Bar talk with Diageo Europe CEO John Kennedy
Any hard-working exec may have a festive drink with family and friends. But, given the sober challenges posed within his specific liquor fief, you might have expected this one to be drowning his sorrows rather than chinking glasses.
After all, the man has quite a cocktail to mix. Southern Europe, where the UK distiller's sales have been declining for five years, still suffers from a bad hangover after the financial crisis binge. Even in Western Europe Kennedy faces a conundrum familiar to many other global brand managers: How to rekindle growth on mature markets?
And the addition of Uncle Vlad's Russia to Kennedy's already huge responsibilities this summer might be interpreted as a very mixed blessing.
So why does the 49-year-old Irish-American, who shares both a name and a New England accent with the former US president, see his glass as half full and not half empty?
Despite the problems on his patch, at least Kennedy knows he is working for a global success machine. In the year to the end of June 2014, the world's largest alcoholic drinks group, and maker of such delightful tipple as Johnnie Walker, Smirnoff, Guinness or Baileys, posted net revenues of £10.3bn. Shares in the sin stock have nearly doubled in price over the last five years.
Diageo's drinks cabinet with more than 150 brands covers a whole range of taste profiles, price points and geographies on 180 markets. Group Chief Executive Ivan Menezes also has a number of levers he can pull to tweak performance, including a strong innovation pipeline.
Meanwhile, the London-based Plc continues to head where the action is: Emerging market share of global revenues is set to grow from 42 to 50 per cent within a few years.
"Look at Africa!"
Actually, only yesterday when I stopped at two Edekas and a Rewe coming into town on my way from Hamburg airport because I wanted to see if the local guys are doing a good job. There were a lot of Diageo displays on the shop floor, so I felt great about that.
Generally, German retailers market the category well. The larger stores frequently stock our "Reserve" brands, i.e. those priced at a local currency equivalent in excess of $40 a bottle, as well as a broad range of international brands, so local consumers are clearly being offered a fantastic portfolio.
However, I have been to some smaller stores in Germany where the spirits category wasn't well-promoted and merchandised. I have even seen spirits locked away in glass cabinets, which makes it hard for customers to access our brands. So there are still opportunities, particularly for smaller retailers, to put a better face on the category.
Presumably you drove past the German discounters as quickly as possible?
Not at all! I want our brands to be everywhere consumers look for them. Many of our German customers shop with discounters, so the more we can do to make the product available with them, the better. Recently a big discounter listed our Baileys brand, and this trend will continue in the future.
Diageo typically increases global revenues at around 5 per cent per annum. Why has growth been so flat this year?
This was mainly because a number of emerging markets, such as Brazil, Nigeria, Russia and China, have undergone a significant slowdown.
But in the next six or seven years around one billion new people will reach an income level where they will be able to start buying our premium core brands such as Captain Morgan, Johnnie Walker, Baileys or Smirnoff. Also, approximately 200 million new customers will begin to purchase our 'Reserve' brands. So the global growth prospects for our company are very promising.
Diageo has stated in the past that it wishes to grow its emerging market share of annual revenues from 42 to 50 per cent. In what time frame will this occur, and will it be at the expense of Europe?
Our emerging market share has grown from something like 30 to around 42 per cent over the last three or four years. We expect this trend to continue and get close to 50 per cent within the next few years, although the exact timing is unpredictable because of the current slowdown in the global economy.
But this doesn't mean that our European business will become smaller, as we still see a lot of potential in the region.
Isn't Europe meant to be in crisis? What makes you so confident on a generally low-growth market?
Firstly, there is our local innovation strength. Captain Morgan rum is a great example. This new product has had a massive impact in Europe over the last six or seven years.
Also, the gin renaissance is happening pretty much everywhere now, so our gin brands, such as Tanqueray and Gordon's, are growing at a double-digit rate. Then anything in our Reserve portfolio is booming at 15 to 20 per cent a year.
Mercifully, although there was a very difficult period in the on-trade in Spain, Greece and Italy, which still isn’t over yet, the rate of decline in some of the big Southern Europe categories like whisky has also moderated.
So a combination of all these factors is delivering better results for the business.
Do you really believe that unemployed young people in Southern Europe will be asking for Johnnie Walker Blue at their local bar any time soon?
It's interesting that expensive products have grown in Greece, Italy, Spain, and everywhere we go. So there are discerning consumers with disposable income in all countries who are interested in our brands.
Our broad portfolio also enables us to cater to many different consumer needs and drinking occasions. The big trend we have seen in Southern Europe is that, rather than stay out late and drinking after midnight, people have one or two drinks right after work and then go home. That's why gin is growing very quickly in the region because it's very good as the first drink of the evening. So our gin brands can really tap into this growth area.
Where does Germany fit into your European growth strategy?
Germany accounts for around 10 per cent of our sales in Western Europe, but I expect it to contribute around 30 per cent of the growth. This is mainly because it’s the largest spirits market in the region, and we still only have a modest share of 5 per cent.
Also local consumers and especially younger people are increasingly migrating to international brands, a category where we are particularly well represented. So the business ought to be able to grow in high-single digits in a sustainable way.
Your country portfolio is a very mixed bag. How do you coordinate such disparate markets as the UK, Greece and Russia?
The key operating principle of Diageo is for frontline local teams to drive the business. We give them the autonomy to run a business that fits the local environment.
