“Makers of big brands must have a long-term view of consumers and consumption in their respective categories. Hence they tend to self-regulate and build sustainable businesses. That’s one of my key points that I will stress during my tenure as president of AIM,” says Andrew Morgan, president Europe of the global drinks company Diageo.
Elsevier Food International, Vol. 9, Number 4, November 2006Pascal Kuipers

In April 2006, he was appointed president of the European Brands Association AIM for a two-year mandate. Morgan does not like the myriad of rules and legislation that have a counter-productive impact on business. Legislation and regulation are certainly needed but should be based on understanding how the industry works and what its needs are. He was among the chief executives of leading consumer goods manufacturers in Europe who on 26 April 2006 sent the memorandum ‘Taking Account of Brands’ to European policymakers. This memorandum – an initiative of AIM – urges policy makers “[…] to give more consideration to the important role of branding and marketing in the generation of employment and economic growth in the EU.”

Why is it that the role of brands is ignored by Europe’s policymakers? Was the memorandum well received?

“We are beginning to build more awareness of the value brands bring to Europe’s economies. In a recent speech, the EU’s vice-president Günther Verheugen acknowledged how closely branded goods are linked to innovation in Europe, to providing jobs, and to growth in general. Last year Peter Mandelson, the EU Commissioner for External Trade, stated that upmarket branded goods account for 48 per cent of European exports. When it comes to regulation, it should be stressed that most branded goods businesses have a sustainable view on their categories, simply because they want to be in business in the long term. Speaking for Diageo’s business, as a company Diageo is actively supporting a responsible consumption of our products in society. We do whatever we can to create the conditions to reduce alcohol abuse. I am convinced that in general branded goods companies take that stand on their categories.”

However, for instance, manufacturers of branded snack products or soft drinks are criticised for their role in marketing unhealthy products to consumers – even infants – while obesity is an increasing problem in society.

“I am not going to comment on individual companies, but as an industry the branded goods sector is doing good work. Companies are taking significant steps to offer healthier products.”

Will there always be an element of suspicion with regard to the food industry when it comes to such problems as obesity or alcohol abuse?

“Yes. And it’s AIM’s role to highlight how responsible, sustainable and self-regulating the branded goods industry is. We will tell this to the regulators. AIM also supports the sharing of best practices among its members.”

Diageo is the champion of compensation with its complementary approach when it comes to business development and allocation of funds. In the US, for instance, it can compensate for losses due to the declining beer consumption by improved results in its spirits business. When it comes to marketing funds, it cuts the budget of the stagnating West European region to the benefit of international growth markets like Brazil, Russia, India and China (also referred to as BRIC markets). And stagnating sales in on-premise channels like hotels, restaurants or pubs can be compensated for by increased sales in retail units.

How strong is this balancing of complementary funds and businesses embedded in Diageo’s strategy?

“We are very much a global company, both geographically as in the different types of consumers we target. We therefore have both the benefits and the risks that come with this global reach so we adapt our organisation accordingly. We have three geographic divisions: North America, Europe and International. The latter are mostly focused on the BRIC markets, of which Russia belongs to my division, Europe. Overall, we realise consistently some seven per cent top line growth, which is good for a consumer goods business of this size. We have the opportunity to move resources around and now we adapt to the growing markets of North America and international. Europe – especially western Europe – is a difficult division. It’s tough to grow the top line here.”

How can you explain the difference in business development between the two developed regions of North America and western Europe?

“In North America the economic growth is stronger than in western European economies. Another explanation is the difference in consumer trends. In North America, we more than gained in spirits consumption what we lost in the beer category. In western Europe, people are going out less and the subsequent decline in consumption is not compensated via at-home consumption. All categories in western Europe are in the flat one per cent growth area, where in the US, spirits consumption grows much faster. In western European markets we also had to deal with regulatory changes such as smoking bans in restaurants and pubs in Ireland, Scotland, Spain, Italy and we also expect this to happen in England next year. This reduced on-premise consumption by five per cent. We built strong businesses such as the ready-to-drink segment with Smirnoff Ice as a key brand. In Europe, this was something of a fad. It grew fast but it also declined fast. In the US, growth in this segment is more structural.”

How does Diageo deal with this situation?

“We continue to drive innovation. An example is Quinn's in the ready-to-drink category. It’s a pure, fermented fruit juice at four per cent alcohol. It’s 100 per cent pure fruit juice at beer alcohol strength. Innovation benefits the company at large. The biggest difference between the US and western Europe is that spirits consumption in the US increased while it didn’t in Europe. Europe’s population is ageing which at first glance looks like bad news as young people tend to consume more drinks at different occasions. Older consumer groups, however, pay more for premium products than younger people do, so in western Europe follow the ‘premiumisation’ trend selling lower volumes of higher priced and high margin premium brands. Like Johnnie Walker Black Label whose sales grew by 15 per cent in Europe.”

Diageo’s complementary nature obviously gives it a solid status among investors. The Diageo share was recently characterised as “hi priced, hi quality but a bit dull […].”

“Well we consistently manage to grow both our top and bottom line and, like I said earlier, that’s good for a global business. As such, we also have to deal with everything that is thrown at us. This morning, for instance, the news broke that there is a military coup in Thailand. We have a large business there so we need to know as soon as possible if this will impact us. Whenever there is a local crisis in a country where we operate, we have local expertise on the ground. We can pride ourselves on the local talents working in our subsidiaries worldwide. We also spent lots of time upgrading our risk management capabilities and we have crisis management mitigation plans ready installed in all our operations.”

