Question

Coke and Pepsi in India: Issues, Ethics, and Crisis Management

There is nothing new about multinational corporations (MNCs) facing challenges as they do business around the world, especially in developing nations or emerging markets. Royal Dutch Shell had to greatly reduce its production of oil in Nigeria due to guerrilla attacks on its pipelines. Cargill was forced to shut down its soy-processing plant in Brazil because of the claim that it was contributing to the destruction of the Amazon rainforest. Tribesmen in Botswana accused De Beers of pushing them off their land to make way for diamond mines.

Google was kicked out of China only to be later restored. Global business today is not for the faint hearted.

It should not come as a surprise, therefore, that MNC giants such as Coca-Cola and PepsiCo—highly visible, multibillion dollar corporations with well-known, iconic brands around the world—would encounter challenges in the creation and distribution of their products in some countries. After all, soft drinks are viewed as discretionary and sometimes luxurious products when compared to the staples of life that are often scarce in developing countries. One of those scarce staples is water. Many observers think a shortage of water is the next burgeoning global resource crisis.

Whether it is called an issue, an ethics challenge, or a scandal, the situation confronting both Coke and Pepsi in India, beginning in 2003, richly illustrates the many complex and varied social challenges companies face once they decide to embark on other country’s shores. Their experiences in India may predict other issues they may eventually face elsewhere or trials other companies might face as well. With a billion-plus people and an expanding economy, and with markets stagnating in many Western countries, India, along with China and Russia, represent immense opportunities for growth for virtually all businesses. Hence, these companies cannot afford to ignore these burgeoning markets.

Initial Allegations

Coke and Pepsi’s serious problems in India began in 2003. In that year, India’s Center for Science and Environment (CSE), an independent public interest group, made allegations that tests they had conducted revealed dangerously high levels of pesticide residue in the soft drinks being sold all over India. The director of CSE, Sunita Narain, stated that such residues could cause cancer and birth defects as well as harm nervous and immune systems if the products were consumed over long periods of time.

Further, CSE stated that the pesticide levels in Coke’s and Pepsi’s drinks were much higher than that permitted by European Union standards. On one occasion, Narain accused Pepsi and Coke of pushing products that they wouldn’t dare sell at home.

In addition to the alleged pesticides in the soft drinks, another special interest group, India Resource Center (IRC), accused the companies of over consuming scarce water and polluting water sources due to its operations in India.

IRC intensely criticized the companies, especially Coca-Cola, by detailing a number of different “water woes” experienced by different cities and regions of the country. IRC’s allegations even more broadly accused the companies of water exploitation and of controlling natural resources, and thus communities. Examples frequently cited were the impact of Coke’s operations in the communities of Kerala and Mehdiganj.

In 2004, IRC continued its “Campaign to Hold Coca-Cola Accountable” by arguing that communities across India were under assault by Coke’s practices. Among the continuing allegations were communities’ experiencing severe water shortages around Coke’s bottling plants, significant depletion of the water table, strange water tastes and smells, and pollution of groundwater as well as soil. IRC said that in one community Coke was distributing its solid waste to farmers as fertilizer and that tests conducted found cadmium and lead in the waste, thus making it toxic waste. And the accusation of high levels of pesticides continued. According to IRC, the Parliament of India banned the sale of Coca-Cola in its cafeteria.

In December 2004, India’s Supreme Court ordered Coke and Pepsi to put warning labels on their products. This caused a serious slide in sales for the next several years.

Sunita Narain

One major reason that Indian consumers and politicians took seriously the allegations of both CSE and IRC was CSE’s director, Sunita Narain—a well-known activist in New Delhi. Narain was born into a family of freedom fighters whose support of Mahatma Gandhi goes back to the days when Gandhi was pushing for independence in India over 60 years ago. She took up environmental causes in high school. One major cause she adopted was to stop developers from cutting down trees. Her quest was to save India from the ravages of industrialization. She became the director of CSE in 2002.

