Diageo sharpens its approach

Diageo used its recent bi-annual Capital Markets Day Investor Conference to highlight how it is changing its approach

Diageo remains the bellwether of the global spirits industry, such is the company’s reach in terms of markets, categories and brands. We hear more from CEO Ivan Menezes and regional presidents Deirdre Mahlan and John Kennedy.


Diageo remains the bellwether of the global spirits industry, such is the company’s reach in terms of markets, categories and brands. The company is in rude health and used the occasion of its bi-annual Capital Markets Day Investor Conference to reaffirm its profit guidance for the coming year. The company expects net sales growth towards the upper end of its mid-single-digit range and to grow organic operating profit ahead of net sales in the range of 5% to 7%.

CEO Ivan Menezes told investors in New York: “Our strategy is to be a reliable compounder of growth, creating a virtuous circle of consistent top-line performance, margin expansion and increased investment in our brands. Consistent execution of our strategy is delivering the results we intended.”

That positive outlook was recently independently confirmed when the IWSR reported that Diageo accounted for a highly impressive 21 of the top 100 brands in its Largest Growing Brands list. The next-largest company was Pernod Ricard with eight.

Diageo accounted for a highly impressive 21 of the top 100 brands in its Largest Growing Brands list.

Menezes said the consumer sector broadly remains challenged, with some macroeconomic headwinds and increased potential for volatility. Nevertheless, the total beverage alcohol (TBA) is an attractive one in which to participate, with a natural runway for growth, when compared with some other consumer packaged goods (CPG) categories. It is well supported by robust consumer trends. “Our deep consumer insights, strong customer relationships and better use of data and technology, combined with the strength and breath of our portfolio is enabling us to outperform our CPG peers.”

Menezes gave a broad outline of those positive consumer trends. “Consumers continue to switch into spirits from beer in markets such as the US, UK and Australia, from wine in Europe, as well as from illicit markets across Africa. In addition to continued TBA share gains, the international spirits market is trading up as consumers seek out more premium brands and experiences.”

The growth in the TBA market is underpinned by strong consumer fundamentals in developed and emerging markets. Consumers are drinking better across the world. In developed markets spirits are well positioned and ‘on-trend’ and are premiumising. In emerging markets, it is expected that 550m new legal-drinking-age (LDA) consumers will enter the market by 2030. “In addition, due to growing incomes, we expect an additional 750m consumers will be able to afford international-style spirits by 2030,” said Menezes.

“Spirits penetration in many emerging markets is still low when compared with developed markets, providing the potential for additional growth.” With the overall spirits market looking set for continuing growth, Diageo currently has dominant positions in most geographies and spirits categories Menezes noted that Diageo has a leading position across the markets that are expected to drive over 80% of forecast retail sales growth in the medium term. “In each of these markets we have great brands, marketing and innovation capabilities, as well as a strong route to consumer which will enable us to continue to grow and strengthen our business. Most importantly, we have an advantaged route-to-market where it matters, in the US, the world’s largest profit pool, as well as an enviable leadership position in Europe, India, Latin America and Africa. “We are also well positioned, with a leading position across the categories that are expected to deliver almost half of forecast growth,” he added. “We are particularly well positioned in the resurgent gin category as well as Scotch, the largest international spirits retail value pool. In addition, while we don’t participate in Cognac directly, our minority position in Moët Hennessy gives us exposure to the leading position.”

Scotch remains key

Scotch is Diageo’s biggest category – accounting for more than a quarter of Diageo net sales. It has the largest international footprint of spirits categories with significant scale in almost all international markets. Scotch economics are very attractive. However, strong emerging market exposure presents economic, regulatory and foreign exchange (FX) volatility.

Diageo reported that Scotch had a good start to the fiscal year, with half-year sales to 31 December rising by 7% and broad-based growth across most regions and brands. Diageo has a leading position in Scotch and is nearly twice the size of its nearest competitor (Pernod Ricard) with a 40% value share.

