Diageo's half-empty glass

The drinks giant has big plans for its spirits but the world seems to be losing its thirst, writes David Brierley

Few companies have corporate bars nowadays, but Diageo is an exception. Liquid lunches are not dispensed at a shabby watering hole, but served in a sleek cocktail bar handy for the gym.

That is a measure of the group's ambitions. The world's largest drinks group wants to change the image of hard liquor. Drinking spirits should be young, vibrant and youthful - and certainly not just a way of getting drunk.

Diageo is nothing if not ambitious. Created in December 1997 through the merger of Guinness and GrandMet, the company clearly has global aspirations. Its name combines the Latin for "day" and the Greek for "world".

"We want to be in the top five of the world's consumer goods companies," Diageo's chairman Tony Greener said last week.

Diageo already describes itself as "a robust, powerful and fast-moving business, well equipped to perform in today's volatile world". And it aims to match the performance of such giants as Unilever, Nestle, Procter & Gamble and Coca-Cola.

A press conference held last week in the corporate cocktail bar restated the ambitions. A sleek corporate video was followed by video clips of glossy brand advertising and upbeat presentations from directors.

The company likes itself. Directors agreed among themselves that Burger King's hamburger was the best-tasting product on the block. Guinness is, of course, truly wonderful. And Pillsbury Toaster Pastry - a kind of pop- toast - is turning American breakfast into "less bowl, more toaster".

Jack Keenan, head of Diageo's drinks division, stood beside shots of bottles of Smirnoff, Johnnie Walker, Gordon's Gin and Baileys Original Irish Cream and proclaimed: "I feel truly blessed to lead a company with such brands. Johnnie Walker was the first global brand, long before Coca- Cola was out of the US."

The Diageo drinks brands do look spectacular. In Smirnoff, it has the world's top vodka; in Johnnie Walker and J&B, it has the world's top two Scotches; in Gordon's and Tanqueray it has two of the world's top gins. Diageo sells around one third of the world's Scotch, gin and vodka.

Given all these strengths, one would expect Diageo to be powering ahead. Yet the audience was bemused. Diageo had, in fact, encountered not a few problems in the second half of 1998. What had happened to profits? Indeed, what happened to sales of Scotch? Both, as it happened, declined sharply. Pre-tax profits fell by pounds 150m and whisky sales dropped, but by "less than the global market for Scotch": they were down by 8 per cent, while Diageo's brands declined by 7 per cent.

Greener sighed: "I wish we could report by region rather than by business. When we have stable economic backgrounds, we can deliver growth and profits."

No doubt Diageo's peers feel the same way. Although Unilever, Nestle and Coca-Cola have all been hit by the downturn in South-east Asia and South America, they still managed to show increased profits. For Diageo, the downturn will be extremely painful.

"Asia and Latin America, along with Turkey and Russia, were the strongest growth areas for whisky. The economic difficulties were a huge disappointment," admitted Keenan. Sales of Johnnie Walker Red Label halved in Asia and plummeted by 6 per cent around the globe. The upmarket Johnnie Walker Black Label even fell by 14 per cent. After many years' marketing effort, investing millions upon millions, this is a disastrous performance. It underlines the fact that whisky is an expensive consumer item, unlike coffee, cola or margarine, and sensitive to the wider economy.

In the boom economy of the US and the improving economies of continental Europe, spirits sales by volume rose 3 per cent, though they fell by 5 per cent in Britain, because of a poor Christmas.

The fact is that whisky and white spirits - which account for two-thirds of Diageo's profits - are a very tough business. That is why GrandMet and Guinness, neither badly-managed, decided to merge.

"We had both become tired," said Greener, the former Guinness chairman. Diageo is supposed to be very different. But its earnings growth over the next few years will come largely from savings due to the merger, not from increasing sales of Scotch or gin.

"Historically, Scotch sales have been as flat as a pancake," said Greener. It is Diageo's ambition to break that pattern. That is why it is so eager to talk up its game; it has to do what others have tried, and failed to do.

