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On 1 July, Diageo will be in the strange position of having a new chief executive for the first time since its formation at the turn of the millennium. The new CEO, Mr Menezes, will face some tough challenges, some of which he was involved in creating through being part of the company’s senior management team since the late 1990s. Others are issues that any current CEO of a spirits company will also be facing.
In this first of two articles, Euromonitor International takes a look at the universal issues facing Mr Menezes and other spirits companies, with a second article looking at the challenges specific to Diageo.
For all international spirits companies, the Western markets of North America, Western Europe and Australasia account for the majority of their revenues and profits. However, these markets are mature in volume terms, with their wider spirits categories either declining or achieving only low single-digit volume growth. The key for any company is to find a category or a product within a category which can perform strongly.
Diageo has had some success, particularly in North America, with Ciroc vodka and Buchanan’s blended Scotch. In Western Europe, it has seen success with Captain Morgan.
However, it will need to do more and avoid what it did between fiscal 2009 and 2011 in Europe, when to maintain volumes it saw profit and revenues per equivalent (volume) unit fall as it discounted heavily. While there was an increase in fiscal 2012, profitability in Europe was still lower than in fiscal 2009.
Although still small scale in volume terms, one of the fastest growing categories in North America and Western Europe is small batch craft spirits.
All international spirits companies will need to be aware of the category and adapt accordingly. As the development of craft spirits is a few years behind that of craft beer, Diageo, along with its rivals, has the advantage of seeing how big multinational brewers deal with it and subsequently adapt their strategies. Does this mean acquiring brands or developing its own, and, if so, in which categories?
This is an issue facing all alcoholic drinks producers around the world as governments react to try and reduce alcohol consumption, either for health, social or religious reasons. This is nothing new but, if anything, is becoming more pronounced, be it through minimum pricing or banning or limiting the advertising and sale of alcoholic drinks.
This is a particularly pertinent problem for Diageo following the Turkish government’s passing in May 2013 of legislation banning the advertising of alcohol and limiting its sale. This will directly threaten the success of Diageo’s Mey Içki acquisition.
Diageo, with its broad range of brands and geographical spread, as well as significant financial resources, should be able to cope and adapt accordingly to the changes, and, more importantly, potentially drive some of those changes. Much, however, will depend on whether Mr Menezes and his senior team can adapt to what is becoming an increasingly fast moving category.