What’s Guinness good for?

The pub smoking ban has been blamed for falling Guinness sales in Ireland, prompting some to call on Diageo to off-load the stout, but others think its hsould stick with the brand and develop its long drinsk offer, as cider begins to take off and the RTD market goes flat

Die-hard Guinness drinkers are used to having to wait for their pint to settle. Unfortunately for the bottom line of parent company Diageo, the ban on smoking in pubs in Ireland has revealed that some of those who have enjoyed a pint of the black stuff are fickle fans, rather than stout supporters.

That fickleness seems to be matched by investors, with some apparently agitating for Diageo to sell off its beer arm and concentrate on spirits, ready-to-drink products and wines.

Yet most analysts seem to reject the idea of a Guinness sale. As Ian Shackleton, drinks analyst at Lehman Brothers, says, Guinness problem in Ireland could be called one of success. Iconic advertising and canny marketing have brought in a whole new wave of Guinness drinkers in the UK and Ireland over the past decade, but many of these have now moved on to the next fashion drink, in this case cider.

Jamie Lister, director of consultancy Drink Works, and a former Guinness marketer and Coors European marketing director, observes that Guinness is an acquired taste. Another part of its appeal is the pouring ritual in pubs. Despite efforts to recreate this with in-can and in-bottle widgets and, more recently, the Guinness Surger a vibrating platform that recreates the familiar white head for home drinkers (MW February 23) it suffers in the off-trade.

Given that significant numbers of Irish drinkers have decided they would rather drink at home, it is perhaps no surprise that Diageos figures for the year to the end of June 2006 published last week show that volume sales of Guinness in the Irish market fell by 8%. Value sales, cushioned by two price rises, were down 3% compared with the same period in 2005.

Diageo blames the fall of Guinness sales in Ireland on the smoking ban, which is driving the switch to drinking at home, and also on increased marketing and advertising spend by rivals. These include the Irish Bulmers brand, sold in the UK as Magners, which almost single-handedly kick-started the renaissance in the fortunes of cider in the long alcoholic drinks market.

With a smoking ban in force in Scotland since April, and similar laws taking effect in England and Wales next year, Guinness is likely to see sales on the mainland depressed further by a switch to home drinking, as well as by the flood of cider products onto the UK market.

Analysts point out, however, that the picture for Guinness is not all black, with worldwide beer sales by value actually up by 4%. While that compares unfavourably with the groups spirits and wines operations, both of which are ahead by 8%, it is stronger than the contribution of ready to drink (RTD) products, up only 2%.

Diageos latest results show worldwide sales of £7.3bn, up 9% from £6.7bn a year earlier. Operating profits, though, were ahead by just 6%, at £2.05bn. Beer accounts for roughly 20% of Diageos worldwide profits, with spirits contributing 70%, RTD 6% and wine 4%. Diageo says Guinness represents 50% of beer volume sales.

Nigel Popham, drinks analyst with Teather & Greenwood, argues that Diageo will definitely not be interested in selling Guinness at the moment. If it were to put the brand on the block then it would wait until it has managed some sort of turnaround to get a better price.

Even rivals are not convinced that Diageo should offload Guinness. Alistair Darby, managing director of WDB Brands, the beers division of Wolverhampton & Dudley Breweries, points out that Diageo did well to cushion an anticipated volume fall in Ireland through price rises. Furthermore, while the bulk of Guinness sales are in the UK and Ireland, the brand is also strong in other regions, particularly Africa.

Darby believes that Guinness main problems the pour length and distinctive taste are actually major advantages. He says: People tend to focus on them as negatives. In fact, they are a marketers dream because they offer real ways to differentiate the brand.

Guinness is not Diageos only beer brand: others include Irish lager Harp and Red Stripe from Jamaica. Far from selling Guinness, some analysts argue that Diageo should add new premium beers to its portfolio to capitalise on its existing beer distribution and marketing competencies.

As Shackleton says, Diageos stated intent is to be a leading player in premium alcoholic drinks, so it should be looking for beers that fit that aim. It doesnt necessarily have to be an acquisition: it could be a joint venture with a beer brand owner that needs someone to handle distribution and marketing, he adds.

Many industry experts say the real question is what Diageo should do about the RTD business, which started to go flat a few years ago after delivering significant profits. Diageo has dominated this market with its Smirnoff Ice brand. But RTDs, which appeal to a younger market, are fashion driven and companies need to constantly ring the changes to keep brands competitive.

Hence the current test marketing in the US of Smirnoff Source, a mix of sparkling water, natural citrus flavouring and alcohol (MW last week), and its launch last year of Smirnoff Raw Tea, an alcoholic iced tea.

Jitters over the performance of Smirnoff Ice may also be behind Diageos decision last week to consolidate all advertising for Smirnoff worth around £20m into JWT, pulling Smirnoff Ice, Smirnoff Ice Triple Black, Smirnoff Twisted V and Smirnoff Raw Tea out of Bartle Bogle Hegarty, which only had the brands for 19 months.

Observers believe Diageo has a strong portfolio of power brands, but needs to leverage them more, as well as build its second-string brands.

In a sense, though, the core problem that Diageo faces is one also apparent to its rivals: how are new drinkers to be recruited? Guinness may well be an acquired taste, but arguably most alcoholic drinks are. Younger drinkers tend to start out on sweeter concoctions training drinks, in effect then move on to more complex beers, wines and spirits as their tastes mature.

One new product development expert says: Over the past 20 years we have seen a succession of training drinks. Babycham gave way to alcoholic lemonades, which spawned alcopops, which became flavoured alcoholic beverages. Where are the next ones are coming from?

Of course, any attempt to develop the next training drink will have to take into account changing attitudes to drinking. It is too early to say whether Diageos latest launch, Quinns (MW March 2), is the answer. Diageo seems to be trying to address different problems at the same time: Quinns targets a younger female audience, but the marketing supports sensible drinking , while the product is made from 100% fruit.

Diageo which makes much of its commitment to responsible drinking will not want to be seen to be actively developing a product that is deliberately designed to attract young people. At the same time, it has to reassure investors that it is investing in ways to leverage its valuable portfolio of brands.

Such a conundrum is enough to drive anyone to drink.

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