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The Coca-Cola Company Struggles with Ethical Crises

Coca-Cola has the most valuable brand name in the world and, as one of themost visible companies worldwide, has a tremendous opportunity to excel inall dimensions of business performance. However, over the last ten years, the firm has struggled to reach its financial objectives and has been associated with a num- ber of ethical crises. Warren Buffet served as a member of the board of directors and was a strong supporter and investor in Coca-Cola but resigned from the board in 2006 after several years of frustration with Coca-Cola’s failure to overcome many challenges.

Many issues were facing Doug Ivester when he took over the reins at Coca- Cola in 1997. Ivester was heralded for his ability to handle the financial flows and details of the soft-drink giant. Former-CEO Roberto Goizueta had carefully groomed Ivester for the top position that he assumed in October 1997 after Goizueta’s untimely death. However, Ivester seemed to lack leadership in handling a series of ethical crises, causing some to doubt “Big Red’s” reputation and its prospects for the future. For a company with a rich history of marketing prowess and financial performance, Ivester’s departure in 1999 represented a high-profile glitch on a relatively clean record in one hundred years of business. In 2000 Doug Daft, the company’s former president and chief operating officer, replaced Ivester as the new CEO. Daft’s tenure was rocky, and the company continued to have a se- ries of negative events in the early 2000s. For example, the company was allegedly involved in racial discrimination, misrepresenting market tests, manipulating earn- ings, and disrupting long-term contractual arrangements with distributors. By 2004 Daft was out and Neville Isdell had become president and worked to improve Coca- Cola’s reputation.

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We appreciate the work of Kevin Sample, who helped draft the previous edition of this case and Melanie Drever, who assisted in this edition. This case was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly available material and the Coca-Cola website.

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HISTORY OF THE COCA-COLA COMPANY

The Coca-Cola Company is the world’s largest beverage company, and markets four of the world’s top five leading soft drinks: Coke, Diet Coke, Fanta, and Sprite. It also sells other brands including Powerade, Minute Maid, and Dansani bottled water. The com- pany operates the largest distribution system in the world, which enables it to serve cus- tomers and businesses in more than two hundred countries. Coca-Cola estimates that more than 1 billion servings of its products are consumed every day. For much of its early history, Coca-Cola focused on cultivating markets within the United States.

Coca-Cola and its archrival, PepsiCo, have long fought the “cola wars” in the United States, but Coca-Cola, recognizing additional market potential, pursued in- ternational opportunities in an effort to dominate the global soft-drink industry. By 1993 Coca-Cola controlled 45 percent of the global soft-drink market, while PepsiCo received just 15 percent of its profits from international sales. By the late 1990s, Coca- Cola had gained more than 50 percent of the global market in the soft-drink indus- try. Pepsi continued to target select international markets to gain a greater foothold in international markets. Since 1996 Coca-Cola has focused on traditional soft drinks, and PepsiCo has gained a strong foothold on new-age drinks, has signed a partnership with Starbucks, and has expanded rapidly into the snack-food business. PepsiCo’s Frito-Lay division has 60 percent of the U.S. snack-food market. Coca-Cola, on the other hand, does much of its business outside of the United States, and 85 percent of its sales now come from outside the United States. As the late Roberto Goizueta once said, “Coca-Cola used to be an American company with a large international business. Now we are a large international company with a sizable American business.”

Coca-Cola has been a successful company since its inception in the late 1800s. PepsiCo, although founded about the same time as Coca-Cola, did not become a strong competi- tor until after World War II when it began to gain market share. The rivalry intensified in the mid-1960s, and the “cola wars” began in earnest. Today, the duopoly wages war pri- marily on several international fronts. The companies are engaged in an extremely com- petitive—and sometimes personal—rivalry, with occasional accusations of false market-share reports, anticompetitive behavior, and other questionable business conduct, but without this fierce competition, neither would be as good a company as it is today.

By January 2006, PepsiCo had a market value greater than Coca-Cola for the first time ever. Its strategy of focusing on snack foods and innovative strategies in the non- cola beverage market helped the company gain market share and surpass Coca-Cola in overall performance.

COCA-COLA’S REPUTATION

Coca-Cola is the most-recognized trademark and brand name in the world today with a trademark value estimated to be about $25 billion. The company has always demon- strated a strong market orientation, making strategic decisions and taking actions to attract, satisfy, and retain customers. During World War II, for example, company pres- ident Robert Woodruff committed to selling Coke to members of the armed services

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for just a nickel a bottle. As one analyst said later, “Customer loyalty never came cheaper.” This philosophy helped make Coke a truly global brand, with its trademark brands and colors recognizable on cans, bottles, and advertisements around the world. The advance of Coca-Cola products into almost every country in the world demon- strated the company’s international market orientation and improved its ability to gain brand recognition. These efforts contributed to the company’s strong reputation.