According to a BusinessWeek writer, Narain strongly holds forth on the topic of MNCs exploiting the natural resources of developing countries, especially India. She manifests an alarmist tone that tends toward the end-is-near level of fervency. She is skilled at getting media attention. In 2005, she won the Stockholm Water Prize, one of a number of environmental accolades she has received.

In addition, she has been very successful in taking advantage of India’s general suspicion of huge MNCs, dating back to its tragic Bhopal gas leak in 1984. Narain claims she does not intend to hurt companies but only to spur the country to pass stricter regulations.

Sacred Water

Coke and Pepsi’s problems in India have been complicated by the fact that water carries considerable significance in India. We are often told about cultural knowledge we should have before doing business in other countries. Water is one of those issues in India. Although the country has some of the worst water in the world, due to poor sewage, pollution, and pesticide use, according to UN sources, water carries an almost-spiritual meaning to Indians. Bathing is viewed by many of them to be a sacred act, and tradition for some residents holds that one’s death is not properly noted until one’s ashes are scattered in the Ganges River. In one major poll, Indians revealed that drinking water was one of their major life activities to improve their well-being.

Indians’ sensitivity to the subject of water has undoubtedly played a role in the public’s reactions to the allegations.

Coke’s and Pepsi’s Early Responses

Initially, Coke and Pepsi denied the allegations of CSE and IRC, primarily through the media. It was observed that their response was limited at best as they got caught up in the technical details of the tests. Coke conducted its own tests, the conclusion of which was that their drinks met demanding European standards.

Over the next several years, the debate continued as the companies questioned the studies and conducted studies of their own. The companies also pointed out that other beverages and foods in the Indian food supply, and indeed water, had trace pesticide levels in it and they sought to deflect the issue in this manner.

The IRC also attacked Coke and Pepsi for not taking the crisis seriously. They argued that the companies were “destroying lives, livelihoods, and communities” while viewing the problems in India as “public relations” problems that they could “spin” away. IRC pointed out that Coca-Cola had hired a new public relations firm to help them build a new image in India, rather than addressing the real issues. According to IRC, the then-new CEO of Coke, Neville Isdell, immediately made a visit to India, but it was a “stealth” visit designed to avoid the heavy protests that would have met him had the trip been public. IRC also pointed out that Coke had just increased its marketing budget by a sizable amount in India. IRC then laid out the steps it felt Coke should take to effectively address its problems.

Pesticide Residue and Partial Bans

The controversy flared up again in August of 2006 when the CSE issued a new study. The new test results showed that 57 samples from 11 Coke and Pepsi brands contained pesticide residue levels 24 times higher than the maximum allowed by the Indian government. Public response was swift. Seven of India’s 28 states imposed partial bans on the two companies, and the state of Kerala banned the drinks completely. Officials there ignored a later court ruling reversing the ban.

During 2006, the United Kingdom’s Central Science Laboratory questioned the CSE findings. Coca-Cola sought a meeting with CSE that it denied. Also that year, India’s Union Health Ministry rejected the CSE study as “inconclusive.”

The Companies Ratchet up Their Responses

As a result of the second major flurry of studies and allegations in 2006, both Coke and Pepsi ratcheted up their responses, sometimes acting together, sometimes taking independent action. They responded almost like different companies than they were before. Perhaps they finally reckoned this issue was not going to go away and had to be addressed more forcefully.

Coke’s Response

Coke started with a more aggressive marketing campaign. It ran three rounds of newspaper ads refuting the new study. The ads appeared in the form of a letter from more than 50 of India’s company-owned and franchised Coke bottlers, claiming that their products were safe. Letters with a similar message went out to retailers and stickers were pressed onto drink coolers, declaring that Coke was “safety guaranteed.” Coke also hired researchers to talk to consumers and opinion leaders to find out what exactly they believed about the allegations and what the company needed to do to convince them the allegations were false.