"This is a completely new company. We have taken out layers of management. We are working in a much more un-bureaucratic way. We are trying to get this very traditional business growing faster than before," insisted Greener.

It is important for Scotland and Britain that Diageo, as leader of the Scotch industry, should succeed. Scotch is one of the UK's top five export earners, contributing pounds 2.4bn in exports in 1997. But their value dived last year, by around 15 per cent. Hard liquor is simply not what it once was. The American thirst for Scotch, which turned alcoholism into the prime source of the American novel, is drying up. This is the central fact of the international drinks trade since the Second World War. No other market has the same potential, yet consumption has fallen inexorably.

The image of dark glamour is gone. It is over 60 years since Prohibition ended. And it is over 50 years since Philip Marlowe, Raymond Chandler's hero, bought pints of whisky "to keep warm and interested".

Nowadays, consumers seek dangerous intoxication in other ways. During the 30 years from 1966 to 1996, American consumption of Scotch fell from 103 million to 3.4 million proof litres. The French now drink more than the Americans - 131 million bottles compared to 120 million in 1996 - but pay less for their wee dram. It is the same in Britain, where Scotch sales have fallen by a third in a decade. The supermarkets' love of the cheap unbranded bottle has not helped.

Keenan commented: "Scotch whisky in the UK is in decline because producers have looked to price and not growth."

The classic response to such decline is to find new markets and to market premium brands at premium prices in the mature markets. That has been the response of Diageo, its predecessors and main competitors. Global sales of the top brands of the world's top five drinks companies - Diageo, Allied Domecq, Bacardi, Seagram and Pernod Ricard - have been static during the last five years. Given the billions spent - Diageo devotes pounds 350m a year to spirits marketing - that is not magnificent. And the recent falls in growth areas are painful.

Of course, there have been successes. Smirnoff is growing in the US; J&B is growing in Spain; Baileys is finding customers in Britain. But there have been notable failures. A marketing campaign to reposition Bell's, the top-selling brand in Britain, was intended to attract a new young crowd. Instead, the old crowd of drinkers were unimpressed and Bell's lost around a 10th of sales last year, massively under-performing. Diageo is backing its successes with more money, while neglecting less popular brands in less significant markets.

There is little alternative. Diageo has around 7,000 spirit brands, but earns a profit on just 80. Some rationalisation has already taken place - Diageo had to hive off Dewar's whisky and Bombay gin as the price of getting regulatory approval for the merger. A package of bourbons and Canadian whisky brands were sold recently in North America. But Keenan is adamant that he will not give a good, if dormant, brand to the competition.

This rich endowment of brands shows the weakness of whisky brands generally. Compared with Anheuser-Busch beer or Coca-Cola, Johnnie Walker does not dominate its markets. It is constantly under threat from cheaper, lower- quality market entrants; it is not self-evidently a unique product. Many people, including this writer, cannot tell one blended whisky from another. This gives Diageo far less clout with retailers and consumers.

"No one brand at this company has the power to drive it forward globally," said Charles Winston, drinks analyst at HSBC Securities.

Profits from spirits are unlikely to grow in the coming years. Credit Suisse First Boston predicts that drinks profits would take until 2001 to reach the level seen last year. Apart from cost-cutting, Diageo's growth during the next few years will come from Guinness, Burger King and Pillsbury. Only Irish stout and hamburgers seem likely to meet Diageo's ambitions to achieve double-digit growth.

Diageo can take heart from Guinness. By the early 80s, Irish stout seemed to be in terminal decline. Guinness had ceased to grow in both Britain and the Irish Republic.

Desperate attempts to diversify ensued. Guinness moved into boating lakes, corner shops and, finally, spirits. Meanwhile, money was invested in attracting young drinkers in mature markets while expanding in Europe and the US. Strong growth in the Irish economy and the revival of Ireland's fortunes also helped give Guinness an enviable image and robust growth.

A similar revival in Scotland - sparked perhaps by the new Edinburgh Parliament - would do Scotch whisky and Diageo no harm at all. A dash of youthful style and exuberance is much needed.

