Beech-Nut Nutrition Corporation is the second-largest manufacturer of baby food in the United States and has long enjoyed a reputation for quality and purity. The company’s Beech-Nut apple juice was labeled and promoted as 100 percent fruit juice and touted as "good nutrition that tastes good." Unfortunately for Beech-Nut, its reputation was tarnished in the mid-1980s when the company was indicted for selling adulterated apple juice—juice made from ingredients different from those specified, or from artificial ingredients.
Beech-Nut Nutrition Corp began as a division of Squibb Corp but was sold in 1973 to a group headed by entrepreneur Frank Nicholas. Nicholas and his partners bought the company in a leveraged buyout and were forced to operate Beech-Nut on a very limited budget. Under Nicholas’s leadership, the company began to experience financial difficulties. Although Beech-Nut commanded 15 percent of the baby food market, its main competitor, Gerber Products Co., held 70 percent. Beech-Nut could not compete with Gerber’s huge marketing budget and found it difficult to capture any more of the market.
In 1977, Interjuice Trading Corporation offered to sell apple juice concentrate at 20 percent below market price to Beech-Nut. Because apple juice products accounted for 30 percent of Beech-Nut’s sales, its executives believed that buying the cheap concentrate could save the troubled company millions of dollars a year and improve its financial picture. So, Beech-Nut began buying the concentrate, but its financial problems persisted. In 1979, the company was sold to Nestle S.A.
Suspicious of the low-cost concentrate, Beech-Nut chemists began testing the apple concentrate for purity. They soon determined that the concentrate contained beet sugar, apple flavor, caramel color, and corn syrup. When two Beech-Nut employees were denied entry into Interjuice’s concentrate-processing facility, their suspicions about the concentrate’s purity increased. With this evidence, the director of research and development at Beech-Nut, Jerome LiCari, sent a memo to senior Beech-Nut executives, expressing his concerns about the purity of the apple concentrate. Senior executives at Beech-Nut, still under severe pressure to improve the company’s financial position, failed to act on LiCari’s information. When LiCari took his evidence of adulteration to the chief operating officer and president of the organization, the company threatened to fire him, and he eventually resigned in frustration.
In 1982, the Processed Apple Institute began investigating widespread rumors of apple juice adulteration in the industry. Investigators warned Beech-Nut that Interjuice’s apple concentrate was adulterated and asked the company to join with other concentrate buyers in a lawsuit against Interjuice and other producers of adulterated concentrate. Beech-Nut refused, missing an opportunity to limit its liability.
Beech-Nut did cancel its contracts with Interjuice Trading Company, but it continued to sell apple juice made from the concentrate it had already purchased. Only after the Food and Drug Administration and the New York State Agriculture Department investigated and found that Beech-Nut’s apple juice was indeed adulterated did the company recall the product.
At first, government investigators assumed that Beech-Nut had been a victim of unscrupulous dealers. But further investigation revealed evidence that Beech-Nut was aware of the adulteration, the most telling of which was Jerome LiCari’s memo. In one instance, when the company learned that the Food and Drug Administration was about to seize a shipment of the adulterated apple juice, the company destroyed it to avoid the negative publicity that might have resulted from such a seizure.
In 1986, Beech-Nut and two top executives were indicted on 470 counts. The company pleaded guilty to 215 felony counts and willful violations of food and drug laws in 1987, and paid a $2.2 million fine. Charges against the top executives were still pending. In addition, five suppliers of adulterated apple juice concentrate were convicted and fined.
Beech-Nut tried to save money by using the low-cost concentrate, even after the company learned that the concentrate was not 100 percent apple juice. Ironically, the ensuing investigation and indictments cost the company more than $25 million in fines, legal fees, and lost sales. Beech-Nut’s share of the juice market dropped 20 percent, and the company sustained near-record losses. Several years later, it still had not recovered from the damage caused by the scandal, and Nestle sold Beech-Nut to Ralston Purina.
Questions:
What are some of the important ethical issues in this case?
