Diageo: Innovating for Africa (minimum 500 words or more): summary of this artic
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Question
Diageo: Innovating for Africa (minimum 500 words or more): summary of this article
I need some company backround and some things they are doing posotive and negative. "Diageo, the world’s leading premium drinks business, had a long history in Africa starting from its beer brand Guinness. Guinness was first exported to Sierra Leone in 1827; the first overseas Guinness brewery was built in Lagos, Nigeria, in 1962. "
Also what is your opinion on this compnay, are they doing good or bad? if so what are some things they can improve or watch out for?
Diageo, the world’s leading premium drinks business, had a long history in Africa starting from its beer brand Guinness. Guinness was first exported to Sierra Leone in 1827; the first overseas Guinness brewery was built in Lagos, Nigeria, in 1962. In recent times, Diageo had invested over £1.2 billiona in Africa over the last 10 years and seen sales increase at a compound annual growth rate of 13%, rising from 9% of global revenue in 2007 to 14% in 2013. After a decade leading Diageo in Africa, Dr. Nick Blazquez knew that the “Africa Hope story” had captured the imagination of investors and CEOs looking for growth opportunities. “There’s an increased level of confidence in the continent as ‘Brand Africa’ is being redefined,” Blazquez said. “Markets are becoming more predictable, giving superior returns and there are vast opportunities for growth.”
But Diageo’s competitors were also investing in Africa. In early 2013, Heineken had announced a £95 million investment in a new Ethiopian brewery.1 SABMiller had also revealed plans to invest one-third of its annual capital expenditure in Africa, even though the region accounted for only 12% of its profits.2 And although Africa’s spirits market was small by global standards, Pernod Ricard had targeted the continent for incremental growth on the same scale as Asia, which accounted for 55% of its sales.3
In the previous decade, corporate Diageo had developed a capability in innovation that had provided significant commercial returns. A similar approach to innovation had operated in Africa since 2010, with equally positive results. “It took Asia 20 years to change,” Blazquez reflected. “Africa will only take 10 years because of rapid urbanization, advances in mobile technology that has leapfrogged fixed line, and the emergence of strong domestic businesses. African economies are now often compared to Asian economies with regards to pace of transformation.” ****** Interesting fact about asaia *****
In late 2013, the African alcoholic beverage market was heating up with journalists anticipating intense competition. “As the cost of building scale in Africa falls—and the desire to reach new consumers grows—the big competitors are starting to encroach on each other’s territories,” noted the
Wall Street Journal.4 “Africa, in short, is the new Asia for consumer goods companies . . . A fierce competitive dynamic (is emerging) as [the drinks companies] fight for market share in the rapidly expanding continent,” reported the Financial Times.
Blazquez considered his next steps. The Africa story was one of growth but the competitive threat was a real one. Would Diageo’s capabilities in innovation play a pivotal role in seizing the opportunity? Even more importantly, was Africa really likely to be the last bastion of consumerism?
Diageo
With 2013 net sales of £11.4 billion and more than 36,000 employees, Diageo was the world’s largest premium alcohol company. Its core strength was a portfolio of 13 iconic and world-class strategic brands including Johnnie Walker (Scotch whisky), Captain Morgan (rum), and Smirnoff (vodka). (Exhibit 1 has a complete list.) These key brands had global appeal and contributed an estimated two-thirds of Diageo’s total sales in 2013. They were also good platforms for product innovations. For example, Baileys Chocolat Luxe, launched in 2013, combined Baileys Cream Liqueur with Belgian chocolate. These brands were supported with significant marketing investment and were positioned consistently around the globe.
Another tier of brands, known as Reserve, focused on the super- and ultra-premium categories. (Exhibit 2 shows Reserve brands.) Most of their sales were in the developed world but they were positioned for growth in other markets, the Asia-Pacific region in particular. In 2013, they accounted for £1.2 billion in sales, 10% of Diageo’s total, and had doubled over the previous four years.6,7 Diageo also offered a full range of brands across the price range, allowing it to maximize sales by providing a full service to about 1 million on-tradeb and off-tradec sellers of alcohol across 140 countries. (See Exhibit 3 for routes to customer.)
Emerging markets, which Diageo referred to as “new high growth markets,” were prioritized for investment in order to build the scale needed to win and build market share. Between 2004 and 2013, Diageo’s sales in emerging markets grew from 30% to 42% of global sales and were expected to reach 50% by 2015. Diageo CEO Ivan Menezes explained what this would mean for the company:
The increase in the number of emerging middle class and high net worth individuals will refocus our business from the core premium brands which account for about 60% of our business to one where local spirits and Reserve, the top end of our portfolio, will evolve to be a much bigger proportion of the whole.8
In January 2013, Diageo’s external financial reporting was changed to five geographic divisions: North America; Western Europe; Latin America and the Caribbean; Asia Pacific; and Africa, Eastern Europe and Turkey. (See Exhibit 4 for a geographic profile.)
Diageo in Africa
The African continent had a larger surface area than China, India and the United States combined. Within the 48 countries of Sub-Saharan Africa,d there were considerable differences in social and political stability, economic size, and potential for growth. Diageo organized its Africa business into four regions: Nigeria; East Africa (Kenya, Tanzania, Uganda, Burundi, Rwanda and South Sudan); African Regional Markets (including Ghana, Cameroon, Ethiopia, Angola, Mozambique and Democratic Republic of Congo); and South Africa.
