A New Approach to Managing a ‘Classic’ Reputation

coca cola sweetener challenge

A new Coca-Cola-sponsored contest seems to publicly acknowledge its reputational risk, but at a minimal cost that could manage or even reduce it.

In early August, the beverage giant announced its Sweetener Challenge, seeking non-employees (preferably scientists or agriculture or nutrition professionals) who can bring the company a “natural, safe, reduced, low- or no-calorie compound that generates the taste sensation of sugar when used in beverages and foods.” The winner will be announced in Fall 2018 and will receive $1 million.

Taxes on soda, the decline of its consumption, and mounting data that sours on sugar has unquestionably affected the bottom line for the company and put pressure on the broader beverage industry. By initiating the contest, Coke seems willing to try a fresh approach to manage or favorably alter its reputation as a brand founded on sugary cola, while simultaneously attracting and retaining consumers and generating sales. That seems far less risky than not trying new techniques.

“[Reputation risk] is created when expectations are poorly managed and exceed capabilities, or when a company simply fails to execute,” wrote Nir Kossovsky in the 2014 Risk Management article “How To Manage Reputation Risk.” “Managing expectations is all about governance, operations and risk management—the blocking and tackling of running a business. Clearly, there can be perverse brilliance in a business strategy of setting expectations very low.”

Last year, Coca Cola suffered a net revenue decline from $11.5 to $9.7 billion, making the $1 million prize a cost-efficient gamble that, as Kossovsky suggested, can “conceptualize an ideal state and implement a roadmap to reduce reputation risk.”

Other companies have turned to their audiences for new ideas to increase awareness and improve their reputations. Folgers was jonesing for a new jingle this year and paid a songwriting duo $25,000 for a flavorful new take on “the best part of waking up.”

Even the commercial aviation industry sought out-of-this-world innovations from average stargazers. When the X Prize Foundation wanted to inspire the private sector to pursue commercial space flight, it did so with a $10 million prize. The pursuit of the Ansari X Prize generated $100 million in new technologies and was ultimately won by the Tier One project’s ShapeShipOne, which was financed by Microsoft co-founder Paul Allen.

According to Kossovsky, “reputational events are tried in the court of public opinion,” and Coke’s will both there and in stores. The company’s new sugar substitute will be announced in October 2018 and will eventually make its way into supermarkets. With just a few sips, consumers can ultimately decide if the company’s investment and reputation risk management technique was a sweet move.

Tips for Managing a Hurricane Claim

Despite early predictions of a mild 2017 Atlantic hurricane season, the latest forecasts reflect the likelihood of more named storms than originally anticipated. If that is not ample motivation for risk managers to double-check their hurricane preparation, then the reality that it only takes one major storm to generate a widespread disaster should be sufficient to warrant a review of their claims preparation.
This process will not only help spot potential gaps in your insurance, but also any issues in your planning that may affect the amount and delay the timing of a claim recovery. Based on recent experience, here are some tips for hurricane claims preparation and management.

Conduct a thorough review of your property insurance. Start by checking your deductible. After a loss, the first question risk managers often get from leadership is: “What’s our retention?” You also need to see if your policy has a blanket or percentage deductible. If the latter, is it a percentage of total insured value (TIV)? Do separate deductibles apply to physical damage and business interruption? Double-check your business interruption deductible. A 2% deductible on a business interruption loss equals seven days of self-retention (365 days x 2%).

In reviewing your policy, check the definitions of covered perils. Look for specific references to “storm surge,” “named windstorm” and “flood.” You’ll also want to make sure your policy covers costs to protect and preserve insured property that sustains physical damage and addresses business interruption losses when a facility is closed to preserve or protect property.

Check fee coverage for claims preparation. In a catastrophe, you may need to retain an outside claims consultant to manage your claim; this coverage—standard in some policies and optional for a nominal surcharge in others—comes in handy for complex claims.

Risk managers also shouldn’t overlook the extended period of indemnity, which gives policyholders additional time after a damaged property is restored to regain market share. And don’t miss assessing how your business interruption coverage addresses payroll; most policyholders want coverage that treats payments to hourly workers as a fixed expense (ordinary payroll), especially during catastrophe events.

During your policy review, be sure not to miss the opportunity to pre-select your adjuster. Designate an adjuster in your insurance policy and meet with them and your insurer’s claims director or examiner before any loss. Besides informing them about your company’s operations and claim strategy, a meeting helps structure the claims process.

List your claims team in your emergency response plan. Creating a team in advance—including claim advocate, restoration company, forensic accountant, engineers and building consultants—will mean they can be mobilized immediately following a major loss event.

After a loss event, communicate with key internal stakeholders. Keep your c-suite, operations, procurement and legal teams fully informed of your loss situation and claim process. And be sure all employees have ample instruction. They will need guidance for setting up loss accounts, invoicing, tracking internal labor, inventory, fixed asset ledgers and on any purchases to help mitigate the loss. They also need to understand the sensitive nature of any discussions with insurance company representatives.

Act quickly to assess the loss. Immediately evaluate the extent of property damage and obtain recommendations on temporary repairs and remediation needed to preserve and protect property. Show the adjuster the full scope of the loss so an appropriate reserve is established.

Designate a key member of your claims team to coordinate, manage and communicate activities of emergency resources, remediation, restoration vendors, environmental specialists and other providers involved in your claim. This encompasses all site inspections and remediation, timelines, target dates, ownership of issues and accountability, and facilitates expedited reviews of damaged inventory.

Work closely with your insurer throughout the loss adjustment process, as well, to negotiate partial payments based on expected short-term expenditures.

