Diageo’s Marketing Strategy Diageo is the world’s leading premium drinks company. It has more category leading brands than any other drinks company and market leadership in many of the major growth markets around the world. Diageo’s unique STP strategy has allowed it develop into a globally renowned brand with an operating profit of over ? 2 billion in 2005. With its headquarters in London, Diageo has experienced rapid expansion with over 80 offices worldwide employing around 20,000 workers.
The firm’s recent success can be largely attributed to its efficient market segmentation and product diversification that have allowed it to meet the specific demands of its global consumer base. The Alcoholic Beverage industry is one of the largest in the world and is estimated to be comprised of 26 public companies and around 200 private companies, the industry is dominated by five large players. In 2005 Inbev recorded the highest revenue ($13. 81 billion) followed by Haniken ($12. 79 billion) and Anheuser-Busch ($12. 01 billion).
Diageo was ranked 4th with annual revenue of $10. 9 billion and return on invested capital up 4. 4% from the previous year to 14. 9%. The global volume of sales of beverage alcohol in 2004 was 182. 9 billion litres with a stable 1-2% growth in the previous five years. The market is made up of 3 distinct categories: beer, wine and spirits with branded beers sales accounting for 76% of total branded alcohol sales. These statistics illustrate the huge competition firms face within the industry highlighting the importance of a well defined and aggressive marketing strategy.
Diageo was formed in 1997, through the merger of GrandMet and Guinness and at the time was a consumer goods company with food and drink at its core. However, by 2000 Diageo had realigned its business to focus on its premium drinks. With 76% of alcohol sales comprised from branded beer sales it is no surprise that eight out the top nine global alcohol companies are primarily breweries. Diageo is the only exception to this rule with leadership in the global spirit market with a strong presence in all three categories throughout the world.
Diageo manages its brands in terms of 8 global priority brands including Smirnoff Vodka and Captain Morgan Rum, 30 local priority brands including red stripe larger and Gordon’s Gin, and some category brands. Global priority brands account for about 60 percent of total sales volume with all local priority brands having market leading positions in the market they were distributed. In such a competitive industry where a strong brand identity is essential, Diageo’s marketing strategy has ensured it has excelled in recent years.
This can be shown with its economic profit increasing from ? 227 million in 2000 to ? 642 million in 2005 with an operating margin of 21. 6%. Diageo’s fourfold strategy of complete category participation, growth of global priority trademarks, investment in BRIC (Brazil, Russia, India and China) economies and selective acquisitions has ensured it is grown faster than any of its competitors. With its extensive market research, innovative product development and aggressive marketing strategy Diageo has developed into a globally renowned brand.
To analyse why Diageo has been so successful I will first examine the macro-environment that affects the firm using PEST analysis. The Political landscape surrounding the alcohol industry varies massively across the globe with numerous restrictions on who is able to consume and buy certain alcoholic products. In most developed countries in Europe the legal drinking age is 18, whilst in the North America it is 21 with both areas enforcing strict punishments for those who break the law.
On the other hand many countries particularly in South America and Asia have outlines on alcohol consumption with little enforcement in place. Alcohol is also banned in Muslim states with many African Nations also prohibiting the production and distribution of alcohol. These factors therefore need to be considered carefully when trying to identify new markets to penetrate, as well ensuring all marketing strategies are aimed at the right population demographic. Other Political factors involve the tight regulations many countries place on mergers and acquisitions and monopolistic behaviour.
In the last 10 years the alcohol industry has seen an unprecedented consolidation as the largest firms try to identify the most profitable segments of the fastest growing and most profitable new markets. This often leads to infringements with national regulations about competition and market monopoly, resulting in the sale having to be approved by a government agency. When looking at the economic aspects affecting the industry and Diageo the main concern is the market saturation reached in many of the developed economies worldwide.
With demand remaining constant and competition increasing it is important for firms to identify new markets to invest in, with particular focus placed on Emerging markets. Another important development is the growth patterns in the alcoholic beverage market with the demand for beer increasing by 2. 7% with particularly strong growth in the premium brands market. In contrast there has been a decline in demand for wine and spirits which are the industries that Diageo has a large market share.
There has also been a recent reduction in operating profit of Diageo in Europe, which can largely be explained by the higher taxes imposed by governments who are striving to reduce alcohol consumption. To me the most important social factor effecting Diageo right now is the well publicised growth in corporate social responsibility. In the last 10 years there has been growing political and consumer pressure on alcoholic beverage firms to act in a more responsible and sustainable manner, with 39 countries recently imposing new and tighter restrictions on the marketing of alcohol.