International spirits, which formed the majority of sales for Diageo, were less developed in Africa than elsewhere. About 55% of Diageo’s African sales were from beer brands like Harp (lager), Tusker (lager), and Guinness (stout). Guinness was marketed in Africa at a 40% to 60% price premium over its competitors and accounted for 50% of all Diageo’s beer sales in Africa.9 (See Exhibit 5 for Diageo’s regional sales by product category.) Given the high cost of building a new brewery and transporting beer, the convention in the industry to establish brand presence was for brewing to be subcontracted or licensed to local producers until sales became sufficiently large to justify building or acquiring a brewery.
Diageo owned and operated 13 breweries in Africa and also had a minority shareholding in a South African brewery. (See Exhibit 6 for Diageo’s African production structure.) The largest operations were East African Breweries Limited (EABL) and Guinness Nigeria, both flagship businesses quoted on the Nairobi and Lagos stock exchanges respectively. EABL, which was the second largest business on the Nairobi stock exchange, brewed and distributed beer and spirits in East Africa and owned brewing operations in Kenya, Uganda, and Tanzania. Guinness Nigeria, which had been brewing Guinness since 1962, was the seventh largest company in the country. Diageo Brands Nigeria distributed the company’s spirits brands. Diageo’s beer and spirits were produced under license in 20 other countries in West Africa. Diageo also had a brewing arrangement with the French Castel Group for production and distribution of Guinness in Democratic Republic of Congo, Gambia, Gabon, and seven other markets. Diageo’s spirits were sold in most Sub-Saharan countries through distributors.
Deficiencies in local infrastructure were a big problem in Africa, beyond that even of corruption and bureaucracy.10 For those living in rural areas in middle-income African countries, on average 60% did not have access to an all-season road.11 The situation was better in some countries, such as Angola where 31% of rural dwellers had all-year road access, but worse in others like Ethiopia where only 11% of rural populations had all-season roads.12 With 70% of Sub-Saharan Africa’s population living in rural areas, a perennial question in Diageo’s planning activity was whether it would be physically possible to distribute and sell a product to consumers after it was produced. Electricity generation was also problematic; the 48 countries of Sub-Saharan Africa, with a population of 800 million, generated less electricity than Spain with a population of 45 million.13 Diageo estimated that in Nigeria, electricity production was 4% of what was required.14 As a result of these issues, the costs of operating a brewery in Africa were up to 40% higher than in developed markets.
Economic growth accelerated in Africa after 2000 and progressive political leaders wanted the benefits to be shared with the whole population. Savvy businesses helped them achieve this goal. “The early 21st century’s outperforming businesses will need to know how to win in complex and highly dynamic emerging markets,” explained Anne McCormick, Corporate Relations Director Diageo Africa. “Government, media, and society’s expectations of these investors are high. Firms have the opportunity to think more strategically about ‘win-wins’ which deliver against the hard business metrics and also create positive ‘externalities’ for their stakeholders.” However, governments often tended to see international companies mainly as reliable sources of tax revenue.
Senator Keg15
Alcoholic beverages had played an important and multi-faceted role in many African communities for centuries. For example, the sharing of local beers from the hometown of a bride and groom was an important bonding ritual between families in some parts of Africa. In 2013, traditional local beer and spirit production still accounted for the majority of consumption in some markets and traditional products were often available at significantly lower prices than the beer and spirit brands sold in the formal, tax-paid market. These illicit products resulted in significant economic loss for governments as no taxes (excise, VAT, corporation tax, duties, etc.) were paid and they often escaped basic legal and hygiene oversight. In some cases, these products led to death and serious injury when made in particularly unhygienic and/or criminal settings, with unspecified or dangerous ingredients, and then transported in containers recycled from other uses such as petrol storage. In August 1998, more than 80 people died in Machakos, Kenya, after drinking a traditional beer that contained methanol.
In the early 2000s, the Kenyan government reduced the taxes on non-malted beers. In 2003, EABL saw the opportunity to launch a non-malted beer made from barley. It was sold in a bottle but had a lower price point in order to compete with illegally produced alcohol, which was typically 80% cheaper than branded beers. Although hopes were high, the new beer failed to meet sales expectations. The government increased taxes on barley beers and many of the sales were from consumers switching from other, more expensive EABL brands. In addition, the target rural consumers had proved difficult to reach because of poor roads.
As Kenya’s second-largest capitalized company on the Nairobi Stock Exchange, EABL had frequent dialogue with the government. In conversations in 2004, EABL managers suggested to government that a lower tax on beer meant that they would be able to offer consumers of illicit brews a safer alternative at a price they could afford, while at the same time regulating and formalizing a section of the market that would contribute to overall tax revenue. The government was initially skeptical but decided to give it a try. EABL designed a new brand, “Senator Keg,” which allowed it to further lower its costs by distributing this lager beer in metal kegs that could be returned and refilled, rather than more expensive bottles. EABL also invested in a completely new distribution network, often working in outlets and locations where illicit alcohol was previously sold. The company encouraged small bar owners to improve their premises and practices, including promoting responsible consumption, delivering drinks hygienically, and widening the range of legally produced products they sold. EABL soon had 7,000 approved outlets in Kenya. (See Exhibit 7 for brand and outlet images.) At the request of the Kenyan government, distribution of Senator Keg was further expanded into rural areas. The number of Senator outlets peaked at 15,000 but was later reduced to 13,000 with closures to improve quality. Although the Kenyan government had foregone excise tax on Senator Keg, in 2012 it received 1 billion Kenyan shillings (about £7 million) in other taxes directly related to the product.
