Coke – Ethical Issues

“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 Investor, 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.

THE RECALL

On June 13, 1999, Coca-Cola[1] (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
bottled[2] 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
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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 was 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 Investor 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. 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 analyst [3] 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
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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.

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

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beverages business. The company also faced problems regarding
government regulations, trademarks registration, languages, and culture.

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 administrator[4] 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”
money[5] 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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Health experts expressed concerns about the increase in consumption of
soft drinks by young people consume, and the consequent harm to their
health (Exhibit II). 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 1998 [6].

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 Candy[7] 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 softdrink consumers drank at least 19 ounces per day and 5
percent of female consumers drank at least 12 ounces per day (Exhibit
III).

Richard Troiano[8] 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 caffeine[9] on
children, an additive present in most of the cola drinks. Analysts[10]
concluded that soft drink makers were encouraging teenagers to
consumer 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 machines. After signing the contract, most high
schools had four machines, middle schools had three, and elementary
schools one.

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Another study[12] 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.

By mid-2001, 240 district schools in 31 states had entered into an

exclusive contracts 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.

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.

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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.

QUESTIONS FOR DISCUSSION:

1.What ethical issues did Coke face during the European crisis? Do you
think Coke handled the situation in the right manner?

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2.Examine the ethical issues involved in the Coke-District Schools
exclusive contract deals. What measures must Coke and the schools take
to minimize the negative impact of its products on students’ health?

3.What measures should the government have taken to solve the

exclusive school contracts controversy and minimize the negative impact
of soft drinks on children?

EXHIBIT I
SEVEN CATEGORIES OF SCHOOLHOUSE COMMERCIALISM

The Center for the Analysis of Commercialism in

Education had identified seven categories of commercial
activities in schools:

• Sponsorship of Programs and Activities: Corporations

pay for or subsidize school events and/or one-time
activities in return for the right to associate their names
with these activities.

• Exclusive Agreements: Schools agree to give corporations

exclusive rights to sell and promote their goods and/or
their services in a school or district. In return, the school
or district receives a percentage of the profits derived from
the arrangement. Exclusive agreements may also entail
granting a corporation the right to be the sole supplier of a
product or service.

• Incentive Programs: These are corporate programs that

provide money, goods, or services to a school or district
when students, parents, or staff engage in a specified
activity, such as collecting product labels or cash register
receipts.

• Appropriation of Space: Corporations pay for the right to

place corporate logos and/or advertising messages on
school scoreboards, rooftops, bulletin boards, walls, and
book covers.

• Sponsored Educational Materials: These are

instructional materials supplied to schools by
corporations and/or trade associations. .

• Electronic Marketing: Corporations provide electronic

programming and/or equipment in return for the right to

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 advertise online to students, families, or community
members.

• Privatization: The management of schools or school

programs by private for-profit corporations or other non-
public organizations.
Source: Center for the Analysis of Commercialism in Education.

EXHIBIT II

HEALTH IMPACT OF SOFT DRINKS

Soft drinks pose health risks because they contain sugar

and various additives and they replace beverages and
foods that provide essential vitamins, minerals, and other
nutrients in the diet. Some of the ill effects of soft drinks
are:

OBESITY

Obesity increases the risk of diabetes and cardiovascular

diseases and causes severe social and psychological
problems. Soft drinks add unnecessary, non-nutritious
calories to the diet that may lead to obesity. They provide
more calories to overweight youths than to normal youths.
Obesity rates have risen in tandem with softdrink
consumption and higher consumption of soda pop leads
to higher calorie intakes[14] .

BONES AND OSTEOPOROSIS

People who drink soft drinks instead of milk or other dairy

products are likely to have lower calcium intakes. Low
calcium intake contributes to osteoporosis, a disease
leading to fragile and broken bones[15] . The risk of
osteoporosis depends in part on how much bone mass is
built early in life. Girls build 92% of their bone mass by
the age of 18[16] and hence must consume enough calcium
in their teenage years. According to a study, teenage girls
in the US are consuming only 60% of the recommended
amount of calcium, with soft-drink drinkers consuming
almost one-fifth less than non-consumers [17] . While
osteoporosis takes decades to develop, preliminary
research suggests that drinking soda pop instead of milk
can contribute to broken bones in children.

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TOOTH DECAY

Refined sugar is one of the several important factors that

cause tooth decay (dental caries). Regular soft drinks
cause decay because they bathe the teeth of frequent
consumers in sugar-water for long periods of time during
the day. A study found a strong correlation between the
frequency of between-meal consumption of soda pop and
dental caries[18] . To prevent tooth decay, even the
Canadian Soft Drink Association recommends limiting
between-meal snacking of sugary and starchy foods,
avoiding prolonged sugar levels in the mouth, and eating
sugary foods and beverages with meals. Unfortunately,
many heavy consumers of soft drinks do not follow these
rules.

HEART DISEASE

Heart diseases occur due to high cholesterol diets;

smoking and a sedentary lifestyle. In addition, a diet high
in sugar may also cause heart problems. High-sugar diets
may contribute to heart disease in people who are “insulin
resistant.” An estimated one-fourth of adults who take
high sugar diets have high levels of triglycerides and low
levels of HDL ("good") cholesterol in their blood. The high
triglyceride levels are associated with a higher risk of
heart disease[19] .

