Diageo attempts to top up our glasses

Diageo GB’s thirst for product innovation shows no sign of being quenched as the world’s largest drinks company is coming under increasing pressure to deliver growth organically, rather than through acquisition.

The company, formed as a result of the merger of Guinness and Grand Metropolitan in 1997, is the world’s largest alcoholic drinks producer and owns brands such as Archers, Captain Morgan, Guinness, Johnnie Walker, Smirnoff and Tanqueray. However, Diageo can no longer grow by acquisition without attracting regulatory attention and new product development (npd) is vital to fill the coffers and satisfy shareholders.

In September, the group posted a six per cent rise in underlying annual pre-tax profits for the year to June, but labelled market conditions “challenging”. In the UK, sales by volume dropped for both Guinness and Smirnoff’s premium packaged spirit (PPS) extensions year on year. Nigel Popham, analyst at Teather & Greenwood, says: “Diageo is not struggling for growth, but clearly it’s a company looking for new avenues of growth to support its huge international business.”

Diageo, which ploughs an estimated 30 per cent of its gross profit into marketing and brand development, has just appointed Virginia Proud as innovation director to spearhead an npd drive in the UK (MW last week). Having spent four years as innovations director in Australia, she has a track record that includes launches of the ready-to-drink (RTD) and mixer products UDL Fusion, a vodka-based drink, and Johnnie Walker & Dry, containing ginger ale. She is also responsible for launching Bundaberg Rum & Cola and Johnnie Walker & Cola on draught.

It will be Proud’s task to spot what could be the latest trend in alcoholic drinks. Flattening sales of PPS products across the sector means that she must come up with new ideas in this area to stimulate demand, or turn to other sectors for inspiration. The company believes there will be a move back to three or five per cent growth in the next two years.

Wine is one sector that is being embraced by rivals such as Allied Domecq, which has made large acquisitions in the area, while Scottish Courage is testing a wine-based RTD product under the name Bliss. Diageo has yet to divert sizeable npd investment into the wine sector, although it owns wine business Percy Fox, with brands such as Blossom Hill, and is launching an Archers extension into wine, called Archers Eden.

But Popham says that wine does not offer the high margins of spirits. Another expert points out that wine production is agriculture based, while Diageo is geared towards the more “industrial” processes of spirit production.

Recent speculation has hinted that Diageo may further explore the beer market, following its joint venture with Heineken in South Africa. But for the time being, Proud must work with the existing portfolio.

In the recent past Diageo’s track record on npd in the UK has, according to buyers, been strong, but primarily dependent upon producing variants. Derek Strange, central buyer for beer, wine and spirits at Waitrose, says: “Diageo is regarded as innovatory, but the majority of its recent success has been based on brand extensions.”

The launch of Smirnoff Ice in July 1999 helped the company become market leader in the &£1.3bn PPS sector. The latest innovation, Baileys Glide, is supposedly selling well according to buyers. Diageo is testing a Captain Morgan’s variant called Morgan’s Spiced Rum and recent packaging innovations include Smirnoff Ice in cans and Baileys Minis.

Producing variants of an existing brand is a strategy that has also been adopted by rivals such as Bacardi-Martini. Having launched Bacardi Breezer, it is now developing a pre-mixed cocktail.

However, it’s not been all plain sailing for Diageo. It has ditched two major innovations in the past 24 months: Gordon’s Edge, a specially formulated extension of Gordon’s Gin, and a pint dispensing system, Guinness FastPour, aimed at cutting waiting time in busy bars (MW May 22, 2003).

But a Diageo spokesman says that out of six major product innovations or relaunches in the past four-and-a-half years, five have succeeded, while the average success rate for a packaged goods company is one in ten. He adds: “Innovation is key to our long-term growth. We undertake lots of research into our consumers’ lifestyle and motivations with the aim of understanding what they’re looking for before launching new products.”

But experts believe a combination of a risk-adverse culture and slow decision-making, caused by the sheer size of companies, is affecting npd in the drinks sector.

Roger Neill, managing partner at Synectics, an innovation and creativity consulting company, and a former deputy chairman of WCRS, says: “In earlier generations, companies seem to have been able to take risks with much more interesting and innovative products. Now it seems to be much more formula-led.” He cites Baileys Irish Cream, developed 20 years ago, as the last important drinks innovation that has demonstrated staying power because “it had a technical innovation built into it, which was hard to copy and also answered an unsatisfied consumer need.”

There is also an expectation that products will come and go quickly. Jamie Lister, director at drinks specialist marketing consultancy Drink Works and a former European marketing director for Coors, points out that new products have little breathing space in which to prove themselves. “The sales and production machines can put undue pressure on new products to achieve unrealistic volumes in a short time,” he says.

He adds that smaller rivals, such as Halewood, have a more entrepreneurial approach to npd as they can put new products onto the market and adapt them without pressure.

Proud responds: “Some examples where we have demonstrated nimbleness include the recent development and launch of Bell’s Special Reserve, in four months. We were also able to get our most recent Archers Limited Edition flavour developed and launched within three months.”

Experts say that the drinks companies should stop chasing the 18 to 24 age group and look to older consumers, now that the age balance in the UK is shifting away from youth. The received wisdom is that consumers establish their pattern of drinking in those early years, but Lister says: “I think this will change as older drinkers become more affluent, educated and have more leisure time.”

Drinks companies are keen to run promotions with experts showing drinkers how to drink spirits with mixers and in cocktails as part of that educational process. Even the staid whisky companies are waking up to the fact that they should be encouraging experimentation, having perhaps taken heart from recent figures for the spirits sector in the UK.

Total spirits rose three per cent by value and one per cent by volume in multiple grocers for the 12 weeks to December 27 last year, compared with the same period in 2002 (AC Nielsen), with the major growth category coming from imported US whiskies, such as Jack Daniels.

Perhaps similarly encouraged, Brown Forman, through its UK distributor, has been testing a ginger-flavoured Jack Daniels pre-mixed drink in the Midlands.

The fans of PPS drinks today may find a natural progression to spirits as they get older. If they do, Diageo, with its existing portfolio, will be well placed to take advantage as consumers develop more sophisticated tastes.