Terry Davis, the long time CEO of Coca-Cola Amatil (CCL), has only been gone 10 weeks or so, but it is clear his replacement Alison Watkins is keen to make some significant changes – including improving the relationship between the company and its major shareholder and supplier, The Coca-Cola Company of Atlanta.
During the decade or so of Terry Davis’ role there was always the suggestion that his desire to move away from the core products of the company – the fizzy drinks like Coke, and that the relationship ‘with Atlanta’ as it is known as Coca-Cola Amatil, had frayed and wasn’t as solid as in past years.
Perhaps that was partly the result of Mr Davis’ strong management and growth strategies which looked to expand into a mixture of non-alcoholic beverages such as fruit juices and coffee, and into alcohol through beer and spirits (brewing and distributorships).
While that was standard business strategy (and one the new CEO Alison Watkins is aiming to do), there was a feeling that the core business – the Australian fizzy drinks and waters – were forgotten, leading to indifferent market growth, especially in the face of the growing dominance of giant retailers like Coles and Woolworths.
That was clear late in 2013 and in the first quarter of this year when sales growth vanished and the company found itself with rising costs and no volume growth in its core products.
Its water products (the market leading Mount Franklin) had been battered by a succession of competing products as the segment outperformed carbonated soft drinks, meaning CCL lost sales.
It was never directly stated, but from time to time there would be the hint that the relationship with Atlanta was no longer as close.
That is until the first move into alcohol foundered when SAB Miller, the huge global brewer, took over Fosters, who broke a number of deals Coca-Cola Amatil had with the company to distribute its beers locally (they were high growing brands such as Peroni).
That unwound, the move delivered a nice capital profit, but kept the company out of alcohol via a non compete clause for a couple of years.
And then there was the half a billion dollars or more all but wasted in the 2004-05 move into SPC Ardmona which culminated with the very public brawl with the federal government earlier this year over a restructuring plan that was eventually done with the Victorian government and huge write offs.
Mr Davis has now gone, Ms Watkins is in the CEO’s office, and is wasting no time to change the company, perhaps to return it to what it was in years gone by.
First there was her admission of a weak first half profit in April’s earnings downgrade, allied to news of a review of the company’s core Australian beverages business, and also the future of its former growth engine, Indonesia.
That produced a 22% plunge in the share price in a couple of days to just above $9, where it has remained, trading within a tight band of 20 to 30c.
And then we saw her comments at the AGM yesterday, and Monday’s surprise early announcement of a major structural and management change in the core Australian non-alcoholic beverages business (i.e. Coke and all those other fizzy drinks and water).
The business, and its alcohol-based stablemate have been separated and will now report to Ms Watkins directly, and the old head of Australia, John Murphy, was squeezed out.
Yesterday the second half of Ms Watkins strategy became clearer.
She warned shareholders that 2014 will not be an easy year (I reckon it will be one strewn with job losses, closures and write downs and losses).
She gave a big hint or two that shareholders (and employees) should expected changes to CCL’s brand portfolio, route to market, pricing structures, cost base, manufacturing footprint and marketing.
The bottom line is that Coca-Cola Amatil will focus more on its Australian operations as it seeks to return to earnings growth, less on Indonesia and move closer to the 30% shareholder in Atlanta.
As a result, Ms Watkins said that while the company remains committed to Indonesia’s growing market, it is reviewing its investment plans there.
That’s business code for ‘it could very well be sold’ perhaps to another bottler or back to the US shareholder. The review is being conducted with The Atlanta giant.
Ms Watkins told the AGM that the Indonesian review, and more importantly, the review of the Australian business, was aimed at restoring the company to "sustainable earnings growth and attractive shareholder returns”.
She told the meeting there were opportunities to lift revenue, improve productivity and cut costs across many parts of the business.
"Our main focus at this stage is Australia, as the most material contributor of earnings to our group," Ms Watkins told shareholders at the AGM in Sydney.
Her comments about the opportunities in Australia and restoring the company to "sustainable earnings" is as much a criticism of the former CEO as it is a list of what will be done next.
"Sustainable earnings" and improved productivity should have been part of the company’s ongoing business plan.
But Ms Watkins has felt the need to remind shareholders of their importance, along with attractive shareholder returns (which follows on from sustainable earnings).
CCA remained very positive about the longer-term opportunity for Indonesia, despite it being a volatile developing market.
"In response to the current challenges, we are reviewing our longer-term growth and investment plans for Indonesia with our partner, The Coca-Cola Company," Ms Watkins said.
"We remain committed to investing for growth in Indonesia, but we must do this with a view to delivering solid and sustainable returns."
Ms Watkins told shareholders the company needed a stronger portfolio of products outside of carbonated beverages and to improve its position in the sports, energy and water categories.
She said it had to be more active in assessing opportunities in new, emerging categories.
The company had been a bit slow in innovating outside its core franchise over the past few years, she added. That’s despite the company’s move into coffee and alcohol products.
She said CCL not only needed to re-assess its portfolio of brands, but also to make better use of its production and warehousing capability.
As part of that, Ms Watkins said the company is actively looking at its operations across Australia, taking into account workplace flexibility and overall costs at each site.
She said shareholders will receive a more detailed list of priorities and objectives when it releases its financial results for the June 30 first half in August.
But it is clear she has outlined the parameters for significant change in the company.
In an update to the April statement, she told the meeting that the difficult trading conditions in the March quarter had continued into in the current quarter. In other words Australian sales of carbonated soft drinks and water continue to fall, or grow more slowly than the market.
While CCL ‘s market share in carbonated soft drinks remained solid and it had grown share in energy drinks, the overall soft drink market remained weak, especially in the grocery channel (supermarkets). CCL had struggled to push through price increases.
Earnings in Indonesia would be "materially impacted" by rising costs, she said, hence the review of operations in that country. Coke is having difficulty getting cost recoveries in Indonesia for higher costs, and in Australia from supermarkets.
However, she made no change to the company’s previous guidance for a 15% fall in June half earnings per share.
Shares in CCL were 2c higher at $9.15.
Ms Watkins didn’t mention how the drop in carbonated soft drink sales is a growing trend in more and more developed economies such as the biggest of all, the US where their sales fell in 2013.
That is a growing headache for The Coca-Cola Company. If it can solve it, or slow the sales losses, then CCL will benefit.
