What does a company do when it can't raise prices?

ROBERT GOTTLIEBSEN
27 JUN 2014
INDUSTRIES FOOD AND BEVERAGES
Suddenly top Australian managers are discovering they cannot raise prices as they once could. But how do you cope when employees want more wages and costs are rising?
Let me introduce you to one business facing just that challenge.
Like so many Australian companies, for decades Coca-Cola Amatil lived in an almost perfect world. Now, along with a vast number of other Australian companies, that world has now completely changed.
At the weekend, take some time to listen to our KGB video interview with Coca-Cola Amatil chief executive Alison Watkins, to be published later today. I found that it was not until after the interview that I fully grasped the impact of what she was saying.
In Coke’s old ‘perfect world’ it had a dominant market share and it could increase prices with almost no impact on demand. Coca-Cola’s strong brand meant that supermarkets had to stock Coke products and its milk bar/small store distribution systems generated high-margin business.
Not surprisingly, for industrial peace Coca-Cola Amatil entered into agreements with its workforce that boosted costs and lowered flexibility. But Coke’s price power meant it did not matter because the costs could be passed on. I have not seen a Coke enterprise agreement but I have seen its subsidiary SPC sign an ‘agreement from hell’ that almost brought destruction on the company (SPC’s infinite management matrix, February 6).
Last year Coke lifted its prices, as it has always done, and there was a backlash which lifted Pepsi sales and cut Coca-Cola back. The price rise might have even accelerated the swing against carbonated soft drinks — Coke provides well over three quarters of the group’s profits. To make matters worse, small stores are losing market share so the so-called ‘rout’ trade is not nearly as profitable.
Alison Watkins stepped into a company that was very different from the one Terry Davis managed so well for some 13 years. So how does Alison Watkins change Coca-Cola Amatil and how does what she is trying to do apply to other companies? Here are some of the steps Watkins is taking.
Firstly, you have to have a state-of-the-art plant. Watkins is fortunate that Davis handed her state-of-the-art plant and distribution systems, except at SPC.
You will see that I ask Watkins about workplace agreements several times. Each time she skilfully dodges the questions with the same answer, which — in my words – was: “Despite the agreements, I have to bring my workforce with me on this new journey.” And she shows passion for this task. And I think Watkins is right. The test of top managers will be whether they can take their executives and workforce with them on this new journey.
Watkins is rethinking the group marketing and look for new products that can be added on. And whereas Terry Davis had a testy relationship with the American parent, Watkins is embracing many of their ideas — the US has experienced the current Australian environment for about five years. Unfortunately, consumers are not going to have the discretionary spending power they once had and this is a long-term change. Companies have to be much more skilled and targeted in their marketing, including using new technology like mobile phones.
Australians will respond to locally made products. The big demand boost that SPC received is still going.
I would add — and I emphasise that Alison Watkins did not say this — sideline command and control managers and those who manage via unions, and instead hire people who can motivate the workforce to work flexibly. They are hard to find because such skills were not always required in the old world when you could just put up prices. Reward them well when you find them.