A Fluid Ounce of Prevention (Rule Maker) July 16, 1999

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A Fluid Ounce of Prevention

By Rob Landley (TMF Oak)

AUSTIN, TX (July 16, 1999) -- Coca-Cola (NYSE: KO) had a bad quarter. There's no other way of putting it. The company managed to earn 38 cents per share anyway, but it didn't enjoy it.

Back in the '80s, the beginning of Robert Gouizetta's stint as CEO gave the world "New Coke." Now, the new guy, Douglas Ivester, is having his own trial by fire. Any time anything bad happens in the world, it affects Coke. The air war over Kosovo deprived Coke of sales. So did floods in China, and the Chinese protests against the U.S. after we bombed their embassy in Belgrade. Some things you just have to ride out.

But sometimes, waiting for a problem to go away is the worst possible course of action. The question that interests me isn't whether there have been more international crises than usual, but whether the new management team is getting up to speed in dealing with them. Coke's problems in China and Yugoslavia haven't made the news recently. Most recent news reports about Coke have centered around its problems in Europe.

Europe is a bit picky about food. They're not particularly happy with the concept of irradiating it, and genetic engineering's out, and they're still a bit touchy about that whole "mad cow" thing. At the start of June, Belgium specifically was in the middle of a full blown food scare after some pork was found contaminated with dioxin. To say the least, these people tended to be a little nervous about what they put in their mouths.

Then, during the second week in June, around 30 children became ill in Belgium after drinking Coke that had an "off taste." Coke responded by withdrawing the "20 centiliter" glass bottles that seemed to have the problem. This was not enough. A week later, Coke still hadn't identified the actual source of the trouble, and on June 14th, the Belgian government decided to issue a blanket recall of all Coke products. This move was immediately echoed by Luxembourg and the Netherlands. By the time Coke tracked down the tainted ingredient (a bad batch of carbon dioxide), its production problem had turned into a public relations nightmare.

But it wasn't over. Two days after the Belgian recall, but before the source of the Belgian problem had been identified, over 100 people in France fell ill after consuming Coke products. France banned all Coke sales until the contamination was identified as Phenol, a disinfectant on the wooden shipping pallets at the French bottling plant. (Phenol is also, incidentally, an ingredient in several brands of mouthwash, but it made the stuff taste bad and that's all that's needed to make people sick.)

As if that wasn't enough, on June 30, Poland found mold in a batch of Coke's newly introduced "Bonaqua" bottled water, which was promptly pulled from the shelves. The diagnosis this time: the mold came from the glass bottles, not the water. But by this point, who cares?

I remember when Perrier bottled water was affected with a similar problem several years ago, when trace amounts of benzene were found in its product. The trace levels were too low to be harmful, and were in fact within the limits allowable for most municipal water supplies. In theory, Perrier could ignore the problem, right?

Wrong. Perrier sprang into action, issuing an enormous voluntary recall of EVERYTHING, before any politicians, regulators, or competitors had a chance to make an issue of it. They created a huge advertising campaign telling anyone and everyone that yes, they pulled all the water. Why? It had a little benzene in it. Did Perrier overreact? Probably. But it wouldn't sell a less-than-perfect product, despite the losses that might be incurred in the process.

Perrier's reputation for caring about the quality of its product was immediately enhanced. More importantly, potential public outcry was completely defused by the public's natural reaction to advertising: if a company is trying to tell me something, it's probably not very important.

We don't trust advertising. We discount it, ignore it, filter it out. The one way Perrier could be sure to prevent the public from taking the benzene problem seriously was to base an advertising campaign around it. That way, Perrier could control the flow of information and make sure that when the source of the problem was found (filtering machinery that had been improperly cleaned with benzene). People would hear about it and be reassured that they had the problem under control.

Coke's problem is summed up remarkably well in the following sentence fragment from this article:

"After an initial silence, Coke sought to reassure health officials..."

An initial silence. Ouch. The Clinton administration reacted to questions about Whitewater with "an initial silence," and everybody determined the administration must be hiding something, even if nobody could figure out quite what. George Lucas drums up press interest in his next Star Wars movie by keeping his scripts and casting decisions secret. The old saying "Whisper, and the world listens," has the corollary, "Be silent and the world engages in some serious gossip."