The company’s flagship Johnnie Walker brand has been rejuvenated, with net sales rising by 10% in H1.

The company’s flagship Johnnie Walker brand has been rejuvenated, with net sales rising by 10% in H1. Within that, the premium Johnnie Walker Black was up 10% and ultra-premium Johnnie Walker Blue grew by 12%. Johnnie Walker’s performance was significantly bolstered by the enormous success of the limited-edition Johnnie Walker White Walker, which was a collaboration with the Game of Thrones TV series. This has been a major recruitment tool for the brand.

Highball to boost Scotch

The company is now set to embark on a major brand initiative to reach key influencers, particularly bartenders, and is launching a highball programme. Diageo president of Europe, Turkey and India, John Kennedy said: “We revisited our serve strategy and asked ourselves, consumers and leading-edge bartenders whether the early work we had developed on highball was the right choice to reframe Scotch and recruit new consumers. The answer was a resounding yes. We believe the highball can drive broader consumption.”

Diageo also has several strong Scotch brands with strength in specific markets, such as Buchanan’s in Mexico, Old Parr in Colombia, and J&B in Spain. Buchanan’s, which has grown at a 10-year CAGR of 8.2% in Mexico, now sees the opportunity to build Buchanan’s in the US, based on the large and growing Mexican population there.

The company has also taken measures to extend its focus at each end of the Scotch category’s spectrum – the primary and prestige segments. In the former, Diageo re-entered primary Scotch five years ago by activating brands such as Black & White, White Horse, VAT 69 and Bell’s.

The re-entry into primary Scotch filled two key objectives: firstly, to recruit emerging market consumers, giving them a taste for Scotch as they trade up from local products and acting as a ladder to standard-and-above products; and secondly, as a hedge against volatility, enabling Diageo to retain consumers as they trade down in more difficult economic times. Kennedy said: “We continue to see primary Scotch as an important recruitment tool in selected emerging markets as consumers come into the threshold of affordability of international spirits.”

Kennedy concedes that Diageo’s performance within the booming market for malt Scotch was somewhat underwhelming in fiscal 2018 and it is now looking to rejuvenate that portfolio. “In fiscal 2019, we revitalised our malts strategy, recognising that consumers are drawn in by the craft and authenticity of malts, but are recruited and captured by the power of brands,” he said. “We have made a number of interventions to build priority, powerful brands and to drive performance on four focus brands.”

The Singleton will serve as its big mainstream play and be the chief recruiting agent, competing against the likes of Glenfiddich and The Glenlivet. Talisker will compete in the increasingly popular peated Islay subsegment currently dominated by Laphroaig. Copper Dog will play in the blended malt category and compete against Monkey Shoulder. The recently refurbished Mortlach will be Diageo’s main prestige offering in malts and comprises part of a larger effort to boost its presence in this area.

While the prestige Scotch opportunity is a global one, China is seen as a key battleground, particularly as the government’s campaign against extravagant consumption fades. The Chinese international spirits market is the most premiumised in the world, with around 90% of retail sales value (RSV) represented by products within super-premium-and-above price tiers. Scotch is the second-ranked international spirits category in China, behind Cognac and is now back in growth after a hiatus of several years.

Kennedy says: “[In Greater China] Johnnie Walker Blue is the heart of what we’re doing, but we have The Singleton and that is a very strong brand for us. It’s got to significant scale and we’ll continue to drive that. That tends to be in Taiwan and mainland China. We’re focused more on prestige and special releases at the highest end of the market where there seems to be an appetite there. We’ve been tracking the interest in Scotch in duty free from the travelling Chinese consumer. What we’re seeing is there’s three times higher level of interest in buying Scotch abroad now than there is Cognac. That’s a good sign that this is a category that’s on trend for the future.”

