Investors seem to have heeded the message of tough love and critcisim delivered at this week’s Coca Cola Amatil AGM in Sydney, especially by the company’s new CEO, Alison Watkins.
The shares are up a a per cent or so by 11 am Friday, from the start of the week.
It’s not a big gain, but the honesty from management about the company’s predicament seems to have been appreciated by the wider market.
The thinking seems to be, at last the company seems to have an engaged CEO in Alison Watkins, rather than a long time incumbent in Terry Davis, who seemed to marking time in the past 18 months to two years of his decade or so at the helm of what was once the byword for earnings delivery and marketing efficiency.
In her speech Ms Watkins said CCA had been too slow at times to tackle new products in recent times, had allowed its costs and pricing to get out of alignment, especially by not recognising the rapid growth in national accounts and the damage they were doing to the high profit margin ‘route trade’.
And she said the company had been caught flatfooted by the new development in the drinks sector this year – ‘value’ water products where CCA hasn’t had a product. That’s unheard of for a company like CCA whose marketing ‘smarts’ have long been the byword among fast moving consumer goods companies in this country.
Those are strong comments about a company, especially to shareholders. Company managements and boards generally close ranks when there are problems, or swing the axe to make a point about the predecessor, loading them with the losses and bad odour. They will come later this year at CCA.
Chairman David Gonski told the AGM that Coca Cola Amatil (CCA) as "a world-class, premium multi-beverage business that has delivered substantial increases in earnings and dividends over the past decade. But it was now facing tougher market conditions and greater competition, which are making growth difficult to find and sustain."
Coming from one of the most circumspect people in Australian business, those comments were a surprise. So it was no wonder that Mr Gonski then declared "The Board believes that now is the time to rigorously challenge all aspects of Group strategy. We have asked that Alison lead a comprehensive review of the business, a process that has already commenced."
That of course raises the question why this process wasn’t started a year ago because it is clear from Ms Watkins’ speech that the company has been suffering earnings and margin strains for quite a while. There were two earnings warnings in 2013, for instance.
But the problem was the then CEO, Terry Davis, who was still in the chair. He had stayed on because the company was having difficulty in finding a new CEO to replace him.
Asking him to review the company and tackle the problems that had built up in the last couple of years of his decade long stint, was obviously a bit too much.
He was all but unmentioned at the AGM. His legacy is not a good one (the terrible SPC Ardmona investment with its half a billion dollar and more cost, is the obvious example), as Ms Watkins made clear in her first speech to shareholders.
Davis’ time ended when the board grabbed Ms Watkins from GrainCorp after the bid for that company from ADM of the US was blocked by the Federal Government last December. That allowed Mr Davis to depart and Ms Watkins to settle in.
But she was handed a tough introduction with her first major statement the surprise earnings downgrade in April that saw CAA shares lose more than 20% in value in a couple of days.
And if anything, her speech this week to the AGM was as much an indictment of Mr Davis’ last couple of years at the helm (which is when the problems emerged). But it would also be fair to say that the CCA board’s performance at the same time was pretty weak. It should have moved to force management to address the problems when they started emerging.
One particular problem must have been galling for CCA veterans.
The company’s great strength has long been the tens of thousands of drinks cabinets and vending machines in stores large and small around the country – from small supermarkets through to corner stores, service stations, cafes and work places.
In Coke jargon is is known as ‘the route trade’ and is responsible for much of the company’s sales and profits because Coke products sold through these machines sell for full price, meaning fat profit margins, much higher than selling to big national buyers such as McDonalds, Coles or even 7Eleven.
But in the last couple of years CCA lost its way and didn’t recognise damage to the trade route from the rapid growth in the big supermarket chains and their huge build out (and more aggressive buying policies), as well as the rapid growth in national fast food chains, such as Domino’s.
When you add in the emergence of thousands of small cafes, bars, coffee shops and other types of eateries, which are expensive to service, but which provide full price profit margin, CCA started seeing the previously strong margins erode. They have high fixed costs and margins, so any loss of volume has a big impact on returns.
And that’s what has been happening in the past year or so, as Ms Watkins explained in her speech to the AGM.
"In the grocery channel, the pricing environment continues to be difficult while private label activity in both water and flavoured carbonated beverages remains high."
"We have maintained our share in carbonated beverages while growing share in sports drinks and energy drinks but have lost share in the water category, with value water the stand out growth category in the grocery channel in the first four months, a category we do not have an offering in," she said. That is perhaps the most damning part of her speech.
