Diageo: No more on the rocks

“I don’t like to be called the turnaround guy,” says Roland Abella, managing director of the Indian operations of Diageo, the world’s largest spirits company (2011 net sales £9.9 billion, or Rs 84,070.8 crore) that owns brands such as Johnnie Walker, Smirnoff, and Guinness. His protests notwithstanding, Abella is Diageo’s poster boy of turnarounds. From driving domestic business in Lebanon in 1999, to restructuring an entire sales team in a day as regional director, Middle East and North Africa in 2002, he has come a long way in a short time. In 2009, Abella was moved to India to put the liquor behemoth back on track. However, the 44-year-old Lebanese will not talk about the exact events that led him to take over the business here.

When Abella took charge, Diageo in India was a war zone, complete with politics and corruption. The charges stacked against it included under-invoicing imports, diverting stocks, inflating promotional expenditure, etc., events that had taken place when Abella’s predecessor, Asif Adil, was in charge. Moreover, the India business itself was not going anywhere and French arch rival Pernod Ricard was steadily getting a strong foothold. Though Adil defends himself against these charges, and Diageo declined to “delve into any matter relating to the past”, what the company needed was someone who could set things right.

Succeeding in a strife-torn part of the world, Abella was seasoned. In two and a half years, he got what the company was missing the most: a good reputation. In October last year, he pulled off a coup of sorts. Diageo appointed an advisory board filled with the finest names in business: HDFC chairman Deepak Parekh, former cabinet secretary Naresh Chandra, Hindustan Unilever’s ex-chairman Ashok Ganguly, and Murugappa Group’s former executive chairman M.A. Alagappan. No liquor company in India has managed to get such a board of stalwarts till date. For Abella, it was a badge of honour in the battle that he was into.

Diageo’s old boy network came handy. Parekh says he has known Diageo’s global chief operating officer Ivan Menezes for a while (“He is a Bombay boy”), as well as his brother Victor Menezes, former senior vice chairman, Citigroup. “That’s how I was approached by Diageo to take up this assignment. Diageo’s entry into India is reasonably recent and it is yet to get into the big league here. But being the largest spirits company in the world, I’m sure it has the capabilities to do so,” he says.

DIAGEO HAS A SHORT HISTORY. It was born of a complex amalgam of many businesses in 1997 (see graphic). In 19 years (the British firm entered India in 1993), it has been through some extremely uneven terrain. Corruption and legal issues apart, its product strategy has flip-flopped all along. In 2002, after eight years of operating a successful locally developed portfolio of whiskey—Gilbey’s—Diageo decided to exit it. The move was to align India with the global strategy of focussing only on international labels such as Johnnie Walker, Smirnoff, and VAT 69. Deepak Roy, Diageo’s (then operating in India as Guinness United Distillers & Vintners) first MD in India, and the man who built the Gilbey’s portfolio, engineered a management buyout of the business, only to sell it to a rival—United Breweries—for a hefty profit. He stepped down soon after.

Over the next three years, as Diageo’s sales took a beating, Ravi Rajagopal, then finance director at its European operations, was despatched to save the boat. Realising the need for a local brand, Rajagopal started talks with Radico Khaitan, a Delhi-based liquor manufacturer, for a joint venture. The venture launched Masterstroke, a whiskey, which flopped. Then came Adil who, among other things, pushed Diageo into wines, without much success.

One of the first things Abella did was to get a focus for the Indian operations. He travelled every day for four weeks, meeting employees, distributors, retailers, and customers, to understand the Indian buyer and feel the pulse of the liquor trade, a complex industry at the easiest of times because of myriad regulations. “I realised there was no focus from a brand portfolio point of view and we were all over the place,” he says. The wine business was the first to go, and last year, Diageo paid £2 million to dissolve the venture with Radico. Wanting to demonstrate the strength of Diageo’s brands, Abella launched a bouquet of single malts and widened the Scotch portfolio with VAT 69 Black.

As a brand, Diageo’s association with India—the world’s largest market for whiskey—has been entrenched in Indian popular culture for decades. Meena Kumari with a bottle of VAT 69 in the black-and-white Saheb Biwi aur Ghulam (1962) or Rajesh Khanna and Amitabh Bachchan with Johnnie Walker Black Label in 1973’s Namak Haraam. Then, Guru Dutt famously re-christened Badruddin Jamaluddin Kazi Johnny Walker, while actor Rishi Kapoor, whose family runs RK Films, was quoted after visiting the Johnnie Walker distillery that it owed his family at least a square metre of land for services rendered to the brand
over three generations.

But the key strategy was to get back in the locally developed branded brew business, which forms the belly of the liquor market. According to Roy, now executive vice chairman and CEO of Allied Blenders & Distillers, locally developed brands form 95% of the market. “They provide distribution width that can be used to push other premium brands.” In October last year, Diageo launched Rowson’s Reserve, a premium whiskey, marking its third attempt at the segment although Diageo’s strategy globally was to focus only on international brands.

