His track record at the world’s leading drinks business speaks for itself, and CEO Paul Walsh leaves Ron Emler in no doubt that his strategy of investing in existing brands and focusing on emerging markets will take Diageo to ever greater heights
“We could be entering a new golden age for spirit consumption,” believes Paul Walsh, chief executive of Diageo, the world’s leading premium drinks business.
“Just look at the number of consumers who can now afford or will afford our brands over the next 10 years. The industry, not just Diageo, has the brands with the prominence that these consumers want.
“It is like a raging torrent. The emerging middle class is not going to start shrinking, demographics don’t change. When you have strong demographics that are economically empowered we will do well.”
Although he is wary of present global economic conditions and predicts further crises, Walsh points to statistics on the shift of power to the “high-growth markets” and the burgeoning middle class consumers in them.
For instance, The World Bank estimates that by 2025, six economies – Brazil, China, India, Indonesia, Korea, and Russia – will collectively account for more than half of all global growth.
“I could dazzle you with statistics about the emerging middle class,” he says. “China will more than triple GDP per capita in the next 12 years. That took Victorian England 150 years. That’s staggering!”
What about Indonesia, sub-Saharan Africa, Latin America? “The numbers are incredible and what’s very clear is that when people have more money they don’t drink more, they drink better.
So we can trade them up the ladder [to premium products].
“When you’ve got categories like Scotch that are rich in heritage, rich in provenance, rich in stories, people want the feel-good that goes with that quality. It’s no different anywhere around the world.
“Four years ago our Reserve Brands [Johnnie Walker Blue Label, Gold Label Reserve, and Platinum Label whiskies, Ketel One vodka, Zacapa rum, Don Julio Tequila, Cîroc vodka and Tanqueray No. Ten gin] were worth more than £400 million in sales. In the last set of full-year numbers, they were worth £1.1 billion in sales. That will double in the next three to four years.”
Walsh speaks from a position of unquestioned experience. After 13 years at the helm of Diageo, he is one of the longest-serving chief executives among Britain’s biggest companies. Since he became chief executive, annual results to last June show Diageo’s operating profit rising by 59.5%, and the value of the company (market capitalisation) more than doubling. Today Diageo is valued at almost £50bn, making it Britain’s ninth biggest company. Significantly, even during the recession, Walsh increased both profitability and the dividend every year. The company also has a rock-solid balance sheet.
Walsh will step aside on 30 June 2014 and the company has already chosen his successor, Ivan Menezes, who became chief operating officer last year after running Diageo’s US arm.
“Diageo is a very fine racehorse but it can’t have two jockeys,” says Walsh. ”I will be around and do whatever I can to make Ivan and this company continually successful… But I must step aside and let Ivan ride this horse.”
As part of a three-year programme in anticipation of Walsh’s retirement, Diageo set a goal of earning 50% of its revenue from the newly developing markets by 2015. Walsh says he will meet that target earlier. And the recent deal to take control of India’s United Spirits (USL) can only accelerate the timetable. Indeed, he regrets that Diageo did not invest more in high- growth areas earlier this century, but admits it would have been difficult to convince shareholders of the wisdom at the time.
To give an example of the potential, he points to the takeover of Mey Içki in Turkey in 2011. Buying the dominant raki producer gave Diageo not only a brand with an 80% gross margin but also provided a stronger route to market for its held 20% of the Turkish market for Scotch; today it has more than half of it.
The takeover of Ypioca in Brazil offers similar prospects, as does the expansion of Diageo’s brewery interests in East Africa. And it is a pattern he sees continuing.
“Smaller companies will find their way into larger companies but I am not near term. There will be more deals comparable with Mey Içki. Overall there will be more power in the hands of the global players. It’s an exciting time for the industry.”
GROWING YOUR OWN
So where will Diageo look for further geographic consolidation and enhanced routes to market? Walsh is non-committal. But based on his criteria, an outsider might speculate that countries such as Mexico and Colombia are under consideration.
“When we buy a local company we are buying a strong local brand and a strong route to market… There are not that many of the quality and scale that would be appealing to us. There are some, but our first objective is always, always, always to grow what we already own. Then if you see things you can add value to and you can acquire at sensible prices – not cheaply, I want to pay a fair price for a good asset – then we will do so. But the way that we will drive value for our shareholders is
by growing what we already own.”
So the main engine of growth will remain pemiumisation to the middle-class consumer backed by what Walsh calls Diageo’s “innovation machine”.
Scotch, which accounts for 30% of Diageo’s turnover, “has a lot of legs. I keep coming back to this emerging middle class. The future is very, very bright”, he says. That underlines the importance of USL because India has a tradition of drinking whisky and a strong local industry, factors not applicable in China, for instance.
But other categories also are ready for the Diageo treatment. Here Walsh points to vodka as an example of how to expand and premiumise the market.