Challenges before Diageo's new boss Ivan Menezes

The world’s largest company will now be headed by India-born company insider Ivan Menezes whose primary role will involve buying local spirits businesses in emerging markets to offer perfect distribution platforms for his branded products.

Already the company expects at least 50 percent of its sales from emerging markets by 2015 with recent acquisitions of local liquors in China, Turkey and Brazil and India’s United Spirits. In the past three to four years, Diageo also poured money into Latin America, Africa and Asia, resulting in these emerging market sales contributing to more than 40 percent of the group’s revenue.

[caption id=“attachment_763259” align=“alignleft” width=“380”] Reuters[/caption]

A front-runner for the top job, the elevation comes six months after he led an ambitious $2.6 billion takeover of Vijay Mallya’s United Spirits, India’s largest liquor company. However, according to media reports, navigating Diageo through changing consumer tastes in slowing established markets, while mopping up growth numbers from markets like India, China and Brazil is likely to be an acid test for Menezes.

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A report in the _Times of India_says the biggest challenge will be on the home turf itself given India’s fickle excise laws and volatile commodity costs. “Leveraging the high-profile acquisition of United Spirits (USL), India’s largest distiller with a big portfolio of low-margin brands, could prove to be one of the toughest challenges for the British company with a nearly 264-year history,” the report says.

Although the deal, announced in November, has been dogged by regulatory delays and a second-stage open offer is unlikely to succeed, Diageo is expected to content itself with a stake of about 30 percent along with management control since a clause in the agreement gives Diageo some headroom to build up its shareholding every year in accordance with local market regulations.

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Secondly, India’s alcohol market has no legal rights to advertise its assets. Hence adopting a winning formula will be a tall task.

And third, political intervention will be another battle since Diageo has faced regulatory action in the recent past over bribery charges.

Investors are also waiting to hear Diageo’s plans for its US-focused tequila business following the collapse in December of talks to buy a stake in Mexico’s Jose Cuervo, whose brand the group distributes under licence.

A New York Times article, on the other hand, says the company’s focus will slowly shift towards organic growth, but that does not mean that acquisitions are off the table. “His job number one will be not to allow the foot to come off the pedal of organic growth,” the report said, quoting Martin Deboo, an analyst at Investec. “Then he has to decide what the next chapter of the strategy will be and how best to evolve the portfolio.”

With inputs from Reuters