May 26th, 2001

Coke Finds Its Exclusive School Contracts Aren't So Easily Given Up

By Betsy McKay
Wall Street Journal

Three months ago, Coca-Cola Co. tried to defuse a lingering controversy about sugary beverages in U.S. schools by making a promise: When it came to education, it would back off on the hard sell of soft drinks.

But Coke is finding that promise was easier to make than it is to keep. And cash-strapped school districts aren’t helping in the matter, either.

Some of Coke’s bottlers are still signing exclusive contracts with secondary schools, despite Coke’s much-publicized March 14 announcement that it would encourage its bottlers to abandon the practice.

Coke acted after the exclusive contracts were criticized by parents and nonprofit watchdog organizations, leading to a spate of bad publicity for the Atlanta beverage giant. These groups say the contracts not only promote poor nutrition but also further commercialize education by making school revenue partly dependent on soft-drink sales.

But since March, the contracts haven’t gone away. Coke’s largest bottler, Coca-Cola Enterprises Inc., which is 40% owned by Coke, says it has struck about 20 exclusive deals since the beginning of this year; the company says it doesn’t know how many of the contracts were bid on since Coke’s announcement.

While noting that his company has made 10 fewer of the pacts so far this year than at the same time last year, John Downs Jr., senior vice president of public affairs for the bottling company, stood by the exclusive contracts. “We will continue to participate in them because we are proud of our long-term partnerships with schools to support positive youth development programs,” he said.

One of the bottler’s arrangements was a five-year, $1.77 million pact with the 35 schools in the Sarasota County School District in Sarasota, Fla., initiated before Coke’s announcement. Other smaller Coke bottlers say they continue to sign exclusive deals as well.

PepsiCo Inc. says while it doesn’t encourage exclusive school contracts, its bottlers will bid for them if asked to. Unlike Coke, Pepsi hasn’t promised to try to eliminate the pacts.

Coke acknowledges that it can’t force its bottlers to abandon exclusive deals. But it also concedes that it hasn’t offered bottlers any financial incentives or other inducements to walk away from the arrangements. At the time the new policy was announced, Coke said it didn’t expect deals then under negotiation to be abandoned. While the bottlers are independently owned and managed, Coke is a part-owner of some of them and supplies significant marketing funds to many.

While Coke says it wants healthier drinks like juice to be sold in schools, some bottlers say they will sometimes offer schools larger commissions for selling soft drinks because they are cheaper to produce.

Despite the bad publicity they can bring, the contracts aren’t easy for some bottlers to give up, especially as the soft-drink market matures and competition with Pepsi heats up. Schools currently generate just over 1% of Coke’s North American business. But teens are the biggest consumers of soft drinks and often form lifetime brand loyalties in high school.

Schools themselves are a part of the problem. Facing perpetual budget problems, many administrators view beverage deals as a source of revenue, since beverage makers pay more for their exclusive arrangements.

For example, school officials in Sarasota, up against a projected $15 million budget shortfall, decided in January to centralize beverage sales, and asked Coke and Pepsi to bid for the right to become sole provider. “This district is troubled by budget problems, and this is one mechanism to avoid the shortfall,” said Pat Black, the district’s director of materials and management.

Coke says its discouraging of exclusive contracts is part of what it describes as an ongoing effort to explore new ways of helping ease school budget problems without fostering commercialism.

“We want to find a better way, but this isn’t something you change overnight,” says Jeffrey Dunn, Coke’s president and chief operating officer for the Americas.

The beverage maker has also formed an Education Advisory Council to help it hash out a new education policy. Members include two former secretaries of education, Lamar Alexander and Richard Riley.

But Coke’s efforts to make schools less commercial could be slow going. For example, Coke has plans to replace its famous big red logo on school vending machines with noncommercial graphics. But only 20% of the machines will carry new graphics by the end of 2002; in explaining that slow pace, Coke cites what it says are the costs of replacing the graphics.

And the new graphics still include some Coke logos. A photo collage of teens playing sports, for example, has a small logo for Powerade, Coke’s sports drink.

Though Coke’s biggest bottler is sticking by exclusive contracts, some other bottlers have embraced the company’s new policy, arguing that exclusive contracts often are unprofitable and that the negative publicity is bad for business.

Coke’s second-largest U.S. bottler, Coca-Cola Bottling Co. Consolidated, says it has boycotted such agreements since last fall. Coca-Cola Bottling Co. of Philadelphia has done the same since January.

Ron Wilson, president of the Philadelphia bottler, said negative publicity about the arrangements has tarnished Coke’s reputation for charitable works. “This isn’t what we’re about,” he said.

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