Making a Trauma out of a Crisis

Coca-Cola has finally admitted it mishandled the scare over the contamination of the world’s best-known brand in France and Belgium that left 200 people suffering from nausea and headaches.

Philippe Lenfant, director general of bottling at Coca-Cola Enterprises in Belgium, this week said: “I admit we perhaps lost control of the situation to a certain extent.” The statement follows stinging criticism of the company’s handling of the crisis.

It is hard to believe the stewards of Coke could make such a series of blunders when managing the crisis. The recent health scare has, according to observers, been a lot more protracted than it should have been. The company’s failure to react quickly enough risks diluting the value of a brand with a &£1bn-a-year marketing spend.

Many of the victims were children.

It is thought there were two separate causes of the outbreak: a defective gas used in a bottling plant in Belgium and traces of fungicide on the side of cans distributed in both countries. Yet the Belgian government insists the real cause remains unclear.

It is the last thing Coke needs at the moment. The company has already been criticised by investors for failing to increase its volume sales and share price, at a time when many US companies are benefiting from a bull market.

Coke’s initial response to the crisis was, to say the least, muted. It withdrew 2.5 million bottles some two days after serious reports came to light on June 8 – and that was it. The lack of explanation of what happened left the Belgian public uncertain over what was, and was not, safe to drink. It took more than a week to get any sort of apology out of Douglas Ivester, chairman and chief executive officer, who appeared to leave much of the work to faceless corporation spokesmen.

His explanation, when it did come, took the form of a letter as part of a full-page ad in 15 Belgian publications. In it, he said: “My apologies to the consumers of Belgium: I should have spoken with you earlier.”

It has been criticised as too little too late. Others see it as a symptom of the group’s arrogance.

James Kydd, Virgin Cola’s outgoing marketing director, says: “It’s outrageous. You don’t expect this from the world’s biggest brand. Consumers want to be told exactly what is going on, with promises of instant action. If this had happened to our cola, we would have immediately placed a full-page ad reassuring people our UK product was safe, but not to drink French imports. It was very arrogant of Coke not to do that.”

Coca-Cola Europe remained tight-lipped about the situation, saying it was too busy to comment to Marketing Week. However, a UK Coke spokeswoman says of the effect on the British market: “We have always had members of the GB communications team ready to answer queries from all sectors of the media – being as informative and open about the whole process as possible.”

In the short term at least, there is no doubt damage has been inflicted on the brand. In the long term, there may be implications for the value of the group as a whole.

Deborah Pretty, a research fellow at Templeton College, Oxford University, who studies the impact of crises on large corporations, says: “A crisis represents a unique opportunity for the stock market to re-rate a company and re-evaluate its future cash-flow potential. In the event of a crisis, the company’s managers are placed under the spotlight and have to demonstrate their talent in dealing with difficult circumstances.”

Pretty points to the example of Johnson & Johnson’s 1982 crisis when seven people died after being poisoned by Tylenol headache tablets. Cyanide had been injected into the capsules, possibly by a disgruntled employee. According to Pretty, who has studied the case, by the end of the year the company had lost $3bn (&£1.9bn) in value, after all market influences had been stripped out. This was after a $150m insurance loss, comprising $100m for the recall and destruction of capsules and $50m for the interruption to business.

Similarly, Perrier. After carcinogenic benzene was found in the world’s most famous mineral water in 1990, the company’s response to the crisis was botched. At first it asserted that the problem was confined to its domestic market, only to find it had spread to North America. Perrier eventually had to acknowledge a worldwide problem. Its share value dropped by about 15 per cent within a few days trading – and slid 40 per cent by the end of the year.

Ultimately, Perrier was taken over by Nestlé.

The bungled crisis hall of fame includes car manufacturer Mercedes, whose A-class car failed the ‘elk’ test two years ago. The test – which involves a sudden swerving manoeuvre as if the driver were avoiding an elk that has stepped into the road – was too much for the car, which rolled onto its roof. The company was slow to admit its error and reassure customers that the car would be recalled.

Retail giant Marks & Spencer, meanwhile, has recently suffered an overly prolonged spate of bad publicity. Jonathan Knowles, director of Wolff Olins, New York, says: “It was not active in managing expectations when all the bad financial news was coming through, and the Greenbury situation came out [the bitter battle to replace chairman Richard Greenbury].

“The PR department barely gave out any information. Nature abhors a vacuum, so the situation escalated. The M&S brand, which upholds British values such as continuity and tradition, used to be seen as a virtue, but it is now seen as a liability.”

Such a situation can arise for a number of reasons. Michael Regester, crisis and issues management consultant at Regester Larkin, says: “This [bad crisis management] often happens when it involves a very well-known brand where things don’t often go awry. Companies can’t believe that something has gone wrong. And when it does they are not used to it.”

But there are other reasons why a crisis can last beyond its natural life. According to Regester, many company structures are not designed to deal with disaster when it strikes. “A large multinational is like an octopus, and people at the end of the tentacles do not feel empowered to act without referring back to the headquarters overseas. And headquarters may not understand the gravity of the situation.”

Companies that breed a culture of fear may also be impeded if the local office proves unwilling to admit it has a problem. David Brotzen, European director of issues and crisis management at PR firm Hill & Knowlton, says there may be wrangling over who should take charge of the crisis. “Often there is a question over whether this is a company, country or corporate issue, and wrangling can ensue, which can delay the process.”

The fear of lawsuits can also result in a sluggish response. A chief executive may also be advised by their lawyers to say – and admit – nothing. In the long term, however, the cost of damage sustained to the brand could well overshadow any legal expenses.

And yet there are examples of successful crisis management.

The Tricon-owned fast-food giant KFC recently discovered it was using Belgian chickens contaminated with carcinogenic dioxins. KFC swiftly withdrew all Belgian produce and went on a PR offensive.

The headline in the following day’s Express newspaper – “Poison alert, KFC bans danger birds” – could have been a lot worse. As the story broke, Grahame Allan, managing director of KFC, appeared on several evening news programmes to reassure customers.

Oliver Wheeler, head of corporate communications at PR company Freud Communications, which handles PR for Tricon, says: “Companies spend a great deal of money building brands, so they must invest a proportion of that in an insurance policy. “You can spend ten years building a brand, and destroy it within 48 hours.

“It astounds me the amount of money spent by companies on advertising campaigns and yet they have no crisis management policies in place.”

A swift response can earn customers’ trust again, and even enhance a company’s standing if the crisis is handled correctly. Publicity surrounding the Virgin rail crash on the London to Glasgow line last week could have been a lot worse. Virgin cast the driver as a hero for averting a bigger disaster. The incident is more likely to be blamed on Railtrack than Virgin.

Turning a crisis into an opportunity may not be too much to ask. “It’s a bit like having credit in the bank,” says Regester.

“If your brand is in good shape when a disaster happens, you can draw on that credit. But if your reputation has gone into the red, then you’re in trouble.”

On top of Coke’s recent problems, such as stymied expansion plans in Europe and limited growth in a bull market, its brand has been severely dented through the company’s failure to adequately manage an unforeseen crisis.

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