EY - The Master CFO Series: A tale of two markets

High Performing CFO

A tale of two markets

Interview: Deirdre Mahlan

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Deirdre Mahlan, CFO, Diageo Plc

EY-Deirdre MahlanThe UK based consumer drinks company Diageo has been an enthusiastic investor in rapid-growth markets. By 2015, the company expects to derive half its revenues from these emerging economies. Here, Chief Financial Officer Deirdre Mahlan discusses the company’s approach to investing in these markets.


Q

How have you seen the opportunity in rapid-growth markets change over the past few years?

 

Beginning around 2004 or 2005, we saw an important shift in these markets. At that point, we had a strong business in Scotch whisky, and we could see big opportunities in both Asia and Latin America. At the same time, we were starting to see our beer business in Africa take off. But we were still learning about consumers in these markets and assessing routes to market by importing international brands, which were very aspirational.

But then in 2008, we had the start of the financial crisis. What became obvious was that the high-growth emerging economies had reached a level of development and maturity and had fast-rising per capita incomes. These markets were still risky, but nevertheless we saw that there was going to be a sustainable level of growth coming from them. So we started thinking more fundamentally about how we were going to capture what we now see as a dominant source of growth in the sector from places outside developed markets.

Q

The opportunities in rapid-growth markets are undeniable, but how do you ensure that you are making the right investments?

 

In high growth markets, local teams will identify multiple opportunities and sometimes want to invest in all of them. The challenge is therefore to insist on the appropriate level of strategic analysis to determine which opportunities are suitable.

You have to be very disciplined and insist that the markets set a period of return and stick to it. And, if they don’t deliver on those targets, then you may have to shift the strategy. In many ways it’s no different from developed markets, although it does require you to make very quick decisions and you have to be prepared to invest ahead.

In developed markets, we’ll insist that the return is fast because routes to market are established and the consumer understands the category. But in emerging markets, you’ve got to give it more time because it takes longer to know whether or not your brand investment is going to make a return. You’re effectively building equity in brands and, in some cases, educating the consumer about a new category.

Q

To what extent do operations in developed markets fund investments in rapid-growth markets?

 

The developed markets, which still represent 60% of our business, have a strong return. The problem is that the growth is slower and competition is also established so you have to balance investments to ensure that they sustain a very strong leading position.

Our “premiumization” strategy in markets like North America has helped to fund our increased investment in the emerging markets. It’s therefore very important that we continue to invest appropriately in North America to continue to support that premium strategy and to drive scale benefits. We also have to manage our European business so that we’re getting the best possible, most efficient growth.

Q

Do you need different management capabilities in developed and rapid-growth markets?

 

In a market like India, you have to make decisions very quickly because opportunities are only going to be available for a short period of time. So the people that you have on the ground need to be able to grasp these opportunities, and be very focused on making decisions, implementing them, and then moving on to the next thing.

In the developed markets, agility is still very important, but I would emphasize sales interactions as a key capability. These economies have brands that have been built over a long period of time. They’ve got leading positions. Very often, the difference between winning and losing in developed markets that are relatively low growth is in the execution.

Q

Does this mean that you have to incentivize people in a different way depending on the maturity of a market?

 

You have to make sure that you create the right tension in your incentive plans between growth and return in each market. For example, if you incentivize a very low-growth market on net sales growth, then the danger is that you are inadvertently incentivising high levels of discounts. So you have to be very clear that you’re looking to drive returns. The emphasis should be more on margin because these businesses are at scale and we expect them to deliver scale benefits.

But in a rapid-growth market, if we incentivise only growth, there is a danger that the team will think that growth is all that matters and that it’s not important how much the margin erodes. So you have to be very clear on strategy and performance expectations. If there are additional sales, then the ratios have to stay in line.

I always start from the point that, all things being equal, teams should aim to get the same dollar of sales next year by spending less by becoming more efficient. Even in emerging markets, I expect them to deliver the base business next year more efficiently than they did this year. It’s an important discipline to deliver sustainable high-performing business.


Biography

Deirdre Mahlan is CFO at Diageo Plc; the world’s leading premium drinks business.

Deirdre has 20 years experience in the beverage alcohol industry, primarily in the US with Diageo and Seagram. In 2007 Deirdre moved to the UK to head up Tax and Treasury for Diageo and assumed the role of CFO in October 2010.

Diageo is the world's leading premium drinks business with a collection of beverage alcohol brands across spirits, beer and wine. Diageo’s products are sold in more than 180 countries around the world. The company is listed on both the New York Stock Exchange (DEO) and the London Stock Exchange (DGE).