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.5
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
Explanation / Answer
Innovating for Africa : Diageo
Diageo played a very big and important role in shaping Sub-Sharan African countries.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.” Beacuse of so much of investments by Diageo it's said "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."
With Net sales of £11.4 billion they are provided wmployment to more than 36000 people in 4 specific regions of Africa like 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.
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.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.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.)
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. They sell a product with few functional benefits—taste, color, packaging—there is not much they can play with.“So they focused on to must have good consumer insights and really close cross-functional teams to identify the right bases for innovation.” 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,’” With this Moto Diago continue and score the consumer's trust and create a brand value in the African Market.