Already a Bloomberg.com user?
Sign in with the same account.
How the soda giant fought charges of tainted products in a country fixated on its polluted water
Indra K. Nooyi says she still feels guilty filling a bathtub with water. It sounds far-fetched coming from the chief executive of a major multinational corporation, until you consider her early years. Nooyi, the chief executive of PepsiCo Inc. (PEP), didn't get much water growing up during the 1960s in the Indian coastal city of Chennai. Although she describes her family as "very middle class," they still had to rise every morning between three and five—the only hours that the valves to the municipal water supply were turned on—and fill every bucket in the house. Two buckets were set aside for cooking, and two each would go to Nooyi, her older sister, and her younger brother. "You had to think about whether to take a bath," says Nooyi, matter-of-factly. "You learned to live your life off those two buckets."
Nooyi left Chennai, propelled by a dream to build a career in the U.S. She headed to the prestigious Indian Institute of Management and later Yale University before moving into the corporate sphere, eventually settling at PepsiCo in 1994. When she was named CEO in October of last year, India's water again became a focus of her life.
This time Nooyi was cast as part of the problem. Villagers charged that PepsiCo—which has named India as a top strategic priority—consumes excessive groundwater in their parched communities. Even worse was the repeated claim that the snack and beverage company, along with rival Coca-Cola Co. (KO), were allowing pesticide residue from groundwater to get into locally made soda. The charges, first leveled in 2003, emerged again two months before Nooyi took over the top job. Pepsi's soda sales, which fell by double digits in India when the scandal first broke, took another big hit last fall. She braced herself as protestors smashed bottles on the streets while several states in India banned or restricted sales of soft drinks. Nooyi, now 51, was livid. "For somebody to think that Pepsi would jeopardize its brand—its global brand—by doing something stupid in one country is crazy."
AN ACTIVIST FAMILYBut Indian politicians and consumers took the charges seriously, in part because they came from Sunita Narain. A well-known activist in New Delhi, Narain, 45, was born into a family of freedom fighters who supported Mahatma Gandhi in the push for India's independence in 1947. She idolized her late father even though he may not always have hewed to Gandhi's creed of nonviolence. "I'm told he even made bombs," she says.
In high school Narain took up environmental causes, campaigning to stop developers from cutting down New Delhi trees. Unlike Nooyi, her ambition was not to leave India but to save it from the excesses of industrialization. She skipped college, explaining that she "was very keen to do a degree in environmental issues, but nobody offered it." Instead, in 1981, she fell in with a charismatic activist named Anil Agarwal who had just started the Centre for Science & Environment (CSE). Narain became director of the fledgling advocacy group in 2002 when Agarwal died. Her tone in that role tends toward the-end-is-nigh alarmism; her savvy tactics often draw media attention and have garnered such environmental accolades as the 2005 Stockholm Water Prize. Indians, she declares, are "getting poisoned by pesticides," and CSE tests show Pepsi contributes to this toxic assault.
On one level a tale of two strong-minded individuals, Pepsi's ongoing battle over water in India also illustrates an escalating global backlash against the ways multinationals consume natural resources. Foreign companies have long transformed oil, diamonds, and countless other raw materials into profits that flow from developing nations to wealthy ones. Now the playing field is leveling. Activists such as Narain have blogs, e-mail, and other cheap, powerful tools for getting their messages out. Consumers, meanwhile, are more aware of how big players do business abroad and can react by boycotting the fruits of bad behavior, from blood diamonds to sweatshop sneakers.
Even as companies begin to take seriously the mantra of social responsibility, they find themselves more vulnerable to politically charged onslaughts. In recent months, Royal Dutch Shell (RDS) has cut oil production in Nigeria amid violent attacks on its operations. Diamond giant De Beers battled allegations that it played a role in relocating bushmen in Botswana against their will, and Cargill was forced temporarily to shut down its soy processing and shipping plant in Brazil amid public outcry that it was contributing to the destruction of the Amazon rainforest.
