The Real Thing

THE REAL THING Coke’s Bumpy Ride through India

About the Book Coca-Cola is an American icon and the world’s largest brand. Considered a torchbearer of American capitalism across the world, it has as many critics and admirers around the globe. Written by an eminent financial and business journalist, this book chronicles the soft drink giant’s troubled business expansion in the sub-continent. Entering India in 1991 after a 14-year exile, Coke’s subsequent policies and practices have been mired in controversy. The pesticides in colas, the closure of the company’s Kerala plant following its exposé as a groundwater guzzler, and the company’s constant fight with environmentalists, social activists and the government provided the impetus for writing this book. The book combines an insider’s knowledge with a reporter’s detachment and is a ‘must read’ for plumbing the depths of contemporary corporate ethics. Biblio Data: Size: 127 mm X 198 mm; Pages: xvi + 250; ISBN: 978-81-903580-5-7; Year: 2009 About the Author Nantoo Banerjee served Coca-Cola India, first as a consultant and later as Director, Public Affairs & Communications. He took a short break from journalism in 2000 to be, in his own words, ‘on the other side of the fence’, the corporate world. He is Consulting Editor and columnist with a Delhi-based news feature and analysis syndicate, India Press Agency. A working journalist for over three decades, he worked for The Indian Express, The Times of India, Business Standard, The Financial Express and The Telegraph. He received the Jefferson Fellowship from the East-West Centre, Hawaii which helped him to work extensively on Foreign Direct Investments vis-à-vis domestic exchange control laws in major Third World countries across the world, including China and India.

Selected Reading

THE REAL THING Coke’s Bumpy Ride through India

By

Nantoo Banerjee

Contents

Acronyms and Abbreviations vi

Preface ix

11. Blunder at Rebirth 1

12. Joint Venture 5

13. Rajan Pillai and Coke 12

14. Business Bully 19

15. Legal Cobweb 26

16. Shares Disinvestment 28

17. The Poor Third 43

18. Think Local, Act Local 54

19. Coke and Controversy 62

10. Pesticola 85

11. Water Thief 127

12. Plachimada Goes Global 168

13. Enfant Terrible 199

14. Not the Real Thing 210

Postscript 222

Notes 231

Index 248

1

Blunder at Rebirth

ebirths are always tricky affairs; corporate rebirthsare often more complicated. But one good thingabout a corporate rebirth is that it isn’t fortuitous:

it is pretty well thought out and planned right down to thelast detail. At least, that is how it should be. But Coca-Cola, the world’s most valued brand, seemed to havedifferent ideas.

In 1991, when Atlanta-based The Coca-Cola Company(TCCC), decided to return to India ending a 14-yearexile, one would have expected the cola giant to havecarried out an elaborate pre-investment scrutiny tovalidate all the reasons that justified its return to India.

In hindsight, it seems unthinkable that Coca-Cola didnot bother. Or, perhaps it was just a perfunctory exercise– which probably explains why it blundered into untrust-worthy relationships and less-than-transparent deals, andlurched from controversies to crises with unfailingregularity. The King of Fizz chose to return to a country ata time when it was in ferment.

The year 1990–1 was one of the most turbulent years inIndia’s political and economic history; there was a ragingpolitical crisis within and its ruinous economy was buffetedby the aftershocks of a war in the neighbouring Gulf.

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In August 1990, the late Iraqi dictator Saddam Husseinhad sent his troops into Kuwait to capture the disputedRumailah oilfields, sending a frisson of fear through theArab world and concern in America that its considerableoil interests in the region could be severely compromised.

President George Bush Sr of the US ordered Saddamto withdraw his troops from Kuwait or face theconsequences of a smackdown by global armed forces ledby the US. As the shrill war of words escalated, tensionsrose in the Gulf and world economies and marketsshuddered as oil prices went though the roof.

The turbulence was felt in India as well, where politicalskulduggery had foisted two minority governments inrapid succession with temporary outside support fromlarge national parties like the Bharatiya Janata Party (BJP)and the Congress.

