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France Slams Coke
Beverage leader's image in turmoil

by Jeff Fischer (TMFJeff)

PARIS, FRANCE (June 22, 1999) -- The sky is blue by 6:00 a.m. and is still glowing twilight-orange at 10:00 p.m. The air is warm and cafe tables line the sidewalks on every major street. Everywhere people are outside enjoying food and drink. It is definitely summer here in Paris, but there is one thing largely missing: Coca-Cola.

A ban on Coca-Cola (NYSE: KO) products spilled into its second week in France yesterday. Canned Coke, Sprite, and Fanta are banned here, while in Belgium the ban is even worse: all canned and bottled Coke products are banned.

Similar curbs have been implemented in Spanish, German, and Dutch markets for products bottled at two Belgium and French plants, and the fear has now spread beyond the vicinity. Yesterday, officials at the Ivory Coast reportedly seized 50,000 cans of Coca-Cola imported from Europe as a precautionary measure. In sum, this ban is the largest in Coca-Cola's history and it may be without merit.

Coca-Cola tested the bottling plants in question and assured the public that nothing is wrong. In fact, company officials shared yesterday that a toxicologist report showed the sickness of the 200 Europeans in question as being psychosomatic. Stomach aches, headaches, and nausea are easy to imagine when frightened, and given the public's inherent concern for tainted foodstuff, the psychosomatic theory isn't outrageous. We had the opportunity to test Coca-Cola's product ourselves. A family member had in his possession Coca-Cola cans imprinted with the serial number that was banned. He drank them anyway. He felt fine. Asked why he drank them, he said that he doesn't believe there is anything wrong with the products -- hysteria has driven the scare.

Whether or not the scare proves groundless, Coca-Cola must address it with utmost seriousness. Yesterday, the company ran full-page ads in major Paris newspapers assuring customers that its products are "irreproachable" in quality. Coca-Cola surely meant for the word "quality" to address "safety," too, because safety is what concerns most Europeans. Food scares in Europe have again become regular fodder for nightly news programs here. Pesticides and hormones are distrusted intensely in cultures that pride themselves on centuries of culinary history. Mad Cow disease is fresh on everyone's mind, and the death of hundreds in Spain several years ago from what consumers thought was cooking oil (but wasn't) still receives cautious remembrance from public commentators. Finally, the recent realization that large amounts of Belgian pork and chicken contained cancer-causing dioxin resulted in an ousted government at last week's election.

Now Coca-Cola must combat a growing concern that its products are somehow unsafe -- that chemicals can get into cans, or that the carbon-dioxide used might not be the highest quality. The fact that this happened to Coca-Cola only makes the surprise and the resulting fear greater. Nobody expected poor quality from Coca-Cola. Everybody trusted Coca-Cola. Can they trust the company again after their unquestioning trust has been tried, and despite the fact that Coca-Cola has largely failed to address the public's recent concern?

The shelves of local grocery stores are empty of Coke, Sprite, and Fanta cans, but they have plenty of Coca-Cola in plastic bottles. Last night at dinner-time more than a few French were seen buying Coke in bottles without apparent second thought, although more people were buying Virgin Cola, which was in fact almost cleared from the shelves, and the Pepsi Max (as it is called here) had just been restocked. The routine in France is often to buy dinner the night that you make it -- related to a desire for freshness -- so every night after work the stores are consistently crowded and behavior is easy to observe, if not explain. When asking one Frenchman how he felt about the Coca-Cola that he just purchased, he didn't understand me, though it was no fault of his own. I was speaking English.

What's next for Coke?

If image is everything, Coca-Cola's image in Western Europe is now closer to Vanilla Ice than it is to Madonna, and news of the scare has been reported around the world so aggressively that Coke must now reassure all of the public repeatedly, probably beginning with more apologies whether deserved or not. It offered one to Belgium today. Meanwhile, the near-term financial impact from the European ban is limited, though not meaningless, because 2% of Coke's $18.8 billion in annual sales are derived in the four main countries imposing bans. Plus, an unhealed scar on the brand's image could result in a long-term avoidance of Coke products by some consumers, and over many years any lost opportunity does compound.

