"We've still got a job to do" - just-drinks speaks to Diageo CEO Ivan Menezes

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Earlier this week, Diageo released its results for the second half of 2018. The group posted a 7.5% increase in sales from the six months to the end of December. Late yesterday, just-drinks spoke to Diageo CEO Ivan Menezes as he travelled between media interviews in London.

Ivan Menezes became CEO of Diageo in July 2013

Ivan Menezes became CEO of Diageo in July 2013

just-drinks: The subject dominating everybody's bandwidth here in the UK is Brexit. You've said before that Diageo can take the fallout from Brexit "in our stride". As we get closer to the leaving date - 29 March - how are you feeling?

Diageo's CEO, Ivan Menezes: We don't see a material impact on the company out of the Brexit outcomes. That said, we very definitely want a deal, so we're working closely with government. Diageo is in a relatively privileged position compared to other industries and sectors when it comes to the impact of Brexit. There are many more challenged sectors.

Our supply chains are more indigenous and our products are exported at very high value. Our ability to manage supply chains relative to other industries is better.

Now, if the UK leaves without a deal, our trade in Europe would be tariff-free under the WTO conditions - we won't face a sudden penalty from trading in Europe.

Longer-term, depending on how the UK sets up trading relationships, there are potential upside opportunities, in terms of new free trade agreements and the return of duty free between the UK and the EU. There are some countries where the EU has FTAs, so we're working very closely with government to ensure the UK gets the same arrangements as exist today for the EU. Should those not happen, they're still manageable.

j-d: The other subject that's front-of mind in the global drinks industry is cannabis. Diageo has been linked to following the likes of Constellation Brands and Molson Coors into the category in Canada.

IM: This is still a very emerging sector, in terms of the consumer impact of how it is developing. For some time now, we've had a team who are tracking things closely and we have a view of how the sector is developing. We share the view of [US spirits trade association] DISCUS that cannabis needs to be regulated very much like alcohol.

The area where there isn't enough science or data on is the longer-term impact. The position we're taking is to study it - we've not made any decisions on it. We are patiently and vigorously understanding and studying it. I'm not in a position to say whether we view it as an opportunity or a threat.

j-d: How concerned are you that any move into cannabis could come into conflict with the 'no nicotine' strategy adopted by some investment houses?

There's no doubt some investment companies have clear philosophies on what they will invest in and what they won't. That's a second-order issue we would need to understand. What we're looking at much more is understanding what the long-term consumer impact of this is going to be.

I'm sure there are going to be some funds that don't invest in companies, but how material that is, I couldn't tell you.

j-d: Diageo has quite a few business units where the group is a majority stakeholder. In light of the dearth of sizable M&A opportunities, would you prefer to increase Diageo's holdings in these businesses?

IM: Last year, we increased our stake in [Chinese baijiu company] Sjuijingfang to 60%. In India, we own 55% of United Spirits, while in Kenya and Nigeria, we have public companies where we own majority stakes. In all of those markets, our approach is to keep the businesses listed - we want to be a local player with local shareholders.

We also upped our holding in India some years back. It's an economic decision we look at from time to time, but we don't feel pressed to spend the money just to buy more of a company - we feel good with that. We're now at 60%, we were at just over 40% and that felt low - we were really keen to get a solid majority.

j-d: Do you still have to factor in cultural sensitivities to these businesses? In China, for example, the authorities have historically taken a dim view of a foreign entity owning a domestic company outright.

IM: It's no different to how we look at India, Kenya and Nigeria. These are businesses that are regulated - EABL (East African Breweries Ltd) in Kenya is one of the most-respected companies and employers in the country. We want to preserve that.

We don't want to be seen as a foreign company running a baijiu business. We have local investors as well. That's been our philosophy so far. Could it change? It could, but it's not something we're looking at right now.

j-d: Over in the US, meanwhile, you sold off 19 value spirits brands to Sazerac last year.

IM: We're seeing more consumers moving straight into premium brands in the US - the lower end of spirits in the US is very challenged, it's declining. So, we see this trending really positively for us. A lot of that is down to the marketing, innovation and vibrancy of what's happening in the spirits sector.

More broadly, spirits is growing faster than beer and wine in the US. That's happening across all demographics. If you look at the data on what younger Americans are drinking today, there's a much bigger share for spirits relative to beer and wine than ten years ago. So, while overall per capita consumption of alcohol is coming down, the shift to spirits - and to premium brands - is still strong.

j-d: There has been a raft of CEO departures in recent months, including at your competitors Brown-Forman and Beam Suntory. In July, you'll have been at the helm for six years. Are you taking stock of your position yet?

IM: I haven't been counting! I haven't quite put them altogether! No, we've still got a job to do, continuing the momentum at Diageo and getting the top-tier performance coming through. That's what I want to keep doing.

What will be Diageo's priorities for the years ahead? - Click here for a just-drinks analysis

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