Britain's Most Admired Companies 2008: Tough Times turn Tables

It's a case of patience rewarded for Diageo. It reaps the benefits of more than a decade spent driving its brands upmarket, while past champions plummet in an economy that has hit the skids as we enter a new age of austerity. It has been a topsy-turvy old year for Britain's Most Admired Companies, reports Andrew Saunders.

by
Last Updated: 09 Oct 2013

Well, it's been a helluva year. You could have cleaned up at William Hill by laying bets back in December 2007 that within 12 months, governmental aid for the collapsed global banking system would total some £2trn. Or that the UK's balance-of-payments deficit would be heading towards £150bn. Or even that we'd be staring down the barrel of what's shaping up to be the nation's worst recession for a generation.

The dramatic shifts in the economic climate are reflected in the biggest shake-up for years at the top of 2008's Britain's Most Admired Companies (BMAC) awards - presented in association with Accenture. We've got a brand-new overall winner in drinks major Diageo, the first time that the top spot has been taken by a company that hasn't won it before since Cadbury Schweppes (as it then was) in 2004. And there's an unprecedented five new entrants in the BMAC Top 10, one of which - sixth-placed public transport group Stagecoach - has leapt an amazing 81 places.

Moving equally rapidly in the opposite direction, a whole raft of traditional BMAC stalwarts from sectors as diverse as banking, retail and construction have taken some serious tumbles down the league table. Bob Dylan could have been singing in 2008 rather than 1963 when he croaked: 'The times they are a-changin'.'

Rising an impressive eight places to take the top spot, Diageo's well-deserved win is a tale of a meticulously planned strategy consistently executed over many years with little regard to the whims of corporate fashion. Under long-standing chief exec Paul Walsh and his right-hand man, CFO Nick Rose, Diageo has pursued its goal of building a world-class portfolio of premium labels focused around Smirnoff and Johnnie Walker, two of the top four spirits brands worldwide. That portfolio now includes everything from Guinness to Gordon's, from Bailey's to Captain Morgan, from Dom Perignon to Justerini & Brooks, and it is growing all the time.

Of course, the drinks business is traditionally a good one to be in when times get tough, as even cash-strapped punters still like to take a drop of their favourite tipple from time to time. But the days when any old booze biz stood a good chance of doing well in a recession are long gone, as the troubles of many of our smaller local breweries testify.

Diageo relies instead on what has become known as 'premiumisation', building leading brands that sell internationally, earn bigger margins and protect against attrition by supermarket own-brands - especially important now that we are drinking more at home. It's a strategy that depends on intelligent and well-judged acquisitions - such as its recent purchase of super premium Ketel One - combined with deft marketing, such as its tie-up with rap-megastar Sean 'P Diddy' Coombs for another vodka brand, grape-based Ciroc, which sells for a hefty £45 a bottle.

Diageo's focus on the top end of the market has also helped the firm to tread a shrewd path through the growing controversy over health issues and worries over irresponsible alcohol sales. With government ministers and consumer groups getting increasingly concerned at loss-leader 'four cans of lager for a pound' retail promotions, Diageo can afford to take a lead on responsible drinking, as its brands are generally too upmarket to be involved.

These core elements are reflected in the breakdown of Diageo's winning BMAC score, where it takes top marks in the three key criteria of Quality of Goods & Services, Quality of Marketing, and Ability to Attract, Retain & Develop Top Talent. That's a pretty impressive trio of attributes for any firm to possess, especially when it's those most ruthless of critics, its opposition, awarding them.

Interims in August showed operating profits steady at £2.3bn, and the firm is bullish, sticking to its target of an increase in full-year operating profit of between 7% and 9%. Diageo also stands to benefit from any further falls in the pound: much of its revenue is collected in dollars, making it a classic defensive pick for investors.

Diageo's success is countered by a catastrophic reversal of fortune for last year's winner, Marks & Spencer, no longer even within sight of the top 10, at 29th overall. The dismal trading of recent months, combined with the poor reaction to Stuart Rose's controversial dual chairman/CEO role, have earned M&S its lowest placing since the pre-turnaround times of three years ago.