After benzene was found in bottles of Perrier a decade ago, it took several years for sales to recover and some argue that sales still are not where they would otherwise be. A different example is the Johnson & Johnson (NYSE: JNJ) Tylenol scare. Management's reaction to the problem has become a textbook study for other companies in crisis. At an expense of over $200 million, J&J voluntarily pulled all Tylenol from shelves, redesigned its packaging, and continually apologized and reassured customers with up-front advertising. Tylenol is now perceived as one of the safest products for sale. The program was costly for J&J, but worth it.

Should Coke have voluntarily pulled all of its products from European shelves? Such an initiative would have gone far to assure consumers that Coke's management has their best interests in mind, and the "cleaning up shop" approach would have also reassured customers that when they saw Coke's products on the shelves again, it would be safe product. Currently, you can't help but view the Coke products that are still sitting on shelves here as somehow tainted.

The next official step here included a joint inspection of bottling plants by the French and Belgium governments to ensure safety. Today, France shared that initial tests came back negative (meaning, good) and the ban might be lifted if Wednesday's results are clear, too. Still, due to the chain of events, Coca-Cola seems to be a company on the defensive rather than a company taking initiative for its customers. Given the right message -- a message of frank openness and compassion -- Coca-Cola could find the public willing to accept an explanation as soon as it's available. So far, however, Coca-Cola's handling of the situation is harming its image rather than helping it. Today's apology was just one step in the right direction.

The scare will blow over eventually, but the final amount of damage inflicted -- although impossible to measure -- will be determined by how well Coca-Cola's management soothes fears now and assures the public now that it cares and that it will not have anything like this happen again. If Coke doesn't do this effectively now, brand damage could trickle on for many years (there are several competing products to choose from, after all), and although unlikely, damage could perhaps even carry to America by some small measure.

When an American family on vacation was approached late this morning for having bottled Coca-Cola outside of Notre Dame Cathedral, the mother, knowing she was being questioned for a column, responded that she wasn't worried. Only cans were impacted, not bottles, she said. "Will you still buy cans in the U.S.?" I asked.

"I would, but we don't buy cans anyway. Just the plastic bottles."

"And you'll continue to drink Coke in France?"

"Yes, I think so. But we're trying to avoid American things in general on this vacation." Her son then chimed in to effectively say that they shouldn't have eaten at McDonald's if that was the case. Having embarrassed the family enough (easy to do with most touring families), I thanked them, mentioned the Fool again ("we haven't heard of it") and went to a cafe for a drink. Coffee, please.

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6/22/99 Close

Stock  Close    Change
JNJ    90 11/16   +0.83
INTC   55 11/16   -1 1/8
CPB    43 1/8     -1
MEL    34 7/8     -1/4
           Day     Month    Year    History
Drip      (0.93%)  (0.31%)  (2.49%)  10.91% 
S&P 500   (0.97%)   2.61%    9.26%   42.26% 
Nasdaq    (1.90%)   4.44%   17.68%   61.89% 


Last Rec'd Total# Security In At   Current
 05/03/99   8.134   CPB    $52.793  $43.125
 06/01/99  19.479   INTC   $40.137  $55.688
 03/09/99   9.076   JNJ    $74.910  $90.813
 06/07/99  22.453   MEL    $33.488  $34.875


Last Rec'd Total# Security In At  Value   Change
 05/03/99   8.134   CPB   $429.42  $350.78 ($78.64)
 06/01/99  19.479   INTC  $781.82 $1084.73 $302.91 
 03/09/99   9.076   JNJ   $679.89  $824.21 $144.33 
 06/07/99  22.453   MEL   $751.91  $783.06  $31.15 


Base:  $2700.00
Cash:    $24.31**
Total: $3067.10 


Base:  $2700.00
Cash:    $24.31**
Total: $3095.95

The Drip Portfolio has been divided into 110.619 shares with an average purchase price of $24.408 per share.

The portfolio began with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to have $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging, we don't expect to seriously challenge the S&P 500 for the first 3 to 5 years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. (NOTE: our investment in Campbell Soup is all but frozen due to fees instituted in its DRP plan.)

**Transactions in progress:

06/16/99: Sent $100 to buy more INTC (finally).



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