Switching to Demand Generation
Until 2010, Diageo’s investments in Africa had been to build production and distribution capacity for its existing brands. “For a long time, we could sell most of what we produced in Guinness,” explained Diageo Chief Marketing Officer Syl Saller (HBS ‘84). “But things changed. We continue to make investment in capacity, but competition now means we have to emphasize brand positioning and growth drivers.” Diageo’s principal competitors in spirits (Pernod Ricard, Bacardi, Beam, and Brown Forman) mainly used distribution agreements. Diageo’s beer competitors, including SAB
Miller, Heineken, and Castel Group, each with larger beer sales than Diageo, had been in Africa for decades and had their own production facilities and distribution.
Significant market growth for quality branded products seemed possible in Diageo’s core markets, given the size of the informal market and the fact that formal beer and spirits consumption was substantially lower than in developed markets. For example, formal beer consumption per capita was 4 liters per year in Ethiopia, compared to 78 liters in the U.S. and 72 liters in the U.K. Ethiopian spirits consumption per capita was 0.4 liters per annum, compared to 7.4 liters in the U.S. and 5.4 liters in the U.K. (See Exhibit 8 for relative consumption levels in Africa.)
Diageo focused its investments on direct participation in the beer and spirits markets of the 10 countries that accounted for approximately 80% of the African profit pool: South Africa, Nigeria, Kenya, Tanzania, Uganda, Ghana, Cameroon, Ethiopia, Mozambique, and Angola. Nigeria was the most significant opportunity. By 2050, Nigeria was projected to be the third most populous country in the world, ahead of the U.S., and to have a GDP greater than Italy, Canada, and Spain.16 Long- term demographic trends in the Legal Purchase Agee (LPA) population in Africa were also favorable. Diageo estimated there would be 65 million more LPA consumers by 2023, which alone would increase the market for alcohol consumption by 3%. (See Exhibit 9 for a profile of selected African countries and Exhibit 10 for a profile of LPA demographics.)
Diageo also saw opportunity in the informal economy,f thought to account for more than 40% of GDP in Tanzania, Nigeria, Ethiopia, and Uganda with similar representation in the alcohol market.17 Trends towards urbanization, growing consumer affluence, and effective marketing were expected to cause consumers to switch from informal and illicit alcohol beverages to branded products.
Growth opportunities By 2011, Diageo had begun to focus on four specific growth opportunities: expanding Diageo’s portfolio; widening consumer choice; exploring further opportunities in mainstream spirits at more affordable price points; and developing new formats to widen consumer choice and demand.
Building the market meant focusing on value consumers—those who could not afford to buy alcoholic drinks at premium prices. “I think of the African market as an iceberg,” explained John Williams, Innovation Director of Diageo Africa. “Our portfolio is only relevant to the top 25% to 30% of consumers from an income perspective. It is where we are strongest. But a big opportunity for us is with the 70% to 75% predominantly made up of the emerging middle class and value market. Clearly our attempts to reach the emerging middle class and value consumer here is very different than in the rest of the world. We are comfortable with that because the scale of the opportunity justifies it. The African market could soon be as big for us in value terms as the United States.” Diageo’s financial modeling indicated that the value market and the opportunity arising from switching consumers out of the informal beverage alcohol segment would be significant for the medium-to-long term as the income gap closed.
Each of the opportunities for growth had an innovation agenda, consistent with Diageo CEO Menezes’ view that the company’s portfolio would have to develop and change to meet the needs of
the fastest growing markets. Williams had been set the target of achieving £1 billion sales from innovation in Africa by 2017, with a target of £250 million in 2014. “It is easy to see further value from spirits and even more from value beer,” Williams noted. “We have to be careful and not try to compete everywhere. Instead, we need to shape the market and choose where to compete. We also have to avoid incremental innovation. The innovation opportunity in Africa is different.”
Innovation at Diageo
In 2005, Diageo undertook a strategic review to redefine its strategy, structure, and objectives. Innovation was identified as a new pillar of growth, with an annual revenue goal of £1 billion from new products. “Diageo had always been great at innovation,” explained Saller, who had been appointed Global Innovation Director in 2005 to meet this challenge. “We have had big successes such as Baileys (Irish cream liqueur) and Bombay Sapphire (gin),g but blockbusters were coming only once a decade. My goal was to enable a steady stream of growth from new products.”
The global innovation director, Saller, reported to marketing to ensure alignment with the strategy of growth via premium brands. A small global futures team was based in London and had responsibility for conducting leading-edge research in liquid development and market trends. Increasingly, this research was conducted in cooperation with universities and commercial partners.