There is now a perception that Coke has quality control problems in Europe. Whether that is true or not, the problems themselves aren't really the issue. The perception of them is. The European public's natural assumption that they can buy Coke and there will be nothing wrong with it has been challenged, and Coke is seen as having to be pressured to react to the problem. Coke has a lot of work ahead of it to dig its way out of this one.

The old cliche about how an ounce of prevention is worth a pound of cure is the lesson Coke's management needs to take from this. To head problems off in the future, Coke has to learn to panic before anyone else can. To repair its damaged reputation, Coke has to impose strict new quality control and testing procedures, and highly publicize them.

I recently received my copy of the letter Coca-Cola sent to all its shareholders, explaining the problem and trying to be reassuring. The letter is dated July 1 and talks exclusively about how quickly Coke reacted to these problems after the fact (as they got bigger and bigger), without one word about how it could have headed them off or what it's doing to prevent similar problems in the future.

*Sigh*

For more on Coca-Cola's recent woes, see:
- CNN on Coke's quarterly results
- CNN's special section on Coke's European problems

- Oak

Stock Change    Bid
AXP   +2 3/4    134.25
CHV   +  5/8     96.94
CSCO  +1 1/4     66.56
EK    -  5/8     72.13
GM    +  1/4     68.06
GPS   +  3/4     50.75
INTC  -  5/16    67.69
KO    +2 1/8     64.00
MSFT  -  9/16    94.38
PFE   +  5/8     37.69
SGP   +  7/8     54.06
TROW  +1 1/8     36.63
XON   +  1/2     78.94
YHOO  -5        154.44

                  Day     Month  Year    History
        R-MAKER  +0.21%   3.07%  17.24%  48.35%
        S&P:     +0.65%   3.35%  16.00%  43.43%
        NASDAQ:  +0.88%   6.66%  30.64%  73.30%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   48 Microsoft     39.13     99.44   154.09%
   6/23/98   68 Cisco Syst    29.21     66.00   125.99%
    5/1/98 82.5 Gap Inc.      22.91     50.06   118.49%
   2/13/98   44 Intel         42.34     67.13    58.55%
    2/3/98   66 Pfizer        27.43     37.81    37.84%
   5/26/98   18 AmExpress    104.07    135.88    30.57%
   2/17/99   16 Yahoo Inc.   126.31    150.25    18.95%
   8/21/98   44 Schering-P    47.99     54.88    14.34%
    2/6/98   56 T. Rowe Pr    33.67     35.06     4.13%
   2/27/98   27 Coca-Cola     69.11     65.00    -5.94%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     79.31    23.28%
   3/12/98   15 Chevron       83.34     95.63    14.74%
   3/12/98   20 Eastman Ko    63.15     72.13    14.22%
   3/12/98   17 General Mo    72.41     69.06    -4.62%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   48 Microsoft   1878.45   4773.00  $2894.55
   6/23/98   68 Cisco Syst  1985.95   4488.00  $2502.05
    5/1/98 82.5 Gap Inc.    1890.33   4130.16  $2239.83
   2/13/98   44 Intel       1862.83   2953.50  $1090.67
    2/3/98   66 Pfizer      1810.58   2495.63   $685.05
   5/26/98   18 AmExpress   1873.20   2445.75   $572.55
   2/17/99   16 Yahoo Inc.  2020.95   2404.00   $383.05
   8/21/98   44 Schering-P   2111.7   2414.50   $302.80
    2/6/98   56 T. Rowe Pr  1885.70   1963.50    $77.80
   2/27/98   27 Coca-Cola   1865.89   1755.00  -$110.89

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon       1286.70   1586.25   $299.55
   3/12/98   15 Chevron     1250.14   1434.38   $184.24
   3/12/98   20 Eastman Ko  1262.95   1442.50   $179.55
   3/12/98   17 General Mo  1230.89   1174.06   -$56.83

                              CASH    $232.29
                             TOTAL  $35692.51