Stout defence of brand Guinness

As a €153 million new brewhouse opens at St James’s Gate brewery in Dublin, Diageo chief executive Paul Walsh talks about the problem of binge drinking and the Government’s plan to ban alcohol sponsorship for sport

DIAGEO CHIEF executive Paul Walsh offers a warm handshake and a cup of coffee at his office in the centre of London.

In the good old days, he might have cracked open some bottles of Guinness or offered me a nip of scotch. But in this era of responsible drinking, coffee is as good as it gets.

Diageo has spent about €20 million promoting responsible drinking in Ireland and Walsh bristles at the suggestion that it is merely paying lip service to the issue of alcohol abuse.

“I think that’s rubbish,” he says in a clear and measured tone that gives a hint of his Lancashire roots. “If you look at some of the advertising that we’ve done and some of the promotions that we’ve run and some of the attitudes that we have changed, it is impressive. I can assure you we are very sincere in our efforts.”

He then starts tapping the table in his compact office, asking: “Where are the parents in this debate? Because if I came home at 18 in that sort of state, I would haven’t been going out and doing it too often. There is a role here for the parents.”

Walsh is an only child. His parents were “loving” but “strict”, especially when it came to alcohol, he says. His own first drink was a half a pint of mild ale, when he was 18, naturally.

“At 16, I wasn’t particularly interested in beer. I was more interested in football and cricket.”

He doesn’t favour increasing the legal age limit for consuming alcohol. “I happen to think that 18 is right. Equally, I would never try and suggest to a market where 21 is the legal drinking age that they should change it. That’s up to them.

“But it does strike me as a little ironic that you can go to [war in] Afghanistan, you can get married, you can drive a car, you can even fly an aeroplane but you can’t have a half of Guinness. It’s a bit strange.”

He has a point.

There is also the issue of binge drinking, where adults get hammered each time they go drinking. It’s a cultural thing in Ireland but some would argue that events such as Arthur’s Day fuel this fire.

Arthur’s Day began in 2009 as a celebration of Arthur Guinness’s 250th birthday. It operates annually in September under the guise of a celebration of music in pubs and has been exported successfully to 54 other countries.

Paint the town black is Diageo’s marketing slogan, but isn’t it just a wheeze to encourage people to get tanked up on a Thursday night?

“Hopefully not tanked up, hopefully enjoying our product in appropriate moderation,” says Walsh fixing his gaze on me.

“It’s very interesting . . . it resonates extremely well in other markets. Arthur Guinness is quite an icon.”

He’s dismissive, too, of plans by the Government to ban alcohol sponsorship for sports events, possibly from 2020.

“The vast majority of people who attend these events, and who enjoy our brands, do so responsibly,” he says. “Unfortunately . . . because certain people abuse the event, abuse the product, we regulate everybody in that regard. I think that’s a very sad state of affairs.

“And sport will suffer and music will suffer because there won’t be sponsors stepping in behind us with the kind of money we’re prepared to put into them.”

Walsh argues that per capita consumption of alcohol is declining in both Ireland and Britain and that less than 3 per cent of people in Britain “drink to excess with regularity”.

That’s still about 1.8 million people, mind you.

“I think it’s progressive intrusion on personal liberties,” he adds. “We are in a world where, let’s face it, they [governments] want to regulate on everything. There is this mood that they know best. But the notion that you regulate for everybody is flawed logic.

“What’s next? Are you going to stop the Guinness Oyster festival? Are you going to stop the Storehouse? Are you going to stop Arthur’s Day? God, it’s going to become a boring world.”

Walsh yesterday donned a hard hat and builder’s boots for a sod-turning ceremony on a €153 million new brewhouse at its St James’s Gate brewery in Dublin, increasing the brewery’s capacity from five to seven million hectolitres a year and allowing Diageo to consolidate all of its Irish brewing activities at St James’s Gate. Plants in Dundalk and Kilkenny will close.

With the majority of the output going for export, the consolidation will also secure the future of St James’s Gate.

It will be the company’s second biggest investment globally in brewing or distilling facilities but is a long way short of the €650 million originally planned in 2008 before the economic crash. That involved the construction of a super brewery in Leixlip, Co Kildare, on lands owned by the Guinness family.

The “cornerstone” of that investment was the release of capital from surplus land at St James’s Gate, which was ripe for development in inner city Dublin during the property bubble.

“We were prepared to reinvest that money in the fabric of the business,” Walsh says. “With the recession, those land prices evaporated. So the whole raison d’être just dissolved and we had to retrench and see what’s next.”

Is the super brewery idea binned forever?

“I don’t think you can say it will never happen. You can say it isn’t going to happen in the foreseeable future.”

The brewhouse will be situated on the north side of the St James’s Gate site, which runs from James’s Street to Victoria Quay.

What about the existing brewery beside the Storehouse visitor centre?

“We’ve still got to finalise our plans for that. Clearly, if we could develop it that would be one option. But we haven’t alighted on any firm plan in that regard.”

One option might be to expand the operations of the Storehouse, which is a big hit with tourists, attracting more than one million visitors a year for the perfect pint of Guinness and views across Dublin from its Gravity Bar.

“It’s been an incredible success story,” Walsh beams. “I think it is now the number one tourist attraction in Ireland. We continue to invest in it to make sure it’s relevant and pristine.

“We will look to see if we can expand that type of tourist attraction. I’m not sure how we could do that but there may be things we can still do with that site to give ourselves a bigger footprint.”