Research and development (R&D) responsibilities for new liquids and packages rested with the 60 scientists that made up the global technical innovation team (R&D). This team reported to innovation to maintain customer focus and reduce the potential for conflict. “We are marketers first and foremost,” noted Global Technical Innovation Director Luca Lupini. “We take consumer insights and turn them into great products.” R&D teams were located in six global innovation centers: Hong Kong, Sydney, New York, Brazil, South Africa and London. This team’s initial target in liquid development was always high. “Irrespective of the starting point for the innovation, we always look at the consumers and ask what will make the liquid great,’’ remarked Lupini. ‘‘We aim to create a ‘gold standard’ liquid, free from finance, raw material, or production constraints early on, and only then look at addressing the compromises needed to turn it into a commercial product. This leaves us in a very different place than if we had begun from a lower base.”
In order to embed innovation in markets, 250 market-based technical staff, with responsibility for the commercialization of innovations, supported the central R&D function. These staff reported to local business leaders rather than central R&D in order to maintain focus on local markets and consumers. Innovation functions were located in six global hubs with the objective of clustering countries with similar portfolios to drive scale in product development.
Building collaboration Innovation in the drinks market was challenging. “We sell a product with few functional benefits—taste, color, packaging—there is not much we can play with,” Saller explained. “So we must have good consumer insights and really close cross-functional teams to identify the right bases for innovation.” Reflecting on the challenges she faced, Saller said: “In many companies there is tension between innovation and other functions, particularly supply. We worked hard so that my people understood the problems facing others as we introduced innovations.” Cooperation with regional and country teams was particularly important in commercialization. “We wanted to work in service to the markets and not stay in a silo for six to nine months, then drop a brand in and say ‘go sell it,’” Saller explained. “So once we identified the markets we would compete
in with our innovations, we tried to create a seamless partnership between the innovation team and the region.”
Outcome over process Saller rejected a linear approach to new product development in which different functions would join sequentially as the project progressed. Instead she emphasized all functions joining as needed, often from the start. “We have an ethos of agility, collaboration and relationship above process,” she said. “We benchmark much lower than our peers on process and analytics. In Western Europe we are more analytical, maybe too analytical. In Africa we use a sophisticated approach but don’t need process neatness.”(See Exhibit 11 for Diageo’s core principles of innovation.)
Innovating for Africa
Africa’s 10-member R&D team was based at Woodside, just outside London. “This was a difficult decision, but if it was in Africa, where would you put it?” Lupini remarked. “The alternative is to have multiple teams but they would be too fragmented and cut-off from access to expertise.” The innovation objective for Africa was the same as other markets. “We never change our standards for liquid beverages,” Lupini explained. “We want a top-end product with good margins in every market.” Approximately 70% of the team’s output was the development of multi-market opportunities relevant for the entire region. In-market support was provided by 40 other technical staff based in each of the 10 key markets, with the size of the team dependent upon the size of the market. “In market, the technical teams work collaboratively with the regional teams,” Williams explained. “We need to be sure that innovations are developed based on local insight. Innovation teams also work on launch and execution plans with the local teams.” Single market innovation was pursued in Nigeria and Kenya, the only markets sufficiently large to warrant such an approach. This work accounted for 30% of the innovations and led to products like a low-calorie Tusker Light beer for Kenya and an extension of the Harp Lager brand in Nigeria.
Markets like the U.S. and Europe had complex but predictable supply, distribution, and sales channels. African markets were not so clear. Great connectivity between functions was required to ensure that raw material supply could be secured, products could be manufactured, and that there was a way to get products to customers.
Volatility in the African market meant that the pipeline of innovation launches had to be carefully managed. “The possibility of rapid change means we always keep an open mind on innovation,” Williams explained. “We know what we will launch in the next nine to twelve months and then we stay flexible on what comes next.” Differences in market development also impacted product launch. “We operate a short- and long-term pipeline of innovations based on our category participation,” Williams explained. “South Africa is a developed market with one pipeline. In East and West Africa, premium spirits are emerging so they have a different pipeline. In Tanzania and Ethiopia, the markets are not as mature so some of our innovations won’t make it there for three to five years.” Ultimately the decision on product launch was the decision of the country general manager.
Flexibility was required not only at the design stage of innovation but also the post-launch phase as market conditions often made course-correcting actions important. For example, Diageo Cameroon had launched a mainstream spirit product at £4 for a 700 milliliter (ml) bottle, lower than was typical for Diageo’s spirits brands but higher than the £1 cost of a bottle of beer. Consumers did not recognize the value they were receiving due to multiple servings from the 700 ml bottle of spirits and sales targets were not achieved.h After a tough initial period, adjustments were made. “We introduced a 200 ml rather than a 700 ml bottle to close the price point with beer,” Williams explained. “We have also tested whether we could sell a single serve in a back-bar dispenser.
Innovating for Africa required strong talent, but also a particular kind of leadership. Saller said:
Without question, talent is the most important input to success in innovation. But we also encourage big dreams and use the term “wouldn’t it be amazing if?” to drive future-back thinking and force ourselves to think about how we might get close to that goal. We spend time talking with people about what it means to them personally to be involved. Some are inspired by changing the face of the alcohol market, others by creating the next generation of African leaders.