Isn't the addition of Russia to your portfolio somewhat of a mixed blessing?
I'm not a politician, but clearly the combination of sanctions, falling oil prices, and the dramatic devaluation of the rouble will have a business impact on any big importer of goods to Russia.
However, although Russia is likely to remain a difficult environment for some time and consumers are obviously going to be very cautious, the long-term potential on this huge market is phenomenal. This is because customers continue to trade up from lower-priced vodka to higher-priced whisky brands, where we are strong, at the rate of half to one percentage point a year.
This trend should continue for the next ten years. So, despite present difficulties, we remain committed for the long-term.
You are on record as having said that Diageo enjoys "big growth" in Turkey. Isn't it supposed to be a Muslim country where citizens are not allowed to drink?
Yes, I can understand why you would wonder. Probably only around 15 per cent of the population consume alcohol. But Raki is the national drink, and the Turks drink it like the French drink wine. We are therefore in a very fortunate position because we own the leading national brand, Yeni Raki.
How high a priority do new products have for Diageo?
Our goal is to have a very strong pipeline of new products to motivate consumers and to meet new consumption occasions. We have invested heavily in both people and the organisational structures that further invention. So over the last two years the percentage of European spirits sales achieved by new products has doubled from between 15 and 20 per cent to around 40 per cent.
But can one really imagine an elderflower Johnnie Walker, or do we lack imagination?
You lack imagination! We have worked on new Scotch flavours in both France and Spain. I am constantly surprised at the appetite consumers have for new and interesting expressions of our drinks. In fact, we have only just started to tap this potential.
Could you give some examples of your innovation?
We've invented a category in some countries around frozen drinks that is doing very well. At the high end of the portfolio, we've moved past aged malt whiskey as the only differentiator to lots of flavour expressions. We have also created Cîroc vodka.
Another example would be the introduction of Baileys Chocolat Luxe last year. This was the first time our scientists have ever been able to suspend Belgian chocolate in a spirits product.
And can you name any new products specific to Germany?
One of the biggest things to have come out of Germany over the last five years was Captain Morgan. It has become a major national player, and we have exported it to other European countries.
Germany has also consistently grown its pre-mix drinks range, which we think has massive room to grow, given that the country is more of a beer market.
We have made a number of acquisitions since 2009, including Ypioca in Brazil, Halico in Vietnam, Shuijingfang in China, and obviously United Spirits Limited (USL) in India, which has doubled our case volume. This has helped to give us a great infrastructure across emerging markets.
I'm sure there will be further consolidation because there always is. But our main focus is on operational excellence, i.e., making the current business model work well.
But given, for instance, Suntory's purchase of Beam, don't you need to make a big acquisition in order to stay in front?
In terms of market capitalisation, we are still significantly ahead of our competitors. So I don't think we need to do anything to maintain our no. 1 position.
Perhaps you could still tell us what would you like to see in your ideal drinks cabinet?
Our strategy is to be a full portfolio company. So we will always look if there are categories of significant size that are growing, either to have a presence in them or to have an offer that competes effectively. So you can look at our portfolio and see where we are really strong and where we still need to fill gaps.
A lot of our growth, though, is organic. For instance, we said five years ago that we needed a luxury vodka, but we didn't go out and buy one; instead we invented Cîroc and turned it into a mega-brand in the US. So our innovation capability is strong, and we would expect that quite often to provide the answers we need, without us necessarily having to purchase new brands.
Could Diageo sell Guinness as some analysts suggest? After all, one doesn’t usually find beer in a spirits cabinet…
You know, I joined this company in 1996, and people have been asking me ever since, whether Guinness is really a part of the organisation; and here we are nearly in 2015, and we still have that same question! Don't forget Guinness is our second-largest brand after Johnnie Walker, and that it makes up around 20 per cent of our global sales. It also has strong margins.
Even on mature European markets we have made a lot of progress in beer recently, and sales have improved significantly over the last twelve months. So I feel great about the business, and it will continue to be an essential part of Diageo globally.
Last but not least, Guinness gives us a very strong footprint in some of the fastest-growing parts of the world, particularly in Africa.
If you are looking for the big explosion in the future, it's not India or China, it's Africa. So Guinness doesn't just have growth potential in its own right, the beer infrastructure also gives us the opportunity to sell our spirits portfolio through the existing sales force.
How much potential do you see in e-commerce viz. how strongly will the Web drive sales?
Alcohol tends to be underdeveloped versus other consumer goods categories where some CPG companies selling pet food, diapers etc. already make 10, 15 or 20 per cent of their sales online. But, although our current level is only around 3 per cent, we think that the virtual segment will continue to grow in our industry as well. So we are focussing on figuring out the right tools to drive online growth.
Diageo opened its first online store in 2013 and is rolling out its virtual storefront on Alibaba in China. Any other plans?
We already have specific programmes with pure-play companies such as Amazon as well as with physical retailers who are driving e-commerce. We have launched a dedicated direct-to-consumer luxury website in some countries where we set out our Reserve brands.
We have also launched bar.com, which is quickly becoming the leading portal for people who want to learn more about making cocktails in Europe.
It's Christmas next week, what will you be drinking?
I shall be skiing in St. Anton; as we've been doing some great work with our Cîroc vodka brand, I might well celebrate with some of that. At any rate, it should help to keep the cold out!
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