Guinness starts the new year with a new chief executive, a new advertising agency, and a whole new set of uncertainties.
As the brewing arm of Diageo (the merger of Grand Metropolitan and Guinness plc), this historic beer business now finds itself in the strange position of playing second fiddle to the lead violin of the two companies’ combined spirits division. Its long-term future within the global conglomerate seems in question.
The focus of the merger is about consolidating GrandMet’s IDV and Guinness plc’s United Distillers to fight flat global spirits sales (MW May 15 1997). This is also where the biggest expected savings are likely to come.
In the merged company, Guinness Brewing’s profits of about 300m will only represent about 15 per cent of the group’s total; it also includes Pillsbury, the US food group, and Burger King, the fast-food chain. There is speculation that Bernard Arnault, the Diageo director who heads French luxury goods group LVMH and tried to block the original merger deal, will make another attempt to persuade the company to spin off its non-spir its businesses. Arnault originally tried to push through his idea of DrinksCo, a three-way merger of UD, IDV and the wine and spirits part of LVMH.
So all eyes are on UD and IDV, which are complementary in geography and in brands. GrandMet is strong in vodkas, liquors and tequilas. It has one scotch brand (J&B) and no serious premium scotch or cognac and champagne. It is very strong in North America, Europe and Eastern Europe, but weak in Asia and Latin America where UD is strong.
City analysts argue that the surprise decision by Guinness chief executive Brendan O’Neill to leave and take up the post of ICI chief operating officer (MW January 15) was influenced by these factors.
“The job he’s got at ICI is a far, far better one than his job at Guinness,” says one analyst. “But there was also no place for him to go within the company for the next few years because the merger has brought about such a strengthened management. There is a question mark over the strategy for Guinness Brewing.”
The new man at the helm of the beer business is O’Neill’s deputy and the managing director of Guinness GB, Colin Storm, who until last April was the managing director of Guinness Ireland, the company’s biggest profit centre.
Analysts at independent broker Lehman Brothers credit O’Neill for putting in place a successful strategy for company growth, primarily through the Guinness brand, after he joined the company in 1993.
This involved reducing costs through a brewery upgrade programme, improving product quality, which had been variable, and increasing investment in marketing. In addition, the roll-out of the Guinness brand into “high potential” markets was accelerated, while existing strong positions in core markets was protected by building portfolio share with an emphasis on the Guinness brand.
On the whole, Guinness enters a new market by finding a strong local partner committed to the new venture (although it does have some interests around the world where it directly controls distribution) and finding key pubs frequented by “trend-influencing customers”. O’Neill is credited with driving the Guinness Irish pubs concept around the world. There were fewer than 200 when he joined but there are about 1,500 now. These pubs act as excellent recruitment vehicles by quickly developing a loyal group of Guinness drinkers.
One analyst suggests O’Neill may have been thwarted in his efforts to tie up new international partnership deals for growth. “It may be that O’Neill wanted to make a few deals that needed a lot of cash which the top Diageo management were not prepared to sanction,” he says.
Diageo is adamant that its beer business will not be sold. A company spokesman says: “We look at these things regularly and continue to look at them, but the board has absolutely no plans to sell Guinness.”
The merger has created a consumer products colossus in the same sphere as Procter & Gamble, Philip Morris and Unilever, with a portfolio of brands ranging from Johnnie Walker Scotch whisky, Smirnoff vodka, HÃÂ¤agen-Dazs ice cream and Green Giant canned vegetables. When the merger was announced in May, Guinness chairman Tony Greener was reported as saying: “Our aspiration is to bat in that premier league. You can’t get there just in drinks or just in food. You need the agglomeration to get the clout in Asia or Latin America. Demerger destroys those opportunities.”
But if Diageo’s objective is to be a company of very strong international brands, it may find that it needs a more focused long-term strategy with fewer diverse businesses. One analyst says: “There may be an international player which would offer a higher price for Guinness Brewing than it really warrants. If that happens Diageo will sell it. This would be an opportunistic move. Diageo is all about cash generation and the repayment of surplus cash to the shareholders. Diageo is focused on shareholder return.” Last November shareholders were told they would benefit from a 2.8bn capital repayment (both companies’ shareholders would receive 70p per share as part of the merger).
It has even been suggested that cash-rich Bass, which already has an agreement with Guinness to import its ale in the US, could be interested in taking over Guinness’s brewing. With Guinness as a licensed brand, Diageo could get out of brewing but retain control of the brand by keeping responsibility for marketing.
The theory goes that the black stuff could be imported overseas into Bass’s international network of hotels and Bass could sell its own brands into independent pub retail estates on the back of Guinness.
However, even though Guinness has no network of pubs – which does create problems when it tries to introduce new brands such as its lager Enigma – Guinness stout is a must-stock for the vast majority of UK pubs. So, according to this theory, a tie-up would only nibble around the edges of the beer market in the independent sector, because rival brewers such as Scottish Courage would obviously not let Bass brands into their pubs.
In the UK, Guinness has set it-self ambitious targets – understood to be more than doubling market share from just under five per cent to ten per cent in ten years. Guinness already has very good distribution, and it would be difficult to increase frequency (expensive stout is not a session drink like cheap, weak lager), so the way to increase sales is clearly by increasing penetration. The target is to get “occasional” drinkers to increase their frequency.
Guinness is testing a cooler version of the black stuff called “Coldflow”, where the stout is served through colder pipes at three degrees centigrade to make it more refreshing and particularly appealing to young drinkers. Targeted pubs, such as those frequented by students, will serve Coldflow Guinness, which could be extended across the country in the warmer summer months.
Guinness’s new advertising agency, Abbott Mead Vickers. BBDO, which snatched the account from Ogilvy & Mather after a 12-year tenure (MW January 15), is expected to increase the ubiquity of the brand and widen its appeal to younger people. It is suggested that the existing “black and white” advertising excluded non-Guinness drinkers and in research was viewed as elitist.
There is an obvious danger that this changed strategy could turn off Guinness’s existing loyal middle-aged following who like the fact the stout is a niche drink. The aim will be to recreate the success of executions such as the “Dancing Man” ad, which did achieve that populist appeal. It has also been suggested that AMV must address the “Irishness” of Guinness, which has been weakened by the launch of the cream ales sector (or “Irish ales”) such as Bass’s Caffrey’s and Guinness’s own Kilkenny.
The decision to review the advertising for the Guinness brand followed an increasingly unhappy relationship between the brewer and O&M, which deteriorated after three well-publicised and highly embarrassing gaffes. Observers say the agency did not stand a chance of keeping the business because it angered the plc board too many times.
Leaked plans for an ad featuring a gay male kiss (which never ran); a press ad featuring a leather-clad man that made visual references to the death of Conservative MP Stephen Milligan, and a poster showing a two-headed fish alongside a quotation saying nuclear power was safe which forced Greener to apologise to British Energy chairman John Robb, did nothing to help relations. As a company which is so committed to marketing excellence, the above-the-line advertising comes under particularly close scrutiny from the board.
Diageo argues that all its four businesses have this level of focus on consumer marketing, despite their apparent diversity. But if mergers are made to simplify and specialise, this one brings together several unrelated consumer businesses.
Some observers point to the example of PepsiCo, which spun-off its restaurant business including the brands KFC, Taco Bell and Pizza Hut, in a plan which separated Pepsi’s fast-food chains from its beverage and Frito-Lay snack foods businesses. Diageo has yet to prove that it can add value to its constituent parts by bringing them together into one worldwide conglomerate, rather than weakening them in a distractingly wide morass of international brands.
Guinness Brewing’s place in that morass is increasingly uncertain.