The hostility toward Pepsi in India has been exacerbated by the particular meaning water holds for Indians. Bathing in it can be a sacred act. For many, death is not properly marked until the ashes are scattered in the Ganges. In a global poll last year by consumer research group Henley World, Indians listed drinking water as one of the main things they do to improve their well-being. Americans reported taking supplements; Germans cited sunbathing.
Yet Indian water is some of the worst in the world, according to the U.N., because of poor sewage treatment, heavy pesticide use, and industrial pollution. Availability is hampered by overpumping and poor management. Municipalities usually receive a pittance from individual consumers that doesn't cover the cost of delivering water, while large farms and industry essentially pay nothing at all, creating little incentive to conserve. In this setting, a foreign company that diverts scarce water to manufacture a sugary, discretionary product is a ripe target for critics.
Nooyi recognizes the delicacy of being so closely associated with water in her native land. But she points out that soft drinks and bottled water account for less than 0.04% of industrial water usage in India. "If we get attention, it's not because of the water we use. It's because of what we represent," she says, pouring herself a glass of PepsiCo's Aquafina water during an interview in her bright, uncluttered office at company headquarters in Purchase, N.Y. Pepsi, a $35 billion corporation, she notes, has gone to such lengths in India as digging village wells, "harvesting" rainwater, and even teaching better techniques for growing rice and tomatoes. She's intensely aware that local perceptions matter. "What we don't want is for people to think that industry is taking out of the ground God-given natural resources and depleting that community of its livelihood or requirements for existence."
Pepsi's water clash in India took a dramatic turn after PepsiCo executive Abhiram Seth visited Narain in February, 2003. Seth, a chatty and wry 55-year-old who dabbles in stage acting, serves as Pepsi's chief navigator through the complex regulatory and political channels of his native country. As executive director of exports and external affairs, he also manages the eclectic agricultural projects that may help to improve the company's image. Seth came to Narain's plant-filled New Delhi office just after CSE had tested the country's top 10 bottled-water brands for pesticides and was pressing for tighter government regulation.
The issue touched a nerve as government studies had recently reported high pesticide levels in milk, rice, and other staples, raising concerns about toxins seeping into the water supply. Indians rely heavily on groundwater for drinking and agriculture, having drilled an estimated 21 million wells, most unregulated, since 1965. Seth came to Narain, he now explains, "to understand the data and see if we could work together to address the issues."
Narain recalls it differently. She claims that Seth bullied her and "gave me a huge lecture about nationalism or some rubbish.... He was clearly trying to get me to back off." With Aquafina scoring near the top in bottled-water quality in the country, she wondered whether there was some broader agenda at work. Narain suspected Pepsi didn't want tougher standards for water because that might require more rigorous treatment of the water going into its sodas. Naturally suspicious of corporate behavior, she thought: "Why don't we check their soft drinks?"
Over the next six months, Narain had CSE's scientists test random samples of 12 major soft-drink brands, from Diet Pepsi and Coca-Cola to local favorites like Mirinda and Thums Up. "Before we did this," she insists, "I had no idea that all of them were owned by Pepsi or Coke." Still, with an annual budget of less than $1 million at the time (it grew to $1.2 million last year), Narain knew very well the value of snagging big-name villains to promote her cause. "Looking at soda draws attention to the whole pesticide problem," she says. What CSE found were minute traces of pesticides such as lindane, DDT, malathion, and chlorpyrifos. Although much lower than those CSE had detected in milk, the residue levels exceeded stringent European Economic Commission standards for water. Pepsi was 36 times as high as the standards, in CSE tests, while Coke was 30 times as high. On Aug. 5, 2003, Narain held a press conference in New Delhi, saying that the Indian-made soft drinks were "unfit for human consumption" and could cause cancer and birth defects over the long term. As a further insult to Indian consumers, she says, samples tested from the U.S. contained no such residue, prompting Narain to accuse Pepsi and Coke of pushing products "they wouldn't dare sell" at home.