Coca-Cola’s return to India appeared to be badly star-crossed. Two years before, arch-rival PepsiCo haddramatically arrived on Indian shores. Coca-Cola felt it hadno choice but to follow in its wake. Nevertheless, in early1991, the situation did not look too great to plan a businessventure in India. Besides the political squalls, the dark cloudsof an economic crisis loomed as the country wrestled with theweight of its mounting debts. The country’s foreign exchangereserves, recalls a former business editor of The HindustanTimes who covered the country’s Finance Ministry backthen, had shrunk to just US $1.2 billion on 12 January 1991,just enough to cover three weeks of the country’s imports.Expatriate workers in the Gulf, who contributed a significantportion of the foreign exchange remittances into the countrywere returning in droves. Standard and Poor’s and Moody’s– the world’s best-known credit rating agencies – haddowngraded India’s sovereign rating to junk bond status.

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By early 1991, Finance Minister Yashwant Sinha was in asweat trying to deal with a mammoth financial crisis. In anunprecedented move, he mortgaged the country’s goldreserves with the Bank of England and several other centralbanks in Europe to raise desperately needed cash to financeimports and head off a situation where India stood in dangerof defaulting on its international debt commitments. Theindustrial landscape really looked bleak: state-ownedcompanies that represented the bulwark of the country’seconomy were awash in red; inflation had soared to double-digit levels, government spending had careened out ofcontrol and revenues were down to a trickle, rendering theexchequer parlous.

Since the start of the 1990s, several Indian economistshad forecast that the country’s huge borrowings from theInternational Monetary Fund (IMF) in the early 1980swould put a huge strain on the country, fuelling theneed for a massive structural adjustment includingdevaluation of the Indian rupee and a stiff dose ofeconomic reforms. Rampant havala (illegal transactionsthat funnelled black money out of the country andbrought it back as legitimate dollars) further weakenedthe rupee and spawned a new breed of carpetbaggers –Non-resident Indians (NRIs) – who wired money througha skein of shell companies registered in tax havens likeSt Kitts, the Isle of Man, the Bahamas and evenMauritius.

Rajan Pillai, a small-time cashew exporter from Kerala wholater set up base in Asian entrepôt Singapore, belonged tothis growing band of parvenus. They had one key trait: aburning desire to make it big in the shortest possible time anddid not care about the rules they bent and the corners theycut to realize their ambitions.

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10

Pesticola

ew Delhi, 5 August 2003. It is a date that Coca-Cola India would wish had never appeared on itsbusiness calendar. The time was 11.30 a.m.

The day was hot and sultry. The mercury had alreadycrossed 36° Celsius. The weatherman had forecast that thetemperature would cross 42° Celsius during the day, 4°Celsius above normal. August is the peak monsoon monthin India, but there was no trace of a rain cloud over Delhi.This is the most ideal energy-sapping weather for outdoorsales of soft drinks. Market experience in India shows thatthe outdoor consumption of fizzy drinks is the highest attemperatures between 40° and 42° Celsius. Coke’s Delhisales team was already out in the market in full strength topush several thousand more cases into the system in a bidto ensure that the city’s dehydrated millions kept reachingout for Coke products and did not have to opt for rivalPepsi’s beverages because of shortages.

That was when the bombshell burst and all hell brokeloose. The Centre for Science and Environment (CSE),an NGO, told a crowded press conference in Delhi thatIndia-made Coca-Cola carried 45 times more pesticideresidues than that was allowed in the EU. The pesticidecontent in Pepsi was 37 times higher............................

Pepsi was a little cleverer in its response. It said thecompany had 15 operational bottling plants throughoutthe country. It had taken ‘required approvals from theconcerned authorities for use of water in themanufacturing soft drinks and is paying water charges asapplicable’. However, the Association of Indian BottledWater Manufacturers provided the last laugh. TheAssociation, a much larger representative body, told theJPC that the manufacturers were not paying any chargesfor using groundwater. ‘No, there is no charge. Nobodyhas asked for it’, the association said. When asked whetherpermission was taken from the Gram Panchayat (villageadministration) for drawing groundwater, the associationrepresentative said: ‘No sir. But in some places you arerequired to have the permission for digging borewells,like in Mumbai where you have to take the permission ofthe Municipal Corporation. I do not know about otherplaces whether the permission is required or not’.