Project Ramani
Critical to making informed investment decisions was to understand the consumer landscape as comprehensively as possible. Market and customer information that was regarded as basic in developed markets was not available in Africa. Andrew Geoghegan, Consumer Planning Director for Africa, explained: “A lot of data exists, but the syndicated data that provides the context is typically of poor quality or lacks consistency.” This meant that Diageo strategy sometimes lacked strong data foundations. “We were just getting by,” Geoghegan added. “We had big growth ambitions, but we were not always being as selective as we needed to be. We needed data that would provoke us to make better choices.” The solution was Project Ramani (Swahili for map), a research program launched in 2012 to accurately describe the size of markets and identify actionable market segments.
Research process Africa was a challenging research environment due to inadequate or non- existent data collection infrastructure and the conservative techniques used by local research providers. “Research in Africa can’t be done with a Western mindset or timeframe,” said Geoghegan. “You must innovate and push local agencies to act and create solutions that are more suited to the unique environment.” Diageo’s requirement for representative sampling in its 10 key markets meant a sample of 30,000 urban and rural respondents. With more than 500,000 data points resulting, timely collection and accurate analysis would have been impossible without the use of technology. Emphasizing leapfrogging technology, a smartphone research app (application) was adapted and used in data collection. Geoghegan explained other challenges in data collection:
West Africa is 50:50 rural and urban. East Africa is more rural, for example, and Ethiopia is 85% rural. We had to be careful about where responses were collected to ensure representativeness. We travelled to meet participants, as most people don’t have a car. We also had to make the research task straightforward as large proportions of our sample had some challenges with elements of literacy and numeracy. Research was conducted in a significant number of national or local languages.
After initial pilot testing in Kenya and Ghana, research in all 10 markets was completed over 18 months. Initial results in mid-2013 revealed specific insights that had not been available to Diageo and the rest of the industry previously due to the scarcity of data. Geoghegan explained:
We accessed insights into consumer spending and category consumption which were previously unknown to us. It has helped us establish some facts to further support our hunches and intuition, inform strategy, and dedicate resource more appropriately. In its broadest sense, it enabled us to size the markets, understand differences between them, identify opportunity in spirits as well as beer, helping us frame the possibilities. For example, we typically spoke of having a 95% volume market share of beer in Kenya, whereas in fact we have only a 50% share of total beverage alcohol, leaving plenty of room for growth. Tanzania was one of the most rural and least affluent countries in our sample, but it has one of the biggest premium beer markets due to the competitor’s investment in branding. These more definitive and accurate insights really help us flex our approach to emerging trends and dynamics.
Project Ramani was to be repeated as necessary. “In Africa, people are not yet jaded by research,” said Geoghegan. “When we run brand development workshops there with consumers, many participants are happy to stay longer than we need them. The results are better in other types of qualitative research too because in other places respondents often try to second guess you.” Research was firmly focused on the best approach for the market rather than replicating efforts used elsewhere. “We are looking at tablet computers for data collection in order to use more pictures and have greater interaction with respondents in future research,” Geoghegan said.
Importance of Supply Chains
As important as understanding where increased demand would come from was being clear on how to cater for the subsequent increased supply. Diageo was an active, if selective participant in supply chains in Africa, where local agriculture was becoming an increasingly large part of the company’s procurement strategy. “We do not tend to describe ourselves as being in agribusiness,” remarked McCormick. “But we have had to engage beyond our usual focus areas simply because in some places, the agro intermediaries do not exist. Being directly involved also means we have the opportunity to shape the supply environment to improve access to quality local raw materials and better understand and manage our costs and foreign exchange exposure.”
The company’s ambitious growth plans meant that sustainable sources of supply were essential for key crops. One challenge was variation in the capabilities of farmers. Diageo had worked to build farmer capabilities for many years, as farmers were generally suspicious of multinationals and it often took several crop cycles before trust was established. A standardized approach to capacity building was made difficult because farm sizes, aggregating entities, and agricultural value chains differed greatly across Africa. Uganda was mainly smallholdings, while Kenya had many large farms that could plant over 2,000 acres. Access to basic finance was also a key challenge for many farmers and Diageo had to come up with innovative approaches to overcome these barriers. Non- Government Organizations (NGOs) were common partners in supply chain development programs. In Kenya, Diageo partnered with KACOFA (Kapchorwa Commercial Farmers Association) to find farmers to work with and to assist with bookkeeping, ensuring fertilizer was used as agreed and that the harvest was sold to Diageo rather than to a third party.
In some countries, Diageo’s interest in supply chains was closely aligned with the focus of the local government. Diageo bought Meta Abo Brewery, a government-owned brewery in Ethiopia, in January 2012 for £140 million. Diageo’s tender bid emphasized investment in building a supply chain to source barley locally rather than importing it from Europe, as had been done previously. Ethiopia’s government saw the benefits of this and designated barley as one of the priority crops in the national plan, the key driver of economic activity in Ethiopia. Immediately after the acquisition of the brewery, Diageo worked in close partnership with the Ethiopian government’s Agricultural Transformation Agency (ATA) and an NGO to organize hundreds of smallholder farmers to plant barley for use in production. “We started small, with an experimental approach and, not surprisingly, the first pilot uncovered many challenges,” McCormick explained. “The initial pilot project cost us a lot given the relatively small amount of grain, but we learned about some of the barriers to working with smallholders, established some bases to build on, and also identified a good number of great farmers we could work with to scale the project.” Scaling this initiative led Diageo to work with a larger model involving small farmers, big farmers subcontracting to small farmers, and a national body that provided funding to develop the technical know-how of local farmers and their ability to get quality barley of the right spec to market.
