Diageo "Close" to Reclaiming its Tequila Leadership Position

FILED JULY 31, 2013

Dear Client:

It's been a big year for Diageo. The company just wrapped up its fiscal 2013, ended in June, with a healthy 8% growth in US sales and 3% volume growth. The company says growth was driven equally by volume, price and mix. The continued strong performance in North America balances out the business in other developed and emerging markets, said Ivan Menezes, during his first earnings call as ceo.

FILLING THE TEQUILA GAP: There is now a pretty large Jose Cuervo sized gap in Diageo's portfolio. When asked about the tequila category in the earnings call, Ivan said: "We feel very good about Don Julio in the US and we're going to be putting a lot of focus behind it globally as well."And beyond that, we have every intention of building an attractive and substantial position in the tequila category and as you can imagine, we've got fair amount of work going on there which, at the right time, we'll be able to disclose more."

Larry Schwartz, president of Diageo North America, elaborated more on the subject with Reuters. He said: " We have some things that I can't discuss that we're close to in getting back our leading position as it comes to profit in the tequila category." He added that Diageo is looking at both acquisitions and in-house innovation.

RESERVE BRANDS NOW 10% OF BUSINESS: You may recall that Diageo created the reserve brand collection (which includes Johnnie Walker's Blue, Gold and Platinum labels, Ketel One, Don Julio, Ciroc, No. Ten by Tanqueray and Zacapa Rum) in response to consumers' growing affinity for premium and luxury spirits. That collection now accounts for more than 10% of the company's total business. For the year, the collection of brands delivered double-digit growth, 40% of which came from US spirits. "It was the birthplace of our reserve brand focus, so it's to be expected that it is the biggest market for reserve," said Ivan.

Johnnie Walker is Diageo's biggest brand by multiple measures and it grew a million cases (worldwide) this year to reach a total of 20 million cases. The brand was up double digits in the US driven by the Black and Blue labels.

Reflecting the meteoric growth in the North American whiskey category, Diageo's Bulleit bourbon and Crown Royal contributed more than 45% of US spirits growth. Bulleit was up about 90% and Crown Royal grew 17% in North America.

Ivan admitted that Diageo hasn't delivered a strong performance on strategic brand Bailey's in the last couple of years, but "fiscal 2013's performance was much stronger." The turnaround is mostly a result of the brand's new global campaign. Ivan said it was ranked in the top 1% of effective ads in the US. "Now, I'm cautious to declare success from one year's results for a brand as significant as Baileys because the key to success will be that we maintain that level of execution again next year," he added.

"We invested significantly behind our brands, creating momentum and building our brand equity," said Larry in a release. "Innovation delivered significant growth to our business this year and at the same time we are growing our base brands."

PRICE INCREASES WILL CONTINUE: Diageo is officially back to pre-recessional pricing levels. "We had a good year as it relates to prices. We see no reason why we can't get price next year," said Larry.

Diageo was able to raise prices across its spirits brands ranging from 3% for vodka brands to 9% for super-premium Scotch. In the ever-competitive premium vodka category, Larry says they will continue taking price. Ketel One is currently 20% more expensive than its competitor and Ciroc is now more expensive than its competitor for the first time . Additionally, the price for Popov's vodka was up 10% and Gordon's Gin was up by 7%. "This reflects our value-based approach in North America, which did cost us some volume share," said Diageo cfo Dierdre Mahlan.

DIAGEO NOT PHASED BY SLUGGISH Q2: You'll recall our recent reports that the second quarter was sluggish for nearly the entire beverage alcohol category (see WSD 07-24-2013 ), but Diageo doesn't feel it's anything to worry about. Larry went so far as to say the entire year so far has been "unsteady," but Diageo hasn't really felt it much. "And total business for our distributors seems to be pretty steady over the last eight or nine months, so we really haven't seen too many ups and downs. So we feel pretty good about the coming year," he said. "The premiumisation trend is good and spirits are still taking share away from beer," Ivan added.

WINE DIVISION TURNAROUND: Diageo's US wine division saw a turnaround in performance as it delivered 3% growth driven by capitalizing on premiumization trends and adding new products. You may recall, Diageo released A by Acacia Unoaked Chardonnay, Sterling Vineyards Carneros Pinot Noir, Sterling Vintner's Collection Aromatic White, and Beaurouge, a red blend from Beaulieu Vineyards. Diageo also launched several "new-to-world" brands in the lifestyle category this year including 5 new brands with 17 different varietals. As such, Diageo is now the number one supplier of innovation wines in the $10-$15, said Larry.

MOVING FORWARD: "Consumer companies are entering an era where demographics and consumer trends are changing far quicker than ever before," said Ivan. "We must ensure that we build on our strengths and stay agile and adaptable to compete effectively, deliver strong performance and build our reputation in a more demanding world."

OREGON RETAILERS REKINDLE PRIVATIZATION ISSUE

You'll recall last year Oregon retailers threatened state lawmakers that if they don't loosen their grip on alcohol policy in 2013 they would be looking down the barrel of a privatization initiative (see WSD 09-14-2013). But the only changes lawmakers made in the 2013 legislature was to allow stores and restaurants to sell wine, beer and cider in refillable containers.

Thus, retailers may make good on their word. "We're getting very serious about doing something for 2014," said Joe Gilliam, who represents the Northwest Grocery Association. They expect to make a decision on whether to go forward with a privatization initiative by the end of August, reports the Oregonian.

But Senator Lee Beyer, chairman of the Senate Business and Transportation Committee, has said he will hold hearings and do some research into what it would take to modernize the state's alcohol policy. He said he would like the Oregon Liquor Control Commission (OLCC) to make the first move and expand a pilot program that has allowed grocery stores to house a liquor outlet.

Meanwhile, the OLCC recently announced it had sold a record amount of spirits for the 2011-2013 biennium at $974.8 million. That's a 12% increase over the previous two years. "It's not the commission's job to set policy," says OLCC chairman Rob Patridge. "It's the commission's job to administer the rules and do so fairly."

WSD BRIEFS:

TRINCHERO FAMILY ESTATES IS launching a lifestyle wine brand called Fancy Pants. Retailing for around $10 "the brand was developed to appeal to the growing segment of consumers who view wine not just as a special occasion purchase, but a way to make everyday occasions a little more 'Fancy,'" according to a release. The national launch includes a 2011 red blend and 2012 pinot grigio

KAHLUA IS ADDING A PUMPKIN FLAVORED EXTENSION this fall, in addition to bringing back Kahlua Peppermint Mocha. Available October through December, Kahlua Pumpkin Spice will retail for approximately $18 a 750 ml.

Until tomorrow, Emily

"Literature is the question minus the answer."
-- Roland Barthes

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