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Water Thief

here are times when money brings out the worst inpeople: it leads to bad judgement, forces one to acton half-baked information, formulate unclear

strategies, devise unethical practices, adopt questionabletactics and become arrogant. This applies to cash-richcorporate organizations as well as their managers. Moneycorrupts corporate behaviour and judgement. Coke’sdecision to set up a water plant in a rain shadow area inKerala is just another instance of poor judgement.

Plachimada village in Kerala’s Palakkad district wasperhaps not the right choice for the location of a beverageplant since it depended so heavily on underground waterreserves. The tribal village is right in the middle of a rainshadow area. The rainfall beyond the radius of 20 kmfrom the plant is almost normal, but not where the Coca-Cola unit is located. Rainfall at Plachimada is far lesscompared to the average rainfall in the state of Kerala.Plachimada’s green surroundings are highly deceptive. Itbelies the underneath truth – lack of rain and an acutedrinking water shortage in the area. One can’t blame thewater-starved local community for accusing Coca-Cola ofstealing their water to make millions of cases of beveragesat its plant for commercial gains..........................................

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It was a huge mistake: Coke soon found itself locked ina bitter battle with Plachimada’s ‘water warriors’. Therecriminations flew between the village Panchayat (a localself-government), a symbol of India’s grass root democracyand Coke, and threw up several basic questions. Firstly,what was the social and economic utility of water guzzlerslike Coke in a country precariously short of freshwaterresources? Next, should there be a strong regulatoryframework to discipline water-based non-essential industrieslike soft drinks and monitor their menacing operations inwater-starved locations? Should India encourage companieslike Coke to indulge in reckless commercial exploitationof groundwater, depriving millions of people of their rightto clean drinking water? India faces a massive shortage ofclean potable water for its people; it is a universal problemfaced by mega-cities like Delhi, Mumbai and Chennai aswell as several hundreds of thousands of villages likeKerala’s Plachimada.

There have been several geophysical studies on theearth’s proven reserves of freshwater. Coke’s own study ofglobal ‘water situation’ says that ‘by 2025, two-thirds ofhumanity is likely to suffer from a moderate to severeshortage of water’. It says that in India, the per capitawater availability is only 1,967 cubic metres as against10,230 cubic metres in the USA. The ‘stress factor’ applieswhen the per capita water supplies drop below 1,700 cubicmetres. With 2.45 per cent of the earth’s land mass andover 17 per cent of its population, India accounts for only4 per cent of the earth’s freshwater resources. By 2025, thefreshwater availability in India per head will fall to 1,600cubic metres.

In such circumstances, it may be interesting to assessthe future of water guzzling companies like Coke and how

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they can avoid compounding the misery of the country’steeming millions, who are thirsty and unclean for want ofwater. How many people consume soft drinks in India?According to the industry, it is close to 200 million or lessthan 20 per cent of its total population. A production of550 million cases of carbonated water by Coke and Pepsiin 2004 would mean the production of over 3,000 millionlitres of soft drinks. Going by Coke’s claim that itconsumes 4 litres of water to make 1 litre of soft drinks,this means that the two soft drinks makers would haveconsumed 12,000 million litres of freshwater during 2004.Coke’s soft drinks business grew at a phenomenal rate of27 per cent in 2002. Inclusive of its bottled drinking water,the business growth that year was nearly 40 per cent.Despite the pesticides controversy, Coke’s volume growthin 2003 was claimed to be 22 per cent. The bottled waterbusiness is fast catching up with the soft drinks business inIndia. The size of the bottled water business (retail packs)in 2001 was estimated at 185 million unit cases or 1,052million litres. This business is growing at an exponentialrate of 40 to 50 per cent a year. The introduction of highlypopular bulk packs of bottled water, each containing 20 to25 litres, for in-home as well as institutional consumptionwill further boost the business in the coming years. It is nowonder that Coke’s India operations have come underincreasing attack from local communities, especiallyaround its plants that have been accused of exploitingmillions of litres of groundwater every day and fouling theenvironment as well.

