United Spirits is undergoing a paradigm shift. I can’t be sure if it is simply because Diageo does things differently from Vijay Mallya or just that alcohol world itself warrants a change. Very often a superb system is created based on an ongoing business environment and when the environment changes, the tinkers starts. Slowly and very slowly this system becomes a patchy, system with too much Jugaad and becomes a liability instead of an asset. This could have happened to USL too. Vijay Mallya went around the country picking up the No1 or No2 brands in each geography, much like the British went about taking over kingdoms and making them his ______ . This worked well for a while, a long while and maybe it could have continued to work, but no one can really argue with the simple advantages of the economies of scale of national brands. This is where Diageo comes in. If you have read Meluha, its the simple difference between the Suryavanshis and the Chandravanshis. 😉
Cutting the chase, on the entire episode of getting VM out and Diageo in, Diageo has spent the last few years cleaning up the company. Figuring out what worked, what works and what according to them will work. While examining their Annual Reports I just couldn’t get over how uncanny their cleaning’s up process was to the Konmari method of Tidying up. Yes, Marie Kondo ! These are the resemblances that I found.
Tidy All At Once – Diageo began fixing everything at once. The books, the brands, the people, the distribution channel, the disinvestment and most importantly the INCENTIVES. The logic is simple, when you go about fixing one thing at a time, while you concentrate on fixing a particular problem, the other problems can deteriorate and make it more difficult to fix in the future. Also, since all systems and processes are interconnected, it is almost impossible to fix things in isolation. It is imperative therefore to be gaining ground on most problems at the same time. Diageo began fixing everything at once. Generalists rather than specialists are usually the best at getting these jobs done. It helps to have 10 hands when you are cleaning up !
- Visualise the Destination – The destination envisioned was pretty simple.
- Focus on selling brands that cost more than Rs 400 a bottle and franchise or sell rights for brands that sell less than Rs 400 a bottle.
- Target and EBIT of 16-18%
- Monetise all non-core assets and rationalise debt.
- Massively ramp up Corporate-Governance.
- Concentrate on Whisky, Vodka and Rum.
- With a 10% of sales budget for Advertising and Promotions, focus on Brand Extensions and Events.
- Bring in maximum cost efficiency and productivity.
- Become a de-facto FMCG company.
- Determine if an item “Sparks Joy” –
- Problem fixers generally start with the problems. They focus on what is NOT WORKING and try to fix it.
- Anand Kripalu, has used the Konmari method in doing just the opposite. He is making USL’s strengths stronger and selling off his weaknesses or things that don’t fit into his visualised destination.
- By focusing on what brings USL joy, the management has simply gotten rid of focus on the rest.
- Human tendencies make us rationalise our inefficiencies. Sometimes we also just feel bad. Its always easier to promote than to fire and this method allows you to focus on what is important and forget the emotional baggage.
- Tidy by Category, not Location – This image says it all.
- If you don’t pick your battles wisely, you are bound to run out of energy way before the main battle.
- This is probably the single biggest change that is going to lead to Diageo growing USL to a scale that it could never imagine, that too profitably.
- Tidy in Order.
- Books of Account
- Categories to focus on and categories to de-prioritse
- Cost and production efficiencies
- INCENTIVES & CULTURE
There is a lot of other stuff that is continuously happening at USL which will project it to a 1,00,000 cr market cap company, but this resemblance with the Konmari was too uncanny for me not to blog about.
In short – buy goddammit !