Patrick Durkin
June 7, 2018
AFR
Alison Watkins has a big, fat problem. The chief executive of Coca-Cola Amatil, already facing declining local sales and an up and down Asian market, knows better than most that a federal sugar tax – already adopted in 28 countries – is probably inevitable in Australia.
“There is a prospect that a sugar tax will at some stage be introduced here,” Watkins tells BOSS, during a wide-ranging interview about the company’s plans to shake up the business. “I think a lot of people believe it at least shows we are trying to do something about it but I think it will be disappointing if that’s the only reason we end up introducing a sugar tax, because we just want it to look like we are doing something.”
More than 60 per cent of Australian adults are classified as overweight or obese and by 2025 that figure is expected to rise to 80 per cent.
In March, Britain became the 28th country to introduce a sugar-sweetened beverages tax and there are growing calls by public health advocates for a 20 per cent sugary beverages tax to be introduced here.
Coca-Cola Amatil is one of the largest bottlers of non-alcoholic beverages in the Asia-Pacific region and one of the world’s five major Coca-Cola bottlers.
Watkins, a former consultant at McKinsey – which she jokes is full of insecure overachievers – worked as an executive at ANZ Bank, became CEO of Berri and then Graincorp before being hand-picked by then Coca-Cola Amatil chairman David Gonski to replace long-time CEO Terry Davis in 2014.
Watkins, who grew up as a tomboy on a sheep farm in Tasmania’s midlands and is variously described by her colleagues as down to earth, clever, hardworking, positive and unflappable, knows radical action is required.
Coca-Cola Amatil has already committed to a 10 per cent reduction in sugar from 2016 levels by 2020. It will shortly put another “major stake in the ground”. The industry is believed to be discussing a target for a 20 per cent reduction by 2020 to help stave off a sugar tax, if members of the Beverages Council, including Coca-Cola Amatil and PepsiCo, can agree.
“The whole industry recognises it’s an imperative. It’s what consumers want and it is what we must do if we don’t want to end up with more regulation,” Watkins says.
Coke No Sugar is expected to replace Coke Zero by the end of the year.
“First and foremost it is about giving consumers more choice. It will also have the added benefit that it should reinforce for the major political parties that there isn’t a need to have a sugar tax.”
The Beverages Council has been fighting hard against a tax.
The ABC’s Four Corners program recently likened the council’s lobbying efforts in Canberra to the tactics of big tobacco to fight or delay the tax. The Beverages Council held its annual general meeting at Parliament House and admits to spending a vast amount of resources lobbying against such a tax. Its 2016 annual report boasted of its success keeping the topic of a tax off the table from both of the major political parties.
“It’s not the public that isn’t on board,” the executive manager of the Obesity Policy Coalition, Jane Martin, told the ABC. “The politicians aren’t on board, and the reason that a lot of the politicians aren’t on board is because of this influence that we’re seeing of groups like the Beverages Council, of these alliances in Canberra, working against effective recommendations.”
Watkins made a decision to stop political donations. Coca-Cola Amatil is a major funder of the Beverages Council but, Watkins says, the company does its own lobbying. She argues that a sugar tax is not a panacea for obesity.
“In Australia, for example, we have seen the amount of sugar-based beverages that people are drinking actually decline quite a lot. Since 1995, added sugar in total has gone down by about 6 per cent and for kids 23 per cent. So people are voting with their feet because they are concerned about their sugar intake. They are reducing it on their own,” Watkins says.
“Then you look at the fact that soft drinks are less than 2 per cent of the calorie intake of the population, so by having a sugar tax it is pretty clear it is just not a meaningful part of people’s consumption, so it is not going to help obesity. We have been getting more obese through a whole host of factors, including our activity and eating more fat, so it is a really complicated and important problem that won’t be fixed with just a sugar tax,” she argues.
But Watkins knows she might be fighting a losing battle.
The iconic drink company – 30 per cent owned by the US Coca-Cola Company – is undergoing the sort of radical transformation that suggests the writing is probably on the wall for a sugar tax.
To support its new sugar target, it is switching to smaller portion sizes, reformulating fizzy drinks to use no sugar or sugar substitutes and is diversifying into alcohol, coffee and water, which Watkins says is being led by consumer demand.
“I think [in 10 years] we will look much more like what the consumer wants,” Watkins says. “At the moment we are about 70 per cent sparkling beverages and the market is closer to 50 per cent, so our portfolio will look more like the market. We will be stronger in dairy and a meaningful participant in some of the smaller categories [more water, more craft-style juice and dairy products] but we will still be very proud to be selling Coke, which will still be a much-loved brand.”
Despite the transformation, Watkins has good reason to be concerned about a tax and the general trend towards healthier eating. Australian beverages still contribute more than 50 per cent of the company’s $4.9 billion annual revenue, most of which would be directly affected by a tax, as well as large swaths of the Asian and New Zealand business.