`COMPLETELY SAFE'Pepsi executives were stunned and outraged. "When you're testing in subparts per billion," Seth says, "it's like measuring one second in 320 years." Pepsi's India team immediately got on the phone with Nooyi, then president and chief financial officer, and Michael White, PepsiCo International's CEO. "We took it very seriously," says White, "but we also knew our products were completely safe." Pepsi held a rare joint press conference with Coke in New Delhi, offering data that contradicted CSE's and saying the company followed the same strict standards all around the world.
Even Narain didn't quibble with the American companies' argument that the level of pesticides in soda was far lower than what Indians put up with in most other foods. But she contended that fruits, vegetables, and milk offer important nutrition, whereas carbonated sugar drinks don't. As for tap water, she said, most Indians have no choice but to drink it. Moreover, Narain adds, multinationals are "a powerful user of water.... We wanted to draw attention to their impact."
She succeeded. Protesters in Mumbai and Kolkata defaced Pepsi and Coke ads and burned placards depicting soda bottles. Several states restricted or banned soda sales. Blasted with e-mail alerts from CSE, journalists and bloggers worldwide leapt on the story, raising the specter of a global consumer reaction just when soda makers were coming under harsh scrutiny for contributing to obesity.
Nooyi says that Indians' sensitivity about both water quality and foreign companies made Pepsi an inviting target. But its marketing strategy had made matters worse, she admits. Rather than promote the company's efforts to improve water and crops, Pepsi had run splashy ads bursting with Indian celebrities. It painted titanic versions of its red, white, and blue logo on ancient Himalayan rocks and buildings around the country. "Combine the public seeing the mercenary side of us, along with the fact that this was an American company," she says, and "they didn't see the other things we were doing."
SPOOKED AND SKEPTICALNooyi also appreciates the anxiety many Indians feel over rapid change, especially when it comes in the form of a big foreign company. As she puts it: "Parents were scared that their children were consuming things they had never consumed. And now they had a reason to stop it. Pesticides in cola. Nobody stopped to say: What pesticides?' Or, incidentally, your tea and your coffee has many thousand times that.'"
Linking Pepsi with pesticides was enough to scare off even sophisticated consumers like advertising executive Manish Sinha. He drank cola almost every day and had even worked on Pepsi promotions at the JWT ad agency a few years earlier. "I was quite passionate about it," says Sinha, now 36 and a vice-president at Bates David Enterprise, an advertising agency in Mumbai. And it was fairly cheap, costing 12 cents to 15 cents a bottle. But the CSE study spooked him. "At a subliminal level, I would rather be safe," says Sinha, who both filters his family's drinking water and boils it to kill pathogens. He has his own memories of past shortages, living off 25-liter containers of bottled water and watching others scrape together money to buy daily supplies from water tankers. He echoes Nooyi's claim that there's a tendency to pick on multinationals, but he thinks the soda makers aren't doing enough to alleviate India's water woes: "I no longer trust the cola companies."
The drama that unfolded after Narain's first soda report card in 2003 could hardly have appeased him. The Indian government flip-flopped between dismissing CSE's findings and supporting the group's call for more stringent standards for carbonated drinks. Pepsi executives joined Narain at sometimes contentious meetings over the next two years aimed at helping the Bureau of Indian Standards (BIS) arrive at guidelines on pesticides, caffeine, and even PH levels in soda. Just when standards were set to be ratified at a meeting in March of last year, Narain says, a cola company executive—she forgets which one—arrived bearing a letter from the Health & Family Welfare Minister to another government official. In it, the minister said the new standards should be deferred because further research was under way.
Narain was furious at what she publicly labeled a corporate power play. "It's clear the letter was written for the cola companies," she says. "They managed to get the standards killed by government." Pepsi executives dismiss the notion as ridiculous. Narain countered with her most effective ammunition: another explosive national study that was released in August, 2006. This time, Pepsi was 30 times as high as the unadopted Indian government standards; Coke was 27. The southern state of Kerala banned the manufacture and sale of all Coke and Pepsi products while other states cut soft-drink sales in schools, colleges, and hospitals. "Everyone carried the story, especially on TV," Seth says with a sigh. Protests revved up again, with some demonstrators pouring cola down the throats of donkeys to show that the drink was unfit for humans. Sales dipped as Narain's campaign again played to the conflicted attitude that Indian consumers have toward powerful foreign brands—especially those portrayed as profiting at their expense.
