Coke - Ethical Issues

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Themes: Ethics in Business
Period : 1999-2001
Organization : Coke, Belgian Health Ministry
Pub Date : 2002
Countries : Belgium
Industry : Food & Beverages

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Case Code : BECG014
Case Length : 12 Pages
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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 schoolhouses (Exhibit I). 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.

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."

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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.