Johnnie Walker and Smirnoff maker Diageo has endured a rocky ride during boss Ivan Menezes’ four-year tenure.
When he took the reins from Paul Walsh, its mainstay North American business was on the verge of a nasty downturn. US drinkers had lost their thirst for Scotch whisky — of which Diageo is the world’s largest purveyor — and for the company’s vodka brands. Hipsters there were turning instead to locally produced bourbons from independent distillers, exposing a glaring weakness in Diageo’s portfolio.
As if that were not bad enough, Indian-born Menezes had to grapple with a slowdown in some of the emerging markets that the Guinness owner had put at the heart of its expansion plans. The company had hoped to reap larger profits from selling its high-priced wares to the aspirational middle classes in developing nations.
That did not work out as planned. Brazil went into freefall, and in China, Diageo was left reeling by President Xi Jinping’s anti-corruption drive. The practice of handing lavish state official “gifts” — such as expensive bottles of spirits — was severely curtailed.
Menezes was forced to knuckle down. He slashed costs and slew some sacred cows, selling off the Gleneagles hotel in Perthshire and its wine division.
Some investors, however, clamoured for quicker and more deep-seated change. As recently as late 2016, there were questions over whether Menezes would survive.
There are reasons to believe that Menezes’ self-help plan is beginning to bear fruit.
The US business is back in growth, after adding George Clooney’s Casamigos tequila and a number of other brands to its cabinet. This week, it is forecast to announce a 10% rise in half-year pre-tax profits to £2.2bn.
The global economy is growing strongly, creating millions of potential new spirits drinkers in Asia and Africa. Brazil, meanwhile, has emerged from a brutal three-year recession that saw its economy shrink by more than 7%. That is a welcome pick-me-up for Diageo , which swallowed the Ypioca Cachaca maker for £300m in 2012 — only to take a £118m impairment charge four years later.
Despite its recent travails, shares are trading just shy of their all-time high. Diageo’s profits have been flattered by the fall in the pound after the Brexit vote, which has given an artificial boost to its overseas sales. At more than 20 times, its shares are not cheap. However, like a bottle of 40-year-old Brora single malt, Diageo is one to tuck away in the cellar. Buy.