Abella spent a lot of time ensuring the organisation understood that “Diageo India is not a local company. We are part of a global organisation and Diageo India cannot be different”. But he also realised that global thinking needed to be adapted. “You cannot compare a strategy that works in the developed market with one for the emerging market,” he says, justifying why locally developed brands such as Rowson’s Reserve are intrinsic to Diageo India’s future. Diageo aims to corner 20% of the market with this product by 2015.

Diageo needed to act fast. Pernod Ricard has been raking in cash from India. As on March 2011, it made about
Rs 335 crore net profit on sales of Rs 2,772 crore. As on June 2011, Diageo’s comparable numbers were Rs 3 crore on Rs 389 crore sales. “In the last few years, Diageo has not done enough to leverage the power of its brands,” says Roy.

In 2001, Pernod bought over the Indian portfolio of Seagram’s and put its might behind developing local brands such as Blender’s Pride and Royal Stag. (It entered India in 1996). With growing prosperity, Roy says, the Indian market is going to be a gold mine for liquor companies for years to come. The spirits market (excluding beer and wine) in India was about 259.37 million cases as on February 2012, growing at 22%. Of this, the premium segment (determined by per unit price) accounts for 7.16 million. The premium liquor market is not just the fastest growing but also the most profitable.

The market has also been abuzz with reports of Diageo negotiating a deal with Mohan Meakin to buy its hugely popular rum brand Old Monk, a move that, if successful, would be Abella’s masterstroke. (In a year, Old Monk sells 3.55 million cases in India, while Diageo with all its brands put together sells just a million. Pernod sells 21 million cases.) What Old Monk can do for Diageo can’t be missed. “You cannot open a liquor shop in India if you don’t stock Old Monk,” says a retailer. This means, potentially, Diageo can ride Old Monk’s distribution muscle. An e-mailed response from Diageo India says, “Diageo continuously examines and evaluates opportunities to augment our business. We are unable to provide a comment on every transaction with which we are linked.”

Abella, for his part, takes great pains to differentiate Diageo’s value-based approach to growth compared with the rest of the industry’s measure of a volume-based play. But getting everyone to agree wasn’t easy. “The biggest change I had to bring was moving that culture of selling cases into generating more value,” says Abella. Abanti Sankaranarayanan, Diageo’s deputy MD, explains that the company pitches the concept of return on investment to get distributors and retailers on board. As on March 2012, about 51,000 liquor outlets across the country are part of Diageo India’s network. Pernod covers about 65,500. Sankaranarayanan says, “That’s about 85% of the outlets [on a count of about 60,000 outlets] we have targeted.”

Abella’s next move is to prepare a local to take over, since he is soon moving into a new role. It’s one of the big issues Diageo has struggled with in the past. In 19 years, it has changed CEOs five times. “Hardly any liquor MNC has become successful here without a local guy at the top. Pernod has reached where it is today because it had local management, as has Beam Spirits [it owns Teachers]. Diageo will eventually need a local person who understands the liquor industry,” says Roy. Earlier this year, Diageo promoted Sankaranarayanan to deputy MD. Abella will continue till the new head is announced, which is likely in a month or so. This time though there’ll be an advisory board to help out.

FIXING THE PRODUCT STRATEGY and parts of the business was easy for Abella, compared to cleaning up the mess with the sales and commercial teams, both of which he felt, were steeped in old practices. Most of the restructuring happened in one stroke which may have cost the company some business. But Abella says, “I come from a school that says that if you want to do a big restructuring exercise, you do it immediately; you don’t do it in phases.” While recasting the sales and commercial teams—a total of 75 people—Abella made sure none of the recruitments were from the liquor industry. “I wanted new blood in the team to bring new thinking in the organisation and take on new challenges. We hired from the consumer goods sector, from management schools, everywhere but the liquor industry.”

Abella’s been bold. A large distributor with a rival firm says: “There are certain peculiarities of the liquor business. One of them is the long-standing relationship the sales guys develop with distributors and retailers. If you keep changing your front end, building a reliable network will be very difficult.” Retailers say this might be the reason behind Diageo’s inability to grow its brands in the north and east.

However, Abella says he was not willing to bend rules, even if it meant forgoing business for a while, because the message being sent was more important. “There were a lot of loose ends, with a lot of commitments that were not made in black and white. It took him almost a year and a half to sort these out,” says a distributor, who did not want to be named. Abella refused to pay exorbitant monthly display charges to retailers. As a result, they stopped promoting Diageo’s brands. Abella bet that even if he didn’t pay the retailers, most of them would still stock the company’s brands given their strength. He was right.

“I was also told by the industry that we had to make facilitation payments if we wanted permits on time and if we didn’t it could take up to a year or more. I preferred to wait,” says Abella. But the permits began coming through “because people are slowly beginning to realise that Diageo will not pay money to get its work done”.

