Will Drastic Dave live up to his name at Diageo?
Putting the finishing touches to Diageo’s annual report, Sir Dave Lewis may be channelling the old slogan of the drinks giant’s prize brand, Guinness: ‘Good things come to those who wait’.
Since Lewis began his tenure as chief executive of the FTSE 100 firm on New Year’s Day, investors have heard very little from him. Though the former Tesco boss was nicknamed “Drastic Dave” for his bold approach to management at Britain’s biggest grocer, Lewis’ regime at Diageo has so far been calmer.
The drinks seller, which also owns Johnnie Walker, Smirnoff and Captain Morgan, will attract the attention of the City on Thursday – not for its top-line numbers, but for its strategy review, which is expected to reveal swingeing job cuts worthy of Lewis’ moniker. What can investors expect from the Guinness owner’s long-awaited update?
Lewis took charge of Diageo following a rocky 12 months for the business, marred by a long hangover of waning demand and operational missteps. His predecessor, Debra Crew, abruptly quit after just two years in charge and the company posted a $200m (£153m) hit from US tariffs just weeks before he took the reins.
Cautious start for Drastic Dave
In February, Lewis’ first outing as chief executive struck a markedly restrained tone. He halved the group’s dividend in a bid to shore up its balance sheet but his drastic acts stopped there. Quizzed by analysts on why his next market update was scheduled as late as this year’s third quarter, Lewis was careful to lower expectations of a slash-and-burn approach to cost-cutting.
Lewis had already visited Diageo headquarters in North America, Latin America, Europe, the Middle East and India, but reminded investors he had yet to spend time in Africa and Asia: “I just want to make sure that I’ve got the firmest of foundations in understanding the business we have today.”
The drinks group’s half-year numbers were dogged by an “increasingly competitive and cautious” consumer environment in the US and slowing sales in China, as many of the problem areas for Crew threatened to haunt her successor.
The Diageo boss set out some areas of focus for his reign – including adapting to changing alcohol habits among younger generations and solving the company’s “very poor” customer service – but the detail of his vision for the alcohol giant has only begun to emerge in recent weeks.
‘Funereal atmosphere’ as job cuts loom
Behind the doors of Diageo headquarters in Soho, Lewis has begun rebuilding the firm in his image. Sir Dave told his executives to slash headcount across their divisions, with “non-revenue-generating” teams on the chopping block.
The impending redundancies were spreading a “funeral home atmosphere” inside the company’s offices, one insider told The Financial Times. Sir Dave has begun building his new top team, recruiting former Unilever colleague Marc Woodward to lead his domestic arm and tapping Procter & Gamble executive Sujay Wasan to head up the Asia-Pacific operation.
Beyond headcount, a key headwind that Sir Dave will need to address is the pinch on discretionary spending which is pushing consumers to trade down from up-market products.
The chief executive has praised Diageo’s “premiumisation” drive towards a stable of high-end brands led by former boss Sir Ivan Menezes. But Lewis has suggested he plans to cut prices and said he will work on the group’s offering of smaller pack sizes in a bid to squeeze Diageo products into consumers’ rapidly tightening shopping baskets.
“There is some evidence of customers trading down to cheaper alternatives, which provides an immediate headwind to Diageo’s premiumisation aspirations,” said Richard Hunter, Interactive Investor’s head of markets. “It remains to be seen whether the concerns overhanging the sector as a whole are cyclical or societal.”
There are some bright spots for Drastic Dave. Guinness’s meteoric market share gains in recent years show no signs of reversing, and the firm’s share price ticked up into a year-to-date gain for the first time late last week. Diageo’s full-year figures are likely to be boosted by the World Cup, and the drinks maker can hope for a further uplift in the Autumn as punters reach for a pint of the black stuff when temperatures start to drop.