KGB Interview: Coca-Cola Amatil's Alison Watkins

-       Coca-Cola must innovate, rather than raise prices, to overcome recent losses in grocery volumes

-       Consumers are increasingly fond of low-calorie and non-sparkling products, but carbonated soft drink will remain the ‘engine’ of the company

-       Coca-Cola’s production, warehousing and transport systems are state-of-the-art

-       Despite encouraging growth in alcoholic beverages, non-alcoholic beverages will remain the company's core focus 

-       A setback at the company's SPC site in Shepparton has led it to review the Victorian government's investment program

-       The next five years will see the Indonesian market become a bigger part of the company's growth portfolio

Alan Kohler: Alison Watkins, the first thing you did when you took over at Coca-Cola Amatil was to split the non-alcoholic and alcoholic divisions into two and have them each report directly to you. And then when you did that, you said that the non-alcoholic beverages division needed strong leadership more closely aligned with The Coca-Cola Company to execute against the grid strategy for beverage strength and drive transformational change. So I’m wondering, what was the problem that requires transformational change?

Alison Watkins: Well, on the non-alcoholic side clearly that business has got quite tough for us, so the last couple of years it’s a very difficult and challenging environment out there. And we spoke about that when we updated the market in April and I really want to make sure that we can give absolute priority focus to that business. It’s such an important part of CCA. The alcohol and licenced business on the other hand is one of our growth businesses. We’re very excited about it. But it’s got some different opportunities ahead of it and I equally want to make sure we give it every chance of success.

AK: So what you’re talking about, the challenge is presumably the fact that your grocery volumes fell by 8.2 per cent in 2013 and that seems to have been because of an increase in the price premium over Pepsi by six percentage points. Is that right? Was that just a massive mistake by CCA last year?

AW: Oh no, I don’t think so. Look, there are a lot of dynamics going on and actually it’s the route, the traditional area, where we’re seeing the biggest volume declines. There are a lot of dynamics going on and we all know in our industry that it’s become a lot tougher to make price increases. Also in our industry volume has been pretty flat. So there are a lot of dynamics going on there and what we’ve seen is more significant volume loss actually in the traditional route customer -- so the small stores who are doing it pretty tough out there -- and that’s where we’ve seen the greatest volume loss. In grocery that’s a very important segment for us. There are some important dynamics going on there around price and it’s not an environment that’s conducive to taking price increases at the moment. We need to respond to our customers’ desire for more innovation and really restore all parts of our business to growth.

AK: But you mucked it up last year by putting prices up, right? That’s its problem?

AW: No, I don’t think that’s the case. We’ve got a need to make sure that we do manage the dynamics between our channels correctly and we need to make sure that our brands are strong. I think it’s true to say that it’s an environment where we can’t rely on price as much as we have been able to do in the past. Clearly our brands are really strong and they will continue to command a premium and we will continue to invest in our brands to make sure that that’s the case. But it’s an environment where we do need to respond to the consumers’ desire for better value which the large customers are obviously supporting and enabling and we need to work hard on our cost base as well.

Stephen Bartholomeusz: Alison, these challenges that you’re experiencing and the loss of the volumes, are these transitory issues and they’re related to today’s circumstance or is there a structural threat to carbonated soft drink (CSD)?

AW: Well, a lot of our volume of course does come from sparkling categories, but we also have very important roles to play in the non-sparkling categories -- like sports drink with Powerade, for example; energy with Mother; Mount Franklin in water -- so we do have a lot of volume outside sparkling. Sparkling is tremendously important to us and we’ve been I think very successful in driving the no-calorie option, so obviously Zero has been tremendously successful, Diet Coke plays a really important role and our flavours, Fanta and Sprite, are also very important for us. We need to make sure that we continue to invest in the sparkling category. And Brand Coke is clearly an absolutely outstanding product for us to have in our portfolio. We need to make sure that we continue to respond to the changes that consumers are looking for around more options, lower-calorie options, smaller pack sizes -- and we’re doing all that, and I’m really actually very confident that Brand Coke and sparkling will continue to be the engine of Coca-Cola Amatil.

AK: What proportion of your revenue is represented by Coke now?

AW: It’s a very high proportion of our revenue. It’s certainly two-thirds, or of that order.

AK: And what proportion of your profit is it?

