The Coke Machine: The Dirty Truth Behind the World's Favorite Soft Drink

by Michael Blanding

  When the Los Angeles plan passed in August 2002, CCE president John Alm appealed to his chief lobbyist and public relations head John Downs, asking, “What is the plan?” Truth is, the bottler didn’t have one. It would take ten months to declare that it was keeping exclusive contracts, even as the bottler encouraged salespeople to offer schools more choices and eliminated big up-front payments. While Alm was announcing the policy, he also produced a private video for friendly politicians calling obesity “a war that’s been declared on our company.” At the same time, CCE proactively became a chief sponsor of the National Parent Teacher Association in June 2003 with an undisclosed contribution; Downs was placed on its board.

  In partnering with teachers and parents, Big Soda emphasized the importance of the money they provided to schools. “They are a win for the students and the schools and the taxpayer,” said the NSDA’s McBride. “I think everybody benefits as a result of these business partnerships.” It was a meme that was picked up by the media. A review by the Berkley Media Studies Group of news articles in 2001 and 2002 found 103 references to obesity threatening children’s health but 115 references to soda sales providing money for schools.

  Later analyses, however, showed they weren’t quite the panacea they seemed. A review by Oregon nonprofit Community Health Partnership found contracts yielded on average only $12 to $24 per student annually—and most of that money came from commissions on purchases themselves. Another analysis by CSPI found that soda commissions averaged only 33 percent—meaning that schools made back only a third of each dollar students spent. The most detailed sections of the contracts, CSPI found, were those delineating just where and how the Coke logo was to be displayed—with stiff penalties to schools for noncompliance.

  When Coca-Cola Enterprises finally announced its own new policy at the end of 2003, it did little to change any of the existing pouring-rights contracts. According to Downs, the company would prohibit sales of soda to elementary school kids during school hours—an empty gesture, as most elementary schools didn’t sell soft drinks anyway. In addition, it would encourage bottlers to voluntarily control vending machine operating hours in middle schools and high schools. As a response to the criticism against advertising to kids, it announced, it would also end the practice of distributing book covers with the Coke logo (even while the vending machine signs and scoreboards stayed).

  As soft drink executives hunkered down at an industry conference in New York City at the end of 2003, the mood was grim. Coke’s sales growth for the year was a disappointing 2 percent overall, and sales volume of Coca-Cola Classic actually declined 3 percent. Then there were other problems: A young accountant recently laid off by Coke, Matthew Whitley, had lashed out with allegations that Coke had committed fraud in consumer tests for a new frozen Coke drink at Burger King. According to Whitley, the company had hired thousands of young people to buy the drink, skewing results. Eventually Coke admitted the scheme, settling for $21 million. In separate proceedings, Coke’s practice of “channel stuffing”—selling more syrup to bottlers than they could sell in order to pump up Coke’s growth targets—finally caught up with it when the Securities and Exchange Commission opened a case against the company, eventually finding that the company had made “false and misleading statements,” though Coke paid no fine.

  Far from Coke’s glory days in the 1990s, the picture was one of a company willing to do anything, legal or illegal, to sell more soft drinks. Nothing made the company look so bad, however, as its insensitivity on childhood obesity. In one 2003 poll in California, 92 percent of respondents declared obesity a serious problem; 65 percent blamed food and beverage company advertising as an important contributor; and 66 percent felt the best solution was tougher regulation in schools. At the soft drink industry’s year-end meeting, CEO Douglas Daft directly acknowledged the issue, calling obesity the biggest challenge the industry had faced in fifty years. Giving cheer to his fellow executives, however, he assured them “a simplistic piece of government regulation will not solve the problem,” an idea he brushed off as “absurd and outrageous.” But that was exactly what activists were now gearing up to do.

