By Andrew Davidson Wednesday, 01 September 2004

The MT interview: Paul Walsh

As the boss of the dominant drinks company Diageo, he lives in interesting times.

A core-focus apostle, he has successfully carved a spirits specialist from the Grand Met/Guinness merger. So will he dispose of the Black Stuff?

The air conditioning is at straining point in Paul Walsh's bright, bold, central London head office. Lucky he has his own cocktail bar on the ground floor - well, what do you expect from one of the world's biggest drinks companies: monastic ascetism?

No doubt the bar's good for product testing, and helps staff bonding too, though I'm not sure if having your boss throw the Singapore Slings together makes it more attractive...

In fact, the whole Diageo office looks more like an ad agency than the headquarters of a FTSE100 giant these days. Up on the working floors, blown-up poster ads decorate walls and screens; down in reception, glass and steel predominate, everything is gleaming and light. Walsh himself, big, shiny, charming behind the slightly gruff, blokeish exterior, looks rather proud when I point this out. He wants his team to work in nice surroundings, he says; going to work should be enjoyable.

After all, the alcohol industry is virtually part of the leisure business now. Success for Diageo, a £9 billion-turnover leviathan that handles a range of top spirit brands and Guinness beer, is not so much about manufacture as marketing: selling an image, promoting a lifestyle, figuring out what people might aspire to.

These are interesting times for drinks bosses like Walsh, who worked his way up as one of Lord Sheppard's proteges at Grand Met. Rivals are consolidating, potential marketplaces are multiplying, the global brand is king, and in this country and elsewhere, governments are beginning to get very concerned about the effects of alcohol, particularly on the young, and the perceived rise of anti-social behaviour. And they are looking at alcohol marketing in particular. A boss needs to tread carefully.

And Walsh knows that. 'I think we have pretty good skills at marketing,' he says, lounging back on his office sofa, 'and I think we can do a better job in communicating to people not to drink to intoxication where you become a public nuisance. At the other end of the spectrum, the police have powers, if outlets are churning people out the worse for wear, to close them down.' Everyone needs to work together, he says, to curb anti-social behaviour.

In truth, all the drinks bosses, like many of the pub chiefs, have their patter on alcohol concern sorted out. 'I could talk about this for hours,' says Walsh at one point. He co-hosted an industry seminar on the issue at Diageo's Park Royal plant earlier this year with representatives from the drinks trade, the bar trade, police, non-government organisations, civil servants and Tony Blair.

'And the thing that encourages me the most,' says Walsh, 'is that people accept that, as good as we may be at marketing, there are more issues afoot here: disposable income is high, particularly among the young now; people go out with a determination to drink to excess; and the abuses of anti-social behaviour are caused by just one or two per cent of consumers.'

He argues a good case. At 49, with his broad forehead, bluff manner and confident, Mancunian-inflected speech, he could be Ron Atkinson's better-looking younger brother. And you can easily imagine him holding forth at the bar in what is still a macho drinks trade: run by men, sold by men. Yet he's smart enough to acknowledge that it's all changing now. He wants more women, more ethnic minorities, more meritocracy at the top of Diageo, which is now a 24,000-employee global company, selling to a vast, multifaceted marketplace.

He cites his own rise, from humble beginnings, as an example of what can be achieved in the right kind of organisation. Only occasionally, when he talks about running teams or closing factories, do you get a hint of the uncomplicated drive that took him from a Manchester comprehensive to the top of a giant firm with a market cap of £22 billion, and on a £2 million salary to boot - making him one of the best paid corporate chiefs in Britain.

He acknowledges that he's hit the peak at the right time. Diageo was formed by the merger of Guinness and Grand Met in December 1997, with interests in food and drink. By 2000, when Walsh became chief executive, it had embarked on a strategic review of all operations and was determined to recreate itself as 'the world's leading premium drinks business'. Out went food interests such as Pillsbury - which Walsh used to head - and Burger King; in came Seagram's spirit and wine brands.