AW: It’s also very attractive margins for us.

AK: Is it two-thirds of your profits as well as two-thirds of your revenue, or is it more or less?

AW: It would be higher. It would be slightly higher than that.

Robert Gottliebsen: Alison, looked at on a global basis, are your production, warehousing and transport systems state-of-the-art?

AW: Absolutely. One of the things that the company’s done really well -- and I’m delighted to see because I’ve worked in a lot of other companies in our industry that haven’t been able to invest the way that we have -- so we have excellent supply chain assets and also our IT investments have been first-rate over the last few years.

RG: Now, I want to take you across to SPC and then bring you back to Coke. We saw at SPC the labour agreement they had there, an ‘agreement from hell’ -- one of those agreements that should have never been signed. No flexibility is the problem. Have you fixed it there at SPC?

AW: As far as I’ve seen, the workforce at SPC are tremendously committed to the future of the company and they’ve played a really constructive role, including responding to the need for more flexibility. But at SPC our workers are not paid over the odds. There were some small parts of the workforce that we have now outsourced and gained greater flexibility through that, but the core workforce at SPC are really very, very supportive of the company’s objectives and behaving extremely consistently with that.

RG: Now, I wonder whether at Coca-Cola itself if similar, very rigid labour agreements exist, which are holding you back.

AW: From everything I’m seeing, the workforce at Coca-Cola Amatil -- we’re having discussions with employees at quite a number of our sites at the moment -- they are being extremely constructive likewise. I think we all appreciate just how difficult it is for manufacturing companies in Australia and our workers can see the pressure on volumes. They understand, and they are highly motivated with us, that we need to build a strong future for Coca-Cola Amatil. We want to be and continue to be a leading Australian manufacturing business and to continue to create jobs and prosperity and all their behaviour is consistent with that.

RG: Can I put that a different way: you had bad agreements, but you believe you can fix them because the workforce understands the problems?

AW: I think that our agreements, from what I’ve seen, are not out of line with what I’ve seen in other industries.

RG: And that’s something. The other industries are bad too. You’ve got to have flexible agreements or they don’t work.

AW: Flexibility is certainly very, very important for us and, as I said, I’m just delighted with the way we’re able to engage in good conversations with our employees.

SB: Alison, you referred earlier to the supply chain and the IT platforms, which I think everyone agrees is great. But do you think when the pressure built on the business those last couple of years and its growth rates tapered, do you think there’s been too much focus on the costs and not enough on the product innovation?

AW: I’d much rather have the investment in the supply chain that’s happened than not and I don’t think those things are either/or. I certainly do agree and we’re having some great conversations with The Coca-Cola Company around how we really make sure that we are putting sustained investment against our brands because for a company like us, that is absolutely the heart of who we are.

We have some great brands and we need to make sure that we continue to remind our consumers of not only the energy and excitement, but also the intrinsic benefits.  You know, Coca-Cola, for example, it’s a wonderfully refreshing drink. We can offer our consumers great alternatives around the Zero, Diet, no-cal options as well as the red Coke. We’ve got a really good job to do ahead of us and I’m very excited about the progress that we’ve been making with The Coca-Cola Company. And I think we all recognise the marketing’s not been where we aspire for it to be and where it will be over the coming years.

AK: I take it from what you were saying before that you’re getting better growth in alcoholic beverages than non-alcoholic. Is that right?

AW: Well, the alcoholic part of our portfolio is small and growing. That’s really encouraging. However, our focus is very much on our core business, which is our non-alcoholic beverages business.

RG: We’ve seen a product fall in many areas of retail since the budget. Have you seen that similar situation for your range of products?

AW: I think the budget has probably somewhat exacerbated what was already a fairly cautious consumer. We’ve certainly seen from all the surveys that consumer confidence has taken a bit of a knock from the budget as consumers work through what does it really mean for me?

RG: And has that affected your sales?

AW: I think that we’re seeing caution expressed by a lot of the retailers. Back in April, we said that we expected trading conditions to be challenging and for that to continue through to the second half. That remains our expectation.

SB: There’s been a lot of discussion and debate in recent years about the power of the supermarkets and the amount of pressure that they put on their suppliers.  Do you feel that pressure and also do you see the rise of the home brands affecting your categories?

