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Considering a Daft Solution

Why Coke Can't Profit and Increase World Living Standards at the Same Time

By BEN WOODRING

Douglas Daft, CEO of Coca-Cola, certainly has a way about him. When he presented "Winning Back the World: Challenges of the Global Economy," recently at Brandeis, his speech was highly cogent and intelligent, addressing many of the issues that socials activists have brought to the corporation's attention in the past decade. He did skirt, or outrightly deny the Colombian unions issue, in which several prominent union organizers during the 1990's in Colombia's bottling firms were mysteriously killed by paramilitaries with an unclear relationship to the soft drink company. Daft did discuss, however, the role of corporations in growing countries and the impact of globalization on local culture. He essentially took the smartest route possible. As a CEO of a company that has come under fire for human rights violations, it would seem inauthentic or like mere appeasement had Daft come out and averred, "No, wait! Coke sees the merits of giving basic human rights and dignities to all peoples! We repent for what has been done by following the right path starting today." Instead, Daft skillfully gave his human rights resolution more backing, claiming that paying workers a "living wage" not only makes sense morally, but economically as well. In other words, profitable market activity will also guide the economy in a direction where all indigenous workers are paid living wages, having their standards of life raised. While it was a good idea to give some sort of economic backing, the idea, when broken down, does not make sense. Coca Cola might be noble and generous enough to spend some of the billions in profits on raising world living standards, but it will not serve them well in the market. Seeing as this idea of living wages would raise costs, Coca Cola would eventually have incentive to move on and ditch the costly labor employed during the short-term social initiative. Let's consider why the market does not yield the flowery benefits that Daft predicted.

Daft summarized the relationship between a socially conscious company and its workers as the "virtuous cycle," whereby extra factor input costs of labor are assumed by the company in order to eventually increase its consumer base. The logic is- if we raise the living standards of people, we now have a larger population that will buy from us, and we will also increase respect for our brand name. Therefore, the losses to Coke from having to pay higher wages to its workers would be offset by the gain in profits from increased consumption of its goods.

This theory might work for certain goods, but it unfortunately will not work for the type of good Coca-Cola offers. For, Coca-Cola is very common and attainable in over 200 countries. It is often the most widely circulated drink, and sometimes the cheapest. For instance, in certain towns in Mexico where a Coca Cola bottling plant uses much of the town's water to produce the soft drink, it might be easier to procure a Coke than clean water. Even the poorest workers have to drink liquid at some point during the day, and that could very well be Coke.

In economic terms, Coca-Cola, the beverage, oscillates between being a fixed good and an inferior good. A fixed good is described as a good that, when an individual's real income goes up, their consumption of that good stays the same (example: much-needed medicine). An inferior good sees a drop in its consumption as the individual's real income rises (example: bus tickets). Contrast these with a normal good (most goods in the market), where an increase in real income leads to an increase in consumption (example: most clothing). In places like America, Coke is closer to a fixed good. In other words, if you won the lottery tomorrow, raking in ten million, it is not very likely that you will start drinking a lot more Coke proportionally to your old soft drink diet. In poorer countries, the impact of a raise in real income on Coke consumption can be more extreme. If Coke is the cheapest or easiest drink to find, being a staple of everyday consumption (this is not always the case), then laborers, faced with an increase in real income, might consume less Coke and opt for more expensive liquids- whether it be clean water, health drinks, or even alcohol. Daft began his speech by discussing a childhood experience in Eastern Europe where Coke was relatively expensive, and thus he could only afford it once a week. This, however, is less likely in today's economy. Worldwide competition with Pepsi has driven soda prices down, sometimes close to marginal cost, where a can of soda might cost ten cents to make (including the can) and only twenty five cents to the consumer. Thus, we are in a different era than Daft's days of luxury Coke. As mentioned a moment ago, Coke now patterns close to a fixed good, and sometimes an inferior good. Fair enough- now what of it? Well, if this is the case, then Coke cannot expect its economic plan to be both profitable and morally acceptable. The logic is simple. Coca Cola runs up its production costs by making wages for laborers higher, and, as a result, sees either no increase in Coke consumption (in this supposed "new" pool of consumers) or even less consumption, if laborers want goods better than Coke.

Now, there are obviously many other factors and ways to make money. This market in the foreign country is hardly Coke's only market. Daft astutely pointed out that, even if Coke is taking losses in terms of profit in some of the individual countries, while a competitor like Pepsi might not adopt the same human rights standards and thereby profit in the same region, Coke can still come out on top because social concern and philanthropy builds the company's brand name. In other words, people will prefer Coke over Pepsi because Coke cares more about is consumers. This is certainly a valid point, and can work in many instances. Yet, again, based on the goods Coca Cola offers and the environments it is usually offered in, we cannot expect these same hypothetical economic results to occur. For, those local families helped by Coke will surely feel indebted to the company and might shift all of their cola consumption away from Pepsi to Coke (if they had not done that already). Yet, it is unlikely that they will buy more Coke than usual- once they satisfy their soft-drink quota, they will spend their money on other, more important products. Therefore we must look more globally. How about consumers all over the earth who might be more attracted to a socially conscious product?

