What can the spirits industry learn from Diageo? - Comment

Following on from just-drinks' analysis of Diageo's performance over the last five years, spirits commentator Richard Woodard considers the takeaways for the wider spirits industry.

Diageo remains the powerhouse of the international spirits industry, with a strong grip on a number of the most significant categories, thanks to its stable of marquee brands and unrivalled routes-to-market. The company has not had things all its own way over the past five years, but it has emerged strongly from the challenges posed by macroeconomic difficulties in emerging markets, plus the increasingly-fragmented nature of mature markets filled with 'craft' start-ups and newly-created brands.

Breadth and scale

The first and most obvious lesson from analysing a company of Diageo's scope and magnitude is that of breadth: breadth in terms of category, geography and market position. Essentially, for Diageo it's as much a question of spreading risk as anything else. Is vodka getting squeezed (the group's vodka sales fell 8% in fiscal-2017)? Well, gin can take up at least part of that slack (revenues up 8% in the same period).

Premium whisky sales collapse in economically-fragile Brazil? Pump more investment into a lower-priced brand like Black & White and, suddenly, you're in the right price bracket at the right time, and able to reap the benefits.

This philosophy applies outside the main international categories too. The recent challenges for international spirits in China are well-documented, particularly for brown spirits such as Scotch. As the leading player in the category, Diageo has been as exposed as anyone to that downturn.

But, the company's ownership of baijiu business Shui Jing Fang is enabling it to outperform its rivals in the market, with the unit's fiscal-2017 sales leaping 65% and Diageo CEO Ivan Menezes acknowledging baijiu's status as "by far the biggest profit pool in alcohol" in Greater China.

As much as the global brands – the Johnnie Walkers, Smirnoffs and Captain Morgans – hog the headlines for a company like Diageo, sometimes there is virtue in having a sizeable share of local spirits too.

How Diageo got burned by the baijiu bubble

Making mistakes

Not that Diageo always gets it right by any means. Seasoned observers would point to historic errors, such as its long-standing and only-recently-overcome reluctance to involve itself in US whiskey – and, more recently, 2014's disposal of Bushmills when Irish whiskey was - and still is - the fastest-growing spirits category on the planet.

But, you can always go back. From barely a blip on the Bourbon radar, Diageo now sources 9% of its annual group sales from North American whiskies. True, Canadian whisky Crown Royal contributes disproportionately to that, but Bulleit Bourbon's sales lifted 25% in the last fiscal year, and is now accompanied by a range of other ventures. These include the Blade and Bow brand, the revived IW Harper label and the Orphan Barrel Project, which targets the fast-growing and highly lucrative US$75-plus limited edition segment.

How much longer can US whiskey maintain its stellar growth?

In Irish whiskey, the company announced earlier this year that it plans to build a new distillery in Dublin, simultaneously launching a new brand called Roe & Co.

Was selling Bushmills a mistake? Many observers still say yes, but Diageo had struggled to exploit the brand's potential, consistently underperforming in the key US market – and the deal with Casa Cuervo enabled it to take full control of Don Julio Tequila. Maybe a fresh start in Irish whiskey was no bad thing.

Mainstream vs premium

The mantra for Diageo over the past decade or two – indeed, for most spirits companies of any size – has been premiumisation; increasingly focusing on higher-priced products to target newly-wealthy consumers in both developed and (especially) emerging markets. Much of the strategic thinking that underpins that idea still holds true, but there has undoubtedly been a correction in recent times, both during the economic crisis of 2008/9 and, in the past few years, the challenges facing some emerging markets.

Now the concept of 'mainstreamisation' is also being talked about, and not just by the traditional purveyors of low-priced spirits brands. In fact, Diageo has the scale and breadth to pursue a twin-track strategy – premiumisation where economic conditions are more favourable; mainstreamisation where they are not.

Has the race to premiumise made spirits forget the mainstream?

Thus, Diageo's Reserve brands stable saw sales increase by 9% in fiscal-2017 in the Europe, Russia & Turkey region, moving up by 15% in the UK. More internationally, the company is targeting up to 30,000 bars and other venues in key cities around the world with its Reserve portfolio.

That approach won't work in a market like Brazil, where the economic and political woes of the past few years have sent sales of premium imported spirits tumbling.

Here, Diageo can protect its position – although not necessarily its margins – by shifting its Scotch focus away from Johnnie Walker and towards the lower-priced Black & White (global sales up 16% in fiscal-2017).

Fellow Scotch brands VAT 69, Bell's and White Horse are also strong players in this area, both as recruiters to the category and as trade-down options when conditions get tough. And, Johnnie Walker is always there to reap the dividends when economic conditions do improve.

Core strengths vs innovation

There's always going to be a tendency for a company as big and established as Diageo to stick to its core strengths, but the business has to balance this with the need to keep moving forward in a fast-changing spirits industry.

Under Ivan Menezes, Diageo has focused even more on spirits (although we mustn't forget the scale of the company's involvement in beer), continuing a process that began with the creation of the company some 20 years ago: more recently, the group has cast off non-core businesses such as the Gleneagles Hotel in Scotland and its wine operations.

This shouldn't translate into a lack of innovation – an area that is arguably becoming all the more vital amid today's 'craft' start-ups in many established markets. Even the daddy spirits brand of them all, Johnnie Walker, has caught the innovation bug, launching a series of 'experimental' bottlings under its Blenders' Batch sub-brand that both target the craft consumer and aim to exploit the recent strong growth in US whiskey.

And then, there is Distill Ventures: the start-up-supporting partnership with creative agency Independents United that has invested GBP10m in the innovative Stauning Whisky set-up in Denmark, AUD10m in Melbourne's Starward whisky, and taken a minority stake in non-alcoholic beverage brand Seedlip.

Looking forward, the risk for a mega-business such as Diageo is that it loses agility as it grows, its corporate reactions dulled by slow decision-making and complacency.

In the currently fast-moving environment, the company's efforts to stop that happening might just provide the biggest lesson of them all.

---