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In this Bain executive conversation, Nick Blazquez, president of Diageo Africa, sits down with James Allen of Bain's Global Strategy and Consumer Products practices to talk about doing business in Africa. In this segment, they discuss some of the challenges faced by companies doing business in Africa, and how Diageo has addressed them.
Allen: What are some of the big challenges you face by doing business in Africa?
Blazquez: There are a number of factors that underpin growth. All are eminently manageable. You need to identify those and invest sufficiently behind them.
One of the things that was clearly going to be a very limiting step—almost—for us was having sufficient leaders to run our business, and quite a number of years ago, I would say that we were quite 'expatriate-dependent' in terms of running our business. Over the last five or so years, we've moved from having about 30% of our general managers being African to about 70% of our general managers being African—and we've got more general managers now than we had before. And that's no accident, you know. There's talent out there and people who are highly capable, and having local folks run your business brings a different perspective that's very, very valuable. But if you look at the pipeline, it was pretty thin. So we decided to launch a pan-African graduate program to accrue a hundred graduates each year going forward for the next few years to ensure we had that pipeline of talent going forward.
Allen: We've looked quite extensively at the Diageo model and one of the things that's quite interesting about it is not only the way you develop talent, but you're also doing quite unique things with distributors as well in building capabilities.
Blazquez: We look to build premium brands and so we invest in marketing and so forth, but then we have to get the brands distributed, so we typically work with distributors for that and we invest quite a lot of money building their capability and helping them develop their business. It's great for them: They make more money, we make more money. So that sort of investing in that value chain and building the capability throughout both the distribution and retail channel becomes quite important.
Allen: With problems with energy, problems with water, issues around roads—how do you do business in a region with so many infrastructure issues?
Blazquez: There are real challenges in terms of infrastructure, whether it be in ports and getting stuff through ports. Or power. In certain countries, the cost of power is huge and really drives up our cost of goods.
However, the margins that you can earn are very attractive. Overall return on investment in 2011 was something like 30%. More and more people are coming into the consumer goods segment and are premiumizing. They're buying more expensive product, so the margins are improving. So, yes, infrastructure has costs—cost in time, cost in working capital and cost in terms of driving up your cost of goods. But the returns are there to drive really good business.
Allen: For a lot of the companies we talk to, one of their biggest issues in Africa is corruption. Is that a huge issue for Diageo?
Blazquez: Diageo's got a well-defined code of business conduct which precludes us from doing anything that is not in line with [ethical] conduct or not in line with laws. We're listed both in London and in New York, so therefore we are very conscious of the UK Bribery Act and the Foreign Corrupt Practices Act. We operate completely successfully in Africa—without paying any bribes, no facilitation payments—it's absolutely doable.
Allen: It's almost hard for you to separate doing good for Africa from doing good for Diageo.
Blazquez: My primary accountability is to create value. If I don't deliver superior returns, hit the numbers, it's going to "no pass." So you've got to do that. You've got to build confidence to allow the investment and so on. That's the ticket to the game. If you can do that and grow your people and give back, well how fantastic is that?
I don't find that doing good is somehow compromising the business. In fact, I think doing good is good for business. It really is. We buy a lot of grain for our breweries and for our spirits production facilities. We source something like 70% of that locally, and we invest in developing agriculture locally. We're doing it because it helps us manage our foreign exchange volatility. It's an ideal natural hedge. So it makes sense for us to invest in agriculture.
Likewise, we do a lot with our Water of Life Program. There are some three hundred million people in Africa who don't have access to safe drinking water and we decided to try to bring water to a million people a year.
As a consequence of that Water of Life Program, we've now brought water to about five million people over the last few years—that's fantastic.
Graduates want to work for us because they've heard of that program. Some governments want to work with us because they heard about some more social outreach program. So we did it because we just wanted to help, but actually it's helping business, so I think there's a virtuous circle between being a responsible corporate citizen—recognizing your responsibilities—but also growing your business.
We deliver superior growth, and we can give back. How good is that?