  The first anti-soda bill was submitted by longtime health advocate and state senator Deborah Ortiz in California in 2002, shortly after Jackie Domac’s health class booted Coke out of Venice schools. If passed, it would categorically ban all soda in schools K-12. Immediately, Coke’s lobby machine descended upon Sacramento. According to Domac, legislators would slip out the back door while she and her colleagues were waiting to meet them, later emerging in the hall talking with a Coke lobbyist. At the same time, a host of industry-paid experts testified against the bill on nutritional grounds (including one nutritionist representing CCF who did not disclose his affiliation). In the end, the bill passed, but only after being watered down to apply solely to elementary and middle schools, exempting high schools. That effectively gutted the bill, since most soda in California was sold just in high schools anyway.

  Over the next few years, the California experience would be repeated over and over in other states, with Coke leading the way to kill anti-soda bills. “When it came to the two major companies, Coca-Cola stood out as the particularly bad actor,” says Michele Simon, head of the Center for Informed Food Choices and author of Appetite for Profit. “They were just nefarious and nasty in their tactics, sending teams of lobbyists to state capitals to lobby hard against the bills.”

  The most notorious example of Coke’s lobbying was in Connecticut, where legislators introduced the most sweeping anti-junk food bill to date in 2005, proposing a complete ban on selling anything but water, milk, and juice during school hours. For this battle, Coke and Pepsi spent a combined $250,000 on lobbying, Coke paying $80,000 up front and an additional $8,000 a month to hire Sullivan and LeShane, the most influential lobbyist in the state. Patricia LeShane, in fact, was a large contributor and campaign advisor to Connecticut governor Jodi Rell.

  “It’s not a level playing field,” says Simon. “Here we are doing cute things like putting sugar in a bag to show how much is in a can of Coke, and meanwhile, Coke is having these closed-door meetings making deals over campaign contributions. These multinational companies have many times more over the resources than the average mother or teacher or nutrition advocate.” In the debate over the bill, lawyers for Coke, which had the majority of pouring-rights contracts in the state, selectively shared revenue data with legislators in opposition. The debate in the House was the longest in the Connecticut legislature in 2005, stretching for eight hours, during which time opponents, according to The New York Times, “derided their colleagues for second-guessing local superintendents and school boards”; some even reminisced about painful times when their parents had denied them candy as children. Pushing the situation to the point of absurdity, a “well-stocked” cooler of Coke mysteriously appeared in the Democratic caucus room on the night of the vote.

  Lost in the debate was the support of 70 percent of the public, according to one poll, along with the American Academy of Pediatrics, the state PTA, and other public-interest groups. Once again, the bill passed, but not without a provision allowing sales in high schools. The biggest shock, however, came when Connecticut governor Jodi Rell vetoed the bill, accusing it of “undermin[ing] the control and responsibility of parents with school-aged children.” The justification was ironic, to say the least, given the lack of control parents and teachers had over the exclusive beverage contracts.

  Even while, for the time being, it held the line against the onslaught of anti-soda legislation, Coke was reeling from the suddenness of the backlash against soft drinks—not only in the United States but in Europe as well. The United Kingdom’s Food Standards Agency was already making noises about binding regulations against soft drinks; and in France, lawmakers voted to ban all vending machines from elementary and middle schools in the summer of 2004, forcing companies to remove them entirely by the end of the school year. Back in the United States, CCE’s John Do
wns admitted to The Atlanta Journal-Constitution that the company was blindsided by the attack. “Clearly we are playing catch up,” he said.

  By late 2004, however, industry began to formulate a line of defense, not just in the back rooms of state legislatures, but in its public image as well. For starters, the National Soft Drink Association changed its name to the American Beverage Association “to better reflect the expanded range of nonalcoholic beverages the industry produces.” Shortly afterward, the group’s president of fifteen years resigned, putting in charge a new director, Susan Neely.