Even the beneficiaries of Pepsi's generosity seem ambivalent. In the tiny Kerala village of Chullimada, Pepsi recently funded the construction of a well, pipes, and taps that bring water to about 50 homes. The dusty hamlet, many of whose residents eke out a living as day laborers, is where organizers met to plan an anti-Pepsi march targeting a company plant in nearby Palakkad last October. As a result of Pepsi's improvements, the households have ready access to water where they once had to walk three hours a day to get it.
But good deeds can stimulate new demands. When Pepsi managers visited recently, about a dozen women presented the customary flowers of greeting and then got down to business. The local governing council won't pay for the added electricity to pump water, one woman complained. As a result, the pumps run only once a day, forcing residents to hoard. It would help, she suggested, if Pepsi covered the extra costs. Annie Kishen, PepsiCo's director of corporate communications for India and a native of Kerala, smiled and offered sympathetic words. After leaving, she confided that the company isn't eager to pick up villagers' utility bills.
In the neighboring palm-fringed village of Ganeshpuram, where Pepsi also installed a well late last year, different complaints surfaced. About a third of the 125 families don't have taps near their homes, an older villager said as Kishen leaned forward with a furrowed brow. All the women used to spend about two hours a day getting water. Now, there are haves and have-nots. What Pepsi needs to do, the local woman insisted, is bring water to every home in the village. Looking a touch embarrassed, Kishen explained later that in Kerala "the people always speak their minds."
After Narain's fresh burst of pesticide allegations in August, Pepsi chose to ignore her and go straight to the Indian media. The company met with editorial boards, presented its own data in press conferences, and ran TV commercials featuring its then-president in India, Rajeev Bakshi, walking through a gleaming laboratory.
CARTOONS AND STICK FIGURESThe company also stepped up efforts to reduce water usage in its plants, a cause that factory manager Ashwini Singla has embraced with almost religious zeal. His bottling facility, in the city of Panipat, near New Delhi, has reduced water usage to 8.6 liters for every case of two dozen 8-oz. bottles, down from 35 liters at the start of 2005. Workers have organized themselves into teams with names like Golden Lion and Ambition. They post Japanese-inspired kaizens, or suggested improvements, to reduce waste, illustrating the ideas with cartoons and stick figures for added clarity. "We had 1,200 kaizens last year," Singla boasts.
Amid all the well-digging, kaizen-posting, and local government lobbying, Nooyi ascended to the Pepsi CEO job last October. One of her first priorities: a trip to India in December, where she spoke widely of Pepsi's initiatives to improve water and the environment, as well as her own fond memories of growing up in the country. One of her main themes: "This is a company with a soul." Indian newspapers and television covered her tour lavishly and with praise. Soda sales improved, although they ended 2006 flat compared with rapid double-digit growth in China. While the worst of the pesticide scandal seems to be behind Pepsi, a cloud remains, as the government still hasn't set contaminant standards.
Narain, meanwhile, has noticeably toned down her rhetoric, even though the contents of a bottle of Indian Pepsi remain the same. Some of her softening may relate to a grudging pride over Nooyi's ascension. "I think it's great to have an Indian woman in such a high-profile position," Narain says. Pepsi officials "seem to be doing something serious about water now." But she has turned down an invitation to meet Nooyi and emphasizes that any shift at Pepsi reflects less a change of heart than persistent outside pressure. "American multinationals have forgotten what it's like to be in a democracy," she chides.
Looking back, Nooyi turns some of the blame on herself for letting things get out of hand. "One thing I should have done was appear in India three years ago and say: Cut it out. These products are the safest in the world, bar none. And your tests are wrong.'" Still, she realizes that PepsiCo will have to continue to do more than simply be stingy with its own water use. "We have to invest, too, in educating communities in how to farm better, collect water, and then work with industry to retrofit plants and recycle." As long as PepsiCo is in the beverage business in places like India, it will remind potential customers of a resource that's increasingly in short supply.