Paul Walsh: Growth Accelerator7th May, 2013 by Ron Emler - This article is over multiple pages: 1 2
“If you go back to 2004/2005 people would have appropriately been critical that we really only had Smirnoff,” he says. “We have grown Smirnoff, which is already the world’s largest volume spirit, and we grow it every year. There is clear water from the number two. But we acquired [a 50% stake] in Ketel One and have done a very good job with it; and we innovated with Cîroc. So collectively we have transformed our role and our position in vodka.
“That’s what we intend to do with Tequila. We’ll look to acquire where we can, but it will be modest. We’ll also look to innovate and we’ll look to forge partnerships. We will have a very robust category position.”
Walsh was not content merely to be the distributor of the leading volume Tequila brand Jose Cuervo and declined a new contract. “After the end of June we can do what we want,” he says. “We own 50% of Don Julio but don’t just assume it’s Don Julio. We’ll have a much broader play. By late summer, you’ll start to see what we have to offer in Tequila.”
And as far as the Ketel One vodka joint venture with the Nolet family is concerned, Walsh says the agreement, which is soon due for renewal “can just roll on and roll on. If the family wanted us to have a bigger stake in the business, we would happily contemplate that. Equally, if they want things to remain as they are, that’s also fine. It has been very successful for both parties”.
In the six months to the end of December, Ketel One grew its organic net sales by 13.4% on a 10% volume increase. It is now a 2.4m case brand.
Walsh concedes that Diageo might be considered too big by the regulators to go for a “major, major takeover” in the vein of Seagram. On the rumours of a break-up of Beam he says, “There would be brands in Beam that we couldn’t own: there would be brands in Beam we wouldn’t want to own.”
Beyond that he is silent, but it is widely assumed that all he would consider would be Jim Beam Bourbon itself.
That said, should a major break up of a competitor be considered, then Diageo, as the biggest fish in the pond, would have an influence on the outcome in the same way that it picked up Bushmills as part of the 2005 dismemberment of Allied-Domecq.
Walsh is realistic about the prospects of buying the 66% of Moët Hennessy he does not own. “There are no regulatory hurdles there, but the owner is very content with his stake. Each time I see M. Arnault [the head of LVMH] I ask him if he would like to sell me Moët Hennessy. He says no and we move on to the next time. So long as that continues to be the case we are where we are.”
He is also clear that Diageo is not about to make an acquisition in wine, which comprises about 6% of its turnover.
“Wine is a volatile category from a profitability point of view. Because it (the wine arm) is the size that it is, we can handle that volatility. But if it was bigger, it would have an impact on the total group, therefore we are fine where we are. I don’t see the need to exit, but I certainly don’t see the need to get bigger.
“I’m sure as hell glad that when certain assets (he doesn’t identify them but read Southcorp and BRL Hardy) became available a number of years ago that we stuck to our guns on our evaluation criteria, even when many in the market were urging us to spend our cashflow.
“There are not enough volumes of quality wine to turn into a global brand, on that I agree with the late Patrick Ricard for whom I had enormous admiration. But there are other dynamics at play.
“There’s the supply component, there is nature – it’s not like Scotch or vodka; sometimes you get a good vintage, other times you get a bad vintage and your prices move accordingly. And the third thing is that the wine industry has not done a good job in getting consumers to pay for the quality they offer.
“It became fashionable to say, ‘Let’s try this, I bought it for £5’. That’s a rough market. I would hate them talking about a bottle of Scotch like that. I want you to tell me how it is worth a much higher price point rather than talk about a little brand that‘s ‘not bad for the price’.
“There are too many minute brands and the industry is incredibly fragmented. A lot of the margin in wine has been given to the major retailers. And a lot of that margin is passed on to the consumer. Look at some of the deals there were around last Christmas on Aussie wine. Three bottles for £10. Horrible! After duty there is not a lot left to pay the capital on the acquisition! That’s why we’re not interested.”
Walsh doesn’t like speaking about his “achievements” – he prefers to talk of “changes over which he has presided”.
“We have put our brands on the pedestals around the world that they deserve to be placed on. Our brands have never been in better shape. We have created an innovation machine, we have improved the image of the industry around our marketing, around responsibility and we now have a seat at the table with the regulators… We have really created a luxury mantle for our brands.
“We have created with Diageo a British company that is global and a champion. And the great news is that there is more to do. It’s an exciting market and Ivan will continue to move it to higher levels.”
Not a bad legacy.