  Most recently a PR exec in the Department of Homeland Security, Neely had previously created the “Harry and Louise” ads that torpedoed the proposed health-care legislation during the early years of the Clinton administration. Now she took the helm specifically to deal with the obesity crisis. She laid out an immediate new strategy: simultaneously denying soda’s role in causing obesity and presenting industry as part of the solution. “The industry thinks [obesity] is a real concern and something we as a country need to address,” she said. “What we are concerned about is when state legislators or anyone else tries to leap to quick solutions to a complex problem.”

  At the same time, a new white knight rode in to rescue Coke itself. Since Goizueta died and Ivester was pushed out, the company had drifted aimlessly under the leadership of CEO Douglas Daft. Buffeted by the obesity crisis, he turned the company away from sugary soft drinks, emphasizing other brands such as Powerade and the new diet drink Coke Zero. In March 2004, Coke created the Beverage Institute for Health and Wellness, a new organization with an Orwellian name, whose mission was to promote “global health and nutrition.” The new institute sponsored a conference in Mexico City that fall to explore the ways in which sugar might be nutritionally beneficial. But that did little to restore investor confidence. While PepsiCo’s stock rose 74 percent, Coke’s fell 28 percent during Daft’s stewardship. Morgan Stanley’s Bill Pecoriello, the dean of beverage analysts, predicted stagnation in the U.S. soft drink market for the next five years, writing that “the glory days of the big mass-marketed soft drink brands are probably over.”

  Coke’s board had had enough. By the middle of 2004, it had quietly pushed Daft out. Amid intense speculation, the man who emerged to take his place was Neville Isdell, a thirty-five-year veteran of the company who had retired after being twice passed over for the top job. A patrician-looking man of Irish descent, Isdell had grown up in Zambia and studied social work before deciding—as he put it—that he could “help more people by working for Coca-Cola than I would be able to individually as a social worker.” From the moment he arrived, he made his message clear: The future of Coke lay not overseas or in health beverages, but in the core of the brand—carbonated soft drinks, and in its core markets—the United States and Europe.

  Isdell predicted it would take eighteen to twenty-four months to turn around the company’s fortunes—a remarkably accurate prediction in retrospect. “I came back to the Coca-Cola Company to make sure that we are the leading growth company in our industry,” he said, reiterating on another occasion: “Regardless of what the skeptics may think, I know that carbonated soft drinks can grow.” Almost immediately, he committed an extra $400 million to marketing and innovation, mostly for cola drinks. In public appearances, he adopted an almost identical tack to the ABA’s Neely—denying soft drinks’ role in the obesity epidemic, while at the same time offering up the industry as part of the solution to the problem. “Carbonated soft drinks are going to be carriers of health and wellness benefits,” he assured analysts in a November 2004 conference call. At a food industry conference, he added without irony: “Healthier consumers are going to be good for us. . . . They will grow older, healthier, wealthier, and hopefully therefore able to buy more from us. Which at the end of the day, let’s face it, is our goal.”

  In the meantime, the juggernaut of anti-soda legislation continued to roll over statehouses. By this time, Chicago and New York had joined Los Angeles and Philadelphia in banning soda on the city level. The first hole in the dike keeping sugar-sweetened soda in high schools, however, started at a small middle school in New Jersey. In April 2005, students at the East Hampton Middle School boycotted food from their cafeteria, demanding they receive healthier options. A few months later, New Jersey passed the first state junk food ban with a ban of soft drinks in high schools. The soft drink companies got together to debate new guidelines, emerging in August with rules nearly identical to those Coke had pushed all along—no sugar soda in elementary schools; no soda in middle schools during the day; and half non-soda choices in vending machines in high schools.

  But that wasn’t enough to stave off soda’s biggest defeat yet. Three years after California’s anti-soda bill went down in defeat, new governor and former bodybuilder Arnold Schwarzenegger championed a new bill to victory that included a blanket ban on all soda in schools—including even diet drinks. When Jackie Domac heard the news, she was ecstatic. “I was very, very happy because I felt like my students’ efforts had really come to fruition,” she says. Her only disappointment was that the law included a long phase-in period; schools wouldn’t be required to comply until July 2009.