Get outside help for complex losses. By bringing expertise and special resources, such as drones and other technology, to determine extent and scope of loss, prepare accurate damage and business interruption assessments, claim experts can make a significant difference in your recovery.

Large-scale catastrophes can involve delays in insurance adjustment and elongated downtime, which can have enduring and widespread negative consequences for an enterprise. With careful planning, risk managers can help their organizations achieve faster and more complete recoveries.

For more information on hurricane preparedness and natural catastrophe planning, visit: http://www.aon.com/disaster-response/

Oroville Dam Flood Claims Filed

Concrete continues to be placed on the lower chute of the Lake Oroville flood control spillway in Butte County, California. Photo taken Aug. 7, 2017, by Dale Kolke/California Department of Water Resources.

California residents in the path of water spilled from the Oroville dam in February had until Aug. 11, six months after the incident, to file claims.

The Mercury News reported that Butte County farmer George Onyett, manager of J.E.M. Farms and Chandon Ranch, filed a $15 million claim, saying that after the flooding in February, about 25 acres of walnut trees were washed away by the Feather River. He said that 1% to 2% of the trees in his walnut orchard were lost and that his land is now “irrecoverable.”

Because of the near-collapse of the Oroville Dam in northern California, communities as far as 100 miles downstream were at risk of flooding. Problems at the dam began when its main water channel, or sluice, was damaged after a winter season of record rain and snowfall after five years of drought. Torrential rainfall caused water levels to rise so quickly that large amounts of water needed to be released to prevent the dam from rupturing and inundating the communities below.

But when the force of the cascading water created a large crater in the main spillway, use of the emergency spillway was required. This safety backup, however, also nearly failed because the dirt spillway, which had never been fortified by concrete, began to erode, increasing the risk of damage to the dam. In anticipation of a possible disaster, almost 200,000 residents living in the shadow of the dam were temporarily evacuated.

Niall McCarthy, an attorney representing the farm, said the spillway crisis was “entirely avoidable.” He pointed to waived concerns about inadequacies of the emergency spillway raised by nonprofit groups in 2005, as well as recently released reports by UC Berkeley Professor Robert Bea, of mismanagement by the state Department of Water Resources, according to the Mercury News.

“There was a certainty of failure with respect to the Oroville Dam,” McCarthy said. “The state chose to make band-aid repairs. The state failed to do its job. (This was) not caused by natural conditions, (but) by human error.”

State officials have maintained it is unclear whether the fluctuation in water releases from Oroville harmed the river and those who farm along it between the shore and major flood protection levees. They argue that some bank erosion would have occurred this year, regardless, given Northern California’s record rainy season, according to the Sacramento Bee.

A number of other business owners and individuals have also filed claims with the state Department of General Services. The Sacramento Bee reported that there were 11 claims at the beginning of July and that there are now a total of 92 claims filed by residents.

A list released by DGS showed claims totaling $1.17 billion. However, that includes a $1 billion claim filed on behalf of “all affected parties” owning land along Northern California rivers where flows were affected by sudden water releases from Oroville. That claim, filed by a Woodland lawyer named James Nolan, added that actual damage amounts aren’t yet available.

Construction efforts at the Oroville Dam spillways are underway and are focused on repairing and reconstructing the gated flood control spillway, also known as the main spillway, by Nov. 1, according to the California Department of Water Resources.

Can You Have Too Many Coffee Shops?

The collective mood among Starbucks (SBUX) shareholders may have been dark and intense on Wednesday, following a 1% downgrade of the coffee company’s share price by BMO Capital Markets due to “store overlap.” BMO analyst Andrew Strelzik wrote: “There are now 3.6 Starbucks locations within a one-mile radius of the typical Starbucks in the U.S. relative to 3.3 and 3.2 stores in 2014 and 2012 respectively.”

That statistic does not factor in competitors, and implies that too many franchise cafes are located too closely together and are fighting for the same $2 per tall coffee.

The warning signs of overlap were acknowledged and dismissed by Starbucks CEO Howard Schultz in 2010, when he told the Harvard Business Review: “We’re not nearly close to saturation in North America, despite what the cynics or pundits might say…”

At the time of that interview, Starbucks total store numbers neared 17,000 and by the end of 2016, there were 25,085. Was seven years close enough to the saturation point to heed the warnings? Or does the old cliché about hindsight apply?

The overlap may have led to what’s known as risk failure, which Risk Management explored in a 2016 article, “The True Character of Risk.” Article author Michael J. Mazarr would characterize Starbucks’ market oversaturation as a “gray swan”—a danger that is “known, discussed and even warned about, but then discounted.”

Mazarr noted: “When senior decision-makers become immune to outcome-oriented thinking, they will not give serious consideration to risk. They may continue to give it rhetorical emphasis, talking about what could go wrong, but the trajectory of their judgment will never substantially vary.”

McDonald’s learned this same lesson the hard way in the 1990s. Although it had 19,000 worldwide locations, upper management wanted deeper market penetration and kept expanding. Cannibalization didn’t hurt the corporation at first, but investments in new locations outpaced the profits earned from increases in total sales. That led to the fast food chain closing 100 stores and unveiling the popular, but risky, offer of 55-cent Big Macs to attract and retain customers.

Unlike in 2008, when Schultz closed 600 locations overnight because he felt they weren’t meeting the Starbucks vision, the current problem is not reportedly a result of poor management or the inability to offer upscale imbibing experiences. Starbucks has just provided customers with too many options near their homes, workplaces and hangouts to get their next sandwich or caffeine fix.