Now Diageo's revenues are driven by a clutch of top global brands: Smirnoff, Johnny Walker, Guinness, Baileys, J&B, Captain Morgan, Jose Cuervo and Tanquery (in order of contribution to profit).

Its biggest markets are the UK, Ireland, Spain and North America, the last contributing 40% of operating profits. It claims nine of the world's top 20 brands of premium distilled spirits.

After four years of reorganising its distribution channels and slowly extracting itself from those food interests - with a consequent dip in earnings momentum - Diageo now has to produce faster profit growth to appease investors. Increased sales in emerging markets such as Africa, Brazil and Russia, steady success in the key US market and bigger economies of scale should, say hopeful analysts, offset declines in more mature markets.

That puts Walsh, who drove through the Pillsbury and Burger King sales and fought for the complex Seagram acquisition, in the driving seat at an opportune moment. But it also means he has a lot hanging on the success of the company in its reformed shape. At Grand Met, he was pegged as an acquisitions man. Now he has to show he can manage big.

Has he got everything he wants from the changes at the group? 'There are a couple of loose ends, but in the main the whole strategy has been executed,' he says. 'The basic thrust of the review was to focus on premium drinks and release capital by exiting Pillsbury and Burger King, and re-employ that capital back into premium drinks. So we sold those and acquired the lion's share of Seagram, getting a quantum improvement in size and scale in America. The loose ends are the 21% in General Mills we own after selling Pillsbury into it, and we still have some contingent guarantees around debt in Burger King. We hope that would be financed away in a reasonable period of time.'

No doubts about the move out of food? None, he says. But wasn't he part of the team that took Grand Met into food in the first place? Only a few years ago many thought spirits drinking was on the way out; now it's all change again. Get that sort of gamble wrong and Diageo will lose massively in what is a high-stakes, global game.

Walsh looks unperturbed. 'I was working on the team that bought Pillsbury.

At that time the view was very much that we had to diversify. And I have seen it from both sides. The whole world has changed in the last 15 years.

You've got retail customers like Wal-Mart, and either you have to be a global player full-scale in consumer products or you won't compete.

'While Diageo had positions in drinks, that leadership was marginal - capital was not limitless. My view, supported by colleagues on the board, was that we should focus on where we can be a global leader. We couldn't aspire to that in food - that slot was taken by the Unilevers and Nestles and Krafts of this world - but we could command that position in premium drinks.'

And the advantage of tearing up the history book is that, as boss, he can set a new corporate style, using the best of what Grand Met and Guinness brought with them. Insiders say he has given the combined business a more open, more relaxed feel compared with the Diageo of his predecessor John McGrath, without sacrificing the drive for results. The bold offices, the confident, informal approach are all Walsh's.

'We are a new company, a company that has created itself, and I think we have tried to blend old and new, keep the best of the past and be brave enough to create our own values and culture. The poster behind you,' he says, pointing to a giant Johnny Walker ad on his office wall, 'is a good example. It says "Johnny Walker 1759", but look around this building - it hardly looks like a 1759 company, does it?'

No, but big glossy pics selling heritage are not particularly profound either. Others say that the 'Americanisation' of Walsh, 10 years at the top of Minneapolis-based Pillsbury, defines his simple, can-do style.

'Paul is very uncomplicated, very straightforward, affable but determined,' says his chairman, Lord Blyth. For a big company in need of steady direction, the style works.

Lord Sheppard, Walsh's former mentor at Grand Met, says his decisiveness helps too. 'Paul certainly believes in action rather than pondering, and he believes in people - always has a good team around him.'

Gareth Williams, Diageo's human resources director, who worked with Walsh at Grand Met, sees those values as inherited from Sheppard. 'It's not about being perfectly right all the time, it's about making a pretty good decision and getting on with it. Also, Paul is good at simplifying, in particular over what he has to concentrate on and what he has to get other people to do.'

