June 1, 2012

Talk with Diageo Europe CEO Andrew Morgan

Andrew Morgan, Diageo Europe CEO (photo: Diageo)
Andrew Morgan: "Germany is growing like an emerging market for us"
After allowing major rivals to steal market share for years, London-based Diageo plc has rediscovered Germany. In fact, the world's largest spirits maker is on a roll here.

Diageo's new thrust in the Federal Republic is a counter-intuitive move by the maker of Smirnoff vodka and Johnnie Walker whisky. After all, Germany's spirits market, like its population, is hardly on the increase.

So why is Europe CEO Andrew Morgan, a man whose very name sounds like a rum brand, rubbing his hands with glee when it comes to business in Germany?

At first blush, he shouldn't be. Retailing here is dominated by hard discounters, and the recession in other parts of Europe has worried local consumers enough for them to eat out less. Gastronomy has been hit correspondingly hard.

Meanwhile, demands for a reduction in the hours of sale for alcohol are becoming increasingly clamant as binge drinking increases among young people at an alarming rate.

Despite these problems, Morgan (56) still wants to continue powering away in Germany. This is particularly intriguing when one remembers that his beat also includes Russia and Turkey.

The polite and professional 56-year-old Brit is responsible for around 30 per cent of Diageo's global revenues (2010/11: €12.4bn). 
 

INTERVIEW

Mr. Morgan, how does it feel to be a top executive at one of the world’s largest “sin stocks”?

I am enormously proud to work for Diageo. I am lucky enough to travel throughout the world and am delighted to see that our brands play an enormously important part in the big occasions in people’s lives. These include weddings, birthdays and funerals, celebrating success at work, or just relaxing and having a good time with friends.

Diageo is in a very human business which plays a very positive role in society.

So Diageo is more about lifestyle than sin?

Our vision is to celebrate life every day, everywhere. Most people whom I talk to about alcohol see it as something which they enjoy at very positive times in their lives.

But alcohol has a Janus-face; otherwise, you wouldn’t have launched your “DRINKiQ” campaign…

DRINKiQ is only one part of our responsible drinking and social responsibility campaign. We are crystal clear that it is not in our interest for anyone to drink irresponsibly. Moderate consumption is what we are about.

We therefore put a lot of effort into educating consumers to drink responsibly and to know the dangers of drinking irresponsibly.

One example would be our very big global sponsorship of the McLaren Formula 1 team which we partly use to combat drink-driving. When Formula 1 drivers tell people how stupid it is to drink and drive, it is a very powerful message.

In Germany, we’ve also been doing a lot of work with local retailers on trying to prevent sales to under 18-year-olds.

Diageo has been more resilient in the current European economic crisis than others but isn’t immune from weak consumer spending. Have you seen a trading-down at premium level?

It’s not as simple as that because the fastest-growing part of our business is actually the most expensive.

Generally across Europe our businesses are broadly flat, while our super-premium business, which we call our “reserve brands group” (e.g. Johnnie Walker Blue Label, Tanqueray Ten etc.) grew in the first half of our financial year by 22 per cent.

So even in tough times, and maybe especially in tough times, people want to reward themselves with a treat. They are no longer so willing to spend on a posh car or other big ticket items, but they are prepared to spend €40, €50 or €60 on a really high-quality spirit or wine.

Thus, in our business consumer psychology seems to be working in favour of premiumisation.

Isn’t the trend also from on-premise to home, and how are you harnessing this?

Yes, this trend has grown over the last five years and fits very well with our strategy of working more effectively with grocery retailers as they are the suppliers of products for at-home and occasional consumption.

So we’ve recently been doing a lot of work on shopper marketing rather than on consumer marketing, which has always been our forte.

We are now becoming much more sophisticated as regards understanding how people shop and how they do so for a particular occasion at home. We shall run promotions and features which actually stimulate consumers to think about an at-home occasion for our brands.