Is Diageo a decentrally-managed company?

“Our model is based on different geographic levels, each with its own profits and loss account. On local levels, our subsidiaries are responsible for their performance. We also have eight global priority brands which are proven multi-market drivers of growth. These can be used in local markets, supported by globally common advertising. Our global brands use the lion’s share of our global marketing budget, which is £1.2 billion. This budget is 16 per cent of our £7.5 billion global net sales. We are significantly increasing marketing spend in the growth regions of North America and international/BRIC markets. We also have several strong local brands like Buchanan’s – a premium Scotch brand used in the Latin American and Mexican markets – and Cacique – originally a Venezuelan rum brand and currently a fast growing rum brand in Spain. We both build local brands, like Buchanan’s, or we acquire them. A recent example is the Irish whisky brand Bushmills, which is increasing in local markets in Europe and the US. There is, however, limited scope for Diageo to do large, global acquisitions due to the competition authorities that limit our portfolio size.”

Does Diageo consider selling its beer business given the declining beer consumption and the troubles of the Guinness brand in its Irish home market?

“No. Beer accounts for a stable 30 per cent of Diageo’s total business. Guinness is a fantastic global brand and we are committed to keep it. It is part of our brands-portfolio that we use to cater to consumers worldwide on different occasions, with different motivations for consumption. Guinness is doing well in the US and West Africa. In the UK, there are signs of recovery based on successful marketing campaigns such as award winning TV advertising and sponsorship of premiership rugby. We have stopped brewing Guinness in the UK and will import it again directly from Dublin. This adds to the brand’s authenticity. In its home market Ireland, Guinness is essentially a pub brand. Its disappointing performance there is partly due to the smoking ban for pubs. Our innovation and marketing is geared towards creating the Guinness experience at home. Therefore, we developed the Guinness Surger, a device that uses ultrasound to activate the nitrogen in the beer and therewith creates the special surge on the beer that is known from draught Guinness. We are currently testing this with Tesco and the results up to now are encouraging.”

Diageo Europe includes Russia – a huge growth market. How is the Russian business developing?

“Very well. Russia shows the highest growth rates in the European region. We have two profit pools in spirits: imported drinks like White Horse, Johnnie Walker or Baileys, and premium and super premium Russian vodka. We recently bought 75 per cent of the local Smirnov brand – not to confuse with our global brand Smirnoff – plus its distribution network. As such, we added a leading brand in vodka. Sure, there are also setbacks in the Russian market. It was for instance difficult to get imported products on the shelves due to technical problems with the tax stamps on the bottles’ labels. This created too many out-of-stocks, but the problem is now nearly resolved. Another problem is counterfeiting. Not only in Russia but everywhere. We are taking this problem seriously by developing packaging that is difficult to re-use and by collaborating with local law enforcement agencies in different markets worldwide.”

This is also an important topic on AIM level.

“AIM fights counterfeiting by sharing best practices of packaging innovations and contacts with law enforcing bodies among its members. We are also urging politicians at the European community to make this a high-profile issue as it severely damages the branded goods industry in Europe and worldwide.”

You are also a board member of ECR Europe. What is your view on the quality of retailer-supplier collaboration?

“A lot of progress has been made with retailers on the supply side via logistic efficiencies. Now it is time to add value to consumers in different categories. ECR Europe’s two new co-chairmen Peter Brabeck from Nestlé and Anders Moberg from Ahold are going to focus on the front end of the business and how this connects with the collaborative supply chain. From Diageo’s point of view, we are committed to our distribution partners both in on-premise sales and in retail channels. On-premise is under pressure but we are working to improve this situation together with our customers. With regard to retail, we will increasingly pay attention to category management. We are moving resources to especially managing hypermarket accounts. As category captains we are capable of creating the right atmosphere in stores and display drinks by occasion. This helps customers to make a better choice and it optimises category performance.”

 

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Andrew Morgan (49) was appointed president of Diageo’s European business in October 2004. Before that, he had several strategic positions with the global drinks company. As president of venture markets between 2002 and October 2004 he was responsible for a global mix of emerging and ‘turnaround’ markets. Between 2001 and 2002 he led the £5 billion acquisition of Seagram, a deal made jointly with competitor Allied Domecq. As Diageo’s CIO and global strategy director between 1998 and 2001, Morgan developed the company’s strategy after disposal of its food business and integration of the spirits and beer businesses. His earlier management experience dates back to 1987.

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Company characteristics
Diageo is the world's leading premium drinks business with known alcohol beverage brands across spirits, wine and beer categories. These brands include: Smirnoff, Johnnie Walker, Guinness, Baileys, J&B, Captain Morgan, Cuervo, Tanqueray, Crown Royal and Beaulieu Vineyard and Sterling Vineyards wines.
Diageo is a global company, trading in over 180 markets around the world. It employs over 20,000 people worldwide with offices in around 80 countries. It has manufacturing facilities across the globe including Great Britain, Ireland, United States, Canada, Spain, Italy, Africa, Latin America, Australia, India and the Caribbean.
Diageo was formed in 1997, following the merger of Guinness and GrandMet and is headquartered in London. The word Diageo comes from the Latin for day (dia) and the Greek for world (geo).
The company is listed on both the London Stock Exchange (DGE) and the New York Stock Exchange (DEO).

 

Volume in millions of equivalent units: 133.8
Net sales after deducting excise duties: £7,260mn (€10,578mn)
Operating profit: £2,044mn (€2,978mn)