Reference no: EM131303931

Coca-Cola Stuffs the Channel to Make the Numbers
The Coca-Cola Company, founded in the late 1800s, is the largest beverage company in the world, with customers in more than 200 countries. The company's brands are many of the most recognized; they include Coca-Cola, Diet Coke, Fanta, Sprite, Powerade, Minute Maid, and Dasani bottled water. Although Coca-Cola focused primarily on customers in the United States in its early years, it has since recognized and relentlessly pursued international opportunities.

By the late 1990s, Coca-Cola dominated its market with more than 50 percent of international softdrink sales. The company has always maintained a strong focus on bringing in, satisfying, and keeping loyal customers. Strategic, recognizable designs on bottles and cans and well-liked global advertising have contributed to the strong reputation the company holds. Coca-Cola consistently is rated the most valuable brand in the world. Over the last ten years, Coca-Cola has focused on traditional soft drinks, whereas archrival PepsiCo has gained a strong foothold on new-age drinks, formed a partnership with Starbucks, and expanded rapidly into the snack business.

PepsiCo's Frito-Lay division has 60 percent of the U.S. snack-food market. Ten years ago, Coca-Cola's market value was more than three times greater than PepsiCo's. By 2006, PepsiCo had a market capitalization greater than Coca-Cola. Coca-Cola has long focused on social responsibility issues. It makes donations to several foundations that focus on education and community improvement. Coca-Cola is also involved in issuing grants and scholarships both in the United States and internationally. It is also concerned with preserving the environment and helping stem the AIDS/HIV crisis in Africa.

All these contributions help Coca-Cola develop an emotional, trusting relationship with its customers. In 2005, CocaCola issued a 50-page report on corporate responsibility in Great Britain. Key accomplishments include supplier compliance and audits, recycling, open work environment, community investment, and an environmental advisory board. Coca-Cola has always prided itself on its strong reputation. The Harris Interactive and the Reputation Institute (creating reputation quotients for companies by measuring 20 perceived attributes) ranked Coca-Cola second in overall reputation in 1999. The company had long been featured on Fortune magazine's "America's Most Admired Companies" list. However, the company failed to make the 2000 Fortune list owing to problems with performance and leadership in 1999.

It also was eliminated from Business Ethics magazine's "100 Best Corporate Citizens" list in 2001. The 2005 Business Ethics "100 Best Corporate Citizens" list also did not include Coca-Cola. Coca-Cola's problems in 1999 began with a contamination scare that had a negative effect on its European

reputation. That year also brought a racial discrimination lawsuit by about 2,000 current and former African American employees against the company. The company settled the suit by paying $193 million. And then-CEO Doug Invester raised concentrate prices-a strategy that did not go over well with the company's bottlers. Overall, it was thought that the company did not handle these crises well. In addition to reflecting poorly on CocaCola's reputation, these crises had a negative impact on the firm's bottlers, distributors, suppliers, and other related third parties.

A major problem that Coca-Cola faced during this period was accusations of channel stuffing. Channel stuffing is the practice of shipping extra inventory to wholesalers and retailers at an excessive rate, typically before the end of a quarter. Essentially, a company counts the shipments as sales, although the products often remain in warehouses or are later returned to the manufacturer. Channel stuffing tends to create the appearance of strong demand (or conceals declining demand) for a product, which may result in inflated financial statement earnings, misleading investors.

Accusations of channel stuffing have been made recently against companies such as Krispy Kreme Donuts, Harley-Davidson, Clear One Communications, Symbol Technologies, Network Associates, Bristol-Myers, Taser International, and Intel. In Coca-Cola's case, the company was accused of sending extra concentrate to Japanese bottlers from 1997 through 1999 in an effort to inflate its profit. The company was already under investigation after a former employee filed a lawsuit in 2000 accusing the company of fraud and improper business practices. In 2004, former finance officials for Coca-Cola reported finding statements of inflated earnings owing to the company shipping extra concentrate to Japan. Although the company settled the allegations, the Securities and Exchange Commission (SEC) did find that channel stuffing had occurred.

However, what Coca-Cola had done was to pressure bottlers into buying additional concentrate in exchange for extended credit. Therefore, the sales were technically considered legitimate. To settle with the SEC, Coke agreed to avoid engaging in channel stuffing in the future. The company also created an ethics and compliance office and is required to verify each financial quarter that it has not altered the terms of payment or extended special credit. The company further agreed to work to reduce the amount of concentrate held by international bottlers.

Although the company settled with the SEC and the Justice Department, it still faces a shareholder lawsuit regarding channel stuffing in Japan, North America, Europe, and South Africa. Despite a solid focus on building and maintaining a strong, positive reputation and a firm dedication to social responsibility, Coca-Cola has had major problems in competing with its rival PepsiCo. The use of channel stuffing and other questionable practices has not been the answer to making the numbers.26

Questions for Discussion
1. How could channel stuffing at Coca-Cola affect its relationships with channel members such as bottlers?

2. In what ways could channel stuffing impact Coke's own customer-service standards?

3. Why would Coca-Cola risk its reputation by engaging in channel stuffing?