant packaging back on the market within 60 days. Renewed cases of tampering shortly thereafter forced the company to initiate a second nationwide recall. After that, it abandoned the capsules in favor of tamper-proof solid pills.
Its swift actions are credited with saving the brand name.
Margulies, however, said he believes the Tylenol case gets more credit than it deserves.
"A lot of people point to that as the great example, but they forget that Tylenol was the victim of outside criminal attacks," he said. "When you have a situation where outside forces are attacking your product, it's easy to say we are the victim too and here's how we are going to help you."
At Coke, as with most corporate crises, he said, that wasn't the case.
"They had an internal problem so it's much more difficult to do what Tylenol did," Margulies suggested.
The Pepsi challenge
One other success story - as public relations campaigns go - was executed by PepsiCo (PEP) in 1993 after a Seattle television station reported a syringe was found in a can of Diet Pepsi.
The report triggered an FDA advisory urging consumers to pour their Diet Pepsi's into a glass before drinking. That, in turn, created a media frenzy and within 24 hours, reports of syringes in Diet Pepsi cans (which later were found to be fabricated) began springing up across the country.
The FDA, unable to find a reasonable cause from a manufacturing standpoint and suspecting a hoax, later recommended a "no recall" course of action.
PepsiCo, which spent half-a-million dollars executing its crisis plan, established a management team immediately to begin disseminating information found from the investigation.
According to PepsiCo's crisis management analysis, used to win the PRSA's Silver Anvil Award that year, a staff of six media relations managers handled 2,000 calls from print, radio and television reporters while 24 consumer specialists, assisted by 40 volunteers, manned the phones to respond to tens of thousands of consumer calls.
Its CEO, Craig Weatherup, appeared on every major network news program to declare the company was "99.99 percent" certain that the tampering did not originate in its plant, bringing a rapid end to the seven-day nightmare.
Making matters worse
Contrast Chrysler and Pepsi with the big-time blunders of Union Carbide (UK) following its deadly chemical spill in Bhopal, India which killed some 6,000 local residents in 1984. And don't forget Exxon Corp. (XON), with continues to rouse protests from environmentalists angry over the company's response to the 1989 Alaskan oil spill.
"Exxon was probably the worst example in history," Lukaszewski noted. "Exxon's [then-] Chairman Lawrence Rawl, didn't even visit the scene for 28-days and his excuse was that he traveled with such a large entourage it would have gotten in the way. But by the time he got there, though, there were some 2,500 reporters and the entire Army Corp. of Engineers. The president had all but declared it a national disaster."
Thousands of consumers to this day boycott Exxon gas stations and some say the company's reputation will never fully recover. But, from a profit perspective, Exxon's bottom line has certainly shown no lasting damage. In 1998 alone, the oil giant earned $6.37 billion, nearly 37 percent more than it made five years ago.
In Union Carbide's case, the worst industrial disaster in history, the Dow component company became defensive following the chemical spill, according to reports, which didn't help its cause. The accident was the first of several blows to the company, including a hostile takeover bid by N.J.-based competitor GAF Corp., that ultimately caused to company to restructure its operations and cut its work force to 10,000 from 98,000 in 1994.
Union Carbide later sold off its consumer products division and sales last year totaled $403 million compared to $9.9 billion before the crisis hit.
Jack in the Box, a West coast fast-food chain, also suffered substantial losses after E. coli bacteria in undercooked hamburgers it served killed two children in 1993. Experts say its sluggish safety initiatives - at least at first - and finger pointing cost the company dearly. It took the company nearly a decade to return to profitability.
The restaurant chain, which is owned by Foodmaker (FM), has since implemented a massive food safety program to restore its public image.
"The company blamed everyone but itself, and it has paid the price," Lukaszewski said. "The brand name suffered."
Karen Bachmann, a spokeswoman for Foodmaker, couldn't agree more.
"We suffered a lot," she acknowledged. "Sales were off 40 percent following the incidents and our stock went from 18 a share to under 4. There were people who predicted our demise."
In response, the company began communicating exhaustively with the press and public. It also implemented an industry-leading food safety program praised by regulators, she said.
As a result, Jack in the Box just posted its second year of record annual earnings.
"It took us a while to turn around," Bachmann said. "We learned that you really can't overcommunicate, even if you don't have all the answers. If you don't people will assume it means something."
Jack in the Box just capped its second year of record annual earnings. Its stock Friday closed at around 28-7/16 a share on the New York Stock Exchange.
Corporate crises, however, don't always translate into slumping stock prices, as they did with Union Carbide and Jack in the Box.
"Wall Street accommodates a lot and finds a lot of things less newsworthy than the media does," Lukaszewski said.
Some stocks, including PepsiCo and Coca-Cola, he noted, are "really impervious" to long-term equity damage.
In Pepsi's case, the seven-day crisis cost the company some $25 million in initial lost sales, but a few months later the beverage-maker was back on its feet, ending "the season with its highest sales in five years," the company wrote in its PRSA case study.
PepsiCo's (PEP) stock closed this week at 37-5/8 per share on the NYSE.
"I think Wall Street is a little more rationale and a little less emotional than the press," said Credit Suisse First Boston analyst James Clark, who follows Exxon. "What Wall Street does well is it says, OK, something has happened. Is it a one-time event or a recurring event? Is it just an accident or is it indicative of bad investments and a bad safety compliance track record?"
Exxon's stock, not to mention its public image, no doubt took a beating in the months following the disastrous spill. But short-term earnings were hit just a few dollars per share, Clark said, and within two years the company was back to business.
"Its earnings and stock price were impeded in 1989 and 1990, but Exxon got right back on its feet again after that," he said.
The same is expected for Coke, experts say.
Shares of Coca-Cola (KO) were trading early Wednesday at 64-13/16 on the Big Board, down from 70 a share this time last month.
Henry Schimberg, the head of Coke's bottling division, estimates the recall will cost the company $60 million in lost sales, or less than 1 percent of its total annual volume.
Experts say the best defense against a crisis situation is a good offense.
"The whole key to managing a crisis well is being prepared in advance," Caponigro said. "First you have to identify the company's vulnerabilities and prevent them from becoming crises. This seems so obvious, but in the hustle of getting work done a lot of companies fail to notice the warning signs."
In almost every case, he said, whether it be a sexual harassment lawsuit or a massive health scare, there were signs that were ignored or never passed on to upper management.
Indeed, the Wall Street Journal reports that Coke may have overlooked an early warning sign last month, when a pub-owner near Antwerp complained that four people at his bar had become ill after drinking bad-smelling Coke.
(Click here for tips on how to handle a corporate crisis from the Public Relations Society of America)
As high-profile crisis management cases go, Coke's handling of the European health scare probably falls somewhere in the middle - stopping short of the textbook "how-to" handling of the Tylenol tampering case in 1982, but well ahead of the widely criticized public relations blunder of the Exxon oil spill.
Margulies said a company's ability to recover from a crisis depends largely on its reputation going into it. Coke, he said, with its long-standing reputation as a consumer-friendly company, should have no trouble getting back on its feet.
"I think Coke got off to a slow start, but that they have handled it successfully," he said. "It's an example of the value of public relations and regular advertising that helps build a name that people respect. I think Coke will work their way out of it and if there were errors they will learn from them."
"Considering the magnitude of what they went through, it would seem to me this has been handled relatively well," he said. "The company basically did what it had to do."
In the end, most agree the company will walk away from the European recall a little bruised, a little wiser and with a newfound respect for the delicate demands of public relations.
The Lukaszewski Group
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