Diageo desperate to ‘crack code’ for North American beer

By Ben BOUCKLEY

- Last updated on GMT

Guinness Black Lager - That's right, it's a lager, not a stout... (Picture Credit: Sam Cavenagh/Flickr)
Guinness Black Lager - That's right, it's a lager, not a stout... (Picture Credit: Sam Cavenagh/Flickr)

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Diageo CEO Ivan Menezes warns that the firm’s beer innovations in North America over the last year have failed and that it needs to ‘crack the code’ for brands such as Guinness that face increasing competition from super premium and craft beers.

Beer accounts for around 21% of Diageo’s net sales worldwide, but the world's biggest drinks company had a tough time in this sector in mature markets, with 2% volume declines for its FY 2013 to June 30 principally driven by Europe.

Menezes did not dwell on Diageo’s beer blues – in Europe or the US – during the firm’s full year results announcement this morning, where the firm reported group net sales up 5% on 2012 to £11.433bn ($17.29bn) operating profit up 9% to £3.431bn.

But Larry Schwartz, president, Diageo North America said:“DGUSA [Diageo Guinness USA - which includes beer and RTD businesses]…had a difficult year with increased competition from new entrants in flavored beer.”

Red Stripe brewing switch from Jamaica to US

Diageo reports in its results announcement that net beer sales fell 1% and volumes 2%, with Guinness losing share in North America as the firm lapped the introduction of Guinness Black Lager (that’s right, a lager not a stout, launched in September 2011) and supply disruptions hit Red Stripe.

Issues for both these flag brands meant the firm suffered a 4% slump in North American beer volume and a 3% dip in organic value sales; Diageo intends to address the Guinness decline by launching a new advertising campaign.

Alix Dunn, director of external communications, Diageo America, told BeverageDaily.com: "In the US, a big part of the Guinness decline was driven by the lapping of the launch of Guinness Black Lager – it is typical to see a leveling off after the first year. 

"We’ve been open about the fact that Guinness Black Lager hasn’t performed as well as we wanted. Guinness also faced intensifying competition for all super premium and craft beers."

CFO Deirdre Mahlan said in January that consumers enjoyed the product's taste, but added that it was about educating the consumer to understand 'black lager'. "Actually finding the right trigger can sometimes take a bit of time."

Dunn told this publication: "On Red Stripe, we faced some challenges when we transitioned production from Jamaica to the US last summer, and we’ve been open about that as well."

Strong showing from pricier spirits

Today, Menezes chose to focus on the firm’s US success in higher-priced spirits, which was driven by a 10% increase in marketing spend; net sales in spirits grew 8% driven by a strong performance in North American whiskey, scotch and vodka.

Price increases across Diageo’s spirits portfolio – from around 3% for vodka to 9% for super premium Scotch – boosted net sales by just over 2%, although the firm said the strategy cost it volume share.

The firm’s sales mix benefited from strong showings from pricier brands Crown Royal and Bulleit Bourbon – 45% accounted for net sales growth – and volume declines for low margin value brands; Diageo’s North American operating margin rose 1.2% despite some dilution from weak beer performance.

Smirnoff net sales grew 6% with the expansion of a confectionery line and the launch of Smirnoff Kissed Caramel, Iced Cake and Root Beer Float; Johnnie Walker net sales were up 14% driven by Black and Blue Label brands.

“Innovation was also a key driver of mix as Crown Royal and Bulleit Bourbon contributed almost half of our net sales growth, the result of the introduction of Crown Royal Maple Finished and Bulleit 10 year old,”​ Menezes said.

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