Successful Innovation for Africa
By 2013, innovation had grown to play a prominent role in corporate Diageo. Innovations generated annual sales of £1.4 billion, 11% of total 2012 sales. Innovation accounted for 50% of Diageo’s growth between 2008 and 2012. In the U.S., 73% of Diageo’s innovations were still on the market five years after launch, compared to an industry average of 36%.18 Innovation had also been successful in Africa. In the financial year ending July 2013, innovation delivered sales of £213 million, accounting for 15% of total Africa sales and 60% of sales growth in Africa. For example, Dubic lager, a well-known Nigerian brand that had gone out of production in 1998, was re-launched in April 2012 with an emphasis on its Nigerian roots and the use of local ingredients. Jebel Gin, a mainstream gin targeted at value consumers in Kenya, was launched in December 2012 and sold through the Senator Keg distribution network. The product was priced at KES 100 ($1.15) for a 25 centiliter pack and sold 80,000 cases in its first two months.19 Diageo’s most successful innovations in the period were Snapp and Ruut Extra.
Snapp
The 2012 launch of Snapp, a premium, crisp, apple-tasting drink designed exclusively for women, was Diageo’s most successful launch of an entirely new brand in its history, with first-year sales of £10 million. (See Exhibit 12 for an image of Snapp.) Diageo had no history developing products specifically for women in Africa.20 “We studied other companies like Nike, Volvo, and Harley Davidson and their approach to marketing to women,” Saller explained. “They dropped the assumption that men would not buy brands that were also marketed to women. This helped us overcome our own internal barriers and think differently.”
Market research was undertaken to develop insights on modern African female consumers and the role alcohol played in their lives. Results indicated that women were becoming more willing to express their confidence, empowered by their increasing financial independence as they built careers outside the home. “We saw that attitudes in Africa were evolving for women in terms of economic power and independence,” said Rommel Ochoa, Innovation Marketing Manager, Diageo Africa
The R&D team in London was given the brief of finding a concept product relevant to African female consumers. The product was to be developed with a focus on Nigeria and Kenya to be sure the brand would have an East and West African mentality and that it could later be scalable across the continent. “We developed three concepts, one of which was the Snapp-type of concept,” Ochoa said. “After three months of testing various liquids, we selected this because we knew it would be unstoppable in the market.” Diageo’s commitment to outcome over process meant that creative teams were involved early and the name was selected at stage one. “We had a name before a product,” Ochoa noted. “It was a word that came up in early consumer concept tests. It engaged people, who just started to snap their fingers when they saw it!”
With a name and a product concept, the supply team, led by Una Gribben, Supply Program Manager for Diageo Africa, took over. “Snapp was a complex project in terms of supply solution,” Gribben explained. “It was new to the world in terms of liquid product, packaging materials and ingredients. We were also working in two countries in parallel with the brief of ‘as fast as possible please’ to capture the new opportunity and growing momentum in the market.” The challenges of making a new product at scale came to the fore at this stage. “Because we were doing all of these new things, there was a real tension around this project,” Ochoa remarked. “We needed complete cross-functional engagement to ensure we had skillsets in branding, quality, finance and engineering all working together to get a workable solution.” Differences in the pH balancei between water in Nigeria and Kenya meant that the recipe had to be adjusted to work in both countries. Using local supply sources—necessary to keep costs down—also posed challenges. For example, it was hard to get the right grade of sugar used in the production of Snapp
To reinforce its position as an upscale beverage, Snapp was packaged in a bottle inspired by a wine bottle. “The bottle was new to world design, yet simple and cost effective to manufacture,” Ochoa remarked. “We try to reduce packaging types for sustainability reasons, but this time we believed it was a critical branding element, so we developed a new bottle design.” Glass supply was a problem. “We didn’t have the same glass suppliers in both countries, and both had only developed spirits bottles for us. So we had to do a full technical audit to see if they could meet our standards.” Advertising for the brand featured the “Snapp Sisters,” three women chosen specifically to be the brand ambassadors for Snapp. They were shown walking confidently past security into the VIP lounge of a nightclub. They rejected the offer of a beer, and instead reached for a Snapp and then took to the stage to perform for the audience. (To view the commercial, go to http://www.youtube.com/watch?v=rbUpPTOMFjY.)
