Diageo Chief Remains Measured in Hunt for Acquisitions; Spirits Giant Stays the Course on Emerging Markets and Guinness

Diageo Chief Remains Measured in Hunt for Acquisitions

Spirits Giant Stays the Course on Emerging Markets and Guinness


June 3, 2014 2:01 p.m. ET


Everyone’s going retro, says Ivan Menezes, CEO of Diageo. The company’s brands include Ciroc, Tanqueray, Baileys and Crown Royal.

LONDON— Ivan Menezes, chief executive of Diageo DGE.LN +0.50% PLC, views his glass of Johnnie Walker as half full.

Less than six months after Japan’s Suntory Holdings Ltd. shook up the liquor industry with a $16 billion deal to buy Beam Inc., Mr. Menezes is optimistic that Diageo, the world’s largest spirits company by sales, can extend its market-leading position. (Suntory itself leaped to No. 3, but remains behind No. 2 Pernod Ricard RI.FR -0.10% of France.)

Amid an industrywide scramble for acquisitions, sales at Diageo—whose brands include Ciroc, Tanqueray and Baileys—declined 1.3% in the most recent quarter as the emerging markets in which the company spent years establishing a presence, such as China and Russia, started to sputter. The U.K.-based distiller also has been criticized for being underweight in bourbon, the fastest-growing category in the U.S. spirits market, and is playing catch-up with Beam and Jack Daniel’s maker Brown-Forman Corp. BFB -0.74%

In his first extensive interview since becoming CEO last July, the 54-year-old Mr. Menezes—sporting a pink Ketel One vodka tie and a Johnnie Walker lapel pin—sat down with The Wall Street Journal in his central London office to discuss deal making, the bourbon boom and creating a new spirits category. Edited excerpts:

WSJ: After Suntory’s deal to buy Beam, does Diageo need to make a big acquisition to stay ahead of the pack?

Mr. Menezes: We are the market leader and I fully intend on extending our leadership. As the industry evolves and consolidation opportunities arise, we will stay very active. We have a strong balance sheet and we are disciplined in our acquisition strategies.

WSJ: Will you continue to focus on acquisitions in emerging markets?

Mr. Menezes: If the right global brands come along, we will certainly participate in expanding our opportunities in the developed world as well.

WSJ: Has Diageo relied too heavily on emerging markets for growth?

Mr. Menezes: No, if you look at where the world is going and the consumer trends we have in the next decade, the emerging middle class that is going to come through, the demographics are very positive. I fundamentally believe the emerging markets will grow faster than the developed world. We’re staying the course.

WSJ: In the U.S., the spirits market is booming. What do Americans want in their spirits?

Mr. Menezes: There’s a strong trend to quality. And so, in every category, it is the higher-end brands that are doing the best, both in the on-trade [bars and restaurants] and for consumption at home. … That trend will continue because spirits are still a very affordable indulgence. If you go out in Manhattan and order Johnnie Walker Blue on the rocks, you’re not breaking the bank.

WSJ: Bourbon is especially hot at the moment, but Diageo is relatively weak in the category compared with rivals Beam and Brown-Forman. What’s your game plan there?

Mr. Menezes: Firstly, if you broaden the definition to North American whiskey we have a very strong position. Within bourbon, we’ve got Bulleit, one of the hottest brands in the category right now. I think we are well-positioned not just in the U.S., but globally, to build Bulleit as a true super-premium luxury bourbon.

WSJ: Some distillers have said supplies of bourbon are tight. You’ve just announced plans to invest $115 million to build a bourbon distillery in Kentucky. How are your supplies of Bulleit?

Mr. Menezes: We’re well-covered in our supply arrangements, and we are investing behind the category and the brand for the future. We can certainly support our growth.

WSJ: Fireball Whisky, from Louisiana-based Sazerac Co., has almost come out of nowhere, fueled by social media. Is Diageo taking note, and how are you relying on using social media to market your brands?

Mr. Menezes: Our category tends to be high-engagement, so social media is very important. We will be moving about 25% of our media spend into the digital space [from around 17% in 2013].

WSJ: Has the trend for extreme flavors in spirits peaked?

Mr. Menezes: It’s important that you extend brands into flavors very carefully. Take a brand like Smirnoff—we invented flavored vodka, we are the market leader. I do think consumers’ taste profiles and repertoires have gotten much broader and that is driving the flavor trend.

But when it comes to whiskey, we will be very careful about flavors. You need to be very deliberate about where you extend.

WSJ: So no plans for Johnnie Walker citrus?

Mr. Menezes: It’s highly unlikely you’ll see a Johnnie Walker flavor extension.

WSJ: Sales of Guinness beer are slowing, especially in Africa. Some analysts have suggested you sell the brand. How committed are you to Guinness in the long term?

Mr. Menezes: I came from the Guinness side. I’ve been very closely involved in it from my days in marketing. Guinness has tremendous opportunity, and our beer footprint in Africa is an enormous asset for Diageo. I do see Africa for beer and for spirits as one of the most exciting avenues in the next 10 years.

WSJ: One of your big objectives is to get consumers to raise the caliber of their drinks—or to “drink better, but not more.” How will do you do that?

Mr. Menezes: Whether you’re in the U.S. or Colombia or Kenya or Vietnam, consumers across all these segments are wanting to trade up and drink better, which is one of the very positive characteristics of our sector.

This is something I think Diageo does better than anyone else. Luxury spirits is a new category, we’re early in the game, and in the next decade you’ll see Diageo make a substantial shift in building a true luxury scale business.

WSJ: You say it is a new category, but expensive spirits isn’t a new idea. What are you doing that is different?

Mr. Menezes: No, there have been high-end, highly priced spirits for a long time. What we’ve done in the last three or four years is put a tremendous amount of focus in expanding the category. That cachet of having a scarce liquid that is beautifully crafted that people really want, I mean, it is classic luxury.



About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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