"The Name Coke Now Scares People"

The contamination mishap could slow its advance in Europe

The European bans on Coca-Cola sales are starting to be lifted. Belgium announced on June 23 that it was ending its prohibition on all Coke sales except those from vending machines. But it will be a long time before the Belgians--or many other Europeans--let the soft-drink company forget the recent Coke contamination or the company's defensive public denial after some 200 youthful Coke drinkers first took sick on June 9.

For Coke and its chairman, M. Douglas Ivester, that may mean more than just some serious groveling will be necessary. Coke could be forced to scale back its efforts to expand and consolidate bottling in Europe. At the very least, according to Stephen Kinsella, a Brussels-based antitrust specialist with the British law firm of Herbert Smith, Coke's plans will likely receive additional scrutiny from regulators. "The name Coke now scares people," he says. "It's going to be trickier for [Coke] to take offensive moves in Europe." Most at risk: a scheme to buy Groupe Pernod Ricard's Orangina.

ALREADY HOSTILE. This is hardly the first time Coke has left a sour taste in European regulators' mouths. Last December, it infuriated European Commission antitrust authorities, including Commissioner Karel Van Miert, by structuring a planned purchase of Cadbury Schweppes PLC's non-U.S. soft-drink business to avoid regulatory scrutiny. "Coke surprised us," says Stefan Rating, a Van Miert aide. Van Miert threatened to review the deal despite Coke's maneuver. In May, Coke withdrew its request to take over Cadbury's brands in most of Europe.

The current mess stands to make Coke even less popular with European authorities. That could also affect Coke's plans to consolidate its European distribution, for example. The company wants to consolidate around four anchor bottlers. Coca-Cola Enterprises Inc. recently announced plans to merge with Greece's Hellenic Bottling Co. But the European Commission has said that Coke's increased control over the soft- drink distribution channel could hurt competing brands. "We'll take a close look," promises Rating.

Unfortunately, Coke's size works against it in Europe. When it tried to take over Orangina, French regulators bristled because Orangina also distributed Pepsi in France. Coke has offered to create an independent distribution company, but many French politicians still dislike the idea of Orangina being anything but French. "There's a definite fear here of Coke's domination," says Luis Mariani, an analyst at J.P. Morgan & Co.

And why not? Coke has made major inroads in Europe. Per capita consumption of all Coca-Cola soft drinks has risen from 63 eight-ounce servings in 1993 to 93 in 1998. Today, the company outstrips Pepsi's sales in parts of Europe by as much as nine to one, according to Donaldson Lufkin & Jenrette. Although Coke now has 49% of the European soft-drink market, it can't afford to lose ground. Europe provides 26% of the company's $18 billion in revenues.

Coke also has to worry about whether the turmoil will prompt consumers to switch. While Pepsi says it will do nothing to take advantage of Coke's problems, it is boosting production to meet demand, a spokesman says. Meanwhile, Chaudfontaine, Belgium's beverage company, says sales of its own soft drinks and its licensed Virgin Cola have been running 10 times higher than normal since Coke was banned.

Still, many industry watchers are confident Coke will bounce back. "I think now they're doing the right thing," says Marc Cohen, a beverage analyst at Goldman, Sachs & Co. For its part, Coke is determined to regain its footing. "We'll spend whatever is necessary to regain the confidence of Belgian consumers," Ivester told reporters on June 23, predicting that Coke would double European sales over the next decade.

But first Coke has a lot of catching up to do. Ivester conceded that the company must "take a low profile and be respectful of the government agencies" in its future dealings in Europe. Per capita consumption of soft drinks remains well below American levels in much of Europe. But it may be a while before Europe lets Coke capitalize on those expansion possibilities.

— With assistance by David Rocks

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