Walsh agrees, adding that, as a boss, you have to be good at 'orchestration' or you sink. 'There's not one area I am head-and-shoulders above my team at. I am interested in marketing, but I've got a very good marketing director.

I am good at numbers, but have a very good chief financial officer. One thing I have learnt in business: if you are in a generalist position and think you are good in one area, get someone even better than yourself in that area, then you will never be tempted to go in and dabble. The worst CEOs are those who dabble on an unstructured basis.'

The difference between now and when he was working his way up, he says, is simply the unpredictability that comes with the top slot. 'At Plc level, things change and you have to be flexible in that regard. When it was announced that Seagram was coming up for sale, whatever you have planned for that day, you change. When I was running Pillsbury, I wasn't confronted with that kind of opportunity.' Also, there are far more external constituents here: the obvious ones like shareholders, and the less obvious ones like governments and NGOs.

'You have to be very disciplined with your time, you cannot be as hands-on as you used to be, and you have to rely on people much more, such as your divisional presidents. The moral is you have to get very good people.'

Walsh has always been good with people, the legacy of having to find his own friends as an only child growing up in modest means outside Manchester.

His father was a thermal engineer. Walsh, as a boy, was gregarious and competitive, throwing himself into sports as compen- sation for the fact that he didn't share his father's engineering bent. 'My father was really talented with his hands - something I never inherited. So I was never engineering-oriented, though I was brought up believing that's what real men did.'

Instead, Walsh set his heart on being an RAF fighter pilot, but was told, after a medical, that he had a minor form of colour blindness, and wouldn't be allowed to fly military jets. 'I've got a pilot's licence now, which shows you how good you have to be for military planes.'

Ditching his ambitions to fly, he trained in accountancy and joined the Co-op, before jumping into Grand Met in financial planning at 26. By the time he was 30, Walsh was moving fast through Grand Met's management hierarchy.

The style there made a big impression on him. 'There was a lot of freedom but huge accountability - never enough to trip you up, but as much as you could take.' He spent time in brewing, which he loved, and hotels.

Sheppard recalls him being sent to sell a hotel in Texas at a key price and coming back saying he hadn't got the right amount for the hotel but had made up the difference by selling its chandeliers separately. 'That's when we knew he was top management material,' laughs Sheppard.

The key moment in Walsh's career came when, having been transferred to New York by Grand Met, he worked on the takeover of Pillsbury. Once it had been acquired, he was asked if he'd run it. Those who worked with him then say it is difficult to underestimate the size of the task that Walsh took on, or the sensitivity with which it had to be handled, as the head of a British firm marching into a bastion of American business.

It was the making of him. 'Over 10 years, we tripled Pillsbury's size, and we certainly more than doubled its operating margins.' First, however, he had to get management on his side at the company's Minneapolis base where, after an acrimonious takeover, few welcomed his arrival. 'That's an understatement,' nods Walsh.

And the beginning was doubly hard. 'I had to lay people off and close plants. Closing a factory is the toughest thing you have to do in business, and you have to remember why you are doing it: to keep the other factories open and running. But the people warmed to the strategy I was trying to execute.

And in the end I think we were able to orchestrate an exit with Pillsbury - by merging it with General Mills, which shares the same location. That was good for business and good for the people.'

Now he uses the skills he learnt there on a bigger stage. There are still questions to be answered about Diageo's shape - why persevere with Guinness when bigger beer giants dominate the global market? Possible tie-ups with others have been mooted. A joint venture with Heineken in South Africa, announced earlier this summer, had industry experts speculating.

Would he ever sell Guinness? He smiles. 'It depends what the price was.' But wouldn't that be like selling the family silver? He shrugs. 'At the end of the day we run our business for shareholders and if someone came in with something phenomenal we would have to look at it, look at the provenance aspect and the broader effects on our business. I cannot sit here and say "not at any price", but it would have to be far more than the multiples offered at the moment. And remember, we ship extract from Ireland and get a very favourable tax position because of the base in Ireland, where the corporate tax rate is only 10%.'

