Guinness owner Diageo entered into a profit-sharing arrangement with US rapper and entrepreneur Sean Combs, also known as Diddy, when celebrity partnerships were still rare.
In 2007, US sales of Diageo’s premium vodka, Cîroc, were lagging. In an attempt to boost its relevance, the London-listed drinks giant made the surprise move of signing the rapper to take charge of the brand’s marketing.
Cîroc flew off shelves under Combs’s direction and by 2010 became the fastest-growing brand in the US, rivalling premium vodka labels owned by Pernod Ricard and LVMH.
“I hit the club, ordered some Grey Goose, switched it for Cîroc to give Puff’s stock a boost,” sang Jay-Z in his and Kanye West’s 2011 track “Primetime”.
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Sixteen years later the relationship between the two sides has descended into acrimony, with the musician and conglomerate poised to enter a bitter legal battle over the terms of their partnership. The subject of the dispute is their joint venture, DeLeón, a premium tequila brand the two sides acquired in 2014.
The case comes as a warning shot to companies entering into high-profile tie-ups and signals the potential for more litigation should the relationship break down or if there is a mismatch of expectations.
“This will start happening more and more,” said Spiros Malandrakis, analyst at Euromonitor. “The number of celebrities with spirits brands means statistically these numbers will rise.”
Combs sued Diageo in May for breach of contract, alleging that the drinks giant had underinvested in DeLeón and Cîroc, stymied their distribution and typecast them as “black brands’' for “urban” consumers. He accused the company of racial discrimination, alleging that executive Stephen Rust told Combs in late 2019 that “if he were Martha Stewart his brands would be more widespread”.
Diageo called the allegations “a transparent attempt to pressure Diageo into an early settlement of a planned parallel arbitration process” and accused Combs of failing to fulfil his duty as a 50 per cent owner, alleging he only invested $1,000 (€910), while Diageo put in more than $100 million.
The legal battle comes at a time of upheaval for the London-listed group. One week after Combs filed his case, Diageo announced that its chief executive of almost a decade, Sir Ivan Menezes, had died suddenly after a short illness. His replacement, former North America president Debra Crew, stepped in a month early to fill the role.
A hearing on September 7th will establish whether the case should proceed to trial – in which intricate details of Diageo’s negotiations and correspondence with its star partner could be exposed – or be resolved behind closed doors through arbitration.
William Delgado, a Los Angeles-based lawyer, said breach of contract cases such as this one were extremely common: “This is as bread-and-butter basic as it gets.” What is less common, he said, were accusations of racism as the basis for why someone was breaching the contract.
Combs alleges that DeLeón sales floundered because of the spirit’s “sparse distribution and relegation to urban communities”. DeLeón was distributed in 3 per cent of all possible outlets, compared with 34 per cent, 36 per cent and 14 per cent for rival tequilas Casamigos, Don Julio and 21 Seeds respectively, according to the rapper’s filing.
The 53-year-old entrepreneur also claimed Diageo failed to practise what it preached on diversity, using images of black business partners in advertising materials without offering them equal opportunity.
The allegations jar uncomfortably with the group’s image as a leader in diversity and inclusion.
“This is about ensuring that all entrepreneurs are empowered to compete and reach their full potential,” said Tarik Brooks, president of the rapper’s company, Combs Global, of the case.
The DeLeón joint venture came about in 2013, when Combs introduced Diageo’s North America president to the tequila, which was popular in Los Angeles clubs. The two sides agreed that if Cîroc was a success, Combs would have equity in their next venture.
“With Cîroc, we tested the waters – or, I would say, we dated,” Diddy told Forbes in an interview at the time. “Now, with this joint venture, we took this step and we got married.”
The honeymoon was a short one. DeLeón did not take off at the pace Cîroc had. When Diageo acquired the remaining 50 per cent of its Don Julio tequila label in the following year, the relationship started to sour. Combs felt further sidelined when Diageo acquired George Clooney-backed Casamigos for $1 billion in 2017. The group also bought Ryan Reynolds’s Aviation Gin in 2020.
Industry sources said as a result, the partnership entered a deadlock in which the brand was maintained but innovation and expansion were placed on ice.
The drinks group alleges that in 2020 Combs threatened to go to the press with accusations of racial discrimination. The company hired law firm Cadwalader to conduct an investigation in response to the allegations, according to two people familiar with the matter.
A spokesperson for Combs said: “If they were really interested in getting to the truth, Diageo would have informed and included Mr Combs and his team in the investigation, given the seriousness of the allegations.” Diageo declined to comment on the investigation and who was aware of it.
Malandrakis said the case shone a light on the risks of such high-profile partnerships, including the media attention around the individual that heightens the chance of scandal and the short-lived nature of celebrity. Good celebrity partnerships should be a springboard on which to build a brand, not to be relied on indefinitely, he said.
“Spirits have a horizon measured in decades, not in years. And no celebrity can possibly be relevant for many, many decades. Even George Clooney has a limit,” said Malandrakis. “It might be a wake-up call for Diageo to come up with a plan B ... beyond celebrity culture.”
Since the drinks giant cut ties with the rapper at the end of June, Combs’s company said in its latest legal filing that Diageo had prohibited him from being involved with the Cîroc brand and had hindered his efforts to promote DeLeón.
“It was never the goal to sever ties with Diageo,” Combs’s lawyer John Hueston told the Financial Times. “They have no legal basis to terminate the agreement.”
Diageo said it had “exercised our contractual rights to terminate the marketing services agreement in place for Cîroc and begin the wind-down of the DeLeón joint venture”.
One week before he filed the lawsuit, Combs launched an online platform called Diddy Direct to help consumers locate stores stocking Cîroc and DeLeón. A Diddy Direct video posted to his LinkedIn profile last month showed Combs distributing bottles of DeLeón to stores in Harlem, New York, with the hashtag #wheresdeleon. The caption read: “Let nothing or nobody stop you.” – Copyright The Financial Times Limited 2023