But the firm is not alone in its suffering, as 2008 has been a terrible year for retailers generally. Sainsbury is only slightly higher at 27, and even the mighty Tesco, which has previously won BMAC a record six times, can only manage fifth. Despite what have been pretty impressive trading figures so far, that's the worst showing since 1994 for Tesco. But the firm does pick up a consolation prize, in the form of the Most Admired Leader award for chief exec Sir Terry Leahy.

Professor Mike Brown of Nottingham Business School, who heads the Most Admired research team, says: 'This year, there has been an unprecedented amount of movement at the top of the table. These results demonstrate that what makes a company admirable in the eyes of its peers when times are good are not necessarily the same qualities that garner respect when the going gets tough.'

Brown knows whereof he speaks - he has been conducting the Most Admired research since even before the first outing of the awards in MT back in 1992, and this month he releases a book on the subject, The Admirable Company - Why corporate reputation matters so much and what it takes to be ranked among the best (Profile Books).

In second place this year is Johnson Matthey, another strong showing for one of the quiet success stories of Most Admired, a consistent top-five performer in recent years. The precious-metals specialist is one of the world's leading suppliers of automotive catalytic converters, as well as a pioneer of fuel-cell technology. But, unlike others at the top of our league table, it eschews the limelight. It has had to grapple with the yo-yo-ing prices of gold and platinum, as well as falling car production, particularly in the US and Europe, yet the firm was ranked top for Value as a Long-term Investment, all the same.

Further evidence that, as the recession bites more deeply, tortoises are going to be the new corporate hares can be found in Unilever's high standing. The Anglo-Dutch food and household goods giant is a child of hard times, born as it was from a series of mergers that culminated just weeks before the Wall Street Crash of October 1929. The only time Unilever has bettered this year's third place was coming out of the last recession in the early '90s, when it managed second overall in 1992 and again in 1995.

The firm's products - including staples such as Flora margarine, Lipton's tea and Wall's ice cream - make it intrinsically resistant to down- turns, as does its decentralised structure. Boss Patrick Cescau, who retires at the end of this month, has spent his time at the helm taming some of the more extreme manifestations of local autonomy. His efforts to make the firm more responsive to centralised management while retaining its famous resilience seem to be bearing fruit. But new CEO Paul Polman, who takes over in January - he joins from Nestle - still has plenty of work to do if the firm's progress is to be maintained.

The overall sector scores this year tell a revealing tale of the changing mood in the UK economy. It's literally topsy-turvy, with confidence plummeting in sectors that have in recent years been generally buoyant and optimistic - retail, home construction and media, for example - while others are riding high, notably the oil, gas and extractive industries, up nearly 70 points on last year.

Of course, if there's one industry that has demonstrated its ability to make money however chill the prevailing economic wind, it's the oil business. Although neither Shell nor BP makes the top 10 this year, each has a track record of good performances in bad times, with strong showings from them both in the early '90s and again after the dot.com bubble in 2000-01. Profits at both are booming, not least because of the $130-a-barrel oil price spike over the summer.

Another business that's doing well - if for rather different reasons - is public transport. Cash-strapped punters are opting to leave their cars behind and let the train, or even the bus, take the strain. Aberdeen-based Stagecoach is one of this year's biggest risers, up from 87th to sixth place. The firm, which operates a 7,000-strong bus fleet in the UK, as well as the South Western and East Midlands passenger rail franchises, reported UK bus revenues up more than 9% and train revenues up by over 8% in the five months to the end of September.

The news is not so good in the banking sector, after a year that will surely go down as one of the worst ever for the nation's lenders. The total sector score of 505.6 is down more than 44 points on last year, and beleaguered HBOS has crashed 97 places overall to 165th. Despite being the nation's biggest mortgage provider, its fate remains uncertain after a year in which its share price disintegrated from a high of 833p to well under a pound. Whether the mega-deal with Lloyds TSB goes through remains one of the big questions for early 2009.

What was originally forced through as a rescue deal looks increasingly unnecessary as such, if only because the Government has now had to bail out all but one of HBOS's main rivals in a rescue package costing almost £400bn. Former high-flyer RBS, 20th last year, is down over 70 places to 91 after a calamitous year that witnessed the departure of legendary boss Fred Goodwin, forced out in October as part of the price of government aid. Asia specialist Standard Chartered is the highest-placed bank overall, but can only manage a lowly 76th, all the same.

