Britain's Most Admired Companies: Diageo's double measure
By Andrew Saunders Monday, 03 December 2012
This year's Most Admired Company - one of the very few to have won the accolade more than once - is leading the charge for growth, finding aspirational new customers in the emerging markets. But we have a first-time winner as Most Admired Leader...
Raise a glass and toast the winner of the coveted Britain’s Most Admired Company Award 2012. Whatever your tipple, the chances are that the taker of this year’s crown can supply you with a pretty upmarket drop of it. It makes eight of the world’s 20 best-selling premium spirits: if you hanker for scotch, there’s Johnnie Walker or J&B; if your fancy turns to G&T or V&T, choose from Tanqueray, Smirnoff and Ciroc; if you’re looking for something with more kick, you could drop a shot glass of tequila (Jose Cuervo or Don Julio) into a pint of Guinness for a high-octane take on Dublin’s finest. Britain’s Most Admired Company this year is global drinks giant Diageo.
It’s a victory which proves that in the 21st century the laurels go to those whose reach extends way beyond traditional export markets, to all corners of the globe. Diageo has a level of presence in and commitments to the emerging markets that few British companies of any sector can match. Yes, it remains strong in the US and Europe, but times there are tough and the real action lies elsewhere. Brazil, China, India, Vietnam, Africa, Turkey – wherever there is economic growth and an emerging aspirational middle class to be sold to, there you will find Diageo and its products. It made a £3.2bn pre-tax profit on net revenues of £10.8bn for the year to June 2012.
Having first been named Most Admired Company back in 2008, Diageo joins a very exclusive club. Only two other companies – the late, lamented Cadbury-Schweppes and Tesco – have managed repeat wins since MT’s first BMAC awards in 1994. The veteran author of Britain’s Most Admired Companies, Professor Mike Brown of Birmingham City University, says: ‘We cannot ignore the stalwart nature of firms like Diageo, which year after year appear as the most admired companies. We owe a great deal to these redoubtable organisations, held in such high esteem by their peers.’
Indeed, mature markets in Europe now account for only 26% of Diageo’s sales, with nearly 40% coming from the group’s international and emerging markets regions. Last month, it agreed to take over India’s largest distiller, United Spirits, from troubled tycoon Vijay Mallya for £1.2bn, a deal three years in the making that highlights Diageo’s refusal to be denied. ‘Persistence pays off,’ was CEO Paul Walsh’s comment on the on-again, off-again acquisition, which gives Diageo 60% of a market worth $6bn and growing at 15% per annum.
It’s a trajectory that many British firms would dearly love to emulate, but the lesson from Diageo is that these things do not happen overnight. The firm has been pursuing its strategy of moving upmarket and further afield for pretty much the whole of Walsh’s 12 years in the hot seat. His vision – that strong brands resonate all over the world – has been matched by canny dealmaking and slick execution. Rather like Jessica Ennis taking gold in the Olympic heptathlon, this is a story of consistent quality of effort: Diageo appears in the top 10 in no fewer than six of Most Admired’s nine judging criteria – including quality of management, financial soundness and quality of goods and services – and is winner of one, value as a long-term investment. Walsh, who is popular with staff and shareholders alike for his no-nonsense style, has indicated his intention to retire in 2014. He should have a comfortable nest-egg to take with him, having trousered a cool £11.2m this year as a result of the firm’s rising share price.
But Diageo is not the only firm to have realised that the time has come to seek rewards beyond Europe. The comfortable old continental markets are static or in decline, hampered by eurozone turmoil and punters whose spending power has been wrecked by years of belt-tightening. No surprise then that the likes of BG Group, oilfield services outfit Petrofac, Rolls-Royce, catalytic converter business Johnson Matthey (up 36 places to sixth) and Bath-based valve actuator specialist Rotork feature in this year’s overall top 10. All operate in or export to a range of global markets that only a few years ago would have been the preserve of a few supergiant multinationals. These markets may be distant, culturally challenging and hard to crack, but the effort must be made. The consequences of failure are less severe than those of not trying at all.
As if to reinforce the gloomy state of the domestic market, another notable aspect of this year’s Most Admired is the plight of the retailers, which traditionally do well in these awards. But if Britain really is a nation of shopkeepers, the shutters are down in 2012. This is only the second year since the awards first appeared in MT in 1994 that none of our big retailers has featured in the top 10. No Sainsbury’s, no Morrisons, no Next, no Boots. This year’s highest-placed store group is the John Lewis Partnership, after a strong trading performance with first-half profits up by 60% to £144.5m. But in a year when so many big high-street names have gone under – Comet, JJB Sports, Peacocks, Game and Clinton Cards, to recall but a few – retailers are feeling the strain, and even those impressive numbers secure John Lewis only 18th place in our table.
