Diageo may have operations in 180 markets around the globe, but the one causing it the biggest headache at the moment is very close to home: Scotland. The drinks behemoth’s announcement in July that it planned to cut 900 jobs north of the border has whipped up a political storm.
At the heart of the frenzy is Diageo’s decision to rationalise its bottling plants from three to two, resulting in the closure of the Johnnie Walker packaging plant in Kilmarnock, Ayrshire, where it employs 700 workers. Although the move will mean the expansion of its plant in Leven, Fife, creating 400 jobs, politicians have united with workers and unions to condemn the move. This week, the Scottish Government upped the ante by putting forward an alternative proposal involving the injection of public money into a scheme that would keep the Kilmarnock operation open.
But despite the strength of the well-orchestrated campaign, which has seen thousands take to the streets of Kilmarnock and which prompted calls for a boycott of Diageo products, the drinks group is highly unlikely to change its mind. The decision to close the Kilmarnock plant, along with the Port Dundas distillery in Glasgow, was not taken lightly. The 1950s facility has been a candidate for the chop for years and the group spent 15 months looking at all the options before finally opting for closure. Any alternative scheme would have to find a way of matching the £40 million of cost savings that Diageo expects to make from its Scottish overhaul in 2012. That is not going to happen.
The name of Paul Walsh, the Diageo chief executive, may be mud in western Scotland but he has not shied away from defending his position. While sympathising with those workers facing the axe, he has been clear about the importance of ensuring that Diageo runs the most efficient and sustainable business possible, even if that means being “hard nosed”.
The reality is that the company has 38 bottling lines at its three Scottish plants but technological improvements mean it now needs only 28. The threat is clear: despite its size, Diageo needs to remain competitive in everything it does — and if it cannot bottle efficiently in Scotland, it will do so elsewhere.
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Mr Walsh has not been slow to question the idea of political interference in a company’s ability to take strategic decisions . He argued recently that the criticism was “short-sighted” in the context of the £500 million that Diageo has invested in Scotland over the past five years — culminating in the opening this year of a state-of-the-art malt whisky distillery at Roseisle — and he gave warning that the furore had portrayed Scotland in a poor light to the global business community as a place to invest.
In a recent television interview, Mr Walsh dismissed such interference as “political grandstanding”, and some observers have pointed out that the Scottish National Party has specifically been targeting Labour’s tenure in Kilmarnock. People on the East Coast have been rather less impressed with the SNP’s sabre-rattling, arguing that its actions are putting at risk Diageo’s plans to create 400 jobs in Leven. As one worker there put it: “Why are jobs in Fife deemed to be less important than jobs in Kilmarnock.”
Although the issues in Scotland are small in the context of Diageo’s global presence, the robust way in which they are being handled exemplifies Mr Walsh’s style during his nine years at the helm of the Smirnoff and Guinness owner. He has seized big strategic opportunities — notably Seagram in 2001 — but he has not ignored the nuts and bolts of producing, marketing and selling alcoholic drinks efficiently and cost-effectively.
Some analysts have suggested that his appointment as a non-executive director of Unilever in March could pave the way for his retirement from Diageo and his elevation to the chairmanship of the consumer goods group. That may well prove to be the case — but not yet. The drinks group last week reported downbeat results against the recessionary backdrop, and while its trading remains resilient by comparison to its peers, Mr Walsh can afford to wait for a recovery to ensure that he goes out on a high.
He also has some unfinished business in terms of acquisitions. Recent rumours of a £9 billion deal with LVMH of France to buy full control of Mo?t Hennessy, the cognac and champagne group in which Diageo already has a 34 per cent stake, may have dissipated for now. But Mr Walsh, 54, has made no secret of his eagerness to sit down at the negotiating table with Bernard Arnault as soon as the LVMH boss is ready. Analysts believe the Frenchman may be minded to do so next year, which would allow Mr Walsh to bed in the business for a couple of years before retiring in 2012. By then, he would have notched up 30 years’ service with the group, enabling him to draw his full pension.
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If Mo?t Hennessy does not come off, the Diageo boss could seek to use the group’s strong balance sheet to engineer a purchase of Jos? Cuervo, the tequila maker controlled by the Beckmann family of Mexico. The British group already has a highly lucrative distribution deal with Cuervo, but Mr Walsh has long harboured hopes of acquiring the brand outright — if the Beckmanns ever opt to sell.
But even if another big deal eludes him, Mr Walsh will be able to embark on his retirement content in the knowledge that he has played no small part in creating a world-class company.
He could even break open a bottle of Johnnie Walker Blue Label to celebrate.