Consequently Diageo has had to invest a large amount of time and resources into developing policies that include improving business ethics, reducing environmental impacts (including reduction of water use and carbon emissions), supporting local communities and marketing responsibly with support for voluntary marketing codes of practice (this is in fact a tactical preference for industry self-regulation to avert possible regulation by governments).
Alcohol is now the leading factor in injury and disease in low mortality developing countries, with alcohol giants including Diageo expanding rapidly into ‘emerging market’ countries who have few alcohol policies or health services. Firms therefore need to be seen promoting responsible drinking and developing campaigns to reduce drink driving and alcohol abuse. Unlike many other industries the alcoholic beverage industry is not particularly driven by technological advances. Production methods are elatively standardised across the industry with no noticeable recent technological advancement having a major impact on the production and distribution in the last few years. The one development however is the importance the internet now plays as part of the alcohol industry’s marketing and communications strategies. Some companies now have a separate website for each of their many brands, targeting a particular market of drinkers. These are highly sophisticated websites, with the very latest in web design and are constantly updated.
Brand websites ask viewers entering the site to enter their date of birth and country allowing them to specifically target the consumers with information on the company’s products, promotions and sponsorship strategy in that region. Segmenting, targeting and positioning form the base when developing marketing strategies for any firm. The overall market is divided into distinct group of buyers and a marketing mix is then developed to cater to this particular group. However in the alcohol industry climate and tradition also play an important role in consumer preference.
It is Diageo’s unparalleled STP which encompass these bespoke consumer preferences that have allowed it to thrive in the industry. Diageo’s global business is managed through three regions, North America, Europe and International with North America responsible for 41% of Diageo’s operating profit. With the geographical segmentation defined Diageo has followed a strategy of striving to have complete category participation, rather than solely focusing on individual brands within categories.
Scotch brands such as J&B and jonnie walker are promoted aggressively in Spain, in Russia Diageo introduced a range of vodkas, whilst focusing on the Rum market in Australia. Diageo’s marketing and investment strategies also differ in different geographical segments. Marketing through sponsorship and customer relationships were the key investment in developed countries particularly North America. Here Diageo made big investments on brand campaigning like the Tony Sinclair- Ready to Tanqueray campaign and Smirnoff’s “Neat” campaign.
It also greatly increased its marketing campaigns focused on African American and Mexican American consumers sponsoring comedy series including ‘Barbershop’ and ‘Latin Kings of Comedy’ which are very popular in these two communities. Another key marketing strategy heavily pursued by Diageo is sponsorship in sport, sponsoring the Canadian football league and the Bundaberg rum rugby series in Australia. In line with the increasing importance of corporate social responsibility Diageo has also teamed up with the McLaren Mercedes F1 team to promote responsible drinking.
Diageo have taken a different approach in the international market which they expect to be the future growth driver and so invest in marketing, significantly ahead of sales. Acquisition and brand positioning are the firm’s priorities in BRIC economies, whereas innovation and market development were the main drivers in Africa. Harp in Nigeria and Smirnoff storm in South Africa are just a few examples. Diageo has also introduced the Business Reporting Awards scheme to create awareness about the prevailing market conditions and investment opportunities in Africa.
When examining the microenvironment of Diageo’s marketing strategy it is important to analyse the firms marketing mix. These are the actions that company can undertake to influence the consumer’s decisions to purchase its goods or services. The marketing mix contains 4 elements these are the product, price, place and promotion known collectively as the 4 P’s. When looking at the product aspect of the marketing mix it is interesting to note that Diageo has nine of the world’s top twenty premium distilled spirit brands.
Diageo was most aggressive in the driving of its four global trademarks which are the highest sellers in their respective categories, Johnnie Walker scotch, Smirnoff Vodka, Baileys Original Irish Cream liqueur and Guinness stout beer. Diageo’s speciality however is its diverse range of products that are specifically developed in order to penetrate specific markets due to the niche consumer preferences across the globe. This also means it is in a strong position should certain markets or products start to decline, with the firm able to transfer resources to more profitable sectors.
The pricing aspect refers to the process of setting a price for the product including discounts. In order to determine which price to set Diageo first needs to analyse the price elasticity of its products which determines how sensitive demand for the product is following a change in price. In the alcoholic beverages industry prices are very elastic due to the availability of a wide range of substitutes and little product differentiation.
