It is rare for a company’s financial and accounting team to a have major role in shaping its future corporate strategy. However, the finance department at Diageo Scotland has re-written tradition.
Led by finance director Stuart Lorimer, a former KPMG accountant, the group’s 65-strong finance team has moved beyond poring over and authenticating historical data to thinking about broader business and environmental issues to become instrumental in major strategic decisions. These include the recent one to embark on a £100m upgrade of the group’s Scotch whisky production facilities.
Diageo — formed 10 years ago from the merger of Guinness and Grand Metropolitan — already operates 27 distilleries across Scotland.
But Lorimer and his team recently persuaded the company’s board of directors of the need to invest £40m in a state-of-the-art distillery at Roseisle near the Moray coast, and a further £60m in enhanced production and supply facilities across Scotland.
A planning application for the distillery was lodged with Highland Council last week.
The distillery, to be located between Forres and Elgin, is expected to have an annual capacity of 10 million litres of pure alcohol, and is expected to be among the most efficient and environmentally-friendly distilleries in Scotland when it opens in 2009.
Only two others are believed to be capable of those levels of volume — William Grant & Sons’ Glenfiddich distillery on Speyside, and Takara Shuzo’s Tomatin distillery.
When Diageo decided it was going to have to step up Scotch whisky production capacity as a result of strong predicted demand from emerging markets such as China and India, the Scotland-based finance team was asked to look at various ways of achieving this.
The company has an estimated 40% of the global market for Scotch whisky, and owns brands including Johnnie Walker, J&B, Bell’s and Buchanan’s in the blended category, and Oban, Talisker, Caol Isla, Lagavulin, Cragganmore, Glenkinchie and Cardhu in the higher-margin malts category.
It also has a 34% stake in Glenmorangie’s parent, Moet Hennessy.
One option for Diageo was to “sweat” the existing asset base harder, for example by running some of its existing distilleries on a 24/7 basis.
However, there were a number of negatives associated with this route, including that it would have put stresses on the equipment and have had repercussions for health and safety, labour and the environment.
For example, shift-working would have caused labour shortages at some plants given their remote locations. There would also have been insufficient down time for repairs and maintenance and the effluent discharged by scores of hyperactive smaller plants could have created environmental concerns.
Other options examined by Lorimer included constructing a malt distillery capable of producing some 10 million litres of Scotch per year on a brownfield site and building two distilleries, each with annual capacities of some five million litres each.
George Kerr, Diageo Scotland’s commercial finance manager for spirit supply, said: “What we did was to evaluate the strength and flexibility of the existing asset base, evaluate how readily a new distillery might be integrated with the existing supply chain, and to integrate environmental considerations into our net-present-value calculations.”
He added that Diageo Scotland chief Bryan Donaghie has a particular mission to see the company’s carbon footprint reduced.
In the end, the finance team recommended that Diageo should pursue the option of constructing a single malt distillery, together with recommendations that the London-based company expand its grain distillery at Cameronbridge, Fife, enhance its bottling capacity at Shieldhall in Glasgow, and enlarge its warehousing and storage capacity across central Scotland.
The Scotland finance team’s thinking played a big part in shaping the decision-making at Diageo’s London head office, where the likes of chief executive Paul Walsh and chairman Lord Blyth were involved in the process.
Kerr said: “Our contribution was to produce an analysis showing the net present value opportunity of opening a new distillery of this capacity, and an evaluation of the downside risks associated with the forecasts for growth in whisky sales not coming true.”
However, Lorimer stressed: “The decisions are still made by the business. Our role is to ensure it is based on fact-based analysis — not gut feel.”
Lorimer said he is now looking to expand the Scotland-based finance team with the appointment of five further finance professionals, following eight recent appointments. The new recruits are needed following internal promotions and the creation of roles within the department, together with business expansion.
Lorimer said: “We’re looking for people that want their accounting ability to make a real difference to the company. We challenge our accountants to think as business leaders, understand the cost drivers, customer requirements, market pressures, and respond effectively. It can be a steep learning curve.”
Last week, Paul Walsh hailed a “renaissance” in the Scotch whisky market as he unveiled a 6% rise in pre-tax profits to £2.16bn, and impressed investors by raising targets for future growth.
Johnnie Walker was the star performer in the Scotch category, with sales in the international division (which excludes North America, Europe and Asia-Pacific) rising 18% and Asia Pacific sales rising 22%.
Johnnie Walker is the world’s best-selling Scotch.
Lorimer’s department is responsible for a £700m per annum cost base that incorporates distillation, maturation, product development and packaging. Many of the assets they supervise were once owned by Distillers Company Limited, IDV, Grand Metropolitan, and Seagram.
They also take care of the Bushmills distillery in Northern Ireland, formerly owned by Pernod Ricard.
Diageo Scotland last year produced 52 million cases of spirits, 37 million of which were Scotch whisky. Non-Scotch brands produced in Scotland include Gordon’s, Tanqueray, Smirnoff and Captain Morgan.
This article was published in the Herald on 10 September 2007. Read on Herald Scotland.