Mon, Apr 19, 2004 page12

• Things going bitter with Coke

  IS THE FIZZ GONE? The once-great symbol of American culture and commercialism appears now to be treading water

  • THE OBSERVER
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  "It's not the real thing." That was the mocking accusation levelled by Coca-Cola's detractors when the soft drinks giant launched Dasani bottled water in the UK three months ago. Dasani, they pointed out, came not from some idyllic rural spring but from processed tap water in Kent, England.

  Which would have been bad enough, except that Dasani was then hastily withdrawn after dangerous chemicals were detected in the product.

  Plans to launch it across Europe have now been indefinitely postponed. It's been a marketing disaster -- just what you don't expect from Coca-Cola, the world's greatest marketing phenomenon.

  By itself, the incident will scarcely make a dent in Coca-Cola's huge finances. The company recorded a US$5.2 billion profit and sold 19 billion cases of drinks last year, so it can afford to pulp 500,000 bottles of tap water. But the Dasani fiasco will raise the temperature when Coke holds its annual general meeting on Wednesday.

  Shaking the top

  The Atlanta-based cola giant's increasingly fraught search for a successor to Douglas Daft, who retires as chairman and chief executive at the end of this year, means that emotions are already running high.

  To date, Coke's chief operating officer, Steven Heyer, and the Gillette boss, James Kilts, are the names most frequently tipped to take the helm, but some investors are loudly demanding that Coca-Cola also take the opportunity to split the roles of chief executive and chairman.

  Institutional Shareholder Services (ISS), the influential American advisory group, and Calpers, the California state pension fund, have both declared their opposition to the re-election of several board directors, including Warren Buffett, the esteemed, avuncular billionaire investor. The sage of Omaha has served on Coca-Cola's board for 15 years and holds an 8 percent stake in the company, but ISS disapproves of his presence on the board because Coke has contracts with other firms he owns.

  Coca-Cola has retorted by praising Buffett's "unimpeachable integrity" and emphasizing that his role is consistent with New York Stock Exchange guidelines.

  The company's official line is also that splitting the role of chairman and chief executive is unnecessary because its corporate governance structure provides adequate checks and balances. However, many industry observers predict that Coca-Cola will submit to shareholder pressure, perhaps by appointing company veteran Don Keough as a non-executive chairman.

  "Beyond all that, though, shareholders are still scratching their heads over why Daft is leaving at all," says one analyst.

  In just over four years at the helm, he has cut thousands from the workforce and reorganized the company's vast global distribution network, earning at least two cheers from investors.

  Sudden departures

  With growth stuck in single digits, Daft's aim has been to focus on margins. This is a break with Coca-Cola's decades-long emphasis on conquering new markets. Investors have constantly been reassured that Daft's work is about to reap dividends, so his sudden departure has spooked Wall Street.

  Coca-Cola, once famed for its home-grown, lifetime executives, has been losing top brass with alarming regularity of late. Jeff Dunn, its North American head, quit last year, to be followed this month by legal chief Deval Patrick. When Daft's retirement was announced, CSFB analyst Andrew Conway issued a note headed: "What is the board of directors thinking?"

  For the moment, Coca-Cola is pinning much on its sponsorship this summer of both the Euro 2004 football tournament in Portugal and the Athens Olympics. Events like these provide the kind of access to a global audience that is increasingly difficult to find these days.

  Coke's expensively bought pro-minence reflects Daft's wish to discard the drink's image as an emblem of American culture. That doesn't play too well in much of the world these days -- witness the success of its rival Mecca Coke in the Middle East. Soon after taking charge Daft dismantled the all-powerful global marketing directorate in Atlanta.

  Nowadays, Coke has a "think local, act local" policy, with advertising locally targeted.

  It would be far too soon to say the company has shed its reputation for corporate arrogance. Less than four years ago, it settled a lawsuit brought by black workers in the US alleging racial discrimination in its pay and promotion policies.

  Last year it was embarrassed by revelations from a former manager about a rigged marketing test involving Burger King, one of Coke's largest customers. Coca-Cola agreed to pay compensation to Burger King and its franchisees and issued a public apology.

  Global woes

  In Colombia, its local bottler has recently been accused of colluding in a brutal government paramilitary crackdown on trade union officials, which it strongly denies. Some of Coca-Cola's contractors in India have been forced to deny accusations of environmental damage, while others weathered controversy before being largely cleared of producing soft drinks containing pesticide.

  Competition regulators in Brussels rejected Coca-Cola's attempt to acquire Cadbury Schweppes's European soft drinks business, and are still investigating allegations that Coca-Cola entered into unfair deals with retailers to display its goods prominently. It was reported last week that the European Commission was finally willing to settle the dispute, five years after it carried out a "dawn raid" on Coke's European headquarters. Coca-Cola denies breaking European law. And there have been other unwelcome controversies.

  On the other hand, Daft has rebuilt bridges with Coca-Cola's bottlers who, across the world, were threatening rebellion over ever-increasing fees. It is seen as one of his better moves, as is the appointment of Steven Heyer as his lieutenant.

  Most investors are thought to favor Heyer, an advertising man recruited from Turner Broadcasting in 2001, as Daft's successor.

  Heyer oversaw a recent batch of quirky ads featuring, among others, a belching Penelope Cruz. But some board members are rumored to have misgivings about his allegedly hard-nosed management style.

  Whoever takes charge, though, will have to find a way for Coca-Cola meaningfully to diversify its portfolio of products.

  Either that, or find an answer to the trickiest question in the beverages industry: how do you keep persuading young people to drink synthetic, high-calorie, tooth-rotting soda?
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