In addition to the Coca-Cola family of products, other drinks include Sprite, Fanta, Lift, Kirks, Powerade, Barista Bros, Fuze Tea, Keri Juice Blenders, Monster and Mother as well as water brands Deep Spring, Mount Franklin and Pump.
Interestingly, the 2017 annual report shows the company’s use of raw sugar increased from 280,887 metric tonnes in 2016 to 288,982 metric tonnes last year.
Investors and analysts are worried the Australian business has flatlined or is in structural decline.
Profits from Australian beverages have fallen almost 30 per cent since 2013, despite beginning to gain market share in bottled water.
The business has also been hit by the introduction of the container deposit scheme in NSW, which will be rolled out in Queensland in November and Western Australia next year. One shareholder asked at May’s annual meeting whether the container deposit scheme was “a sugar tax in drag”.
“You make a good point,” Watkins replied.
“Our Australian business is the one going through the most change but we are very, very determined,” Watkins tells BOSS.
Push for acquisitions
Watkins, who turned things around at GrainCorp, has already stamped her mark as one of the country’s most powerful female chief executives. Cochlear, ASX and Santos director Yasmin Allen has worked with Watkins. “I’ve seen her toughness,” she says.
“You learn as a CEO you can’t really aspire to be popular,” Watkins says. “If you like to be liked too much you lose your objectivity. You have to have zero tolerance for any poor behaviour. The most important thing is to stay consistent and sometimes that is hard when you are not seeing the results you would like.”
Watkins is consolidating operations by closing a bottling plant in Adelaide. She has proposed the sale and leaseback of Perth facilities that would raise $150 million to $200 million; a similar deal for the Brisbane manufacturing plant raised $156 million last year.
She plans to use $40 million from cost savings to reduce prices, roll out more cold-drink equipment and invest in digital technology and marketing. She also announced in April the company would invest at least $10 million over the next year in Amatil X, a newly created venture fund to invest in start-ups to find new sources of revenue.
At May’s AGM, however, Watkins warned investors they would have to wait until 2019 or 2020 to see signs of the green shoots.
Trading in Indonesia and PNG in recent months has been subdued, as rising living costs forced consumers to cut back on discretionary spending. Analysts fear growth from Indonesia and PNG may not be strong enough to offset an 8 or 9 per cent decline in Australian beverage earnings.
On the plus side, Coca-Cola Amatil’s strong balance sheet (net debt to EBITDA of 1.5 times last financial year’s earnings) and cash flow (about 92 per cent cash conversion) mean analysts are pushing hard for acquisitions.
“They probably need an acquisition over the medium term, especially if Indonesia and Papua New Guinea continue to underperform,” Watermark investment analyst Ian Carmichael says.
Macquarie sees alcohol – Coca-Cola Amatil’s spirit brands include Jim Beam Bourbon and Canadian Club whisky – as a key area of growth this year. Coca-Cola Amatil sold its half share in Pacific Beverages to SABMiller as part of the Foster’s takeover deal in 2011 and was restrained from selling, distributing or manufacturing beer in Australia until the end of 2013.
“The Australian beer market is becoming increasingly fragmented – the number of craft brewers has increased from 30 to 379 in the last decade – presenting [merger and acquisition] opportunities for CCL,” Macquarie says.
Watkins – who has often talked about the pressure from short-term investors – says while they are very focused on growth there are no current plans for a deal. Acquisitions may be on the agenda but Watkins is not wasting any time in shaking up the company’s existing product line-up.
No-sugar soft drinks
Coca-Cola Amatil has cut the amount of sugar used in 22 products sold in Australia since 2015. In the past two years it has lowered the amount of sugar in Lift by 23 per cent (from about 10 teaspoons of sugar in each can to eight), Sprite by 26 per cent, blue Powerade by 20 per cent and Deep Spring by 26 per cent.
It has introduced smaller portion sizes, including the 250 millilitre Coca-Cola cans, and is offering sugar substitute stevia in Sprite. In May, it launched the first Coca-Cola Stevia No Sugar in New Zealand and Coke Stevia will shortly launch here.
Coke No Sugar – the new brand the US giant is hoping will win over consumers wary of calorific carbonated drinks – also launched here in June last year and is planned to replace Coke Zero by the end of the year. But it was a troubled launch, with Woolworths initially refusing to stock No Sugar. The supermarket relented in December.
“Many of our Coke Zero drinkers are very attached to it so we are going about it carefully to bring Coke Zero drinkers with us,” Watkins tells BOSS.
Despite the challenge, Watkins believes she can shake up the business while still generating a good return for shareholders who are waiting for the company to hit a promised mid-single-digit earnings growth target.
