British Distiller Diageo Shifts Its Focus in Acquisitions to Fast-Growing Markets

When the Beijing authorities last month finally allowed the deal between Diageo, the world’s largest liquor maker, and Shui Jing Fang to go ahead, Diageo’s chief executive, Paul S. Walsh, was in an airplane crossing the Atlantic. He plans to celebrate the acquisition, which could be worth as much as $1 billion, by sharing a shot of baijiu with his team in Singapore this week.

Like its rivals, Diageo, the British maker of Smirnoff vodka and Johnnie Walker scotch, is going after local spirits makers in faster-growing economies like China to make up for declining sales elsewhere.

Diageo is working on a new management structure it plans to announce in August that will allow it to better track local consumer trends in China, Africa and Latin America.

“These markets are getting to a size that they have real scale now,” Mr. Walsh said in an interview last week. “Rather than to call on the London office for support, they need to stand on their own feet.”

Mr. Walsh plans for half of Diageo’s sales to come from developing economies within the next four years. Diageo, which also makes Guinness and Ciroc vodka, generated 32 percent of sales from these markets in 2010.

To achieve that goal, Mr. Walsh says he plans to shift investments from the mature markets of Europe and the United States to the faster-growing regions.

“I need fewer sales people in Greece, and I need more sales people in Asia and Latin America,” he said, sitting in his office, the shelves of which are lined with special editions of Diageo brands, including Shanghai White, a baijiu-infused vodka it sells in Hong Kong and Macao.

Diageo’s profit rose 1.5 percent, to £1.63 billion, or about $2.6 billion, in 2010 from £1.61 billion a year earlier as growing demand for spirits in China and Latin America and for beer in Africa made up for slower growth in the United States and Europe.

Sales in the nine months that ended on March 31 fell 3 percent in Europe, as many consumers in Greece and Ireland stayed home rather than go to restaurants or bars.

Some analysts said Diageo’s push into Asia was long overdue because its French rival, Pernod Ricard, the world’s second-largest liquor company, had been quickly gaining market share there and had started to challenge Diageo’s No. 1 position. But with about £2 billion cash in hand, Diageo has a larger war chest for acquisitions than Pernod Ricard, which owns Absolut Vodka.

Still, acquisitions in developing markets can be complex, which the baijiu deal showed. They also are few and far between and sometimes expensive, analysts said.

“The level of competition is intensifying and the level of investment you have to make is high,” said Matthew Webb, an analyst at JPMorgan Cazenove in London. “It’s a good opportunity, but it’s not without risks.”

Local spirit brands in Asia were too small or unattractive for companies like Diageo seven years ago, Mr. Walsh said. Yet as disposable incomes among Asian households grow, so do local brands. “In these new markets there are no huge businesses to buy,” he said. “But I want to see more of these local deals.”

Diageo is now in takeover discussions with the family that owns Jose Cuervo, the world’s biggest tequila brand, that could be worth $2 billion. Diageo already distributes Cuervo.

Any deal would add to an already busy year for takeovers. In its largest deal since it bought some Seagram brands in 2000, Diageo agreed to pay $2.1 billion for the Turkish distiller Mey Icki in February. A month earlier, Diageo bought a 23.6 percent stake in Halico, one of the biggest spirits producers in Vietnam.

In June, the company took a 50 percent controlling stake in the Guatemalan rum producer Zacapa.

Some analysts said Diageo could also bid for Fortune Brand’s Jim Beam bourbon label to increase its market share in the United States. Mr. Walsh did not rule it out and said Diageo was being careful not to let its footprint in the United States diminish. But he said as far as acquisitions were concerned, his attention was now on emerging markets.

Article source: http://feeds.nytimes.com/click.phdo?i=6cfccb2e23031d3e4d2b6893d7f73514