Drinks giant Diageo will reinvest some of the savings produced through cost-cutting initiatives into advertising, particularly in the US, as the owner of Guinness and Smirnoff looks to ‘fuel its top line’.
Diageo expects to deliver £500 million in savings by the end of 2019, along with a considerable improvement in its organic margins.
The company’s chief executive, Ivan Menezes, promised to reinvest two-thirds of the money back into the business. That represents a kitty of around £330 million, although there was no figure put on the amount to be invested specifically in marketing.
“We are creating a virtuous circle,” Menezes said. “The more efficient and effective we are, the more investment we can put behind our biggest opportunities, fueling top line growth and driving margin expansion.”
It comes as the US market continues to play an important role in the business, accounting for roughly 60% of the £348 million of operating profit that it generated in 2016.
Diageo will focus in the coming year on India, the US spirits segment, and growing its profile in the Scotch whisky category. From a position of 4% volume decline and 5% value decline in 2015, it has seen a turnaround in Scotch’s fortunes. Net sales were up 6% in the first half of the current fiscal year, with growth across all of its Scotch whisky brands including Johnnie Walker and Buchanan’s.
Menezes continued: “We have already started reinvesting and specifically up weighted marketing spend in the US in this second half. In [the fiscal year 2018] I expect we will up weight further in the US and also behind Scotch.
“The rigor we now have on measuring the effectiveness of our marketing means that we know what works and what doesn’t work and we will reallocate the resources behind the biggest opportunities.”
He said that the centrepiece of Diageo’s efforts to invest in its brands was a new marketing catalyst system, which involved putting the power to measure and evaluate brand performance in the hands of all of the company’s marketers.
Menezes reaffirmed Diageo’s outlook for the year, after reporting net sales of £6.4 billion for the first half of the fiscal year.
He commented: “The year has continued well and our expectation of delivering stronger financial performance this year is unchanged. We remain confident of achieving our medium-term objective of consistent mid-single digit organic top line growth and 100bps of organic operating margin in the three years ending fiscal 2019. With the consumer at the heart of the business, improved insight and measurement has supported better brand building and innovation while ensuring we stay ahead of emerging consumer trends. Our everyday focus on efficiency enables us to invest more behind the growth of our brands. I am pleased with the continued progress in more disciplined execution and the improved agility we have across Diageo.”
© FoodBev Media Ltd 2024