How important is Europe to Diageo, and what percentage of its global annual revenues do you hope to achieve there in three years?

We are committed to increasing our global proportion of developing markets to more than 50 per cent within the next couple of years. Europe accounts for around 30 per cent of our global revenues, but I would not expect that figure to increase over the next three years.

Isn’t that a little disappointing coming from a European CEO?

You have to fish where the fish are. Essentially our European division is polarised. There are some fast-growing developing markets such as Russia and Turkey, but there are also some more mature businesses in Western Europe.

Which brings us to Germany where spirit sales are hardly growing by 2 per cent a year. Why are you aiming to double annual revenues by 2015 on a market dominated by hard discounters?

If I was to distil my answer down to one word, it would be: headroom. There is a lot of potential because we have always under-indexed in the German market.

But why not concentrate on, for instance, Russia?

At 15 per cent per annum, Germany is growing like an emerging market for us. So why shouldn’t we take advantage of such growth?

Why then has Diageo let Pernod Ricard, Campari and Jim Beam push past you in Germany?

There are lots of reasons which have made the market challenging for us to deal with in the past. I don’t think historically that we have had our best capability and leadership here. We do now. A lot of the growth we are getting at the moment is really due to us doing our job better.

How so?

We have now built a much better customer management capability. We were always pretty good on the consumer end of things with our advertising, marketing and consumer insights. However, I don’t think we ever really got to grips with our big off-trade customers in the grocery retail segment.

We are now building much more collaborative partnerships with the major grocery players and are therefore getting more visibility for our brands in their stores. We are also gaining a better share of the promotional calendar, which in turn gets us market share.

Why did Diageo neglect the German market?

I think this goes back a long way to when we owned Asbach Uralt. We became very focussed on trying to grow it to the detriment of our international brand portfolio. By the time we had figured out that we were better off without Asbach Uralt, we were a long way behind some of our competitors.

This meant that Germany didn’t feel a very attractive place for us. We are now clearly focussed on the strengths of our international brand portfolio and are getting some really good growth.

German retail buyers are obsessed with price rather than value-added. Isn’t it dangerous to focus so much on local retail customers?

I think that’s an old way of thinking about the relationship. We see it today as one of joint-value creation, in other words, creating more value in the chain and sharing the additional margin.

That can be by introducing new products which are more profitable, or by getting consumers to trade up by featuring different products, or organising the shelf differently.

Also, our in-store shopper marketing programmes can be skewed to a positive mix of the products, which makes them more profitable for both parties.

Why are you also considering listings with German discounters? Wouldn't this sacrifice the value-added of your premium brands for sales volume?

I think that it is only dangerous, if you allow it to be. We recognise that the discount channel is a particularly significant part of the category here in Germany. However, discount retailers are not just a German issue, you have them across Europe.

Due to the predominance of hard discounters in Germany, we should like to have our brands available for consumers who shop in this channel.

We think that over time we can develop a business which doesn’t breach any of our price levels around Europe. We don’t expect there to be any dilutive effect on brand equity because our pricing will prevent this type of problem.

Given your ambitious plans, are you happy with your product portfolio in Germany?

We’ve got a great portfolio which includes Smirnoff vodka, the biggest spirits brand in the world, and Captain Morgan, which is growing at 80 per cent per annum. We also have a first-class "Baileys" business and a great Scotch whisky business with a premium single malt portfolio that is second to none.

If you look at our German portfolio dispassionately, the one thing that is possibly missing is an American bourbon whiskey. Our company has been looking at this gap for a number of years and continues to look for opportunities.

We are holding this interview in Hamburg’s “twin towers” where you plan to open your new German head office in August. Why go to the expense of moving from Wiesbaden which is both centrally-placed and near Germany’s largest airport?

Hamburg is a more important commercial and logistical centre. It is also a great source of management talent. Last but least, some of our largest retail customers, such as Edeka, are also based here.

 
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 22, 01.06.2012


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