Paul Walsh: innovation ‘too slow’ for industry growth

Former Diageo CEO Paul Walsh has argued that M&A is a greater tool for growth in the spirits industry than in-house innovation, claiming failed innovations are not measured effectively.

Paul Walsh, former CEO of Diageo, sat on the panel of the Distillers’ City Debate 2017

Walsh was speaking during the Distillers’ City Debate 2017, hosted by The Worshipful Company of Distillers, against the motion: ‘This house believes that innovation is a more effective tool for growth than acquisition in the spirits industry.’

Walsh – who was CEO at Johnnie Walker maker Diageo from 2000-2013 and is now chairman of Compass Group, the world’s leading contract catering company – said “sensible” merger and acquisition activity has “far more palpable impact, far quicker”, while innovation as a tool for growth can be “too slow” and “too unpredictable”.

He emphasised a distinction between “renovation” and “innovation” in the spirits industry, claiming that “too often we confuse the two”.

For Walsh, renovation is activity that keeps the parent brand “top of mind in the eyes of the consumer”, whereas innovation “has to be evaluated as to whether we should be building it ourselves, or buying it”.

He argued that M&A can only be undertaken when a company’s “base business is offering some kind of growth” as it is “renovating” the brands it already owns.

Using Diageo’s 2000 joint acquisition of Seagram’s with Pernod Ricard as an example, Walsh said acquisition can be “transformational” for large companies and provides “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,” he said.

Walsh also said the cost of failed innovations is unclear. “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.”

M&A also allows producers to “neutralise the competition” by preventing a competitor from buying that same brand, Walsh said. “Or indeed, you are capturing the brand that would compete against your innovation,” he added. “So you are consolidating your position of strength.”

Furthermore, the “cost and distraction” of innovation “can be punitive”, said Walsh, while “getting the attention of your salesforce can be very difficult and many 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,” he said.

He added: “If you’ve bought something and it delivers five years from the acquisition day, people will have forgotten how much you paid for it.

“Fundamentally that means that if you have confidence in what you’re about, you should pay up and then hold management’s feet to the fire to deliver against the growth potential for that acquisition.”

More arguments from the Distillers’ City Debate 2017 will be published on thespiritsbusiness.com in due course.