Even Queen Elizabeth II and Prince Philip visited the Storehouse during their trip to Ireland in May 2011.

“It’s a must-see place isn’t it?” says Walsh with a grin. All it needed was for Her Majesty or the prince to taste the pint that had been pulled for them.

“We did try.”

Diageo had rather better luck when US president Barack Obama and his wife Michelle visited Ireland that same month. Millions of television viewers worldwide saw Obama eagerly neck a pint of Guinness in Hayes’s pub in Moneygall, Co Offaly, while the First Lady tried her hand at pulling a pint.

Walsh was “very appreciative” of their patronage.

Not surprisingly, the Englishman likes the odd pint of Guinness himself but with a portfolio of brands as long as a bar counter – Bailey’s, Bushmills, Smirnoff to name a few – in a trendy watering hole, what is his favourite tipple?

“When I go to my pub, it’s Guinness,” he says. “Now you think I would say that. However, in the past some journalists have tested me on that and the landlord of the local pub has borne it out.

“If I pop down there of an evening with my dog, I’ll have a pint of Guinness. Equally, in front of the fire or in my home I like a nice Johnny Walker.

“Summer’s day? I like a nice Tanqueray and tonic. I’ve got a lot of good offerings to choose from, all consumed with appropriate moderation.”

Of course.

How does the pint of plain in Britain compare with Dublin?

“Well, bear in mind when you drink a pint of Guinness in the Storehouse you are drinking very, very fresh Guinness.

“In fact, if you go around Dublin you are drinking outstandingly good Guinness. But the beer here [in London] is very, very good.”

Guinness represents about half of Diageo’s global beer portfolio.

In the year to the end of June 2012, net sales, which exclude excise duties, rose by 8 per cent in emerging markets and by 2 per cent in developed markets (which included a 9 per cent increase in North America). Overall, the rise was 4 per cent.

It’s a different story in Ireland, where the beer market declined by 5 per cent in that period. Diageo said Guinness draught and Smithwick’s draught grew market share but didn’t publish specific figures.

“Overall, I think Ireland in the foreseeable future will be relatively flat,” Walsh says, no pun intended.

A price rise seems counter-intuitive but that is what Diageo pushed through a fortnight ago, with the cost of a pint increasing by five cent.

“The cost of ingredients is going up, the cost of fuel is going up. And therefore we are obliged to pass that through. If you don’t, you end up just suffering a permanent margin diminution, which in turn leads to a lack of investment in the brand,” Walsh says, explaining the rise.

He assures me it wasn’t a matter of the company getting its retaliation in first with the budget just around the corner.

“No, it’s just a matter that we’ve got these increases hitting us and therefore now is the time to pass it on,” he says.

On a broader point, what is Diageo exactly? To many in the industry, it’s a premium spirits group with Guinness and some other beers tagged on.

“I can see how you might apply that lens,” Walsh says. “But if you go to Ireland, they would say we’re a beer company with spirits tagged on. It depends which end of the telescope you’re looking through.”

Walsh says Guinness is one of only two truly global beer brands. And the other?

“I hate to throw bouquets at the competition but it’s green and begins with H. They have done a very good job marketing it,” he says, leaning back in his chair.

Walsh was born in the town of Chadderton near Oldham in the north of England. His schoolboy dream was to be an RAF pilot but colour blindness put paid to that.

“I did get a pilot’s licence but unfortunately instead of the government paying for it I had to pay for it. So I had to regroup and studied finance/economics.”

He still retains an interest in aviation, serving on the board of Federal Express, but time pressures meant he could not keep up the pilot’s licence.

Walsh joined GrandMet in 1982 in a finance role before moving into sales and marketing. He worked his way up the ranks, joining Diageo’s board in 1997 when it was formed from the merger of GrandMet and Guinness.

Walsh landed the top job in 2000 and has moved the group out of hotels and food to concentrate on alcohol.

He makes no apologies for his £11.2 million remuneration last year, of which £8.2 million was based on long-term incentives.

“A lot of that has been driven by an appreciation of our stock price,” he says. “If you’d invested in Diageo over the past three years, you’d have had an 80 per cent return or something like that.

“In large part, that’s what has driven my compensation. And by the way, there were years when we didn’t have that return when I didn’t get any long-term incentive and that’s the way it should be.”

With a name like Walsh, it’s no surprise to discover that he has Irish roots. “My great grandfather,” he explains, “emigrated to England. Actually, he set up a number of off licences. The apple didn’t fall too far from the tree.”

Uniquely, for a chief executive of his stature, Walsh has publicly indicated his retirement date – some time in 2014. Normally, CEOs try to keep people guessing to avoid becoming lame ducks.

“Time marches on. I’ve been in this job for 12 years. I’m 58 next [birthday]. The standard retirement age is 60. I have an obligation not only to grow this business and deliver for our shareholders but also to provide for a clear succession plan,” he says, matter-of-factly.

The recent creation of a chief operating officer role was a nod in the direction of succession.

“The board and myself will now have to figure out the finite timing of that. But, yeah, it’s going to be in that zone. It might be a year later, but that’s the zone.”

Name

: Paul Walsh

Job: Chief executive Diageo Plc

Age: 57

Family: Engaged. One adult son from previous marriage.

Lives: West Sussex

Hobbies: Sailing

Something you might expect: A pint of Guinness is his drink of choice in his local pub.

Something that might surprise: He wanted to join the RAF