If Coca Cola really thought helping these poor countries would build brand name, why wouldn't they advertise this on their bottles and on television, instead of leaving it up to some curious kids from Columbia or Brandeis to stumble into a presentation like the recent one and then tell their friends all the neat things the company is working on. It is not that Coca Cola does not have efficient advertising managers. Rather, it is because they understand the nature of the American soft drink market. Shopping for a Better World is not a common coffee table read, and you don't see many consumers toting global corporation watch material at supermarkets. Goods like Coke and Pepsi are based on convenience- get in, get out, get drinking. Also, in an increasing number of environments, there is no choice between Coke and Pepsi. Almost every restaurant only offers one or the other, similar to universities, ballparks, and prisons. Therefore, it has increasingly become less of a matter of marketing directly to the consumer (except in terms of image in commercials, usually about cool or "quirky" youth), and more a matter of winning contracts with large institutions or venues. And how much human rights material is being thrown on the table when Coca Cola meets with another giant like Aramark? In the increasingly common situation where people have only once choice, i.e. Pepsi or nothing, they'll choose the Pepsi, regardless of the social implications. This is essentially the situation I face every day in Usdan and at the C-store, and what can I say? I am appalled by the murder of the union leaders in Colombia, but I also like soda.

So, essentially Daft's argument about brand name is also probably irrelevant, seeing as the company does not make much of an effort to disseminate information of their social initiatives in advertisement or product packaging. So again, we see, in America, the case of Coke being essentially a fixed good. No change in product presentation will lead to no increase in consumption from Coke for having a better "brand name." Similarly, any advertising of social initiatives on cans or cups in a place where Coke is the only option to begin with, is a waste of print and advertising, only serving to drive up input prices.

Therefore, seeing as the brand name argument basically fails in most cases, as does the "virtuous cycle" contention, it appears as if Daft and Coca Cola have developed a short term plan just to momentarily appease those damn mouthy liberals, but with no real sustainability for the future.

Don't get me wrong. Daft seemed like a nice enough man, and again, was very intelligent. His intentions for Coke sounded very noble indeed. There is no question that a multi-billion dollar corporation like Coca Cola could afford to raise living standards in many countries without seeing equally proportional gains in consumption and profit. It would take a long while for all the net losses to cut into that girth of wealth and exhaust the worth of the company. So, while it doesn't make sense economically as Daft suggested, it still makes sense morally and is financially feasible. The problem is, Coke and its shareholders will not be willing to witness losses period after period. They want profits, they want returns. Daft also idealistically asserted that, once you please shareholders as your first priority, increasing the value of the company, you then have the liberty to work on other important issues. In the current case, the exact opposite logic must be employed. The important issues cannot be worked on if the company expects profits every period. Eventually, in the long run, Coca Cola will have to return to what it, similar to many other companies, has done for a long time - find cheaper labor to lower input prices and increase profits. On a global scale, Coca Cola, considering its size and capital capabilities, has a perfectly elastic demand for labor curve, meaning, at any point, in any country, it can leave and find a cheaper source of labor. They will continue scouring the globe until their demand for labor in a certain environment stops being perfectly inelastic- in other words, they find the cheapest labor in the world and cannot go elsewhere to lower input costs. Now, finding barrel-bottom labor, unlike the "virtuous cycle" in terms of Coke, does work with the capitalist market system. Cheap labor is what has fueled the growth of many corporations throughout history. If hiring more expensive labor was economically sound, why hasn't Coke been doing that since 1886? Is it a modern epiphany that escaped the likes of Keynes and Galbraith? The answer is no- it simply doesn't work. Coca Cola cannot hope to address these social issues within the same construct as the capitalist profit ethic.

When economists realized in the late 20th century that some people disagreed with the fundamental principle "all humans/firms wish to maximize economic profit" seeing some value in equity and egalitarianism, many of the economists, wishing not to lose the credible economic platform that had been building since Smith's Wealth of Nations, simply incorporated the idea of equity into profits. In other words, if I see that wealth is being distributed more evenly than it was before, I am still economically "profiting" because such a phenomenon pleases me. It is this questionable mentality that surfaces in Daft's speech- namely, the steadfast insistence that the market will ameliorate difficult social issues. So will I still drink Coke? Most likely, but I won't delude myself into thinking that I'm
solving the world's problems in doing so.

Ben Woodring '06 is an Editor-in-chief of The Watch

Weldon Kennedy / The Watch

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