"The US is the one market where we've not seen gin's momentum develop" - Diageo CEO Ivan Menezes talks to just-drinks

Today, Diageo announced its results for the 12 months to the end of June, with mid-single-digit sales increases fast becoming the norm. just-drinks editor Olly Wehring spoke to group CEO Ivan Menezes about the latest figures.

just-drinks: So, another set of boring figures from Diageo, then. Are you bored of these as well?

Ivan Menezes: No, never bored! What I'm happy about is the broad-based momentum behind these results. Every part of the world is growing nicely, the vast majority of our portfolio - both the brands and categories - is healthy. We do have challenges, but we're investing back in the business; our marketing investment is growing faster than sales. We've also got strong cash flow.

They're really a high-quality set of results. We want to stay consistent and keep delivering in a reliable way. Of course, it takes a lot of creativity, innovation, flair, efficiency and agility to be able to do this year in, year out. That's what we're trying to build into the culture of Diageo.

j-d: What are the kinds of challenges you're having to deal with?

IM: There's Captain Morgan in the US, for example. It's the one brand and category that's not in growth. Rum is more sluggish in the US, it's a challenging category. We're doing a bunch of things on Captain Morgan in marketing and innovation terms. It's a big area of focus to get the brand in healthier shape, although it's growing nicely outside the US.

One of the things we're doing, for example, is a partnership with Major League Soccer in the country, which has a very different, multi-cultural, young adult following; these are fun events, not like a lot of the corporate entertaining that happens at other big sporting events in America.

We've also got challenged markets, like Nigeria, which continues to be a very difficult environment externally. There's also [South] Korea, where our Scotch whisky business is challenged.

We can and should do better, and that's what we're focused on.

j-d: Rum is in decline at the moment. How do you see the category's future direction of travel?

IM: The development of spirits categories and trends don't move overnight, but they do turn, over time. Take a look at what's happened in whisk(e)y, gin and Tequila. The more-premium end of rum has all the characteristics to bring some vibrancy back. I don't see this as being terminal sluggishness, it depends a lot on what the players in the category do, such as bringing some vibrancy into rum as well as premiumisation into higher-quality rums. We're tracking very closely and we believe this could develop the category. We don't have a forecast on it but the actions that we and other players take can shift rum's dynamic.

j-d: This also sums up what's been happening in gin. You've reported double-digit growth for your gin portfolio in Asia-Pacific, while Brazil was also strong. Is gin breaking out of its bubble and into other markets?

IM: Most definitely. We're seeing an increased interest in premium gin developing across Latin America, parts of Africa, Asia and it's clearly strong in Europe. We think we're at the early stages of what could be continued, exciting growth for gin. With Tanqueray and Gordon's, we want to be at the forefront of it. In markets like South Africa and Brazil, Tanqueray is in explosive growth.

We've also introduced Villa Ascenti, an Italian, high-end gin, which will first go into Europe. So, we're broadening our portfolio. We remain excited and optimistic about gin.

j-d: And yet, North America seems immune to gin's allure.

IM: The one market where we've not seen gin's momentum develop is the US, which has been pretty stable. We're going to be trying some things on Tanqueray to accelerate the interest in gin there, but it hasn't happened yet. We've got a bit of interest happening in top-end bars where bartenders are getting more interested in gin.

The quality of tonic has historically been a big problem - Gun tonic [tonic dispensed from a multi-mixer nozzle] doesn't make a very good gin & tonic. Fever-Tree has now gone in and there are other, higher-quality mixers developing. We've got to get the serve, the ritual and the quality of the mixer right. All of these will contribute.

We also have the phenomenon of really fast growth in Tequila and whisk(e)y in the US, so there's a lot of energy going into these categories. Gin's growth in Europe has come largely out of wine and beer. So, the category dynamics are a little different in the US. I would hope we can see an acceleration in the gin trend in the US.

j-d: It's strange to see a company the size of Diageo waiting on the success of premium mixer companies to help grow gin. Why not create your own premium mixer range or buy an existing producer?

We don't see ourselves getting into the mixer business. We don't see it as core to Diageo. We're seeing good success in premium pre-mix: In Australia and the UK, we've launched a Tanqueray pre-mix range at a high price-point.

It's a different business. We wouldn't be the best holders to build a big mixer business. There's enough interest coming into this category and we welcome that.

j-d: Turning to Tequila, your sales last year rose by almost a third - Is this becoming broader geographically, or is Tequila still reliant on Mexico and the US?

IM: It's primarily in Mexico and the US, but we're definitely seeing Tequila gain traction in the top-end on-premise around the world. In Europe, for example, we have Casamigos and Don Julio in our reserve structure. Looking at the numbers, though, it's still very much coming out of those two markets. I think this will be a ten-year journey but the trends are encouraging.

j-d: Then, in Diageo's 'Local Stars' brands bracket, there are some dustier ones - J&B and Windsor, for example - that haven't done very well. What role do these older brands have to play for Diageo?

IM: Scotch whisky is obviously an important category for us. At any point in time, across our Scotch portfolio, we will always have markets and parts of the portfolio that are under-performing. In the cases of Windsor and J&B, it's less about the brand and more about the markets in which they operate.

With Windsor in South Korea, the business entertaining segment in the country is in decline: We don't see this societal change being reversed. We're managing it accordingly, through the introduction of some lower-abv offerings. It's not going to be an easy turnaround.

In the case of J&B in Spain, the story has been the shift in category dynamics over time from whisky to rum to gin. Whisky is stuck and we're trying to revive it. We've some exciting new marketing in place in the country, but we'll have to see. In the meantime, we're benefiting from the gin trend, with Gordon's and Tanqueray doing well.

With these brands, we're challenged more by the category context and the markets in which they are - it's not that the brands themselves are underperforming their category.

j-d: Finally, you're spending a lot of your profits on share buybacks. Isn't there anything else Diageo could spend its money on?

IM: The company is delivering reliable and consistent free cash flow, which has been a change from, say, 20 years ago. That's down to the company's disciplined execution. Now, what do we do with the cash?

The first thing is to invest in the business: I'm looking for projects to invest behind all the time. We're spending GBP150m on the Johnnie Walker experience in Scotland, we're upgrading distilleries there, we're opening two new distilleries at Brora and Port Ellen, we're building breweries and expanding capacity in Kenya. All these projects are the first priority. I'm in a mode of wanting to see more projects cross my desk.

The second thing is acquisitions. We took up our stake in Shuijingfang to over 60%, we bought Casamigos, we've got 25 investments through (incubator partner) Distill Ventures. We'd like to do more there and we have the capacity to do more, but we have to get the right brands. We're not out to buy for the sake of buying.

Then, we pay our dividends, which are healthy and will keep growing at 5%. After that, we have a leveraged target range of keeping our net debt to EBITDA between 2.5% and 3%. We're confident about our cash generation for the next three years.

We're certainly investing enough in the business and keeping enough of our powder dry for acquisitions. The balance is returned to shareholders. We're fortunate to be in this position.

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