Scotch is also performing well in the US. There, the company’s Game of Thrones partnership has been particularly effective. Diageo North America president Deirdre Mahlan said: “The most exciting aspect of the Game of Thrones partnership has been the halo effect of White Walker on the Johnnie Walker trademark, as well as our ability to extend the partnership to our single malts, bringing new consumers into our trademarks, driving incremental floor displays and consumer engagement.”

Diageo is the leader in the US spirits industry, with share close to double that of the second-largest competitor.

That growth is underpinned by overall favourable trends for spirits. The US is the largest global TBA market, with consumers spending more than $220bn annually. Within that, spirits are taking a greater share of TBA, gaining 5% share within the past decade. For the last five years the sector has grown around 4%, outpacing much of the broader CPG category; spirits now has 37% share. Diageo is the leader in the US spirits industry, with share close to double that of the second-largest competitor.

Diageo’s value growth in the US is outpacing volume growth because of mix improvements. Mahlan said: “Though premium growth has been decelerating, super-premium-plus tiers are accelerating. Given this context we have been focused on accelerating our growth and increasing our share in super-premium-plus tiers. We’ve seen some early results of this focus – as evidenced by our acceleration in F18 growth rates across super-premium, ultra-premium and luxury. Value and popular have been consistently negative or flat – supporting our continued strategy to limit our investment in these price tiers.”

This premiumisation is evident with tequila. The US is the largest tequila market in the world, with more than $4bn RSV. The category is continuing to grow and premiumise quickly, and premium-plus is expected to drive more than 80% of RSV growth in the next five years, reinforcing Diageo’s decision to acquire the remaining 50% of Don Julio that it did not own and Casamigos. These brands are two of the biggest contributors to category growth and have each increased their share of the category by 1% of value share from F17 to F18.

Diageo sharpens its innovation edge

Menezes explains that the role of each innovation falls into one of three categories: recruit, re-recruit or disrupt. “Our focus is on recruiting new consumers to our occasions and brands. We expect more than 50% of innovation projects to be within this recruit category this year, compared to around 30% four years ago.”

This is enabled by Diageo’s understanding of white space, and its strength in developing consumer insights. Take Hop House 13 Lager, which meets the criteria of a core lager occasion but offers consumers a brand from the highly recognised brewers of Guinness that have greater flavour and craft credentials. Re-recruit gives existing consumers another reason to choose Diageo products such as Baileys Strawberries & Cream. Disrupt is focused on changing consumer attitudes or behaviours such as Pure Brew non-alcohol beer. In the US, Diageo is the clear leader in innovation, with seven of the top 10 spots in the last 52 weeks, over three times its market share.

Mahlan adds: “We have shifted our innovation strategy to move more to recruit and disrupt, which were more sustainable platforms for brand growth because they access new categories or new consumer occasions. So, for example, say, five years ago, a significant amount of our innovation in the US was re-recruit. And that would be something where we’re just bringing new news to the consumer, same category, same occasion. So, another flavour on Smirnoff, for example. The shift to really focus the development of our innovation to recruit and disrupt creates a more sustainable platform. Crown Royal Regal Apple was a totally new consumer occasion [higher-energy occasions]. It had a very small cannibalisation effect because it was a new occasion. Same thing with Ketel One Botanicals, which is accessing volume from another category, wine.”

Menezes adds: “Our strong consumer insights are enabling us to launch bigger and more successful innovations; However, across the consumer goods sector it can be difficult to maintain momentum behind new innovations. Often, successful launches fail to drive consumer traction and repeat purchases leading to volatile financial performance. Our focus on ‘recruit’ innovation grounded in stronger consumer insights is bringing new consumers to our brands and driving sustainable quality growth.”

Innovation is also playing a big role in Diageo’s emerging market strategy. In India it has played a part in repositioning its IMFL portfolio out of the popular segment and into the prestige-and-above (P&A) segments. P&A currently accounts for two-thirds of the profit pool of the IMFL category, and that is expected to grow to 85% by 2025 and over 90% by the turn of the next decade.


This content is courtesy of Global Drinks Intel magazine and provided to the IWSR with permission for publication.

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