While this approach may have worked in some regions, states such as Tamil Nadu, where liquor distribution is government-owned, are difficult to crack. That’s where the advisory board also comes in. Alagappan says his contribution to Diageo will be in the form of helping chart the company’s route to success in Tamil Nadu. “It is a big market and a difficult one. My job is to help Diageo find ways within the legal framework to break into this market,” says he, a big fan of Diageo’s single malt, Talisker.

ABELLA’S INSISTENCE ON PLAYING by the book has a background. It’s something that he or Diageo officials refuse to discuss. But Diageo India’s former executives speak about a day in March 2009, when John Pollaers, then president of Diageo’s Asia Pacific region, walked into Adil’s office in Mumbai. By evening Adil had resigned and cleared his room. Pollaers quit the company a few months later.

When Adil was appointed to head Diageo, his mandate was to make it a name to be reckoned with in a market that was opening up. He created a buzz around the Diageo brands by hosting lavish dinners and events that made it to the society pages of newspapers. Adil liked to compare his position with Vijay Mallya. He would often tell colleagues: “If Mallya is the king of good times, then I [meaning Diageo India] am the emperor of good times.” The showboating and aggression was not confined to the office.

It is standard practice to pay retailers to display and promote brands, but during Adil’s tenure, the Diageo sales teams would pay 60% more than competition. A retailer in Colaba, Mumbai, says Diageo paid up to Rs 80,000 a month, even as Pernod Ricard offered Rs 50,000. The problems started when lines blurred between aggressive business and unethical practices. Diageo’s former executives, declining to be named, say the top management would give directions to send expensive brands such as Johnnie Walker Blue Label, Talisker, King George V (Rs 49,000 a bottle) as gifts to friends. They add that unused or unopened cases left over from official parties were never returned, and invariably found their way to the grey market.

Adil, who now runs his own business, puts it differently. “Sometimes you have to do things just to be able to get your work done. There were a lot of social ambassadors of the brand to whom the liquor was given. In any case, we are talking about 200 bottles out of 2 million cases [12 bottles make a case] that Diageo India sold at the time.” He adds that they were bottles of Johnnie Walker Black and Gold, Smirnoff flavours, Nilaya, Baileys, and wines. “Sometimes there would be a few bottles of Johnnie Walker Blue, Talisker, and at most one or two King George’s. But these [King George] were sent on instructions of senior Diageo management. All were within approved budgets,” he says.

A Diageo ex-employee who headed a business division alleges that imported stocks meant for India were diverted to traders in West Asia. “The problem was not just the diversion of stocks which was not permitted by Diageo, but a lot of money passed hands between the traders and people in Diageo India.” Adil says the stocks were sold to a trader in West Asia, one in Maldives, and one in India for further sale in neighbouring markets (Pakistan, Bangladesh, and Nepal). “It was under the purview of the India region, and done after discussion and approval of management. So, the strategy was not a diversion, but rather a sale directly to pre-approved customers.”

The issue that triggered an investigation by India’s Directorate of Revenue Intelligence was undervaluation of the import prices of beverages. On February 9, 2012, the Settlement Commission slapped a fine of Rs 57 lakh on Diageo. It also fined the company’s erstwhile distributor Sun Tan Trading Rs 74 crore. The Settlement Commission order states: “Investigation that followed revealed that the Diageo group of companies, including Diageo India Private Ltd. and the applicant (Sun Tan Trading, an erstwhile Diageo India distributor), connived, devised, and implemented a system where the goods were imported at suppressed values, resulting in huge evasion of customs duty.” The order also observes: “The Diageo group created Sun Tan Trading Co., the applicant, as a façade to substantiate lower import values…” A senior executive at a rival firm says, “The relationship between a company and its distributor is very close-knit and it is often not possible to divorce the activities of one from the other.”

Adil defends himself fiercely and calls his time at Diageo “a fun learning experience”. He says he was trying to change a lot of practices that were not “according to the law of the land”. His parting shot: “When I first tried to raise the flag, as I would be finally held responsible for what happens in India, I was not listened to.”

Globally, Diageo is regarded for its professional ethics and stress on compliance. Former employees say that the company has robust systems of compliance training and hotlines built into its DNA. And yet, for almost three years, Diageo did not take any action to prevent a situation that led to the abrupt exit of the head of one of its fastest growing markets. A lot of old-timers quit the company as well.

In a written response, Diageo says: “As the world’s leading premium drinks business, our success has always been and will be based on the strength of our iconic brands and the strong connect consumers have with our products. The past is behind us; we have a clear vision to be the most admired and respected business within India. We do realise that businesses in developing markets require stronger and regular controls and process checks since they are in a constant state of evolution of regulations, policies, etc. and that is something that we have up-weighted significantly in the last few years. We have a great team in place and have made great strides towards fulfilling our vision.”

Clearly, Abella’s job seems to be over here. He has reinforced his reputation as the turnaround guy, though he still doesn’t like being called one. In his role as MD of Global Travel & Middle East (a Diageo division), Abella will be based in Singapore. In the three years he has spent here, the Diageo India head feels he’s become more “spiritual”. “From Smirnoff Black I’ve moved on to Johnnie Walker Black; maybe I’ve matured.”