Diageo’s Walsh Sees ‘Slow’ Recovery as U.S., Europe Trail Asia
By Andrew Cleary
Nov. 2 (Bloomberg) -- Diageo Plc Chief Executive Officer Paul Walsh said the world’s largest liquor maker will see a “long and slow” recovery from recession in its biggest markets, and plans to compensate by expanding in emerging economies.
The U.S. and Europe will take more time than Asia to rebound, Walsh, 54, said in an interview at Diageo’s London offices. Countries such as Mexico and Brazil have been “almost business as usual” through the slowdown, the CEO said, adding that China has seen a “sharp, V-shaped recovery” as a result of the country’s $586 billion stimulus package.
“I’ve been in this business 27 years and never seen anything like it -- we just saw the brakes go on in November,” Walsh said. “There’s been gradual improvement since April, but it’s not a snap-back” to pre-crisis growth levels, he added.
Diageo saw sales growth stall in the U.S. toward the end of last year as distributors stopped ordering and depleted inventories, while consumption faltered in European markets from Spain to Ireland. The CEO said he plans to expand in Latin America, Asia and Africa to guard against any future slowdown. In 10 years time, Diageo’s revenue from those regions will represent a “much bigger” percentage of the total. The U.S. and Europe currently account for about two-thirds of net sales.
The CEO said one of the main lessons he learned from the recession was the crippling effect of de-stocking, as retailers’ practice of reducing inventory is known.
“We didn’t have enough visibility of the inventory,” the CEO said. “In the future, we’ll work closer with distributors to understand depletions better.”
Pernod, LVMH
Competitors Pernod-Ricard SA, Brown-Forman Corp., Laurent- Perrier SA, Remy Cointreau SA and LVMH Moet Hennessy Louis Vuitton SA have all said sales were hurt earlier this year as U.S. retailers ran down inventory during the recession.
Walsh said the Thanksgiving and Christmas holidays will be “critical” indicators of whether U.S. consumers are prepared to increase purchases of Diageo’s more expensive brands such as Johnnie Walker whisky, Ketel One vodka and Baileys liqueur. “The jury is still out,” he added in the Oct. 27 interview.
LVMH said this month that demand for cognac improved “significantly” as wholesalers began to replenish their inventories, echoing comments from Remy Cointreau.
Diageo is developing computer software and implementing inventory-management practices globally to ensure it has better knowledge of what is being held by third parties, Walsh said.
Advertising Perceptions
The CEO said consumer spending, which has strengthened this year as interest rates have declined along with food and gas prices, may be affected should governments raise taxes to reduce borrowing. Britain had the biggest budget deficit for any September since records began in 1993, figures this month showed, while in the U.S., the deficit hit a record $1.4 trillion in the year ended Sept. 30.
“How governments solve their deficit problems will be crucial,” Walsh said. “Any increase in corporate or personal tax would squeeze disposable income,” he said.
The maker of Guinness stout has seen a change in the way marketing and advertising are perceived, with consumers more likely to respond to messages about a product’s quality and heritage, rather than a superficial ad campaign, Walsh said.
Diageo’s new online campaign for the Smirnoff vodka brand, its top-seller, focuses on the story of founder Piotr Smirnov and his son Vladimir, who fled Moscow for Paris after the 1917 Russian Revolution having escaped death by firing squad. Guinness’ advertising campaign this year has focused on founder Arthur Guinness and the stout’s 250th anniversary.
“Bling has gone, consumers’ views have changed,” he said. “People will still pay for quality, but ostentatious consumption is gone.” To reflect the change, Diageo has shifted its advertising focus to “play up the legitimate quality credentials of brands, with more talk about authenticity,” the CEO added.
To contact the reporter on this story: Andrew Cleary in London at acleary7@bloomberg.net.
Last Updated: November 1, 2009 19:00 EST