"Outside of the grocery channel we have experienced a mix shift to lower margin accounts – from higher margin field sales to lower margin national accounts and quick service restaurants.
"This impacts both rate realisation and earnings as we have substantial fixed costs to service the route trade and so suffer earnings de-leverage when volumes fall.
"It has been challenging to keep our field sales in growth over the past few years as big chains and quick service restaurants continue to grow quickly and we first saw an increased rate of decline in field sales volumes in the last quarter of 2013, offset by growth in other our non-grocery customers.
"It was the acceleration of this decline, rather than the expected return to growth in the first quarter, that has surprised us. This, combined with poor grocery performance lapping weak prior year comparatives, has had a meaningful impact on our results to date this year.
"Since our update to the market in April we have completed the Easter trading period with results as expected and trends consistent with the first quarter. That is, while our market share in carbonated beverages has remained solid, the CSD category continues to be weak – declining by around 1% in the grocery channel in the year to date – which has continued to make price realisation difficult," Ms Watkins explained.
That is perhaps the key reason behind the profit downgrade earlier this year which was again confirmed at the AGM this week.
And then there was this, telling, admission from her – after only 10 weeks on the job at CCA.
"(W)e need to be more active in assessing opportunities to grow in new and emerging categories.
"I believe we have been a bit slow as a business – and perhaps lacked the courage – to be as active in innovating outside our core franchise over the past few years.
"This of course means working more collaboratively with our partners, The Coca-Cola Company, to increase the pace of new product development and to strengthen the effectiveness of the significant investment we as a system make in marketing and promotional spend.
"Whilst it is early days, I believe we have already identified and aligned on a number of ways to work together even more effectively," she told the meeting
"I have just spent a week at a Global System Meeting bringing together the leadership of The Coca-Cola Company with major bottlers from around the world. I am confident we are well aligned with the Coca-Cola Company’s own strategy.
"There is no doubt leadership of the Coca-Cola Company recognises and is responding to concerns about sparkling beverages such as obesity and sweeteners. TCCC is already the largest player in beverage categories outside CSDs and the global leader in juice and this focus is continuing.
"There is exciting innovation in CSDs like Coke Life, as well as across many other categories. There is innovation in equipment and packaging. We can draw on all of this. Our markets are important to the overall success of the System and I know we have their support.
"The second area of focus is in our route to market and pricing. One of the strengths of this business historically has been making sure we had the right product, in the right pack for the right consumption occasion and at the right price.
"Recently our price, pack architecture has become a little unbalanced so we will review this and ensure we are providing each one of our customers with the right service at the right price.
"The depth and breadth of our customer relationships via our account teams, sales force, call centre and online capabilities truly does give us the ability to have our great brands within arms reach for every consumer. The strength of our portfolio and market intelligence gives us a wonderful ability to assist our customers make better decisions for their business.
"At the same time we need to ensure that we have an even more competitive cost base and ongoing productivity improvements. This is essential in a market where volume growth has slowed, and where we will not be able to rely on taking raw price increases in the same way as we have in the past.
"The good news is that in some areas we are already quite advanced. Procurement is a good example where we have just restructured our procurement function to better leverage Group scale and capability, allowing for quality and service improvements while yielding substantial savings over the next three years.
"With respect to the strategic review process, we have already assembled a long list of opportunities and we have commenced comprehensively sizing the prize in Australia and we are in the process of establishing a programme office to co-ordinate and manage the various initiatives.
"We would expect to be able to provide a more detailed list of priorities and objectives by the half year result in late August, and expect to have a fully scoped plan under implementation later in the year which will aim to set out some longer-term expectations for earnings growth for the business."
And then this final warning to shareholders about the rest of 2014.
"Finally – this will not be an easy year. There will be hard decisions and changes, but this is a great company with very strong foundations and we are confident we can restore CCA to growth.
"Highly capable, accountable leaders will be central to our success and I know through this journey we will provide them with exciting new challenges and opportunities to grow, as well as the satisfaction of achieving results," Ms Watkins concluded.
All in all it was a rare speech in these days of corporate spin. Ms Watkins has laid clear a litany of errors, bad management and missteps at a company which for years has been a legend in market and investment circles for it’s no nonsense, tough minded approach to marketing and selling excellence.
She is not afraid to be measured and held accountable, which is a big start in what will be an attempt to return Coca-Cola Amatil to its roots.