Based on its research findings, Coke created a TV ad campaign that featured testimonials by well-respected celebrities. One of the ads featured Aamir Khan, a popular movie star, as he toured one of Coke’s plants. He told the people that the product was safe and that if they wanted to see for themselves they could personally do so. In August and September 2006, over 4,000 people took him up on his offer and toured the plants. Opening up the plants sent the message that the company had nothing to hide, and this was very persuasive.

The TV ads, which were targeted toward the mass audience, were followed by giant posters with movie star Khan’s picture drinking a Coke. These posters appeared in public places such as bus stops. In addition, other ads were targeted toward adult women and housewives, who make the majority of the food-purchasing decisions. One teenager was especially impressed with Khan’s ads because she knew he was very selective about which movies he appeared in and that he wouldn’t take a position like this if it wasn’t appropriate.

In a later interview, Coke’s CEO Isdell said he thought the company’s response during the second wave of controversy was the key reason the company began turning things around. After the 2003 episode, the company changed management in India to address many of the problems, both real and imagined. The new management team was especially concerned about how it would handle its next public relations crisis. Weeks later, in December 2006, India’s Health Ministry said that both Coke’s and Pepsi’s beverages tested in three different labs contained little or no pesticide residue.

Pepsi’s Response

Pepsi’s response was similar to Coke’s. Pepsi decided to go straight to the Indian media and try to build relationships there. Company representatives met with editorial boards, presented its own data in press conferences, and also ran TV commercials. Pepsi’s commercials featured the then president of PepsiCo India, Rajeev Bakshi, shown walking through a polished Pepsi laboratory.

In addition, Pepsi increased its efforts to cut down on water usage in its plants. Employees in the plants were organized into teams and used Japanese-inspired kaizens and suggested improvements to bring waste under control. The company also employed lobbying of the local government.

Indra Nooyi becomes CEO Pepsi had an advantage in rebuilding its relationships in India, because in October 2006, an Indian-born woman, Indra Nooyi, was selected to be CEO of the multinational corporation. It is not known whether Pepsi’s problems in India were in any way related to her being chosen CEO, but it definitely helped. After graduating from the prestigious Indian Institute of Management, and later Yale University, Nooyi worked her way up the hierarchy at PepsiCo before being singled out for the top position.

She previously held positions at the Boston Consulting Group, Motorola, and ABB Group.

Prior to becoming CEO, Nooyi had a number of successes in Pepsi and became the company’s chief strategist. She was said to have a perceptive business sense and an irreverent personal style. One of Nooyi’s first decisions was to take a trip to India in December 2006. While there, she spoke broadly about Pepsi’s programs to improve water and the environment. The Indian media loved her, beaming with pride, and covered her tour positively as she shared her own heartwarming memories of her life growing up in India. She received considerable praise. Not surprisingly, Pepsi’s sales started moving upward.

While all the criticism of Coke and Pepsi was going on, roughly from 2003 to 2006, both companies were pursuing corporate social responsibility (CSR) initiatives in India, many of them related to improving water resources for communities, while the conflict was center stage.

A Commentary on “What’s Going on”

Because of all the conflicting studies and the stridency of CSE and IRC, one has to wonder what was going on in India to cause this developing country to so severely criticize giant MNCs such as Coke and Pepsi. Many developing countries would be doing all they could to appease these companies. It was speculated by a number of different observers that what was at work was a form of backlash against huge MNCs that come into countries and consume natural resources.

Why were these groups so hostile toward the companies? Was it really pesticides in the water and abuse of natural resources? Or was it environmental interest groups using every opportunity to bash large corporations on issues sensitive to the people? Were CSE and IRC strategically making an example of these two hugely successful companies and trying to put them in their place?

Late in 2006, an interesting commentary appeared in BusinessWeek exploring the topic of what has been going on in India with respect to Coke and Pepsi.

This commentary argued that the companies may have been singled out because they are foreign owned. It appears that no Indian soft drink companies were singled out for pesticide testing, though many people believe pesticide levels are even higher in Indian milk and bottled tea. It was pointed out that pesticide residues are present in most of India’s groundwater, and the government has ignored or has been slow to move on the problem. The commentary went on to observe that Coke and Pepsi have together invested $2 billion in India over the years and have generated 12,500 jobs and support more than 200,000 indirectly through their purchases of Indian-made products including sugar, packing materials, and shipping services.

