Europe Says, "No Coke: Pepsi! (or Anything Else)"

Europe Says, "No Coke: Pepsi! (or Anything Else)"

Europe Says, "No Coke: Pepsi! (or Anything Else)"

Moneybox
Commentary about business and finance.
July 21 1999 6:27 PM

Europe Says, "No Coke: Pepsi! (or Anything Else)"

At this point, Coke executives have to be wondering if there's a way to make all of Europe disappear. First, the company's planned acquisition of Orangina from Pernod-Ricard was blocked by French officials on antitrust grounds. Then, Coke's attempt to buy Cadbury Schweppes' soft-drink brands outside the United States and Japan was blocked by EU officials, who essentially made Coke write off all of Europe. ("I'd like to buy Asia, Africa, and South America a Schweppes" lacks something as a slogan, doesn't it?)

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That was followed by the removal of Coke products from supermarket shelves across the continent after a bout of mass hysteria--as Malcolm Gladwell argues convincingly in a recent issue of The New Yorker--over supposedly bad soda. And today Coke said that European Commission officials had raided the offices of Coke and its bottlers in Denmark, Austria, and Germany, looking for evidence that the company had violated competition rules.

It has been a very bad few months, which underscores the fact that globalization is not a smooth process. In particular, the EC's activist antitrust stance has complicated the picture for Coke in ways that don't appear to have easy solutions. And what's ironic is that that stance depends upon a picture of Coca-Cola that recent events have suggested is outdated at best and completely misconceived at worst.

The raids on the Coke offices, for instance, are apparently intended to document a pattern of anticompetitive behavior in the form of rebates and other incentives to distributors and retailers. Because these incentives are meant to encourage distributors to stock Coke instead of its competitors, the argument goes, they constitute an unfair attempt to corner the market.

On the face of it, this seems absurd. Companies from Philip Morris to Kellogg's offer rebates and discounts of various kinds, and these sorts of incentives are easily duplicable. If the rebate works as a corporate strategy, then someone will fund Coke's competitors to engage in that strategy in order to attain or at least defend its competitive advantage. If it doesn't work, then all Coke is doing is shooting itself in the foot.

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To the EC, Coke is not like other companies. Rather, in an argument analogous to the one the Department of Justice has been making about Microsoft, the EC contends that Coke is the dominant player in the soft-drink market, and that therefore its behavior has to be judged by different criteria than that of its competitors. What would be legal for Pepsi is illegal for Coke.

This theory--that different rules apply to monopolists--makes sense in certain contexts (the Baby Bells do have a unique obligation to provide their competitors with access to people's phone lines), but is nonsensical in others. More to the point, the idea that Coke has a monopoly or even a stranglehold on the European market is simply absurd. Did the French go without soda when Coke was removed from the shelves? Are there really not other drinks that consumers might choose instead of Coke? If Coke did have a monopoly, it would presumably have meaningful pricing power, which is to say that it could raise prices without fear of losing business. But the company's most recent results demonstrated that when Coke raises prices, its case volume and its market share drop. Coke remains a global powerhouse, and its brand strength has not been meaningfully imperiled. But it's not a monopoly.

The EC's vigilance when it comes to Coke, in fact, seems more symptomatic of a reflexive distrust of U.S. incursions into the European market than a well-considered antitrust stance. That doesn't mean that this vigilance is any less costly for Coke. And it also suggests that before we start thinking about what will happen when every person in China is drinking Coke, we should start wondering about what will happen when most of the people in Europe aren't.