Buenos Aires — Álvaro Cárdenas has headed the Latin American and Caribbean operations of Diageo (DEO) since January 2021, the result of his latest promotion in the company following a 14-year career in the British multinational alcoholic beverage producer.
In an interview with Bloomberg Línea, the Colombian executive does not shrink from the logistical and cost challenges that the company is facing as a result of the war in Ukraine, as well as spiraling global inflation and the lingering effects of the Covid-19 pandemic.
He says that, despite these adverse circumstances, Diageo has been making progress in improving its margins, as it moves towards its goal of increasing its market share in Latin America and the Caribbean from 4% to 6-7%.
The key to this growth will be an agenda focused on productivity, pricing and a sustained investment in marketing, at a time when Latin Americans’ brand preference is shifting toward premium products, he says.
“Brands such as Buchanan’s, Old Parr, Johnnie Walker, have shown a much more accelerated recovery than we were expecting”, Cárdenas sayd, adding that the company is also seeing growth of gin and tequila sales in markets such as Brazil and Colombia.
The following conversation was edited for length and clarity.
Bloomberg Línea: The war in Ukraine is interrupting international trade flows, and making fuel costs more expensive, among other issues. How do you think this new scenario will impact your operations in Latin America and the Caribbean in 2022?
Álvaro Cárdenas: What is happening with the crisis in Russia and Ukraine is a tragedy, and at a time when we were already facing many challenges due to the pandemic, with an unprecedented inflationary economy. Before it was a problem exclusive to emerging markets, but now it is impacting everyone, also with a great volatility of devaluations, especially of emerging currencies. I have never seen the cost of energy like this in my professional life, and it generates a lot of instability and anxiety in all markets. It has a huge impact on consumer confidence, who will be much more conservative in how they see the future and how to reposition their resources. Thank goodness we operate in a category that is resilient, especially international spirits and distillates. During the last three major global recessions it was one of the most resilient categories. And in the Latin American market we see the consumer is increasingly looking for more premium products and brands. And we are also very strong. Last year we grew our net sales by 45%. With that 45% we have to be careful because a lot of it also comes from a base that has been heavily impacted by the pandemic. We are also recruiting consumers outside the international distilled spirits category, which was always one of the big challenges we had.
In 2021, the company’s net income recovered strongly relative to 2020, but remained 16% below 2019 levels. What were the main obstacles last year and what may happen this year?
In emerging markets during the pandemic and still in fiscal year 2021 we were experiencing situations of shortages, lockdowns, closures in some countries of restaurants, events and hotels; still very depressed by the pandemic. So in our previous fiscal year, even though the second half of the year was very positive, we were still very much impacted in the first half of the year. But when you look at the results of the first half of this fiscal year, which is fiscal year 2022, they show a big recovery versus fiscal year 2019 at the level of sales growth and at the level of operating margins as well.
Since the beginning of the year [through March 14] Diageo’s stock in the United States has fallen by 20%.
The markets are very volatile. I’m not an expert on the subject, but we all ultimately read what happens in the news itself, and Diageo’s stock is no exception to that. We were seeing the markets rising much more, going up, getting more valuable. And what we’re seeing now is a lot of volatility because of the situation with Ukraine, plus all the inflationary issues. But even when we compare ourselves with our peers, Diageo stock is still a stock that is and will continue to be very attractive.
Which brands led the company’s recovery, and in which countries was it strongest?
The truth is that what we saw from a growth point of view was quite consistent across all markets. Scotch was very resilient as a category in almost all markets. Brands like Buchanan’s, Old Parr, Johnnie Walker, showed a much more accelerated recovery than we were expecting. So, Scotch has been one of the categories that has leveraged the recovery we saw in the first half of the year. Four years ago, gin was not an important category in the region; today it is starting to be quite relevant in markets such as Brazil and Colombia. We have tequila, which used to be very exclusive to Mexico, but it is already a trend in Brazil, very strong in Colombia, and in other Central American markets.
And in terms of general growth levels, which are the countries that led the recovery?
If you look at Paraguay and Brazil, the latter of which is a big market for us, it grew by 30% in the first half of this fiscal year.
Yes, in net sales. Mexico grew 13%. Central America and the Caribbean grew by 68%. So, double-digit growth and more in almost all the markets in which we operate.
In Argentina you have significant operations, but I imagine that the country’s economic instability limits the growth of the business. What are the economic variables that you follow closely here?