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14

Not The Real Thing

hatever be the brand value of Coca-Cola, itsreluctant response to the public outcry againstits Kerala operations and quality compliance of

its products like Kinley water and CSD in India, thedisastrous Dasani water launch in the UK in the winter of2004 and the growing arrogance of the managementtowards its detractors have taken the fizz out ofthe company.

The recent ‘mocking accusation’ in the British mediafrom ‘Coca-Cola’s detractors’ that ‘it is not the real thing’after what they found in the much touted Dasani bottledwater may be an example of growing consumer andpublic distrust of the beverage behemoth and its muchhyped brands. The company had no choice but to recallsome half a million bottles of Dasani water and abandonthe sale, at least for some time. Commenting on theincident, The Observer painted a painful picture of thecompany and the attitude of its management. It was bestsummed up by an observation from a London-basedmarketing analyst, Allyson Stewart-Allen, ‘who was born inNorth America and studied the rise of Coke. Stewart-Allensaid, “Coke is a marketing company. Customers drink theimage of youth and vigour it creates. Anything that

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threatens that image strikes at the company’s future – andyou don’t get much more threatening than selling tapwater which turns out to be an expensive disaster”. Thequestion raised is, “How could a feel-good firm that boasts2,000 customers a second […] create so much badfeeling?” If this is not arrogance, what is? The companydoes not seem to care about what its consumers,customers and stakeholders feel about it anywhere in theworld. Its ways of doing business in a developing countrysuch as India, with much less concern for health andconservation, pliable administration and easy-goingregulatory authorities, is even worse. In the UK, Coke atleast paid for Thames water, however, small the amountmay be compared with the final price of the bottled water.In India, groundwater, which the company exploitswithout any restriction, comes free.

If the pesticides controversy and the company’s constantquarrel with the community in Kerala caused only smallembarrassment to TCCC, the management was totallyexposed over the Dasani bottled water fiasco in the UK.The product recall from the UK market is somewhatreminiscent of a similar action the company was earlierforced to take in Belgium and France after detection of anoverdose of carbon dioxide in Coke making consumerssick. Dasani was not produced ‘from some idyllic ruralspring’ in Scotland or at some other locations in the UK.Coke’s bottled drinking water came straight ‘fromprocessed tap water in Sidcup, Kent’. It was the biggestmarketing farce in memory.

Surprisingly, the company appeared to be oblivious toor unconcerned about the growing public wrath against itsquestionable practices and claims. It seemed to respondonly to mass action (Kerala), class action (allegation of

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racial discrimination in the US) and actions taken byregulatory authorities and the judiciary. The pattern of itsreaction to external criticism and holding statements werearchaic, of the mid twentieth century vintage. Thestatements were evasive, clumsy and often irrelevant,perhaps deliberately so, and out of sync with the times.They made the company and its management instantlyuntrustworthy and evoked greater inquisitiveness aboutthe company’s operations and management practicesamong its detractors. This kept Coke constantly in thenews for one bad reason or the other.

The dictatorial nature of the management did not seemto encourage contrary views or ideas within theorganization. Thus, Coke became increasingly prone tocrises, many of which were avoidable. In India, Cokeignored the early warning when the pesticides controversyfirst broke in February 2003, over its Kinley water brand;six months later, it plunged into a deeper crisis over itsCSD. While the pesticides controversy was ragingthroughout the country, the company was constantly in thenews for selling products past their expiry dates. At theend of 2003, nearly 1,000 cases against the company weresaid to be pending before various consumer courts,mostly relating to product quality and the company’sintegrity. The company did not seem to care. Underconstant pressure of pushing sales volume and highermargins, other business considerations were oftenblurred. The volume pushers called the shots. They werethe company’s blue-eyed boys. Other managementfunctions were support functions. As a result, the volumepushers were always right. They were part of all othermanagement functions and manipulated them wheneverthey were in trouble or trapped for wrongdoing.

