Shaking up the industry for a new consumer

The IWSR interviews Deirdre Mahlan, Diageo’s North America president

Diageo North America president Deirdre Mahlan tells the IWSR how the company tackles the challenges of a rapidly changing industry

 

Diageo North America president Deirdre Mahlan tells the IWSR how the company tackles the challenges of a rapidly changing industry.

Diageo remains the bellwether of the US spirits industry, such is the scope of its business and dominant position across most categories and occasions. Yet that size also brings challenges, particularly in a US marketplace with rapidly changing consumer and industry dynamics.

The conventional wisdom is that big brands are under pressure. Certainly, the data indicates that many of the big iconic brands that have dominated the US market for decades – e.g. Budweiser, Heineken, Absolut and Diageo’s Smirnoff – are now finding growth more elusive. The industry landscape is changing in other ways as premiumisation trends show no signs of abating, nor does the growing consumer preference for brands with real heritage and craftsmanship. There is also a growing moderation trend among some consumers – the so-called mindful drinking phenomenon. New sales channels are also emerging, whether it is e-commerce or the growth of sales at the point of manufacture. You could argue that Diageo, given its dominant position, has more to lose than most from this change. Yet, on the flipside, Diageo has the resources and wherewithal to fully exploit these incipient opportunities. Thus far, the company seems to be navigating the new environment well. The company wrapped up fiscal 2018 by reporting a 4% rise in net sales in the North America region, with US spirits growing 3% and continued growth in both Diageo Beer Company USA and Canada. Keep in mind that North America is Diageo’s largest single region, representing some 34% of global sales.

Diageo North America president Deirdre Mahlan explains that the US distilled spirits market overall remains buoyant. “Overall trading in the industry has been pretty consistent with different types of opportunities and acceleration depending on what categories you are in and that is determined by consumer trends, but overall there has been stable growth in the US spirits industry of around 4% overall,” she says. “Spirits have also been continuing to gain market share from beer. That looks to continue on the strength of innovation and a consistent level of marketing. So overall trading conditions are good.”

Mahlan notes that Diageo is gaining share in most categories that it participates in, except for vodka. Vodka sales were down -3%, and within that Smirnoff was down -2%. “We are having to do some work to effectively stabilise and then re-base our investment against new consumer messaging platforms in vodka,” she says. “We have done that with Smirnoff and we are getting improving performances.”

Sales are also being pulled down by a handful of poorly performing flavour variants, observes Mahlan. She concedes that there was a certain amount of over-proliferation in vodka flavours, but says overall, they were a very positive addition. “It is absolutely true that there was an over-proliferation. Hindsight is 20/20, but there was a time where we moved very strongly towards investing against the Millennial population, which is important because they are a growing cohort, but then we did not spend enough of our energy and resources investing against the existing [Baby Boomer] cohort, which has long driven the growth of the brand and that is not the Millennials. The Millennials are the future.

“Vodka flavours did not damage the equity of those vodka brands,” continues Mahlan. “There is no evidence of that. What happened was it was a trend that was leveraged significantly across the industry and then the consumer moved on and decided to try something else.

There is a continuing role for vodka flavours.

That is not necessarily a bad thing. Vodka flavours have created a significant amount of value in this industry – sometimes people forget that – but the value is material. We have to remember that over time people will move on and so now perhaps is the time to rationalise some of those flavours if they are not appealing. Even some of the smallest flavours are creating an amount of value here. The consumer trends take care of themselves. The ones that came at the end of the cycle – the confectionery flavours – are the ones that fell the fastest. But things like raspberry, watermelon, green apple and vanilla are still sizeable brands and in many periods, they grow. There is a continuing role for vodka flavours.”

Mahlan refutes the notion that Smirnoff’s problem is a growing resistance, particularly among Millennials, toward mass-market brands. “When people say the Millennials don’t buy big brands, I point out that they certainly buy every Apple product that there is,” she says. “Our experience with Millennials is that they are perhaps more focused on experiences and more knowledgable. They want to know your brand, they want to understand what is in the brand and what the brand stands for. Being a mass-market brand is not a problem as long as your message is absolutely authentic, on target and clear. The shift that we are seeing in Millennials that is really important for brand builders is their focus on experiences. We are very focused on occasion. It is about the right brand, right occasion and right price. Our brands have to show up and augment consumer experiences and those are the brands that we see winning over the long term.”

Mahlan doesn’t believe that the growth of the craft sector is significantly impacting big brands. She notes that large brands (selling more than 1m cases) are still gaining share relative to craft brands (which Diageo defines as less than 40,000 cases). “I don’t think it is accurate to say that large brands are under pressure,” explains Mahlan. “What is happening is that there are more large brands. So now some brands, including Bourbon and some of our own brands, have gone from small brands to large brands and they are creating more competition for other very large brands. There is some share re-balancing among the biggest players. There is no evidence that the smaller brands are gaining share relative to brands over a million cases. It feels harder to compete, but that is because there are more successful big brands.”

That isn’t to say that vodka doesn’t have challenges. “It isn’t anything fundamental,” says Mahlan. “Vodka is probably the most versatile and mixable spirit. There are two major things that are happening now. One is the consumer exploration into different taste profiles and that is where tequila and whisky come up… They are also very interested in learning about the authenticity and history behind a Bourbon brand, for example. It is the same thing with tequila. Unflavoured vodka has never stopped growing. Because people have moved from flavoured vodka onto other types of whisky, including flavoured whiskies, the flavoured vodka category is declining and that is masking some good performance in terms of unflavoured vodka.”

Fortunately, Diageo is capturing much of that consumer migration into whisky and tequila. Crown Royal grew 3%, with growth accelerating for Crown Royal Deluxe and Crown Royal Regal Apple, and this partially offset by Crown Royal Vanilla lapping its launch last year. “Crown Royal is actually our biggest brand in this [US] market,” points out Mahlan. “People sometimes forget that. It has very strong equity in this market and we have been doing two things – one is really ensuring that we amplify the overall messaging about the equity of the brand, which is about generosity effectively… The second piece is our flavoured whiskies.” Crown Royal Regal Apple was launched in 2014 and reached 1m cases faster than any other brand, and it grew double digit this past fiscal year. Diageo then successfully launched Crown Royal Vanilla and that has been a slower build.

Find out more about US whiskey in our US Beverage Alcohol Review and globally in the IWSR Global Database.

For enquiries, please email enquiries@theiwsr.com or call us on +44 (0)20 7689 6841.

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