Alliance Boots is next at 20, up from 36 last year. Sainsbury’s finally makes it at 57, despite interim profits up slightly to £405m and its highest market share for a decade. M&S is at 71st (down 38 places on last year) with Asda at 73 and Morrisons at 109, plummeting from 14th in 2011. What of six-times past winner Tesco? It is down no fewer than 130 places, languishing at a lowly 171st, after a year in which profits shrank for the first time in 18 years.
Things are as bad as they have ever been out on the British high street, and Tesco CEO Phil Clarke is finding out the hard way how tough it can be to take over from a leader of Sir Terry Leahy’s stature and dominance. But does this mean the supermarket chain is permanently diminished? Here at MT we think not, and expect to see it climb up the rankings again in years to come.
Second place overall goes to last year’s winner, Berkeley Group. Its achievement is all the more impressive as home construction is one of 2012’s least optimistic sectors, a total score of 475.6 for the eight companies included equating to an average of only 59.5 per company. Only transport fares less well, its nine firms scoring 491.5 – an average of 54.6 apiece. By contrast, the most optimistic sector is oil and gas, where 643 points shared among 10 companies makes an average score of 64.3.
Berkeley continues to focus on the lucrative London and southeastern region, insulating it from the worst woes of house price blackspots such as Yorkshire and the north-west. Annual profits are up no less than 58% to £214.8m. And if you can’t go abroad, make sure abroad comes to you – many of Berkeley’s smart apartments in the capital are sold off-plan to overseas customers. But there are positive signs for rivals, including Barratt and Persimmon – the Government’s ‘New Buy’ incentive scheme has encouraged first-time buyers, and margins are improving as a result of lower land prices.
But what of this year’s other main award, Britain’s Most Admired Leader? The big news here is that we have a brand-new winner in the shape of advertising sage and WPP boss Sir Martin Sorrell. Sorrell is well known to readers of MT and needs no introduction, not least because he is the subject of this month’s MT Interview (See the December edition of MT, p50). Suffice it to say that his award is well deserved and proves that a good reputation is the best asset you can possess. Sorrell may have had a couple of spats with shareholders over the size of his £13m pay package, but the massed ranks of British business still admire him more than any other UK corporate leader.
BG Group – the upstream business that resulted from the spinning off of Centrica from British Gas back in 1997 – is up to third place from 17th last year as it continues to do well in the growing LNG business, especially in Australia and Brazil. Veteran chief executive Frank Chapman is due to step down in the new year, and in October a row about overstated reserves hit the share price. Some pundits reckon BG could become a takeover target as a result.
The biggest climber in the top 10 this year is Petrofac, up to fifth from 68th last year. The oilfield services group may not be as well known as some, but it is doing great business all the same. Its boss, Syrianborn Ayman Asfari, is one of the growing band of wealthy foreign entrepreneurs who choose to make London their operating base and home, to the benefit of both the Exchequer and the employment figures.
In fourth place is Rolls-Royce, one of BMAC’s most consistent high performers. Hardly a year goes past that it does not feature in the upper reaches of our table, and it has topped its sector – aero and defence engineering – for a decade. How apt then that the world’s second-largest maker of aero engines picks up a new accolade this year, thanks to our sponsor BSI. The first BSI Award for Continual Excellence goes to Rolls- Royce, recognising that it is the only firm to have been in the overall top 10 for each of the past five years.
Outside the top 10, honourable mention should go to Rightmove, which makes its BMAC debut at 16 but also manages to walk off with the overall award for quality of management and to share joint honours for financial soundness with Rotork and Shell. Rightmove is a survivor – indeed a thriver – dating back to the first dotcom boom, and it has worked to become the country’s most visited property website. Its ‘low-friction’ business model and careful cost control helped it make an eye-popping gross margin of almost 70% on revenues of £57.9m. Chief exec Ed Williams, who has been with the firm since launch in 2000, is stepping down next year, and can go out on a high.
Aidan Heavey’s adventurous oil business, Tullow, also does well in the judging criteria, voted top for both innovation and its ability to attract, retain and develop top talent. Its shares performed strongly this year, thanks to new oilwells in Kenya. It has also controversially acquired a licence to drill in Greenland’s environmentally sensitive Baffin Bay region.
This has been a year notable for economic and political upheaval – the effects of the Arab Spring are being felt well beyond its epicentres in Syria, Libya and Egypt. Tensions between Israel and its neighbours are rising ominously, and we all received contrasting lessons in leadership change from the two biggest economies in the world, the US and China.
At home, the Coalition rumbles disappointingly and dysfunctionally on, and apparently there was a spot of bother across the channel over the euro too. Meanwhile, the rise of social media has given a powerful voice to many who were previously unheard, with the consequence that a Twitter storm is now never more than a few minutes away – as the row over corporate tax avoidance has shown.
Perhaps it’s not such a surprise then that, surrounded by volatility, the top of the BMAC table shows such stability. Six of this year’s top 10 also featured in last year’s, and 14 of the top 20 make repeat appearances. The message seems to be that while companies and their employees need to embrace uncertainty if they are to keep up with a changing world, evolution rather than revolution is the way forward. Surely we can all drink to that?