Notes

Chapter 3RAJAN PILLAI AND COKEAntoine Riboud’s statements regarding the tussle between BSN andRajan Pillai was reported in the Business Standard, 24 November1992.

Chapter 4BUSINESS BULLYThe cover story referred to on p.22 is from the Businessworld, 24December 2001.

Chapter 5LEGAL COBWEBHCCSW, HCCNW, BCCSE and BCCNE had a common registeredoffice at 13 Abul Fazal Road, Bengali Market, New Delhi 110 001.The suggested amalgamation scheme of the five subsidiaries is afollows:

The scheme said, ‘The Coca-Cola Company, USA, the ultimateholding company, indirectly owns seven subsidiaries in India. Theseare: the transferor company and two other subsidiaries – HindustanCoca-Cola Holdings Private Limited and Bharat Coca-Cola HoldingsPrivate Limited. Hindustan Coca-Cola Holdings Private Limited inturn has two subsidiaries, HCCNW and HCCSW (TransfereeCompany), while Bharat Coca-Cola Holdings Private Limited also hastwo subsidiaries, BCCNE and BCCSE. At the instance of TCCC, theultimate holding company, the Transferor Company is desirous ofconsolidating part of its continuing business, referred to in thisScheme as Transferred Undertakings of the Transferor Companyespecially when three other group companies are amalgamatingpursuant to separate proceedings being simultaneously initiated in

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the Delhi High Court for the merger of HCCNW, BCCSE andBCCNE into HCCSW, the Transferee Company herein.

‘The present scheme has been proposed to facilitatemanagement, administration and financial efficiencies, andalignment, coordination and streamlining of day to day running ofoperations relating to preparation, packaging, sale and distributionof non-alcoholic beverages in the Republic of India with a view toimproving cash flows and returns to shareholders on the largeinvestments made and proposed to be made.

‘The Transferor Company while continuing its business, on theScheme being sanctioned, will focus its attention on improvingefficiencies for the manufacture and sale of concentrate andbeverage bases, and other related operations’.

It was further stated that the amalgamation would createsynergies of operations besides economies in administrative andmanagerial costs by combining operations and this would result inimproved performance for the amalgamated transferee company.The amalgamation will improve the financial structure and cashflow management of the transferee company, while combining themanufacturing strengths and reserves of the transferor companies.

Index

PART I

Organizations/Institutions/Companies

ABN AMRO Corporate Finance34

Action Aid 174–5, 178, 197Amarchand & Mangaldas 34Association of Indian Bottled

Water Manufacturers 103,108, 111

Bharatiya Janata Party (BJP) 2,32, 104

Britannia Industries Limited xv,7, 12, 14–17

Britco Foods Company 6–7,12–13, 16–17, 26

BSN (UK) Limited, 13Bureau of Indian Standards

(BIS), 60, 65–6, 68,88–9, 120, 238–9

Burger King 218Cadbury Schweppes Beverages

India Limited 24–5Central Bureau of Investigation

(CBI) 17Central Food Laboratory (CFL)

89, 92, 95–6

Central Food TechnologicalResearch Institute (CFTRI)92, 95–6

Central Ground WaterAuthority (CGWA) 108, 142,145, 153–4

Central Pollution ControlBoard 96

Centre for Science &Environment (CSE), 63,66–8, 85–93, 95 107–8,111–4, 117, 119–23, 126, 149,188–9

Christian Aid 174, 178,190–4, 197

Coca-Cola India xi–xii, 18, 28,35, 40, 45, 59, 74, 77, 82, 85,87, 94, 99, 108, 115, 123–4,182, 184, 202–3, 206, 208–9,223–6

Coca-Cola South Asia HoldingsInc. (CCSAH) 5–7, 12, 16

Communist Party of India(Marxist) (CPM) 166