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Business News/ Companies / News/  Transformation, not legacy issues, the real challenge: USL’s Kripalu
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Transformation, not legacy issues, the real challenge: USL’s Kripalu

Subject to shareholder approval for integration, Diageo India and all its operations will get integrated into United Spirits, Anand Kripalu says

United Spirits chief executive Anand Kripalu. Photo: S. Kumar/MintPremium
United Spirits chief executive Anand Kripalu. Photo: S. Kumar/Mint

Mumbai: When Diageo Plc nominated Anand Kripalu, a former senior executive at Cadbury Ltd and Unilever Plc, as the next chief executive officer of United Spirits Ltd in September 2013, industry experts were sceptical if an executive from outside the liquor industry could succeed at India’s largest liquor company.

After starting out as CEO-designate in October last year, Kripalu took over the post from Ashok Capoor in May.

Circumstances haven’t helped Kripalu. During his short stint so far, he has been forced to deal with legacy issues related to United Spirits’ Indian promoter, UB Group. Soon after United Spirits reported its thrice-delayed, fourth-quarter earnings in September, the company initiated an investigation into its accounting practices, as several cases of suspected financial impropriety surfaced.

Three independent directors quit the company’s board in the same month. In November, the company’s public shareholders also rejected 10 related-party transactions involving Diageo and Vijay Mallya’s UB Group.

Kripalu, however, said “green shoots" had started to appear. In an interview, he spoke about the company’s strategy to improve market share and recover margins, plans for asset sales and progress in the internal investigation. He also spoke about integrating Diageo India with United Spirits. Edited excerpts:

United Spirits has lost market share and seen margins decline over the past few years. What is the turnaround plan?

The vision for this company is to become the best performing, the most trusted and the most respected consumer goods company in India. To become the best performing, there are four strategic priorities we’re going to pursue. First is focus on power brands. We have roughly 140 brands, you add another 15 from Diageo—how do you choose which brands to focus on. The second priority is route to consumer—sales and distribution. We are trying to shift the focus from a sell-in, volume-based approach to quality of sale. This involves a big mindset change in the sales guys. The third priority is efficiency—cost optimization across the value chain, monetization of non-core assets to generate cash and reduce debt and optimizing our manufacturing footprint.

We are also investing about 700 crore in next three years on just upgrading our factories and bringing them up to a standard that is fit to be a Diageo factory.

The fourth strategic priority is organization. We need to make our structure efficient, strengthening areas such as corporate governance, compliance, corporate relations, legal. We are also trying to create an easier culture in the company. We introduced things such as flexible timings, work from home, letting people wear casuals on Fridays, etc.

For achieving the second part of our mission statement—to become the most trusted and the most respected consumer goods company in India—that’s a personal priority for me. We are improving governance, controls and standards. The industry doesn’t have a great reputation and this is where there’s a legacy creating opportunity (for me).

We changed our auditors (last year) and we went through a lot of challenges because of that change. But I still think it was the right thing to do. We launched a whole new code of business conduct.

We’ve launched an open hotline for people to complain about things that are not being done right.

Which are the focus brands that you have identified?

We are doing this as per the market structure. There are four segments—popular, prestige, premium and luxury—and find brands to play in each segment and which brand will play what role. Some brands will be for gaining share from competitors, some brands will play the role of growing the segments. It’s an ongoing process. Some brands are obvious. For instance, Bagpiper will be in popular, McDowell’s No.1 in prestige, Black Dog in premium and Johnnie Walker in luxury and so on. But at any point, I cannot see a business of this size having more than 15 or 20 power brands. How long will it take to get to that position is something we are working on.

Will you sell some brands?

One hundred and forty brands is too many—that’s clear. But we’re not going to sell brands, just to be clear. We may migrate some brands, we may franchise out a few brands. Basically, we have to be flexible about different business models that may work in various states.

What’s your target for making money from selling the non-core assets?