AW: We have a great relationship with our major retailers and there’s always a challenge from them, which helps us.  For example, they’re very keen to see greater innovation from us and I think that’s a very appropriate challenge. They’re keen to see us plan over longer timeframes with them and I think that’s a very appropriate challenge. So, I feel that having really good strong retailers in our market is a good thing for suppliers like us.  It helps lift us.  It lifts our standards and that’s a positive dynamic for us.

SB: Do you think they deal with you in an unfair manner?

AW: We’re in a fantastic position with our retail partners. We have great brands, we have a very important role to play in their broader offer and we’re a large company, so no I don’t see anything of that nature.

RG: First of all, has the demand for SPC products killed the high level that was there before the controversy? And secondly, are you still fully committed to the investment program that was announced a few months ago?

AW: SPC’s been a great story and most of us are familiar with the wonderful support that we’ve had from consumers, which has certainly boosted sales quite significantly and that boost continues and customers of course -- for example, the five year deal that we’ve signed up with Woolworths -- have really rallied behind the SPC brand and company. That’s been very, very positive for us. 

We have committed with the Victorian government to a $100m investment program. We recently announced that we are reviewing that because unfortunately we had a little bit of a setback with the Shepparton Council recently voting against a closure of a road that bisects our site, and that has meant that we need to go back to the drawing board somewhat as far as the site layout and design goes. 

We were hoping that we’d be able to have the site operate as one integrated flow, which clearly would assist efficiencies and then that of business efficiencies are pretty important, so we are rethinking those plans. I’m very confident that this business has a really strong future and that a significant investment program will be part of that. We’re very, very grateful for the support that we have from the Victorian government and also from the local community, although disappointed clearly at that decision.

AK: Alison, could I ask you to think forward five years. What do you think Coca-Cola Amatil will look like in five years’ time? Will Coca-Cola and the sparkling beverages be a smaller proportion of the revenue? Will alcoholic beverages, beer and spirits be larger? Will you still be in food?

AW: Yeah. We’re working through a really good process at the moment, Alan, to really answer exactly those questions. It’d be premature for me to comment on that, but I know that brand Coca-Cola and the other brands that we have through our relationship with The Coca-Cola Company will be an absolutely integral part. 

I would expect that we would be an even stronger participant across all the categories that we play in, both non-alcoholic and alcoholic. I think that we’ll be innovative and that fruit-based innovation will be very much a part of that story. And then of course, Indonesia -- which is a wonderful growth option for us today -- will be a more significant part of our portfolio as well. So, I think we have a very exciting to look forward to.

SB: Alison, you say Indonesia is a wonderful growth option, but the growth’s all been about volume, hasn’t it, and also about volume growth. Can you see a point where that becomes a consistently reliable and mature franchise?

AW: Indonesia is a rapidly changing market and we’ve had a very strong position there. Amatil’s been present in Indonesia since 1992, so it’s a market we know very well and we’ve adapted to the different political and economic environments that have played out over the 22 years we’ve been operating and we’ve adapted very, very well. 

We will need to continue to adapt because as the middle class continues to emerge very rapidly and are really keen to consume more non-alcoholic, ready-to-drink, we need to make sure that we are accessible and available for all of those emerging consumers. 

We also need to recognise that there’s quite a lot more competition in the segments that we are in, so certainly in colas, in juice, in teas and juice, teas, waters are very important in Indonesia. There are really a lot stronger competitors there now, and so we need to adjust our strategy. We’re working on how that will play through, but certainly I think for us to continue to grow with the market is an important objective.

SB: You seem to be pursuing a deeper and warmer engagement with The Coca-Cola Company than your predecessor Terry Davis had. But do you think the door will be opened at some point to get another Asian franchise?

AW: It’s premature to speculate about that. We will continue to do our very best with the franchises that we have and, yes, absolutely working very closely with The Coca-Cola Company we see as essential to doing that. We have exclusivity each way on our non-alcoholic portfolio, so it makes good sense to work collaboratively with them. 

We have a need to really make sure we get strong investment into the brands, innovation. Those are very strong capabilities that The Coca-Cola Company brings. So, we are keen to make sure that we work very productively together and I’m really confident that the motivation is there on both sides for that to happen.

AK: Thanks very much, Alison.

RG: Thank you.

AW: Thank you. Thanks, Alan. Thanks, Steve. Thanks, Bob.