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How Diageo plc Is Changing

Successful companies don’t stand still. They’re always evolving. Today, I’m looking at the changes taking place at FTSE 100 drinks giant Diageo (LSE: DGE) (NYSE: DEO.US). — and what they mean for investors.

Paul Walsh, chief executive of Diageo from 2000 to 2013, transformed the company into the world’s leading premium drinks business, delivering a fantastic return for shareholders in the process. Brand acquisitions, including over £2bn of deals in his final two years, were a key part of Walsh’s strategy.

Change of boss

Diageo’s chief operating officer, Ivan Menezes, stepped up to the top job last summer in a well-flagged succession. In a Q&A session with analysts, Menezes said that while the drinks industry is not yet fully consolidated and Diageo would continue to look at acquisition opportunities, “My focus really is on making the acquisitions we’ve made deliver”.

diageoAnother change Menezes has signalled is accelerating the growth of Diageo’s premium core brands (over 60% of the group’s business), and to “win in reserve [high-end luxury brands] in every market”.

The chief executive is also “driving a mindset change to ensure we deliver productivity gains continuously” — de-layering the organisation to drive out costs being just one plank in a strategy that he expects to deliver savings of £200m a year by the end of Diageo’s fiscal 2017 (the company has a June year end).

Looking to the future

Menezes has a hard act to follow, but has set out his stall on how he intends to drive organic sales and profits growth. Despite recent concerns about emerging markets, he sees plenty of scope for organic growth. He has in his sights 1.3 billion new middle-class consumers in emerging markets in the next 10 years, and 400 million new high net worth, luxury-brand consumers around the world.

While Menezes has so far focused on integrating his predecessor’s acquisitions and putting in place his own plans for forward organic growth, Diageo does have the balance-sheet strength to turbo-charge growth with acquisitions, as in the past; indeed, we’ve already seen the company acquire two small tequila brands. Bigger acquisitions could be on the cards, if the time and price is right. Menezes has said: “We will look at everything; we will look at global brands as and when they become available”.

On the face of it, a well-executed strategy of organic growth and choice acquisitions could be as rewarding for shareholders in the next 10 years as in the past 10.

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G A Chester does not own any shares mentioned in this article.