There's little cheer to be found in the home construction business too, where collapsing share prices and slumping sales have sent the sector score nose-diving to 500.4 - that's down over 90 points on last year's figure. But Tony Pidgley's 13th-placed Berkeley Group bucks the trend, the only house-builder in the top 20 and a clear 34 points above nearest rival Telford Homes at 54th. Berkeley is voted top for its Quality of Management this year, too. A great accolade for Barnardo's boy Pidgley, who sold his land bank when prices were still high and now has £200m to spend just as soon as he judges the time is right. All eyes will be on him to see if he can call the bottom of the market as astutely as he called the top.

Despite all the action in the upper and middle reaches of the table, down in the murky depths, life is more stable for some. These are the determined BMAC bottom-feeders which no amount of agitation can dislodge from their Stygian homes. Mike Ashley's Sports Direct is one of them, 217th last year and 228th this, after a dismal year's trading. Ashley has cut the firm's profits forecast by around £15m and is also busy trying to flog another of his underperforming assets, Newcastle United FC. Interest from the US has been apparently brisk - thanks to a bit of help from the falling pound - and there are rumours that a deal may be cut by the end of the year.

Woolworths is another, bumping along at 238th place, down from 217 in 2007, after posting a record £100m half-year loss. Sir Alan Sugar had tried to take a 4% nibble in October but was left scratching his beard when the seller failed to deliver his shares. With debts of £300m, Woolies' retail operation is now up for sale, and all 800 high street stores may go for as little as a quid. That's the price of a bag of pick'n'mix. Energetic new boss Steve Johnson, who took over only in September, may soon be left with only the firm's joint BBC DVD venture, 2entertain, and the distribution business EUK to run. Still, at least they are doing reasonably well.

The smoking remains of Bradford & Bingley - brought down by a serious buy-to-let mortgage habit - can be found in 235th, one place below embattled life insurer Friends Provident. B&B's savings business is now in the hands of Spanish group Banco Santander, which also owns Abbey.

To reflect the increasingly international nature of UK business, the eligibility criteria this year have been modified to allow the inclusion of selected international, publicly listed firms in a number of sectors, where their UK presence and operations are significant enough to merit consideration alongside BMAC's traditional constituency of UK-listed businesses. Among these newcomers are the UK operations of Bayer and BASF in chemicals, Irish construction business Kingspan in building materials and budget airline Ryanair in transport.

Another sign that prudence and parsimony are emerging as the key corporate preoccupations for the months ahead is a move towards appointing CEOs with a financial background. When times are good, investors look for growth first; as a result, leaders often emerge from the sales and marketing side of the business. But when belt-tightening and cashflow become the main concerns of shareholders, bosses from the finance department gain the ascendancy. There are at least three high-profile appointments of that ilk this year: Ian Livingston at BT and Jeremy Darroch at BSkyB are already in post, while Peter Voser takes over at Shell in July. All were previously finance directors of their respective organisations, and will doubtless be ruthless in making sure that the numbers continue to stack up. BT's Livingston has already announced 10,000 job losses, with hints of more to come.

So as we said back at the start, it's been a helluva year. We can't help wondering which companies will be picking up next year's BMAC gongs, and what extraordinary things will have come to pass in the intervening period. We just hope that anyone who puts a tenner on the recession having ended by then will turn out to be a winner.

The Admirable Company - Why corporate reputation matters so much and what it takes to be ranked among the best, by Michael Brown and Paul Turner, is published by Profile Books. It is available to MT readers for £10 (RRP £15) by calling 020 7841 6300 and quoting 'Management Today'.

 

ADMIRABLE QUALITIES

What are the bosses of Britain's 10 Most Admired Companies doing right?

1. DIAGEO - Paul Walsh, CEO

First-time BMAC winner Diageo is up eight places this year. Walsh's consistent and painstaking development of a portfolio of leading brands - Guinness, Smirnoff and Johnnie Walker, to name but three - has created a profitable drinks empire that operates with the dynamism and marketing savvy of an FMCG firm. It's also a leader in the responsible drinking campaign. Diageo's combination of brand strength and light-on-its-feet responses should see the firm fare better than most in the downturn.