It’s hard for me to talk about the exact numbers. We are going through the monetization and we will monetize a material amount of non-core assets. For instance, the capex plan of 700 crore over the next three years for improving our factories will be more than funded by asset monetization. You’ll also start seeing a significant reduction in debt.

United Spirits’ margins are far lower than rival Pernod Ricard’s. Are margins more important for you or increasing market share?

Are we going to try and improve margins in time? For sure. Are we going to try and improve market share in time? For sure. The way you can drive premiumization in this category allows you to both invest and grow margins. Right now, we are going through a period of massive change. We are changing how we operate. We’re setting our brands right, we’re going to invest more behind some of our brands,we’re changing our capabilities—there’s a lot happening.

Once we’re through this phase we’re creating the platform for long-term success.

How long will this phase last? Is it taking too much time?

That you have to judge. We’re already starting to see green shoots. The last quarter’s results show that. And you can’t ignore the kind of change we’re trying to drive for this industry. That is an effort that is going to be great for all.

Is there direct pressure from Diageo’s global investors to turn around United Spirits?

Do you think there’s any chance that Diageo would invest $3 billion in something and there would be no pressure? It’s a no-brainer. This is one of Diageo’s biggest moves globally and India is now Diageo’s second-biggest market.

To what extent are the legacy issues related to UB a hindrance in turning around United Spirits?

Whatever the legacy issues are, they are in the public domain. In no company can you say that nothing can come up later. But I’m sure nothing material will come up. We and our auditors have gone into it in great detail. So I don’t think anything material will come up.

The real challenges for me today are not legacy issues. I mean they take up time, we have to go to shareholders to get approval, but the real challenge is the transformation that we’re trying to drive and making that happen as quickly as possible. We’re changing the way this industry has worked for half a century. That is the challenge: doing that well and doing that with a minimal loss of business. And I’m encouraged so far.

Several analysts expected Diageo to bring in executives from outside United Spirits at various levels. I will bring in outside people, where I think we need to change or where there’s a capability gap we can’t fill internally.

I’ve kept most of the leadership team intact. I’m not trying to change for the sake of change.

We need the right amount of outside-in experience and inside-out knowledge. This is a complex industry and we need people who understand the nuts and bolts. We’ve brought in some people from FMCG. We hired a customer marketing head from Reckitt Benckiser, we brought in someone to drive sales effectiveness from the industry, we have a new HR head who worked at Unilever and Vodafone. But it’s a horses for courses approach and in general the talent at the senior level at United Spirits is pretty good.

What is the scope of the internal probe? Can you identify executives whose roles are being looked at?

The scope of the probe is to get to understand the three qualifications that came in the audit report. It’s about receivables, the UBHL (United Breweries Holdings Ltd) loan and if there was any lien created (on United Spirits assets to facilitate a loan to Kingfisher). It’s also about finding out whether there were any other transactions of this type. Then, to understand what was done and whether it was appropriate or not. And then, whether there were any individuals involved.

The probe is not about individuals, but about the issues.

Will you take action against individuals, no matter who, if you find they acted wrongly?

It’s premature to say right now, but if you’re doing a probe and if you find something you have to take action. Otherwise, what’s the point of doing it? But we have to wait and see and I don’t want to speculate.

When do you expect to finish the internal probe?

In the near future. I can’t give a specific date because we have to do the job properly.

United Spirits is going back to seek shareholder approval for the integration with Diageo India. There’s fear among shareholders that United Spirits doesn’t have the capability to handle luxury Diageo brands such as Johnnie Walker. What’s the plan for the integration, if shareholders approve of it?

Subject to the shareholder approval of the integration, the plan is to integrate the brands, the people, manufacturing and the business. Diageo India and all its operations will get integrated into United Spirits. All Diageo India people will also move to United Spirits. So it’s not as if we’re just moving the brands and leaving behind the people who were managing these brands. The people are coming with the brands.

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Published: 19 Dec 2014, 12:42 AM IST
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