Comment – Diageo: Trimming Peter to Plump Up Paul

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What started yesterday (24 May) as a review of operations just in Europe for Diageo, has spread today to become a company-wide consideration of how to create “a more cost-effective organisation”.

At first glance, Diageo's two announcements in two days looks like little more than a cost-saving exercise to boost the bottom line. Indeed, a cynic would read the news, then proceed to call up the company and ask what amount of cost-saving it is targeting, or how many jobs it is intending to cut.

So, that's what we did.

Joking aside, Diageo maintains that this is more a redistribution of resources into areas where they will be more profitable, rather than a move to trim its outgoings.

Speaking to The Times last week, company CEO Paul Walsh was quoted as saying: “This year, I expect emerging markets will be about 35% of our total business — and in the next three years I think it could easily get to 50%.”

The only way Diageo is going to hit as ambitious a target as this in the developing markets of the world, is going to be through a combination of investing sensibly in its resources in those countries, and making acquisitions there.

I expect that, between now and August, when Walsh has promised to provide an update on the reviews' progress, we will see the lower-growth markets of Western Europe and North America go under the microscope of Diageo's bean-counters, in order for the likes of China and India to get more support from the drinks giant.

Ideally, Diageo would like to see this strategy augmented by an acquisitive prong.

If only they can persuade potential targets to ignore the hype.

Sectors: Mergers & acquisitions, Spirits, Wine

Companies: Diageo

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