Guilty of sweet nothing

Days after the Queen knighted him for services to business, Sir John Sunderland has found that Cadbury Schweppes, the company he has helped run for nearly a decade and where he is now chairman, is a business facing a deepening crisis.

Cadbury is facing a major confidence crisis after failing to act on a salmonella scare until forced to do so by the FSA. Legally its actions may be justifiable, but it’s made a mockery of the brand’s ‘ethical’ credentials – and taken the shine off its chief’s new knighthood. David Benady reports

Days after the Queen knighted him for services to business, Sir John Sunderland has found that Cadbury Schweppes, the company he has helped run for nearly a decade and where he is now chairman, is a business facing a deepening crisis.

The announcement on June 23 that Cadbury in the UK was recalling seven lines of confectionery – including several Cadbury Dairy Milk products – amounting to 1 million bars, on suspicion that they might be contaminated with a salmonella bug is likely to cost the company dearly.

Analysts at Cazenove estimate that the recall could cost Cadbury Schweppes up to &£20m in lost sales, and damage its brand image. Reports in the national press also suggest confidence in the chocolate brand has “taken a nose dive”, following a survey of consumer attitudes. Meanwhile, trading standards officers are carrying out further tests at Cadbury factories to see if any other products are affected.

Cadbury says it discovered in January that chocolate crumb – an ingredient in a range of its confectionery products – at its plant in Marlbrook, Herefordshire, was infected with the Montevideo strain of salmonella. It blamed the contamination on a leaking pipe, but says it decided the level of contamination in the affected products was too insignificant to pose a threat to health.

It did not issue a product recall notice until asked to do so by the Food Standards Agency (FSA), which found out about the contamination in June. This followed the discovery by the Health Protection Agency (HPA) of an unusually high incidence of people reporting cases of infection with salmonella Montevideo – over 50 between May and June, an increase of more than 200% compared with the same period last year. The HPA is investigating a link with the Cadbury products.

The issue hinges on whether or not Cadbury was required to tell the FSA about its discovery in January. This rests on interpretation of Article 19 of regulation 178/2002 of the 2004 European general food regulation. It states that food safety authorities should be notified and a product recalled if a food producer “considers or has reason to believe” that the product “is not in compliance with the food safety requirements”. Cadbury says it believed the products did not pose a threat to health, so it didn’t need to issue a recall notice.

But an FSA spokeswoman says: “According to general food law, having salmonella in a ready-to-eat food such as chocolate is unacceptable and can be a health risk.” She says it will be up to local authorities – Herefordshire or Birmingham – to decide whether to take legal action “over any perceived breach”. The FSA’s expert advisory committee this week reportedly said Cadbury’s system for checking the safety of its products is unreliable and out of date, and underestimates the level and likelihood of salmonella contamination.

A Cadbury spokesman says: “We believe we took the right actions at the time and we are working in full co-operation with the FSA.”

The rot sets in

If the FSA is proved right, this could deal a heavy blow to the company’s reputation as an ethical business. For the newly ennobled Sunderland, now non-executive chairman, and Todd Stitzer, Cadbury Schweppes chief executive, the contamination crisis could throw off-course the corporate strategy they put in place after they were installed as the management team in 2003.

Stitzer, who replaced Sunderland as chief executive, announced in October 2003 a four-year programme to cut &£1.6bn of costs through redundancies and factory closures as part of the “fuel for growth” strategy. This aims to plough the money saved back into marketing and innovation. Alongside this is a target of boosting revenues by 3-5% per year. While these targets do not seem especially stretching, any glitch in distribution would certainly make them more difficult to achieve.

Cadbury Schweppes’ trading update on June 7 states: “Our EMEA region has had a challenging start to the year, particularly Cadbury Trebor Bassett (CTB) in the UK. Revenues and profits in CTB have been impacted by an estimated &£20m and &£12m respectively due to the combination of a weak market and increased discounting to clear high levels of inventory built up during the implementation of a new IT system in the fourth quarter.” The company’s margins are already under pressure from a hike in costs due to rising oil prices. While even a &£20m hit from the recall would do little to dent annual profits close to &£1bn, the effects on confectionery sales in its core UK market could be damaging.

The crisis threatens to detract from the kudos that goes with the royal gong the Cadbury Schweppes chairman has received. But it also invites comparisons with other product recalls. The classic example of best practice is considered to be Johnson & Johnson’s (J&J) handling of the Tylenol crisis in the US in 1982, when seven consumers died after an unknown hand spiked capsules of the painkiller with cyanide.

J&J immediately withdrew the product from retailers’ shelves at a cost of $100m. It later relaunched the painkiller with tamper-proof packaging and distributed 40 million coupons worth $2.50 each. Its prompt action was credited with rescuing the brand from oblivion and Tylenol bounced back to become a leading product in the US. J&J’s speedy and honest handling of the crisis ultimately became a symbol of reassurance for the brand.

One observer says the Cadbury contamination could have happened to any food producer, but adds/ “It was poorly handled by one of the most trusted brands in the land. I don’t think the public will appreciate the gamble that Cadbury took by delaying the product withdrawal.

“It has had since January to think about how to frame the story for the press, and yet its PR efforts verged on the blasé at times. At a time when food producers are under severe scrutiny from all angles, a transparent approach is needed to protect the integrity of trusted brands. Honesty, particularly in the food industry, is at a premium – consumers don’t know who to trust and rely on brands to help them navigate. If brands are shown to be withholding the truth they risk losing credibility and potentially damaging their brand value.”

Taste of things to come

Examples of poorly handled recalls include Coca-Cola’s experience in Belgium in 1999 and Perrier’s benzene scare in 1990. Coke was slow to announce a recall when children in Belgium became sick after drinking its products. The problem was traced to contamination of Coke products and they were eventually banned in Belgium and many were withdrawn in France. Perrier was also slow to act on a benzene scare in 1990. The product was eventually recalled, but the brand never recovered. The lessons are clear – if there is a problem, recall products immediately, explain the situation to consumers and apologise and compensate.

But one City analyst believes Cadbury Schweppes is being victimised by the FSA in retaliation for rejecting its “traffic light” labelling system. The FSA rejects the charge and says its actions are taken only on the basis of evidence it receives. Meanwhile, the analyst praises Cadbury Schweppes as an ethical company with high standards of probity, but concedes: “If it had withdrawn the products at the outset with a full explanation, it could have come away smelling of roses.”

As British Airways awaits the results of the Office of Fair Trading’s investigation into price-fixing allegations and Kit Kat is investigated over complaints that its Big Brother Golden Tickets promotion was fixed, these are tense times for some of the UK’s biggest brands. Along with Cadbury, they are living under a cloud that will only be dispelled when full investigations have been carried out. Depending on the outcome of these enquiries, this could be just the beginning of their problems.

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