2. JOHNSON MATTHEY - Neil Carson, chief executive

A vintage performance from the almost 200-year-old precious-metal specialist. It was voted top in its chemicals sector in all but one of the nine judging criteria, to achieve its highest-ever overall position. Under CEO Carson, Johnson Matthey has carved itself an enviable lead in the specialised business of supplying automotive catalytic converters, and is now one of the UK's leading contenders in fuel-cell technology, too.

3. UNILEVER - Patrick Cescau, group chief executive

Cescau's four-year stint as boss of Unilever comes to a close at the end of this month, when he retires to be replaced by Paul Polman, formerly head of Nestle's US business. Cescau's management reforms have brought the geographically dispersed and traditionally largely autonomous Unilever businesses together under much slicker central control. It's a model that should preserve the company's famous resilience, while improving its growth potential when the upswing eventually comes.

4. BSKYB - Jeremy Darroch, CEO

The former CFO who took over the hot seat from James Murdoch last December, Darroch has reintroduced door-to-door sales teams in a bid to keep his customer base growing. It seems to be working so far - subscriber numbers hit 9 million in the three months to October, up 5% on last year. That's nearly three times as many as arch-rival Virgin. Rates of churn remain impressively low, too. But he's under the Ofcom spotlight, owns a big chunk of dead-duck ITV and may be forced to sell some of Sky's valuable broadcast rights to competitors at bargain prices.

5. TESCO - Sir Terry Leahy, chief executive

A 'mere' fifth place for six-times BMAC winner this year, but Tesco still picks up a gong - boss Sir Terry remains Britain's Most Admired leader. The nation's favourite supermarket continues to buck the dire economic climate with first-half profits up 10% to £1.5bn. The brakes are on across the Pond, however, with a slowdown in the planned roll-out of its ambitious Fresh & Easy US venture, which has already cost the group a £60m write-down.

6. Stagecoach Brian Souter chief executive

The Aberdeen-based public transport group founded by Souter in 1980 is one of this year's highest climbers, rocketing up from 87th to sixth - proof that downturns don't mean slow going for everyone. A quarter of Stagecoach's UK operating profit comes from South West Trains, but it also owns a 49% share of Virgin Trains, and runs the popular Megabus coach service. Souter introduced Megabus to the US two years ago, where it now carries 150,000 passengers a month - the fastest-growing service in the company's history.

7. ROLLS-ROYCE - Sir John Rose, chief executive

Rose has been boss of ultra-consistent BMAC performer Rolls-Royce since 1996 (he joined the firm in 1984). Recession or not, it's still trading well, with orders up by £5bn in the four months to October. Annual profits are expected to be up slightly from last year's £800m. But Rose remains cautious about what effects the deteriorating global economy will have on the firm, and he has just announced 2,000 redundancies worldwide.

8. MAN GROUP - Group Peter Clarke, group chief executive

Clarke calls the current turmoil 'the most extraordinary markets any of us have ever seen', and even the world's largest listed hedge fund group isn't immune - profits for the six months to September fell 24%. But compared to the battering taken by its rivals, Man is doing pretty well. For starters, more money came in than went out the door: net inflows stood at $4.2bn for the six months to the end of September. Clarke says Man's balance-sheet strength and adaptability will help it to weather the storm.

9. KINGSPAN - Gene M Murtagh, CEO

The 36-year-old Murtagh took over the helm of the family business in 2005 and hasn't looked back. Despite the impact of the credit crunch on its share price - and the wider construction market - Kingspan has performed better than most. It even managed to raise loans of EUR330m after the events of Black September, a vote of confidence in the firm. But Murtagh expects full-year profits to fall by some 33% to around EUR150m.

10. 3I - Philip Yea, chief executive

Yea does not fit the archetype of private-equity bosses. He is 'more schoolmaster than master of the universe', as his MT profile last year described him. And a degree of understated leadership sits well with the hubris. Although his group is suffering with the rest of the industry - it made its first loss for five years in the six months to December - it is less highly geared than most rivals. 3i's strong mid-market focus, wide geographic spread and 60 years of experience leaves it in good shape to exploit the upswing.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Upcoming Events

Subscribe

Get your essential reading delivered. Subscribe to Management Today