Simon Litherland, MD of Diageo GB, was our guest editor this week. Anna-Marie Julyan asked him about NPD, management and, first up, of course, duty

Q: You upset a lot of people in the industry with your recent proposal to tax all alcohol at the same duty rate as spirits.
A: In fact, our view hasn't changed for a number of years. Diageo believes the tax system as it stands is unfair. Alcohol is alcohol. The fairest way is to tax per unit of alcohol.

Q: But spirits are stronger.
A: The vast majority of spirits are drunk as long mix drinks. The consumer needs to have a better understanding of alcohol and how much they're consuming, whether it's a beer, a Smirnoff and cola, or a glass of Chardonnay.

Q: As the world's largest spirits manufacturer, though, isn't your argument self-serving?
A: Not at all. We're unique in the marketplace in that we compete in beer and wine as well as spirits. Guinness, for example, is one of our top three brands. If a fairer and more equitable tax system does [have a negative impact], we need to live with the consequences of that.

Q: So how is the wine side going? Would the industry not be damaged by your tax proposals? How are you coping with exchange rates?
A: The challenge with the wine industry is margin and foreign exchange certainly hasn't helped. It's a very competitive category. Increasing price to offset the exchange impact is one option, but it's a very price-sensitive category. We will increase prices because we don't have the margin to absorb it, but we need to do so carefully.

Q: If the government does introduce minimum pricing what would the impact be?
A: It's been talked about as a way to combat alcohol abuse, but I don't believe it would be effective. It's a very blunt instrument. The vast majority of people drink alcohol responsibly and people who abuse alcohol will continue to do so even if it is more expensive. I'd much prefer to see targeted interventions aimed at the minority who use alcohol irresponsibly.

Q: On the one hand you're saying higher prices won't combat alcohol abuse, but on the other your duty proposal will see prices increase on all alcohol categories apart from spirits. What gives?
A: I think there are different issues here. One is about how you tax alcohol, and we're advocating a fairer, more transparent taxation system. The Treasury is doing a review; it asked the industry to submit proposals; and this is a view we've held for 10 to 15 years. The issue of minimum pricing was proposed as a vehicle to tackle alcohol abuse. But I'm not suggesting our proposal will solve alcohol abuse. There are better ways to do that.

Q: Let's switch now to your own contribution. You moved to this role 15 months ago. What do you feel you have brought to the post?
A: Well, I've definitely brought some different perspectives and asked some dumb questions. I was fortunate to pick up responsibility for a business that was very well run with fantastic people and some great brand market positions, and I've been able to continue that journey with the team.

What I have tried to do is create a bigger sense of possibility and belief in our ability to grow ourselves and our business, despite the maturity and competitiveness of the market and the economic situation. I also feel our customer relationships have moved a long way in the past few months. A big focus for me this year has been building relationships both across the business and with our customers.

Q: What sort of a boss are you?
A: I try to spark people's imaginations about what they can create and achieve, and then empower and support them in making it happen. I like to set very clear business priorities and keep it simple. Great relationships are the bedrock of our success.

I believe in celebrating and rewarding outstanding contributions and have introduced Managing Director's Awards for individuals across the business who have achieved fantastic outcomes.

Q: The changes seem to be working: volume and net sales are up 9% and 5% over the past year at Diageo GB. What are the most important reasons for the success of the business in the past year?
A: We've been able to take share and grow our business across beers, wines and spirits. I would identify three key drivers. We've had particularly strong growth of spirits in the off-trade, up 18% compared with 6% across the market. Premiumisation has been another reason. A year ago we created the Reserve Brands business, which has had great growth [20%] in its inaugural year. Third would be innovation.

Q: What has been the most significant piece of NPD?
A: Smirnoff Flavours and Pre-Mix. But I'm also working with my team to broaden the definition of innovation. It doesn't have to be a new-to-the-world brand to be interesting or valuable. New packaging, brand extensions, new SKUs (50cl, 35cl), formats or delivery systems are every bit as important if they help meet the requirements of consumers, shoppers and customers. We need to innovate and evolve in every part of our business.

Q: With the off-trade growing so well for you, that must be creating tension with your on-trade customers. Which is most important?
A: We've seen a continued shift from the on-trade to the off-trade and that's set to continue for the foreseeable future. But the on-trade remains critically important to us.

Q: We reported in our Focus On Spirits last month that volume sales of vodka were down overall in the off-trade. What has caused this?
A: It's partly due to price relativity, so the duty increases on lower-­value own-label products will be proportionately higher than on brands, and you get a narrowing of price between own label and branded goods. I also think the vodka category has become more price-competitive over recent years. Smirnoff is far and away the market leader, but a few other brands are investing heavily.

Q: Some of your competitors have chosen not to engage in promotions and have seen sales drop. Yet your brands are all in strong positions. What's your attitude towards promotion?
A: We invest heavily in both marketing and customer marketing to grow premium brands that offer great value and quality to our consumers at full price. I believe price promotion will always be part of the sales mix, but our category is overly promoted.

Forty-eight per cent of alcohol is bought on promotion compared with 40% of confectionery and 33-35% for fmcg, and I don't believe that the level of promotion on alcoholic drinks is sustainable. At the moment we're almost training consumers to expect to buy alcohol on promotion. If reduced to the same level as fmcg, it would create value for us and retailers as well.

Q: What can you do about it?
A: We don't set prices. It's up to the retailers to price the brands they sell. However, we can choose to participate in promotions if they bring them to us. Where we do choose to do so, we want to ensure we generate a return for our investment and secure great availability and visibility for our brands. Across our portfolio we have maintained our premium price point relative to the ­category.

Q: But don't you take a hit on margin when you engage in these price promotions?
A: Yes. Often we have a choice to invest in a promotion or not, and sometimes we will and sometimes we won't. The key thing for us is to work collaboratively with our customers to understand their business strategy.

Q: City analysts Execution Noble said this week that a lot of money at Diageo is spent on marketing, but costs haven't been monitored closely enough and the return on investment isn't good enough.
A: To grow our brands we need to invest. We continually improve our efficiency and effectiveness in order to release funds to invest behind the brands. And the topline growth in the business is evidence of the success of our strategy.

Q: That reminds me. This summer Guinness was replaced by Aviva as Premiership Rugby sponsor. Why has that sponsorship deal ended and what's next?
A: Guinness has been a sponsor of Premiership Rugby for a long time and rugby is a really important part of our marketing mix and will continue to be. There's a great fit between Guinness and the rugby enthusiast, and although we have discontinued our partnership with Premiership Rugby we are still going to be very heavily involved with rugby. Watch this space.

Q: Are you on the lookout for other brands? A cider?
A: We have a strong innovation pipeline. We're always looking at new opportunities. One of the particular areas we're looking at is long alcohol drinks and refreshment. I think cider meets a particular consumer need and while we may look at meeting that need with a cider, we are more likely to look at alternative product offerings to meet the same consumer need.

For example, at the moment we are testing a brand called Jeremiah Weed, which is a sweet-tea liquor served with cloudy lemonade, in Wetherspoon pubs. The signs are encouraging. And we're separately testing Jeremiah Weed Brews including a ginger-based long alcoholic drink, which we're very excited about.

We're doing some incubator tests in outlets in Oxford at the moment. If the trials are successful we hope to launch these into the off-trade.

Read more
Editor's Comment: Let's foster a culture where getting drunk isn't cool (2 October 2010)