Ruut Extra
Ruut Extra, a clear beer targeted at the value consumer as an alternative to locally brewed spirits, was launched in Ghana in December 2012. (See Exhibit 13 for an image of Ruut Extra.) The beer was made from cassava, a widely grown local root crop, in order to achieve costs savings. The use of a traditional crop, which could open up new opportunities for rural communities, also enabled access to better excise tax rates. The product was given an eight-week development period with a strict deadline. “Under normal circumstances you’d go, ‘It’s not possible,’” acknowledged Ekwunife Okoli, Diageo’s Managing Director for Africa Regional Markets, referencing the competitive landscape in Ghana. “We had to act in an extraordinary way. And I assure you, absolutely, eight weeks from idea to delivery.”21
Diageo also wanted to assure the Ghanaian government of its commitment to local sourcing. Learning lessons from Senator Keg, Guinness Ghana and other producers had agreed lower tax rates with the government for products that could demonstrate a high level of local agricultural inputs. Cassava was cultivated extensively in Ghana, but was a crop that suffered from high wastage rates as it rotted quickly after harvest unless it was processed. Rising levels of agricultural and other imports and the need to invest in, build, and modernize local agricultural value chains for certain crops were a source of concern for the Ghanaian government, who saw investment in agriculture as key to accelerating socio-economic development in rural areas. The commitment to local sourcing by a blue chip international investor such as Diageo and another one of its competitors was attractive. “We have been here for over 40 years, so I went as a local business that contributes significantly to its local economy including through our tax contribution,” explained Peter Ndegwa, Managing Director of Guinness Ghana Breweries Limited. “We also went as an industry to show our willingness to invest. Finally, we talked about the other countries we worked in where tax decreases did not lead to revenue leakage. It made sense and the government decided to set up a lower tax rate, provided specific conditions were fulfilled.” Diageo also had significant incentives to use local crops. “I presented a move to 50%-60% local sourcing over five years,” Ndegwa recalled “The value for us was in lower foreign exchange losses on raw material imports, which had become a problem. Lower taxes on local raw materials were also compelling, as was the opportunity that a 30% lower price point provided for innovation.”
The development process was different to the usual Diageo approach. Typically it could take 6 to 12 months to bring a new innovation to market. Cassava had not been used in branded beer before in Ghana and there were concerns about sourcing and production. “A senior leader at the meeting in Ghana, where the cassava beer was first proposed, brought ground cassava back to the Global Beer Technical in Dublin, to enable the technical team to design and develop a cassava-based beer,” explained Dawn Reilly, Brand Change Manager for Diageo Africa. “My job was to develop a supply chain and manufacturing process from scratch. By the end of the first week, we had two liquids and worked out that our plant could actually produce the beer.” A cassava supplier in Ghana had a government-built production facility but needed Diageo’s help to create a supply chain, although initially they did not meet Diageo’s global standards. “We had to work with them to bring the suppliers up to our standards and that can take time,” Reilly explained. “But we had total business alignment with the Ghanaian supply director and the Ghanaian general manager. We identified the critical risks to project delivery and ensured that the key stakeholders supported moving ahead in the knowledge that effective mitigations could not be found in the timeframe. We took risks, but always knew what risks we owned and decided to go with them.
Taste tests were conducted with Diageo’s Ghana employees. “We didn’t do a big formal piece of research,” explained Innovation Marketing Manager Chris Laidlaw. “I brought the beers from Dublin to Ghana and then tested them with our guys on the production line. When the product scored well against the leading local beer, we knew we had a winner. We had a value beer that we didn’t have to compromise on to get a taste that consumers wanted.” Route to market was activated through heavy advertising and promotion. “In Africa, you don’t just turn-on distribution. Many of the small shops are run by local entrepreneurs,” Laidlaw explained. “We engaged with local community leaders. They knew this was a Ghanaian beer made from Ghanaian cassava and its success became a community project.
After only a few months, by late 2013 Ruut Extra had 5% market share, was growing fast, and had been named Emerging Brand of the Year by the Chartered Institute of Marketing in Ghana.22 “We won a number of marketing assets,” said Laidlaw. “We made sure Ruut was available at all of the cultural festivals and built great distributor loyalty. Our cost structure allowed us to do a 600 ml bottle like all value beers. We also developed and strengthened our connections with the local farmers, our supplier-partners. When our competitor came with a 300 ml value offering, they struggled to get distribution or consumer acceptance.”
“We succeeded in this because we were able to speed up collaboration. We are good at this in Diageo,” said Laidlaw. “But the success of Ruut Extra has created new expectations. Ivan [Menezes, Diageo CEO] has asked us to be more entrepreneurial and to look at our decisions now as if we were running our own businesses, while supporting and coaching others in their projects. This is a change of mindset of us, but one that we are keen to embrace.”