  No Sundblom Santa Claus could cheer the Coke faithful when it got the news just before Christmas 2005 that PepsiCo had for the first time ever passed Coke in total market capitalization—$98.4 billion to $97.7 billion. Much of that rise was based on Pepsi’s food divisions; Coke was still the undisputed leader in selling soda. At least there was a bright spot with the first inkling that Isdell’s strategy paid off. The company saw a 4 percent increase in all products, including a 2 percent rise in carbonated drinks in the last quarter. “There is growth still in carbonated soft drinks and we have demonstrated that,” crowed Isdell.

  Emboldened by the rising tide against soft drinks, however, activists were preparing for their endgame. Finally, they had a plan to make Big Soda into the next Big Tobacco and turn the Coke polar bears into Joe Camel. They were going to sue.

  The window outside Dick Daynard’s office at Boston’s Northeastern University still says “Tobacco Control Research Project.” Inside, the decor includes several antique tin cigarette advertisements (“Chesterfield—They Satisfy!”) and a stuffed Joe Camel atop a bookcase stuffed with binders labeled “Philip Morris,” “Brown & Williamson,” and “R. J. Reynolds,” along with bound back issues of the Tobacco Industry Litigation Reporter. Daynard has been called the “intellectual godfather of tobacco litigation,” and that’s by his detractors. He was one of the original lawyers behind the lawsuits against the tobacco industry for fraudulent practices in the 1990s. That campaign succeeded in 1998 with a $250 billion settlement by the tobacco companies, who admitted they’d lied about the addictiveness of their products, followed five years later by a global tobacco treaty to limit cigarette sales overseas.

  In the summer of 2005, however, he was pursuing a new quarry—soda. “The number of analogies [is] very surprising,” says Daynard, now director of something called the Public Health Advocacy Institute (PHAI). “You are dealing with an addictive product sold to kids, where, if not the addiction, at least the taste is acquired at a young age. You are dealing with a product that, at least when initially produced, was not understood to be deleterious, yet as the evidence kept coming in, companies kept marketing it and stonewalling.”

  The idea of suing the soda companies over the issue of childhood obesity had been percolating since a conference organized by PHAI in 2003. As long as the anti-obesity advocates were forced to go after soda one school or one state at a time, they reasoned, Coke and Pepsi could stone-wall indefinitely. If they were going to succeed, they’d have to speak the language companies understood—hitting their bottom lines with legal damages, or besmirching their brands so badly they’d be forced to settle.

  Shortly after the confab, one of the lawyers, John Banzhaf, threatened to sue the Seattle School Board if it renewed its contract with Coke, but eventually backe
d down. It was one thing to brand multinational corporations as greedy, but it was simply too risky to go after a school that was already hurting for cash. It took another two years for lawyers to get up the courage to go after those they argued were really calling the shots: the companies themselves. “I look at Coke and Pepsi as the Colombian cartel, the bottlers are the middlemen, the school is the one who is actually selling the drugs,” reasons Stephen Gardner, litigation director for the Center for Science in the Public Interest, which joined with PHAI in seeking a lawsuit. “The best way to stop it is to go after the cartel, the ones who are actually selling the product.” (The imagery is ironic given Coke’s origins as a cocaine-laced nerve tonic, to say nothing of its later problems in Colombia.) As the lawyers prepared a class-action lawsuit in the fall of 2005, they modeled their strategy after the tobacco case, arguing that the companies knew the damage their products could do, yet pushed them anyway. The situation was made even worse by the presence of caffeine in the drink, which rankled the lawyers as much as it did Harvey Washington Wiley a century earlier. According to one study at Johns Hopkins University, consumers couldn’t tell the difference in taste between caffeinated and noncaffeinated sodas, contradicting soft drink makers’ claims that the substance was added for taste, and implying that it was there to addict consumers. “You are talking about selling an addictive substance to kids—an addictive substance that is bad for them,” says Daynard.