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As the largest drinks company in the world and owner of many of the best known and biggest selling spirits brands on the planet, Diageo has an unmatched international profile. In an exclusive interview, Diageo's chief executive, Paul Walsh, talks to Olly Wehring about the company's current performance across a range of markets and his outlook for the future.

Meeting Diageo's chief executive, Paul Walsh, is always a daunting assignment. As the CEO of the largest spirits company in the world, in the drinks business they don't come any bigger. And with a stature that suggests he'd make a pretty good rugby player, Walsh is a fairly commanding physical presence too. Thankfully, however, he is a man who likes to get straight down to business, so the butterflies are swiftly dumped in the lobby, and we launch straight into things.

We start by looking at the company's performance on a geographical basis. In Western Europe, most drinks companies have suffered as the markets have matured, something Diageo has addressed over the last couple of years through cost-cutting.

"We will continue to see the benefits of (cost cutting) actions coming through certainly for the next 12 months," Walsh says. "The nature of the improvements we've made are such that we will start to see the benefits drop in (in) '06 and to a certain extent in '07. The main projects have been around centralising all of our back-office functions in Europe - that is ongoing and proving very successful - and as difficult as these things always are, the closure of Park Royal (London), which has allowed us not only to save that cost but to improve the efficiency of our Dublin operation."

Given the tough market conditions, Walsh is pleased with the resilience of Diageo's spirits sales. "Excluding RTDs, in spirits volumes we've actually been able to grow," he says, "not as much as I would like, but we have seen some growth. Our spirits brands have done OK in what is a very tough market. The bottom line, then, is that top-line will be challenged but back out RTDs and I think that spirits will be fine, and we will continue to have growing profits here in Europe."

The once-booming RTD business has taken a hammering recently, targeted as encouraging binge and underage drinking in markets like Germany and the UK, and subject to increased taxation as a result. "The reality is that they have been subject to, I would say, unfair tax burdens," Walsh says. "In the UK, a bottle of Smirnoff Ice carries a much higher tax burden than the equivalent strength beer. That's the consumption occasion that it's targeting, so it strikes me as very unreasonable. But it is what it is."

Paul Walsh

Walsh concedes that the products have been targeted by responsible drinking pressure groups but is clearly sceptical of the singling out of RTDs in this regard. "In reality, does anybody confuse Smirnoff Ice with a non-alcoholic product? I think not," he says. Moreover, he believes RTDs have an important role to play in the future. "I think the fact that we're still selling them suggests that it's still something the consumer wants. Whilst I don't expect growth, I'm hopeful that we can hold on to the business we currently have here in Europe. I think elsewhere in the world we can probably grow that business. We're having certain success in South America, we've got some ideas on how to develop the category in the US. Clearly, Australia has always been a very strong market for RTDs. But I do think, from a tax point of view, it's going to be hard to grow here in Europe."

Walsh won't be drawn on new product plans for the RTD sector in the US, but is rather more effusive about Diageo's prospects for the whisky category there. "I think there's quite a renaissance on the way in Scotch," he says, "and I think in many ways we have led that. There is no question that Crown Royal is doing and will continue to do very well. So I think whisk(e)y in general is going to do well in the US." Walsh is also upbeat about Captain Morgan and Baileys in the US going forward.

Where there appears to be room for improvement is in the performance of Tanqueray, which has to compete with Bombay Sapphire, a highly successful - and coincidentally - former Diageo brand. While Walsh clearly does not wish to give a now competing brand airtime, he appears to take a grudging pride in the continuing success of a former Diageo jewel. "I'd like Tanqueray to do a bit better," he says. "There's nothing wrong with the product. I just think that there's a fantastic competitor product that we used to own that is doing quite well. The brand that we launched many years ago has captured the imagination."

It is clear that Walsh is more sanguine about the US than Europe. "In many instances, you have the mirror image of the US here in Europe," he explains. "In the US, you've got a growing population aged 21 years of age and above, in many European countries you have a shrinking population. You have a very buoyant consumer environment in the US, and you've got a very uncertain one in many parts of Europe. For us, the US is very important, which is why we continue to invest very aggressively in that market."

Elsewhere, Walsh seems happiest with Diageo's performance in South America, particularly Brazil. "We all know that Latin America has gone in peaks and troughs. The troughs are never as deep as the previous ones, the peaks are always higher than the previous ones. So whilst it oscillates, it is an upward trend and at the moment it's doing very well."

The two big emerging markets - India and China - are also development areas for Diageo but Walsh points out that they remain for now small scale. "Both of those markets are coming from a small base, and therefore it doesn't have the same impact for Diageo as say the US or indeed South America," Walsh says. Furthermore, some development markets - namely Nigeria, Taiwan and Korea - have been problematic for Diageo in the past year, and Walsh notes that "we're not out of the woods yet".

In Nigeria, Diageo increased the price of Guinness as the market was softening. Walsh concedes that it was probably an ill-timed decision, and the company is now having to weather the consequences, though things are improving. As Walsh put it: "You make your decisions as you see them at the time, hindsight's 20:20!"

Notwithstanding the blip in Nigeria, Walsh sees Africa, along with other development markets, as critical growth areas for Diageo, going forward. "If we'd met a few years ago," he says, "I would have said that the US was where we wanted to focus. Today, I'm very pleased with how the US is performing and I think our investments there have proven very wise. I think the next areas for us are the BRIC (Brazil, Russia, India and China) economies and, once we get through the tough work in Nigeria, I think we'll see further growth coming from Africa."

Part two of this exclusive interview, in which Paul Walsh discusses recent and future acquisitions, both by Diageo and its competitors, responsible drinking and new growth opportunities, will be published next week.

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