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Case study: Diageo
By Abby Ghobadian
The story: After a series of mergers, demergers and acquisitions, the management of Diageo, the conglomerate formed by the 1997 merger of Guinness and Grand Met, made a strategic decision to focus on premium alcohol drinks. Diageo was in charge of an expanding and wide-ranging collection of brands, some of which had broad appeal across many countries while others had more regional appeal, sometimes limited to just a few markets.
The challenge: After both organic growth and acquisitions, three key dilemmas emerged by 2002. First, how to manage brands with significantly different appeal, such as Guinness, a brand with strong Irish roots but huge global appeal, or Buchanan’s, the leading Scotch whisky in Latin America. Second, how to rejuvenate tired brands and third, how to improve the market share of the most successful brands, such as Captain Morgan, J & B, Smirnoff and Johnnie Walker.
The initial strategy: To help managers maintain focus and allocate resources, Diageo developed three brand classifications: global priority, local priority and category.
The global priority brands were the big sellers that were popular across a number of important markets and received the lion’s share of promotional resources and attention; by 2010, this figure was £1.3bn. Each of these brands was marketed consistently across all relevant markets and under the direction of a global brand team. * * * *
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Local priority brands were those popular in specific geographic areas. They were managed at the regional level, with executives adapting the marketing to suit local needs.
Category brands played specific roles within a sector; they might be aimed at a particular type of consumer or at a particular price point. Promotion and positioning decisions were made by local executives.
What happened next: The three groupings were flexible enough to change: global priority brands become “strategic brands”, changing to reflect the fact that while all key brands were not necessarily global, they were very much international. This group increased from eight to 14, with brands such as Crown Royal, Windsor and Buchanan’s migrating into this new category to reflect their increasing stature.
In addition, Diageo developed ways to deepen its understanding of consumers, including in emerging markets. When sales of whisky brands declined because Scotch’s image failed to appeal to younger people, the brands were rejuvenated by replacing Scottish cues, such as tartan and bagpipes, with contemporary images more in tune with the lifestyle of consumers in the developing countries. Hence, the move to link Johnnie Walker to Formula One racing.
Diageo also strengthened its focus on the consumer, including putting significant resources including in-house specialists into consumer planning globally.
One result of this planning capability was Cîroc, a grape-based vodka launched in 2003 and aimed at affluent drinkers with buying power and a taste for premium brands.
Meanwhile, emerging markets offer new growth opportunities for Diageo, thanks to increases in both adult populations and an awareness of international spirits brands. This provides opportunities to promote brands in all categories.
In addition, consumers are increasingly willing to switch from illicit alcohol to legal, branded versions. Diageo’s strategic response has often been to promote the safety and legal nature of branded alcohol and to develop a better supply network.
The results: Diageo has become the world’s leading premium drinks business by volume, net sales and operating profit. It makes and markets eight of the world’s 20 best-selling spirits brands.
Key lessons: Having inherited or acquired a large number of disparate brands, Diageo solved the marketer’s global vs local dilemma by segmenting its brands in a way that helped the business prioritise its resources effectively at a crucial stage of its evolution.
A subsequent focus on understanding consumer lifestyles, increasingly in emerging markets, has helped the company’s growth, whether in adjusting established brands or acquiring new ones.
The writer is professor of organisational performance at Henley Business School and co-editor of the Journal of Strategy and Management
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