Diageo says farewell to top-performing CEO

Sir Ivan Menezes has been highly praised for his decade at the top of Diageo following the announcement that he will retire as chief executive at the end of the company’s financial year on 30 June.

Since he moved into the driving seat in 2013, Diageo’s shareholders have enjoyed a handsome 127% return of their investment compared to the FTSE100’s dismal 17% and today Diageo is responsible for £1 in every £10 of the UK’s food and drink exports.

He adopted and refined the strategy of his predecessor, Paul Walsh, making Diageo the pre-eminent producer at the top end of the global spirits market. He also further enhanced its reputation in beer through Guinness and East African Breweries.

He relentlessly premiumised the company’s portfolio and acted swiftly to broaden it with acquisitions such as Don Julio and Casamigos in Tequila and niche additions such as Don Papa rum.

Despite the fraud perpetrated by Vijay Mallya over the purchase of United Spirits, Menezes has made what is now Diageo’s Indian subsidiary a slimmer, more dynamic operation by selling off a batch of commodity brands in the same way that he took Diageo out of the low margin wine market and sold off peripheral interests such as the prestigious Gleneagles Hotel in Perthshire.

Much the same could be said of China, where Diageo is a player in the all-important baijiu market via its 60% stake in Sichuan Shuijingfang. Diageo is also building a distillery to produce whiskey for the China market in concert with Yanghe, the third largest producer of baijiu.

Menezes relentlessly focused on the all-important US market, which accounts for more than a third of Diageo’s net sales and about 40% of its profits. Ruthlessly he unloaded a portfolio of underperforming brands to Sazerac.

With Diageo the foremost supplier of premium spirits to US drinkers, the group stood in good stead when coronavirus struck in 2020 and triggered the home cocktail boom. They wanted tried and trusted brands.

And despite the chaos caused in the early days of the pandemic, by last Christmas Diageo’s global business was 36% larger than it was in 2019, having benefited from the data systems and marketing clout it could employ around the world during the crisis.

But Menezes’ achievements do not mean he is simply handing over a silky-smooth machine to his nominated successor, Debra Crew, at present Diageo’s Chief Operating Officer and the former head of its US business. Far from it.

The ex-US Army intelligence officer will inherit a large in-tray when she takes over on 1 July, with the most immediate task to announce the group’s results for the year to the end of June.

In January, Menezes said he was “confident” about the continuing pattern of delivering the medium term objective of organic net sales growth of between 5% and 7% and organic operating profits growth of between 6% and 9%.

Will Diageo achieve that this time around? There are some doubts but its is unlikely that Diageo will end its status as a “Dividend Aristocrat” by enhancing the payout to shareholders just as it has done every year since the merger of Guinness with Grand Metropolitan back in 1997.

But there will be much interest about forward trends. Just how far is growth slowing in North America? Is there any evidence of consumer resistance to price rises?

Is there evidence in the second half figures of a more muted reopening of the China market than predicted?

Crew’s comments will be closely dissected, as will her predictions for 2024.

Not only that, but analysts will also focus on the strategic target she has been set by Menezes. Some 18 months ago he said that by 2030 Diageo wanted to increase its slice of the total beverage alcohol market from 4% to 6%.

That means more than a 50% increase because the total TBA market is itself expanding rapidly. Between now and 2027 it is predicted to grow by more than $400 billion.

At the start of this year Diageo held a 4.6% slice but as the global market grows and competition intensifies, how will Crew plan to achieve Menezes’ much trumpeted target? Incremental progress may be increasingly difficult to achieve.

What will she forecast for next year?

Demographics are in her favour. For instance, the burgeoning middle classes in both India and China are predicted to swell demand for imported alcohol by annual compound growth rates in the high single digits over the next five years.

Diageo is strategically positioned to benefit from those trends, but so are its competitors, not least Pernod Ricard in India and Remy Cointreau in China.

More unpredictable is the US market, where the swing to cocktails at home has triggered the fast-swelling market for RTDs, which is in its comparative infancy and where all the major brand owners, Diageo included, are scrambling for position.

Brand identity, where Diageo is strong, is significant. But so is the final taste combination. Here Brown-Forman and Coca-Cola are blazing a trail with Jack and Coke.

Under Crew, Diageo will continue to in-fill its portfolio with niche acquisitions but despite its strong cash flow and balance sheet, blockbuster takeovers are unlikely – competition authorities in the US especially would not allow Diageo to become even more powerful.

Standing still is not an option, so Crew’s strategy is likely to be more of the same. Cutting costs will be ever more difficult so the backbone will be continual price rises where consumers will bear them, heavy marketing spending and the launch of new products, which will eat into margins. Further share buybacks are also expected.

And what of Menezes after 30 June?  At 63 he is unlikely to want to take his large pension pot and sit back.

After a decade as one of Britain’s most successful chief executives, he meets every criterion to become a powerful multinational chairman and to take up less demanding non-executive directorships.

On his own retirement from Diageo, Walsh indulged his passion for motorsport by becoming chairman of McLaren while FedEx and McDonald’s welcomed him into their boardrooms.

Menezes is already a non-executive director of the US based fashion retailer, Coach.

Given his strong interests in equality, the environment and the furtherance of British businesses development with South East Asia, he is expected to remain energetic in those spheres.