Diageo: Zero-based budgeting is ‘the new normal’

Diageo, which owns brands such as Johnnie Walker, Smirnoff and Guinness, is implementing zero-based budgeting (ZBB) for the first time this year as part of wider plans to be more “cost conscious”, which includes forming “deeper partnerships” with fewer marketing agencies.

The strategy was introduced in July for the start of Diageo’s new fiscal year. It means the company’s marketing teams will have to justify spending on all new brand activity rather than budgets being based on the previous year’s spend. However, Charles Ireland, Diageo’s new general manager for GB, Ireland and France, told Marketing Week at an executive lunch today (1 November) that the company has already been getting to grips with the new approach “for the best part of a year”.

The move comes after Diageo said in January that it would become more “stringent and demanding” when reviewing agency fees, as it looks to drive improved returns from lower marketing spend. At the time, Diageo revealed it spent £806m on marketing for the six months ending 31 December 2015. This represents a 5% decrease from the £846m it spent on advertising in the first half of 2015.

Ireland added that the initial cost-cutting measures were put in place after the business benchmarked itself against the rest of the industry.

“Normally we’d have six to eight agencies, but now we want to form ‘deeper’ partnerships with a reduced number of agencies. And there are financial benefits for both sides,” he said.

Ireland also admitted, however, that the new approach can feel “a bit disempowering”.

“Before, you could do what you wanted as long as it made good business sense – which is very empowering as an organisation. Now, we have a roster. We will tell [our marketing team] that they can work with any agency, but our preference is one of those [on the roster],” he explained.

Nevertheless, Ireland acknowledged that being disciplined and cost-conscious is “a requisite of being a world class organisation”.

“Buzzwords like ZBB are thrown around a lot, but they are very important. We believe ZBB is simply part of being a financially responsible business. We want to get the same services but more efficiently. It’s the new normal of doing business,” he commented.

“An FMCG business like ours has had to re-evaluate our approach, as maybe five to 10 years ago it was much less scientific.”

Charles Ireland, general manager for GB, Ireland and France, Diageo

Diageo also believes its new financial approach will keep it on par with the rest of the sector which is implementing similar measures, as well as battle increased economic uncertainty following the Brexit vote.

He concluded: “Other global competitors are employing leading-edge financial approaches, so we need to do it as well. We see it as the next phase of operating in this world. While Brexit is a new phenomenon for the UK, global volatility, uncertainty, complexity and ambiguity is not.”