Earlier this week, a panel of esteemed speakers went head-to-head to debate whether innovation or acquisition is a more effective tool for spirits industry growth during the sixth Distillers’ City Debate. Here are some highlights from the key arguments of the evening.

Panellists from left to right: Simon Hales, Paul Walsh, Ian Buxton, Michael Ward, and Tom Sandham

Chaired by Ian Buxton, author of the 101 Whiskies and Gins series, the panel consisted of Michael Ward, global head of innovation at Diageo; Paul Walsh, chairman of Compass Group and former CEO of Diageo; Tom Sandham, writer and co-founder of Thinking Drinkers; and Simon Hales, MD, European equity research at Barclays Investment Bank.

The debate was hosted at a time of both prolific M&A activity in the spirits industry, and also rampant innovation. But which route results in greater growth in the spirits industry worldwide?

The motion of the debate, organised by The Worshipful Company of Distillers, was: ‘This house believes that innovation is a more effective tool for growth than acquisition in the spirits industry.’ Arguing in favour of the motion was Ward and Sandham, while Walsh and Hales put forward their cases against it.

At the start of the evening, the audience voted in favour of the motion, but minds were changed once the debaters had left the podium, and acquisition pipped innovation to the post.

Click through the following pages to see some of the debaters’ key arguments.

Michael, Ward – global head of innovation at Diageo

First up was Michael Ward, whose argument centered around the thought that innovation creates longevity and diversity among spirits brands.

Here are some of his key points:

• “I believe that innovation keeps brands relevant and vibrant in a constantly changing consumer landscape, and that innovation creates the next great brands that define our industry.”
• “When you look at companies and people who are good at innovation, they are just more successful. Innovation demands consumer curiosity. Quite simply, to be a successful innovator, you need to be a successful entrepreneur, and companies that do that well are built for the longer-term success. When we look at Diageo, 16% of what Diageo sells didn’t exist five years ago.”
• “If we tried to replace the products that we have created and launched over the last five years, you would have to buy a brand the size of Johnnie Walker. Or buy a company larger than Campari.
• “My point, be it numeric, or be it cultural, is that innovation is by far and away preferable to drive growth in our business, particularly when you look at how we compete.”

Paul Walsh – chairman of Compass Group

The former CEO of Diageo put forward a compelling case for acquisition, which he claimed has “immediate impact” on growth, while innovation can be “too slow” and “too unpredictable”.

Here are some of his key points:

• “So often in the case of innovation, you can certainly evaluate the payback on the successful innovations, but do we truly capture the cost of those innovations that have failed? Maybe the world has changed in the three or four years that I have been off the watch, but I am not sure I was ever convinced that we ever did that analysis correctly.”
• “If you decide to buy, the first thing you get is an immediate impact. You don’t get something that drifts on, which people are too afraid to kill because it isn’t delivering the returns it promised – you have immediate impact.”
• “De facto, you neutralise the competition. If you’re buying a brand or buying the market, de facto you are stopping a competitor doing exactly the same. Or indeed you are capturing the brand that would compete against your innovation. So you are consolidating your position of strength.”
• “I have seen many large companies have fabulous ideas, but neutering something that’s very small and getting the attention of your salesforce that’s used to delivering big brands and big distribution is very, very difficult and many of those ideas fall by the wayside. I would contend far better, let somebody have that idea, grow it, and then buy it when it’s 50,000-100,000 cases, and you avoid that painful upbringing.

Tom Sandham – co-founder of Thinking Drinkers

Spirits writer and comedy performer Tom Sandham spoke of the way that, throughout history, innovation has propelled growth of the spirits industry.

Here are some of his key points:

• “If you look at two of the big innovations in spirits: St Germain is a good example, Sipsmith is another. Innovative ideas that have been made big and successful to a certain point but now acquisition has stepped in and these companies are going to take them even further, get them into the hands of more people. When you start a brand, I imagine that is your ambition.
• “But I still would argue in favour of innovation. Despite all this, I still believe it is more effective. And I think that’s because I see, from a historical perspective, I see it is integral in human history.”
• “For me, innovation is the seed. When we talk about the technology that encompasses our industry – the creation of the alembic still in the late 700s by a Muslim man, the still that’s still used today. The man was an innovator – he discovered hydrochloric and sulphuric acid.”
• “Innovation for me is the seed, but more than that, it’s the plant, it’s the fuel, it’s the water, it’s the manure, it’s the horticulturist – it’s Alan Titchmarsh. That is what innovation means to me.”
• “I actually think that innovation should spread through every part of a business, people should always be having ideas, and that is why I believe it is the most critical and effective part of growth in the spirits industry.”

Simon Hales – MD, European equity research at Barclays Investment Bank

Last to take to the podium was Simon Hales, who, like Sandham, also looked to history, but to show that merger and acquisitions in the spirits industry have create the scale needed to generate meaningful growth.

Here are some of his key points:

• “Acquisitions aren’t only about costs. Over a long-term, acquisitions should form an integral part of a company’s strategy to build stable growth for its business, and its industry. That’s how the great distillers were created, and what’s really driven the spirits industry for more than a century.”
• “Acquisition creates scale, and scale allows businesses not only to spread risk, scale means they can increase financial resources available to support growth in all its guises, be that international expansion, marketing support, or innovation itself.”
• “Consider the state of the spirits industry just 25 years ago: many distillers were single brand or single category producers. Most had limited financial resources to invest in marketing or new product development. Per capita consumption in the spirits industry’s largest market – the US – was in sharp decline. We saw per capita consumption fall 40% between 1980 and 1995 and emerging market growth had stalled.”
• “So what changed? Well I think fragmentation in the industry became consolidation, and consolidation provided power for the industry to reinvigorate growth of spirits.”