Therefore brand image and reputation are an essential part in determining the elasticity and subsequently the price. Other factors effecting Diageo price setting is the highly competitive nature of the alcohol beverage industry, with market penetration often necessary in heavily saturated markets like the USA, with Diageo setting prices artificially low in order to stimulate short term demand. As previously mentioned Diageo is heavily involved in the placement process, with market segmentation integral to its business strategy.
As a result Diageo has invested heavily in ensuring accurate product placement undertaking backward vertical integrations in many markets. It now overseas operations including producing, distilling, brewing, bottling, packaging, distributing, developing and marketing a range of brands in approximately 180 markets around the world. In such a heavily competitive industry Promotion is arguably the most important aspect of the marketing mix. Diageo spends over $1000 million a year on advertising to try and develop a strong brand identity and promote brand loyalty.
Its Promotional techniques depend strongly on the product placement with Diageo following high class positioning statements for Smirnoff stating it embodied “liberation boldness and versatility” therefore targeting the top end of the market. Alcohol is also heavily associated with sporting events and Music with Diageo therefore investing huge amounts to sponsoring numerous global events including the Johnnie Walker Golf Classic in Australia. This well defined marketing mix strategy has ensured Diageo has outperformed its competitors in its chosen markets over the last few years.
However competitors are constantly developing new products and marketing strategies to help it capture market share and get a stranglehold of key markets. Therefore in order for Diageo to continue to be successful it is important that the firm indentifies critical success factors. When analysing the Alcohol beverage industry it is important to note the alcohol consumption patterns have changed considerably. Consumers are shifting their interest from discounted products to more expensive premium products, with a number of companies introducing premium brands with higher price tags.
On the other hand in low and middle income countries, consumers are shifting from unrecorded, locally produced beer to commercial regional brands. This development means Diageo will need to review its marketing techniques to ensure it is targeting the right population segment with the correct product and marketing strategy. Diageo also need to invest more and acquire a larger market share in the beer market because of the sheer volume of the market which is also growing at 2. 7% per annum whilst spirits and wine are showing negative growth.
Diageo should therefore transfer resources to developing and marketing beer products such as red stripe and Guinness. However the most important factor facing Diageo’s long term success is the race to expand into the emerging markets with particular emphasis placed on the BRIC economies. With many of the developed countries economies fully saturated and extremely competitive there is huge room for expansion within these countries which are seen as the critical growth driver for the drinks industry in the coming years.
With the pace of industry consolidation set to slow down any scope for further industry consolidation lie on cross sector investments between beer and spirits or beer and soft drink bottlers. Diageo’s presence in all the sub sectors of alcohol throughout the world could also be a core competence for the firm as there is now a wider opportunity in emerging economies including Columbia, Mexico, Czech Republic and Poland.
In order for Diageo to exploit these opportunities it will need to develop a thorough understanding of local consumer preferences with many markets being dominated by local priority brands like Windsor-Windsor in Korea and Mackenzie in Taiwan. It is also important to consider the stability of the countries government and the long term prospects for the economies gross domestic product, per capita income and other crucial key economic indicators before investing.
Diageo has always stressed on brand building, innovation and strong sales execution with superior relationships with its customers. To sustain top and bottom line performance Diageo needs to create a unique route to the market for spirits and wine brands in the United States where the firm’s global priority brands lack a unique selling point. The company also needs to restructure its business in Europe to deliver operating profits and growth in line with other markets.
One way of achieving this would be to improve sales performance and customer relations with its three largest global customers – Tesco, Wal-Mart and Carrefour. Marketing therefore forms an integral part to Diageo’s short and long term strategies as it competes with its rivals to establish itself in the emerging markets. What is clear to see is that a large amount of Diageo’s success can be attributed to its product diversification that have allowed it to successfully identify and exploit potential gaps in the market.
Investing over $1000 million a year on advertising has ensured the firm has developed a strong brand name across the globe as well as a thorough understanding of the demands of its crucial consumer groups. Diageo has numerous issues to address to ensure it remains successful in the future. However with its innovative marketing strategy, a strong brand identity and a vast amount of resources at their disposal Diageo is in a strong position to establish itself as the global leader in the alcoholic beverage industry.
Bibliography Hill and Bakke (2005), Global alcohol corporations: What they tell us about themselves and why it’s a worry. Icap Report 17 (2006), The Structure of the Alcohol Beverage Industry. Diageo Marketing Presentation (2009) www. Diageo. com accessed on 7th December 2009 www. businessweek. com accessed on 7th December 2009 www. marketresearch. com – Alcoholic Drinks – BRIC (Brazil, Russia, India, China) Industry Guide.