KIDNEY STONES

Kidney (urinary) stones are one of the most painful and

one of the most common disorders of the urinary tract. A
study suggested a link between soft drinks and kidney
stones. Researchers conducted an intervention trial[20] .
The trial involved 1,009 men who had had kidney stones
and drank at least 5 1/3 ounces of soda pop every day.
Half the men were asked to refrain from drinking pop,
while the others were not asked. Over the next three
years, drinkers who reduced their consumption (to less
than half their customary levels) were almost one-third
less likely to experience recurrence of kidney stones.

ADDITIVES: PSYCHOACTIVE DRUG, ALLERGENS, AND

MORE

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 Several additives in soft drinks have raised health
concerns. Caffeine, a mildly addictive stimulant drug, is
present in most cola drinks, as well as in some orange
sodas and other products. Caffeine’s addictive quality may
be one reason why six of the seven most popular soft
drinks contain caffeine[21] . Caffeine increases the
excretion of calcium in urine. Drinking 12 ounces of a
caffeine-containing soft drink causes the loss of about 20
milligrams of calcium. That loss, along with the relatively
low calcium intake in girls who are heavy consumers of
soda pop, may increase the risk of osteoporosis. Caffeine
can cause nervousness, irritability, sleeplessness, and
rapid heart beat [22] . It makes children restless and fidgety
and causes headaches. Caffeine’s addictive quality may
keep people hooked on soft drinks (or other caffeine-
containing beverages).

Several additives used in soft drinks can cause occasional

allergic reactions. Yellow 5 dye causes asthma, hives, and
a runny nose. A natural red coloring, cochineal (and its
close relative carmine) may cause life-threatening
reactions. Dyes can cause hyperactivity in sensitive
children. In diet sodas artificial are more harmful.
Saccharin, which has been replaced by aspartame in all
but a few brands, has been linked in human studies to
urinary-bladder. Several cancer experts have questioned
the safety of acesulfame-K, which was approved in 1998
for use in soft drinks.
Source: Liquid Candy, Center for Science in the Public Interest.

EXHIBIT III
RISING CONSUMPTION OF SOFT DRINKS

Carbonated soft drinks account for more than 27 percent of Americans'

beverage consumption. In 1997, Americans spent over $54 billion to buy
14 billion gallons of soft drinks. That is equivalent to more than 576 12-
ounce servings per year or 1.6 12-ounce cans per day for every man,
woman, and child. That is also more than twice the amount produced in
1974. Artificially sweetened diet sodas account for 24% of sales, up from
8.6% in 1970.

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 Table I

Consumption of non-diet soft drinks by 12- to 19-year-

olds (ounces per day) and percentage case of calorie
intakes (all figures include non-drinkers)
Ounces per Percentage of
Year
day calories
Boys Girls Boys Girls
1977-78 7 6 3 4
1987-88 12 7 6 5
1994-96 19 12 9 8
Source: The US Dept of Agricultural Nationwide Food Consumption Survey,
1977-78; Continuing Survey of Food Intakes by Individuals, 1987-88,
1994-96.

Children start drinking soda pop at a remarkably young age, and

consumption increases through adulthood. 20% of one and two-year-old
children consume soft drinks. These toddlers drink an average of seven
ounces (nearly one cup) per day. Toddlers' consumption changed little
between the late 1970s and mid-1990s.

Table II

Consumption of Regular and Diet Soft Drinks by 12 to

19-year-olds
(excludes non-drinkers)
Year Ounces per day Ounces per day
Boys Girls
1977-78 16 15
1987-88 23 18
1994-96 28 21
Source: The US Dept of Agricultural Nationwide Food Consumption Survey,
1977-78; Continuing Survey of Food Intakes by Individuals, 1987-88,
1994-96.

ADDITIONAL READINGS & REFERENCES:

1. OCA Joins Nader Organization to Ban Junk Food in Schools,

www.organicconsumers.org, August 19, 1997.
2. Sullum, Jacob, Caffeine Fiends, Creators Syndicate, April 29,
1998.

For any query/discussion, write to [email protected]

 3. Jacobson, Michael F., Liquid Candy, www.cspinet.org, 1998.
4. Kaufman, Marc, Fighting the Cola Wars in Schools, The
Washington Post, March 23, 1999.
5. Belgium widens Coke recall as more children fall ill, Reuters
News, June 14, 1999.
6. Bates, Stephen, Coke is banned after safety scare, The
Guardian, June 16, 1999.
7. Belgian Ban on Coke Products Reduced; Coke's Reputation
Damaged, www.bevnet.com, June 17, 1999.
8. Echikson, William; Baker, Stephen and Foust, Dean, Things
Aren’t Going Better with Coke, BusinessWeek, June 28, 1999.
9. Coke Explains Belgium Crisis to Shareholders, Reuters News,
July 12, 1999.
10. Whelan, Elizabeth M. Why Belgium Waffles About the Safety
of Coke, American Council on Science and Health, July 1999.
11. Molnar, Alex, Looking for Funds in All the Wrong Places,
www.asu.edu, April 2000.
12. Currinder, Marian, Coke Thirsts for Business in Florida
Schools, www.opensecrets.org, April 2000.
13. Bryce, Robert, Marketing Wars Enter Schoolyard, The
Christian Science Monitor, July 2000.
14. Abrams, David, Schools ordered to turn off vending
machines during day, www.gazette.com, August 01, 2001.

Source:
www.icmrindia.org/free%20resources/casestudies/Coke%20Ethical%20I
ssues9.htm

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