Continuing Protests, Renewed Priorities, and Strategies

Eventually, the open conflict settled down and sales took an upturn for both companies, but the issue lingered. In June 2007, the IRC continued its attacks on Coca-Cola. It accused the company of “greenwashing” its image in India.

The IRC staged a major protest at the new Coke Museum in Atlanta on June 30, 2007, questioning the company’s human rights and environmental abuses. They erected a 20-foot banner that read “Coca-Cola Destroys Lives, Livelihoods, Communities” in front of the New World of Coke that opened in May 2007. Amit Srivastava of the IRC was quoted as saying, “This World of Coke museum is a fairy tale land and the real side of Coke is littered with abuses.” A representative of the National Alliance of People’s Movements, a large coalition of grassroots movements in India, said, “The museum is a shameful attempt by the Coca-Cola Company to hide its crimes.”

Piling On

The protestations by these groups apparently motivated other groups to take action against Coke. It was reported that United Students Against Sweatshops also staged a “die-in” around one of Coke’s bottling facilities in India. And more than 20 colleges and universities in the United States, Canada, and the United Kingdom removed Coca-Cola from campuses because of student-led initiatives to put pressure on the company. In addition, the protests in Atlanta were endorsed by a host of groups that participated in the U.S. Social Forum.

Coke’s Renewed Priorities

Undaunted, Coca-Cola continued its initiatives to improve the situation in India and around the world. Coke faces water problems around the world because it is the key natural resource that goes into its products. The company had 70 clean-water projects in 40 countries aimed at boosting local economies. It was observed that these efforts were part of a broader strategy on the part of CEO Neville Isdell to build Coke’s image as a local benefactor and a global diplomat.

The criticism of Coke has been most severe in India. CEO Isdell admits that the company’s experience in India has taught some humbling lessons. Isdell, who took over the company after the crisis had begun, told The Wall Street Journal, “It was very clear that we had not connected with the communities in the way we needed to.” He indicated that the company has now made “water stewardship” a strategic priority, and in a recent 10-K securities filing, had listed a shortage of clean water as a strategic risk.

In August 2007, Coca-Cola India unveiled its “5-Pillar” growth strategy to strengthen its bonds with India. Coke’s new strategy focuses on the pillars of People, Planet, Portfolio, Partners, and Performance. The company also announced a series of initiatives under each of the five pillars and its “Little Drops of Joy” proposal, which tries to reinforce the company’s connection with stakeholders in India.

Though most of the attention focused on Coca-Cola, it should also be noted that Pepsi has continued taking steps on a number of projects as well. One novel initiative is that the company now gathers rainwater in excavated lakes and ponds and on the rooftops of its bottling plants in India. The company sponsors other community water projects as well.

Indian Beverage Association Formed

Though Coke and Pepsi are typically fighting each another in their longstanding “cola wars,” due to their mutual problems in India they formed the Indian Beverage Association (IBA) in the summer of 2010. Other beverage companies were quick to join.

Because of continuous hostility from regulators and activist groups, the two companies decided that a joint effort to address issues might make sense.

The IBA was formed to address the issues related to the government of Kerala’s charge that Coke is polluting the groundwater in the state and other taxation issues that affect both companies. Their issues have been ongoing, but Kerala’s government decided to form a tribunal against Coca-Cola, seeking $48 million in compensation claims for allegedly causing pollution and depleting the groundwater level there. Another important issue was the value-added tax (VAT) by the Delhi government. The IBA brought in other bottlers and packaging firms that had similar interests and issues in India.

Question; What are ethical considerations in terms of Kantian or Utilitarian theory? How should sustainability be considered?

* If the case involves a company's or a manager's actions, evaluate what the company or the manager did or did not do correctly in handling the issue affecting it. How should actions have been handled?


Answer 1