Spoken like a true finance man. He grins. Others suggest he will not be frightened of taking the big decision, if it has to be taken, and that if he's learnt one thing from Lord Sheppard, it is (as another puts it), 'strategic curiosity': never saying never to anything.

Of more impact on Diageo's fortunes may be the increasing restrictions on alcohol marketing. The huge success of innovative products such as alcopops, and their obvious appeal to a teenage audience of under-18s, has led some to conjecture that drinks firms are going to have to be better controlled, in particular where they deliberately target a younger consumer.

'Well, I bridle at that,' says Walsh. 'Look at this,' he adds, pulling a small bottle of Smirnoff Ice from the drinks tray by his sofa, setting it side by side with a litre bottle of Smirnoff, with virtually identical labelling. 'Are you in any doubt about what it is?'

But what about products like Bacardi Breezer, with their blatant drink-me-be-sexy ads? 'Not our brand,' he snaps. 'You will have to talk to Bacardi about that. But at Diageo, we have one of the most stringent marketing codes in the industry. We have no actors below the age of 25 in our ads, we don't do promotions that equate social and sexual success with alcohol consumption. Occasionally, we have one that's on the line, but we are not perfect. We are learning the business as we go along.'

So why can't drinks companies use their marketing expertise to dissuade young people from drinking to excess? If adults can be successfully persuaded to stop drink-driving - for which you credit either the Government or the industry - why can the same not be done around anti-social behaviour?

The problem, says Walsh, is the sophistication of the UK advertising audience. They have run successful ads in Ireland, showing that getting drunk is stupid and looks stupid, but when they test similar fare in the UK, they rate badly. Likewise, with attempts to educate drinkers on how much alcohol by volume they can take. 'The feedback is: "Don't tell me how much alcohol I can drink; who are you to tell me?" It might be politically smart of us to do that, but it would be commercial suicide.'

So how do we know giants like Diageo are really making an effort? He looks puzzled. 'We have walked away from certain concepts that we believe could be construed to promote excessive consumption,' he says. The problem is, smaller firms haven't, and Diageo often has to answer for the whole industry.

Will he stay long at the top? He laughs. 'My experience is that people never stick to what they say. But I love this business and what we are doing.' He has few hobbies. He likes gardens but more sitting in them than digging, and plays the odd round of golf near his home in Haywards Heath, Sussex. He has one son, now grown up, and work is everything. Even a walk to a country pub will end in him counting how many bottles on the optics are Diageo's.

'And if there are not enough, I will make a call on Monday morning!' he grins. But mainly he travels a lot. 'I get so much energy visiting our teams, whether in America or in emerging markets like Russia.'

Walsh will need more than energy in the next few years as investors look to Diageo for real growth, in both cash and profits. As its chairman Lord Blyth points out, Walsh has overseen the transformation of the company, shedding food and nailing the big acquisition in Seagram. Now he has to show that it all works. 'Paul has got to make the business grow, and that is the challenge for everyone in consumer goods where firepower is increasing and consumers shop around more than they did in the past.'

Blyth has no doubts he will do it. Fans like Sheppard depend on it. Others are waiting to see.

THREE TOUGH CHALLENGES FACING PAUL WALSH

1 Balancing business performance through brands in some 180 of the world's markets.

2 Changing attitudes to alcohol and consumer drinking behaviour so that this industry is able to continue to outperform.

3 Balancing short and long-term expectations of Diageo's shareholders and other key stakeholders.

WALSH IN A MINUTE

1955 Born 1 May, Manchester. Educated Royton and Crompton Comprehensive and Manchester Polytechnic
1976 Joins Co-op
1982 Joins the finance arm of Grand Met's brewing division
1986 Appointed FD, brewing division
1987-9 Holds financial position with Inter-Continental Hotels and Grand Met food sector
1990 Made division chief executive of Pillsbury
1995 Appointed to Grand Met board
1997 Appointed to Diageo Plc board
2000 Made chief executive of Diageo Plc.

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