just the Answer - Andy Fennell, chief marketing officer, Diageo

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In this month's just the Answer, we sit down with Diageo's chief marketing officer, Andy Fennell, who assumed the post in September 2008. Fennell timed his promotion to almost coincide with the economic downturn, but remains in strong support of the strategy of premiumisation.

just-drinks: What is Diageo's definition of the term 'premium'?

Andy Fennell: We draw the line between premium and standard at the Smirnoff, Captain Morgan price point and upwards. The generally accepted definition of premium is, if you're in the US, US$10 and up. A standard bottle is premium. Twenty dollars and up is super-premium and $30 and up is ultra-premium. The ultra-premium goes all the way.

j-d: Following LVMH's positive results earlier this month, how satisfied are you that premiumisation has ridden the storm in the drinks industry?

A-F: Firstly, we believe that premiumisation is not cyclical, it's a structural aspect of consumer goods categories and it's effectively based on human nature – we want to do better in life and we choose certain categories to demonstrate to ourselves and others that we're doing better in life, and we economise in other places. After this recession, we've got the savviest consumer that the world has ever seen, but with the same basic human motivation.

That said, Moet Hennessy's numbers were good for the last quarter. I'm sure they will have talked about the fact that they had weak comparisons and that, for as long as they've got data, post-recession they've always seen an improvement in their performances.

Over the last 40 years, figures show that Champagne takes a hit in recessionary times, and then comes back and continues to grow. The overall trajectory over 40 years, then, is very positive – that's also true of Scotch and super-premium vodka, and it reflects the fact that drinks are one of the categories that consumers use to demonstrate that they're doing better in life. When they've got money, they buy more premium things, and when they've got less money they trade down a bit, or in the case of Champagne, they trade out.

You've got to get underneath the numbers and look at how much is comparison versus the prior year. It's appropriate for companies like LVMH to be quite confident in the medium term, but less specific about the short-term future.

j-d: Some observers have claimed that Diageo shifted its marketing emphasis in the second half of last year more towards tactical promotions and introducing new brands at lower price points. Where does this sit in Diageo's premiumisation policy?

A-F: Premiumisation has been about a third of our growth in the last ten years, so opening up markets and winning market share is the rest. Premiumisation, therefore, is really important to us and that doesn't just cover the top-end - that covers persuading someone to buy at the price tier above where they're currently buying. If you're a Johnnie Walker Red drinker and we can persuade you to buy Johnnie Walker Black, then that's just as valuable to us.

We think our competitive advantage comes partly from the breadth of our portfolio and the breadth of our geographic participation. We'll be persuading consumers to trade up while, at the same time, offering brands which fulfil different roles in different countries. That's part of being a big, successful company.

Andy Fennell, Chief marketing officer of Diageo

All of our activity is in premium and above, and any brands that we've got that are cheaper than that have been there for a long time and we only activate them tactically at times of recession. We're a premium-and-up company and we're successful throughout those price tiers.

j-d: If premiumisation is cyclical, then, would it not be fairer to describe premium alcoholic drinks as recession-proof than as recession-resistant?

A-F: The dynamic is not cyclical, it's about human nature. If you're worried about whether you're going to have a job or worried about paying the bills, then you look to economise even in the categories that you would normally look to trade up in. In Western Europe and North America, there is some trading down in recessionary times.

The changes in our mix, however, are very modest compared to other FMCG categories - the change in dynamic caused by economic downturns is huge to them. For us, it's a slight shift in mix from more premium to less premium in the developed world. So, we're not recession-proof, there is an impact – but it's very modest.

The bounce for premium drinks companies is fast and takes us to a new high point every time.

j-d: Has this recession changed the landscape for the drinks industry immeasurably?

A-F: In some ways it's different, in some ways it's exactly the same. People feel like they've got less money in the middle of a recession. As soon as they've got a bit more confidence in what's coming in each month, they look to selectively trade up. That's the same dynamic, and that has caused the long-term trend for premium drinks which is attractive to investors in our category.

What's different is that the consumer coming out of this recession is a lot more savvy. They've more information, they've got the ability to use the Web to help them make choices. We talk about the era of consequences: people will be very choice-ful about where they spend their discretionary income, and moreso after this recession than after previous ones.

j-d: In the BRICM markets, how big a part does premiumisation play for Diageo?

A-F: Ultimately, the way that we grow in the developing world is through the premiumisation dynamic. The way that international spirits grow is that there is premiumisation from local spirits. Once international spirits are established, there's premiumisation within those international spirits.

So, you look at how developed a market is for international spirits consumption - Latin America, for example, is  quite well developed, whereas parts of Asia are quite under-developed. Then, the basic dynamic that makes our business attractive to consumers in those countries is that we offer a trade-up option to their local spirit choice. Then, you've got to get some scale because we want lots of people to do that trade-up.

Premiumisation is the big macro-dynamic at work in the developing world, supported by urbanisation, increased income and demographic growth - scale is important, ultimately, because we want lots of people to premiumise, not just the uber-rich.

j-d: Talking of uber, Diageo also plays in the uber-premium sector, for example with Johnnie Walker Blue Label King George V Edition, which retails at around US$740 per bottle. What's the point of a launch like this?

A-F: We've also launched the John Walker, which retails at around $3,000 a bottle. You might ask: "What's the point?" and underline it for that one!

We do make nice margins on those brands, but obviously the number of consumers shopping at those pricepoints are fewer than at lower pricepoints. Yet, the biggest dynamic from the development of King George V was the increased sales of Johnnie Walker Blue Label. The point is about making the Johnnie Walker brand more special.

'Halo' would be the marketing jargon for it.

j-d: Will Diageo continue with this approach?

A-F: Yes, we will. You can do premiumisation through great marketing or great retail execution – one other way is through innovation: you can launch things which are more expensive than the offer that's currently out there.

Around the world at the moment, we've probably got half a dozen tests going on with premium versions of our Scotch brands, for example, Johnnie Walker Double Black versus Johnnie Walker 12 Year Old, which sells at a 15% premium. That's using innovation to drive premiumisation and we think it's a good way of doing it and one we'll certainly continue to do.

j-d: You said recently that you believe bling is a thing of the past. What does that mean for the future of celebrity endorsements?

A-F: The quote in its full glory is: 'Bling is dead, long live luxury'. Consumers interrogate products - they demand great product experience. It's insufficient to be superficial and expensive alone. You can be expensive, but you need to justify the price. I welcome that as a dynamic for our category. We should justify the price we ask through the product as well as the imagery we create. I see a future for celebrity endorsement – it always works best when it fits with the product and the brand. I see that still being the case. If the consumer thinks the product is authentic and that the association is authentic, then it will continue to work.

j-d: Has marketing got easier or harder?

A-F: I wouldn't say it's got easier or harder. What makes brilliant marketing, which persuades consumers to change their behaviour, is challenging, but it's always challenging. You have to delight consumers in a way that's better than your competitors.

The context changes, not only between recession and boom periods but also between markets, like North America and Latin America. If you've got a market that's growing at 20%, then you've got to grow at 25% to make it a good performance. And, if you've got a market that's declining at 2%, then flat is good.

I've really enjoyed the last 18 months. I feel fortunate that I work in a sector that consumers care about and that people are interested in. Right now, there are hundreds of conversations going on about my brands. I'd rather be in this sector talking about this regardless of the context than I would be in just about any other industry I can think of.

j-d: Which one non-Diageo drinks brand do you look at and wish you could have to market?

A-F: Come on, mate. I can't answer that!

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