Explanation / Answer
"Diageo, the world’s leading premium drinks business, had a long history in Africa starting from its beer brand Guinness. Guinness was first exported to Sierra Leone in 1827; the first overseas Guinness brewery was built in Lagos, Nigeria, in 1962. " Guinness was first exported to Sierra Leone in 1827; the first overseas Guinness brewery was built in Lagos, Nigeria, in 1962. In recent times, Diageo had invested over £1.2 billion in Africa over the last 10 years and seen sales increase at a compound annual growth rate of 13%, rising from 9% of global revenue in 2007 to 14% in 2013. Dr. Nick Blazquez knew that the “Africa Hope story” had captured the imagination of investors and CEOs looking for growth opportunities. “It took Asia 20 years to change,” Blazquez reflected. “Africa will only take 10 years because of rapid urbanization, advances in mobile technology that has leapfrogged fixed line, and the emergence of strong domestic businesses.Diageo With 2013 net sales of £11.4 billion and more than 36,000 employees, Diageo was the world’s largest premium alcohol company.The African continent had a larger surface area than China, India and the United States combined. Within the 48 countries of Sub-Saharan Africa,d there were considerable differences in social and political stability, economic size, and potential for growth. Diageo organized its Africa business into four regions: Nigeria; East Africa (Kenya, Tanzania, Uganda, Burundi, Rwanda and South Sudan); African Regional Markets (including Ghana, Cameroon, Ethiopia, Angola, Mozambique and the Democratic Republic of Congo); and South Africa. Diageo owned and operated 13 breweries in Africa and also had a minority shareholding in a South African brewery. Diageo’s beer and spirits were produced under license in 20 other countries in West Africa. Diageo also had a brewing arrangement with the French Castel Group for production and distribution of Guinness in Democratic Republic of Congo, Gambia, Gabon, and seven other markets. Diageo’s spirits were sold in most Sub-Saharan countries through distributors. “The early 21st century’s outperforming businesses will need to know how to win in complex and highly dynamic emerging markets,” explained Anne McCormick, Corporate Relations Director Diageo Africa. “Government, media, and society’s expectations of these investors are high. In 2013, traditional local beer and spirit production still accounted for the majority of consumption in some markets and traditional products were often available at significantly lower prices than the beer and spirit brands sold in the formal, tax-paid market.Until 2010, Diageo’s investments in Africa had been to build production and distribution capacity for its existing brands. “For a long time, we could sell most of what we produced in Guinness,” explained Diageo Chief Marketing Officer Syl Saller (HBS ‘84). “But things changed. We continue to make investment in capacity, but competition now means we have to emphasize brand positioning and growth drivers.” By 2050, Nigeria was projected to be the third most populous country in the world, ahead of the U.S., and to have a GDP greater than Italy, Canada, and Spain.16 Long- term demographic trends in the Legal Purchase Agee (LPA) population in Africa were also favorable. Diageo estimated there would be 65 million more LPA consumers by 2023, which alone would increase the market for alcohol consumption by 3%. In 2005, Diageo undertook a strategic review to redefine its strategy, structure, and objectives. Innovation was identified as a new pillar of growth, with an annual revenue goal of £1 billion from new products. Volatility in the African market meant that the pipeline of innovation launches had to be carefully managed. “The possibility of rapid change means we always keep an open mind on innovation,” Williams explained. In East and West Africa, premium spirits are emerging so they have a different pipeline. In Tanzania and Ethiopia, the markets are not as mature so some of our innovations won’t make it there for three to five years.” Project Ramani,Critical to making informed investment decisions was to understand the consumer landscape as comprehensively as possible. Market and customer information that was regarded as basic in developed markets was not available in Africa.West Africa is 50:50 rural and urban. East Africa is more rural, for example, and Ethiopia is 85% rural. We had to be careful about where responses were collected to ensure representativeness. We travelled to meet participants, as most people don’t have a car. We also had to make the research task straightforward as large proportions of our sample had some challenges with elements of literacy and numeracy.As important as understanding where increased demand would come from was being clear on how to cater for the subsequent increased supply. Diageo was an active, if selective participant in supply chains in Africa, where local agriculture was becoming an increasingly large part of the company’s procurement strategy. “We do not tend to describe ourselves as being in agribusiness,” remarked McCormick. “But we have had to engage beyond our usual focus areas simply because in some places, the agro intermediaries do not exist. Being directly involved also means we have the opportunity to shape the supply environment to improve access to quality local raw materials and better understand and manage our costs and foreign exchange exposure.”In some countries, Diageo’s interest in supply chains was closely aligned with the focus of the local government. Diageo bought Meta Abo Brewery, a government-owned brewery in Ethiopia, in January 2012 for £140 million. Diageo’s tender bid emphasized investment in building a supply chain to source barley locally rather than importing it from Europe, as had been done previously. Ethiopia’s government saw the benefits of this and designated barley as one of the priority crops in the national plan, the key driver of economic activity in Ethiopia. Immediately after the acquisition of the brewery, Diageo worked in close partnership with the Ethiopian government’s Agricultural Transformation Agency (ATA) and an NGO to organize hundreds of smallholder farmers to plant barley for use in production. “We started small, with an experimental approach and, not surprisingly, the first pilot uncovered many challenges,” McCormick explained. “The initial pilot project cost us a lot given the relatively small amount of grain, but we learned about some of the barriers to working with smallholders, established some bases to build on, and also identified a good number of great farmers we could work with to scale the project.” Scaling this initiative led Diageo to work with a larger model involving small farmers, big farmers subcontracting to small farmers, and a national body that provided funding to develop the technical know-how of local farmers and their ability to get quality barley of the right spec to market. To reinforce its position as an upscale beverage, Snapp was packaged in a bottle inspired by a wine bottle. “The bottle was new to world design, yet simple and cost effective to manufacture,” Ochoa remarked. “We try to reduce packaging types for sustainability reasons, but this time we believed it was a critical branding element, so we developed a new bottle design.” Glass supply was a problem. “We didn’t have the same glass suppliers in both countries, and both had only developed spirits bottles for us. So we had to do a full technical audit to see if they could meet our standards.” Advertising for the brand featured the “Snapp Sisters,” three women chosen specifically to be the brand ambassadors for Snapp. They were shown walking confidently past security into the VIP lounge of a nightclub. They rejected the offer of a beer, and instead reached for a Snapp and then took to the stage to perform for the audience. “We succeeded in this because we were able to speed up collaboration. We are good at this in Diageo,” said Laidlaw. “But the success of Ruut Extra has created new expectations.