Diageo’s growth plans: More premium brands and diversity in leadership

Dive Brief:

• Diageo CEO Ivan Menezes said the spirits maker will pursue a M&A strategy that prioritizes premium brands in its portfolio, CNBC reported. This approach underscores the alcohol company’s realization that consumers are drinking “better, not more,” and that premium brands deliver growth and high margins, Menezes said.
• In addition to this strategic alignment with trends, the company announced its new 10-year plan with a focus on promoting moderation in drinking by focusing on quality not quantity; championing diversity by having 45% of its leaders from ethnically diverse backgrounds and 50% of its leaders as women by 2030; and achieving net-zero carbon emissions across its direct operations, as well as reducing the amount of water it takes to craft every drink by 30%.
• In an increasingly competitive market, factors like sustainability, diversity and premiumization can help alcohol companies stand out. Diageo is working to adapt to consumers seeking to support ethically and environmentally responsible companies, at a time when that demand is growing. 

Dive Insight:

Premiumization has been a growing trend that touches a myriad of categories in the food and beverage industry. Despite the pandemic-related economic hardships of recent months, the premium trend has continued, with sales of premium and super-premium brands increasing 1.7% year-over-year at retailers for the 26 weeks ending Oct. 4, according to IRI data.

IRI noted that alcohol companies have particularly benefited from having brands that cater to shoppers seeking premium options. Diageo, the world’s largest liquor maker, has plenty that serve this niche. Not only does it have old standbys like Talisker single malt and Johnnie Walker Blue, but it has also acquired several premium brands in recent years.

In 2017, Diageo purchased Casamigos for $1 billion, and this year it signed a deal to pay up to $610 million for Aviation American Gin and its parent company Davos Brands.

While the company has been bringing more premium products into its portfolio, it has also been shedding some of its lower-tier products. In 2018, Diageo announced it would sell lower-end brands in its portfolio, including Seagram’s whiskey, to Sazerac for $550 million. There will likely be more of this type of M&A in the near future. 

“We want to keep adding to the growth and margin profile of the business by acquiring fast growing brands with high margins at the premium end of the market … and we’re on the hunt for more,” Menezes told CNBC. “But it is about finding quality brands that we can see growing well over a decade.”

Diageo is not alone in looking to make premium products a larger component of its core portfolio to attract 21st century drinkers. Pernod Ricard recently acquired the Malfy premium gin brand for an undisclosed sum.

Premiumization is not the only tactic that Diageo is using to reach today’s consumers. The company’s push for moderation in its messaging speaks not only to responsible drinking but to a growing segment of consumers reaching for low- and no-alcohol brands. U.S. bottled low- and no-alcohol beverages are projected to jump about 32% between 2018 and 2022 — three times their growth in the previous five years — according to IWSR data reported by Bon Appetit. 

Already, Diageo has tapped into this trend. Last year, the spirits maker acquired a majority share in London-based Seedlip, the world’s first distilled nonalcoholic spirits brand. Just last month, it launched 0.0, a non-alcoholic version of its Guinness brand. Focusing on a message of responsible drinking will likely continue to help broaden the appeal of its non-alcoholic beverages as it frames the choice as a responsible one endorsed by the sprits maker itself.

Diversity and inclusion is another initiative that Diageo is aligning itself with as it looks to “shape a more diverse and successful long-term business and society,” Menezes said in a statement. The spirits industry lacks diversity and major companies are looking to correct that disparity by introducing goals and initiatives aimed at bringing in more women and people of color.

About 80% of executives in the beverage and tobacco manufacturing industry are male, according to the Equal Employment Opportunity Commission. Part of the reason for this disconnect is that traditional networks within the industry have largely not tapped into segments of the population that have not historically been industry insiders. Other companies are working on diversifying the industry as well, Constellation Brands previously announced it will invest $100 million in female-founded alcoholic beverage companies by 2028.

Studies have shown that having a variety of voices is beneficial for a company’s bottom line. Without a wide swath of voices, those gaps can lead to missed opportunities, including overlooking potential innovation ideas. A report from McKinsey reviewed companies in the top quarter for racial and ethnic diversity and found they were 35% more likely to have financial returns above their national industry medians.

In an industry where competition is fierce and margins are thin, having an edge through a diverse workforce is an attractive proposition, both financially for the company as well as for consumers that are looking to support socially responsible businesses.