“We take capital from shareholders and need to generate a return but we judge ourselves by many other metrics, which go to our sustainability over the long haul,” she says.
Watkins’ ability to pivot and survive is not surprising given her circuitous career path, which suggests she is capable of remaking a business under pressure.
Watkins says her childhood on a sheep farm in Tasmania’s midlands shaped a lot of her thinking. She still returns home to the family farm in western Victoria’s unglamorous Camperdown most weekends after spending her weeks in Sydney. “I have always enjoyed food, beverages, agriculture. I like businesses that make real things and I can talk to my kids about what we do.”
Down to earth
Watkins likes to understand every facet of the business and in 2016, the CBD column in The Sydney Morning Herald reported that she arrived with the Neverfail water delivery guy at a boutique fund management firm as she got to know the business from the ground up.
Watkins still loves to get out in the business. While some observers have perceived her as cold or robotic, those who know her best say she is real and down to earth and loves to chat to staff, including the truck driver who drops off a Coca-Cola rig behind Melbourne’s Exhibition Building for our cover photo shoot.
When we are done, Watkins accepts a lift in our photographer’s old and jam-packed Volkswagen Passat to be dropped off out the front of the building where she jumps out with her bags to head to a lunch.
After studying commerce at the University of Tasmania, she met her husband, Rod Watkins. He wanted to go to Sydney and study an MBA so Watkins moved with him and started to work as a chartered accountant, before doing her own MBA.
“He [Rod] pushed me quite hard and said, ‘You should go for that’,” Watkins says of the man who gave up his career at investment bank Turnbull & Partners to turn farmer and help raise their four children – three girls and a boy. Only one is still at school. “I get a lot of important HR advice from him [Rod]: usually, ‘You should just sack the bastard.’ He does tend to see things in black and white.”
Watkins worked for 10 years at McKinsey: “It really opened my mind,” she says. “I really dislike hierarchy. McKinsey had this very strong value called the ‘obligation to dissent’.
“McKinsey is full of insecure overachievers and everyone feels woefully inadequate. You are constantly thrown into situations where you feel out of your depth but you get a lot of feedback, which is not always pleasant. It has taken a lot of my career to leave that insecurity behind,” she says.
“It got to a stage where I thought it would be great to be the client rather than an adviser.”
Watkins joined ANZ Bank, where she became head of strategy and later head of regional banking working with then CEO John McFarlene and ANZ’s then global head of HR, Elizabeth Proust, and where she says she learnt the nuts and bolts of business. It also established her as one of a handful of top executive women with major listed operational experience.
Growing confidence
Reflecting on the ANZ interview with Watkins back in the late-1990s, Proust says: “Alison nailed her interview on her CV alone.”
Watkins says watching Mike Smith as chief executive at ANZ and Michael Luscombe as CEO at Woolworths, when she joined their boards, got her thinking how great it would be to run a listed group. “I can do that,” she thought. When the opportunity came along to run fruit juice company Berri, she jumped at it.
Watkins says she has had a number of mentors, including McFarlene, the late James Strong and others, when she had big career decisions to make but she hasn’t always followed their advice, including those who told her not to take the Berri CEO job.
“I remember one mentor telling me, ‘I think you should just stay put. Who is this company?’ I learnt their advice could be helpful even if it is just to sharpen how other people might perceive things,” she says. “I have a coach in the US who also helps me, it is great to have someone to talk to about certain situations – even dealing with your own board.”
David Gonski, who worked with Watkins on the ANZ board, tells BOSS that Watkins is “very clever, hardworking, full of energy, a good leader and communicator, as well as being a very decent person”.
Former Coca-Cola Amatil director Jillian Broadbent, who has an office opposite Gonski’s in Sydney’s Chifley Tower, recalls grilling former CEO Terry Davis about gender diversity at the beverage giant only to discover there were no women among the top 40 executives. Less than a decade later, the company has passed its target of 30 per cent female executives and directors by 2020 and is the only ASX 100 company with a female chairman and CEO.
Watkins works closely with Coca-Cola Amatil chairman Ilana Atlas, a former lawyer and banker who was mentored by Gonski in 2011. “We speak weekly, it is quite informal and she will often drop me a text message,” Watkins says of her relationship with Atlas.
“I’ve worked with a few different chairmen over the years and you have to see what works best. Ilana works best with short, sharp informal interactions,” she says. “I’ve worked with Don Taylor at Graincorp where we went through an intense relationship with a hostile takeover, and David Gonski when I first joined Coca-Cola Amatil.”
Atlas says that all of Watkins’ hard-earned experience has been the perfect preparation for the monumental task of re-making a famous business under pressure. “She is very real, down to earth and listens with real interest to everyone’s suggestions,” Atlas tells BOSS.
“She is always positive and unflappable.”
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