At the moment, however, Diageo looks set to fall short of its high-flying ambitions.

TOP 10 IN SPIRITS

COMPANY N0 OF TOP 100 BRANDS

UDV (Diageo) 17

Allied Domecq 12

Bacardi Ltd 4

The Seagram Co 10

Pernod Ricard 7

Brown-Forman 4

Suntory Ltd 5

Jim Beam Brands 3

Eckes 5

Davide Campari 3

TOTAL TOP 10 70

Source: Impact Databank

TOP 10 DISTILLED SPIRIT BRANDS

RANK BRAND COMPANY TYPE

1 Bacardi Bacardi Ltd rum

2 smirnoff Diageo vodka

3 Johnnie Walker Red Diageo Scotch whisky

4 Ricard Pernod Ricard anis/pastis

5 J&B Diageo Scotch whisky

6 Absolut V&S Vin & Spirit vodka

7 Jack Daniels Brown-Forman Beverages Tennessee whiskey

8 Gordon's Gin Diageo gin

9 Jim Beam Jim Beam brands bourbon

10 Ballantine's Allied Domecq Scotch whisky

Source: Impact Databank

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Arts and Entertainment
The Apprentice candidates Roisin Hogan, Solomon Akhtar, Mark Wright, Bianca Miller, Daniel Lassman
tvReview: But which contestants got the boot?
Arts and Entertainment
Jim Carrey and Jeff Daniels ride again in Dumb and Dumber To
filmReview: Dumb And Dumber To was a really stupid idea
News
people

Jo from Northern Ireland was less than impressed by Russell Brand's attempt to stage a publicity stunt

Sport
Scunthorpe goalkeeper Sam Slocombe (left) is congratulated by winning penalty taker Miguel Llera (right)
football
Life and Style
A woman walks by a pandal art installation entitled 'Mars Mission' with the figure of an astronaut during the Durga Puja festival in Calcutta, India
techHow we’ll investigate the existence of, and maybe move in with, our alien neighbours
Arts and Entertainment
Sir Ian McKellen tempts the Cookie Monster
tvSir Ian McKellen joins the Cookie Monster for a lesson on temptation
News
i100
News
ebooksNow available in paperback
Travel
Tourists bask in the sun beneath the skyscrapers of Dubai
travelBritish embassy uses social media campaign to issue travel advice for festive holiday-makers in UAE
Arts and Entertainment
Jennifer Saunders stars as Miss Windsor, Dennis's hysterical French teacher
filmJennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress
Life and Style
tech
Sport
Nabil Bentaleb (centre) celebrates putting Tottenham ahead
footballTottenham 4 Newcastle 0: Spurs fans dreaming of Wembley final after dominant win
Life and Style
Sebastian Siemiatkowski is the 33-year-old co-founder and CEO of Klarna, which provides a simple way for people to buy things online
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

Carlton Senior Appointments: Sr Wealth Manager - San Francisco - Inv AdvisoryFirm

$125 - $175 per annum: Carlton Senior Appointments: Senior Wealth Manager – In...

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Day In a Page

Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas
La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

Deaf community outraged by La Famille Bélier

The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
10 best high-end laptops

10 best high-end laptops

From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
Susie Wolff: A driving force in battle for equality behind the wheel

Susie Wolff: A driving force in battle for equality behind the wheel

The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

'No abs Adam' plans to muscle in on Usain Bolt's turf

After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
Calls for a military mental health 'quality mark'

Homeless Veterans campaign

Expert calls for military mental health 'quality mark'
Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

Meet Racton Man

Analysis shows famous skeleton was a 6ft Bronze Age superman
Garden Bridge: St Paul’s adds to £175m project’s troubled waters

Garden Bridge

St Paul’s adds to £175m project’s troubled waters
Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

Stuff your own Christmas mouse ornament

An evening class in taxidermy with a festive feel
Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

Joint Enterprise

The legal doctrine which critics say has caused hundreds of miscarriages of justice
Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

Freud and Eros

Love, Lust and Longing at the Freud Museum