Argentina, and all the markets in Latin America have a quite different level of volatility, and I think that has never been a factor that inhibits the great ambition we have in all markets. One of the great benefits of working in Latin America is that you learn to manage this type of volatility, both monetary and economic, as well as political and regulatory. Our operation continues very well in Argentina; we operate with great allies. We recently launched Guinness, which is our stout, in Argentina, and it is one of the first countries in South America where we have Guinness. We follow very closely all the different macroeconomic variables, we continue to bet on the consumer and we have done it through local production and through having the best portfolio for the needs of the Argentine consumer. So, despite the volatility that has been going on for a period of time, as we have seen in Venezuela as well, we are still present.
You launched the double stout here, but why are the other Guinness varieties not imported? Is it because there is no market?
Because it is generally how we start with our strategy. It depends on the maturity level of the market. For example, when we look at the stout market in Latin America, stout within the whole beer segment is still very small. The region is still very much dominated by lager, which is lager or light beer. First we have to educate the consumer with pragmatism, and do it through the main variant that we have with Guinness.
In Europe and the United States the trend of non-alcoholic beverages or beverages with very low percentages of alcohol is growing, is this starting to be seen in Latin America?
It is starting to happen. I think we are starting to see it all over the world. It depends a lot, again, on how penetrated the distilled beverage category is in each market, and how mature the consumer is. In Latin America we are seeing that in some markets this trend is more relevant and more accelerated, such as in Brazil and maybe also in Colombia. But in general it is still very small. At Diageo we were determined to have a portfolio and react to these trends, and we are doing so in an appropriate way in each market.
You mentioned gin as a boom in the region, what would be the next drink that could be the next boom?
The increasingly relevant category is tequila. And right now I think it is the same as Scotch. But those two categories are the ones that we think are going to have much more preponderance as a consumer trend. We are already seeing it with tequila and we are just starting in the United States and Mexico, but all markets are becoming quite friendly to it, and when you look at all these players where they are entering to create their own brands, they are doing it in the tequila category. So we think that’s the next category that’s going to generate quite a lot, that’s going to be quite exciting for Diageo over the next 10 years.
Are craft beers a fad that’s going to grow, and how does it impact Diageo?
Consumers are looking for brands that speak to them, that are more personal, that tell stories. And I believe that this search for a more intimate connection with brands will continue, and that is one of the magical things that craft beer brings. I think this trend will continue. That is why we have Guinness, which is more than 200 years old, in our portfolio. It is the most craft-ish one we have. We are seeing an opportunity, market by market, to enter this segment. And with every product innovation from now on, the consumer wants to talk about sustainability, how this brand is making people drink better and not drink more, how this brand is based on organic products. The brand equity component is much more complex than it was before.
So you are evaluating local brand acquisitions for the next few years in Latin America?
Every day it’s a big part of our job to see what the opportunities are, what portfolio, what brands are connecting with consumers in a different way, and we’re always pretty open-eyed to see what opportunities we have in the markets. That includes Latin America.
What are Diageo’s main objectives for this year in the region in terms of investment and sales?
We have two big objectives. One is how we manage to recruit consumers outside the international distilled spirits category. Today we are about 4% of the total beverage market. We are quite relevant when you look at international distillates, but when you include beer and wine and locally produced distillates, we are 4%. The room for growth is very big. And look at how to move to 6 or 7%. We are managing to expand the margin, grow the topline, and at the same time we are increasing everything that is marketing investment. This is the equation that we have to keep working on from now on in order to maintain engagement with consumers. We can’t protect margin by cutting marketing. We have to be much more aware of the productivity agenda, and even more so now in terms of prices, with unprecedented inflation, and with an impact on costs.
Because of all the factors you mentioned, improving margins this year seems an impossible mission.
It is more complex than it was some time ago, but we see a consumer that, despite all these situations, is moving toward premium brands, especially in the spirits category. So they want new brands that connect and have a different value. That has made us very resilient. We are using technology, data, precision marketing, to better understand this consumer. We are generating pricing insights in a much more agile way. There are certain capabilities that we have built over time with respect to the culture, the systems, the tools we have, how the organization is working, that make us much more confident today in recovering those margins. So we are doing it. The reality is that in the first half of last year we were already with margins above fiscal 2019 in an environment with a lot of inflation.
What we are doing in Latin America, this whole journey of progress, of sustainability, of environment, society and governance, is a journey that we have already communicated in our 10-year action plan. It is a very challenging action plan with respect to the goals that we want to deliver. We are learning from this, what are the mechanisms that we have to put in place to measure progress through zero-carbon goals, our diversity and inclusion agenda and so on. I think Diageo is one of the most progressive companies with this agenda. We’re learning a lot in carbon measurement. We know a lot about managing water. In some places we are more advanced than others.
Translated from the Spanish by Adam Critchley