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A Talk With Peter McDonough of Diageo North America

May 11, 2011

Diageo North America is known for its marketing prowess on its established, big-volume brands, but the company has created numerous product successes in recent years—more than is generally realized. SND interviewed Peter McDonough, Chief Marketing and Innovation Officer at Diageo North America, to take a look at the company’s recent innovation activity.

SND: Diageo North America placed a major focus on innovation in recent years, rolling out a slew of new products. Which ones are you most pleased with?

McDONOUGH: There are several that I’m pleased with, starting with our new Red Berry and Coconut flavors on Cîroc, which have redefined success in flavored vodka. We’ve got a fantastic partnership with Sean “Diddy” Combs, which has allowed us to engage people in a unique way. Normally it would take 7-10 years to build to the scale we have today on Cîroc, and he’s done it in four years. He’s a brilliant brand partner. It’s been a combination of his great activation and the liquids themselves. When people try a Cîroc Coconut or a Coco Loso, they’re absolutely wowed. Another success is Crown Royal Black, which has exceeded expectations in the scale and speed of consumer acceptance. The enthusiasm for it in the on-premise is fantastic.

Another strong innovation area has been the flavored malt beverages. We’ve had our challenges with Smirnoff Ice over the past few years, and we took a different direction in introducing Smirnoff Premium Mixed Drinks, which offer the taste of mixed drinks in a single-serve package. It’s been a fantastic success and proven that flavored malt beverages are still vibrant. They’ve rejuvenated a category that was in a state of stall.

SND: And what’s been disappointing?

McDONOUGH: We’ve had some wonderful ideas that haven’t gotten the traction I’d like. One example would be The Singleton Scotch. I’m a big fan of opportunities in brown spirits, but The Singleton’s distribution in the U.S. has been more limited than we’d hoped. Another one is Zwack, a fantastic Hungarian liqueur in the shot space. Amid all the excitement in that arena, I had ambitions of it being a vibrant shot brand, capturing the LDA-to 26-year-old consumer. It’s been a success, but not a great success.

SND: A new product launch for Guinness Black Lager is taking place right now. What drove you to that space, and what’s your expectation?

McDONOUGH: I’m very excited about Guinness Black Lager. Guinness is an iconic global trademark, but it’s much bigger in its imagery and personality than in its actual sales. Looking at the global profile, Guinness sells more in markets like Nigeria, for example, than North America. The fact that the U.S. is only the world’s fourth-largest market for Guinness means there’s something I’m not doing right. Americans are lager drinkers, and Guinness Stout can be challenging for some people to embrace. But now it’s in a liquid profile they love. Guinness Black Lager will appeal to the tastes of American beer drinkers.

SND: One wonders why this has never been done before. It sounds like a powerful idea. What took so long?

McDONOUGH: It is indeed something you look at and think, “Why did it take so long?” We’ve got different variants of Guinness Stout, but the Guinness brand has never ventured out of the stout world. This new product isn’t a traditional lager. Most lagers are yellow and lighter in their flavor profile, but we’ve made it with the classic Guinness barley that gives it black tones. So it’s a black lager that’s not only distinctive in its appearance but also in its very robust flavor profile. It’s very much made in the spirit of a lager, with a crisp and refreshing taste—great for warmer weather enjoyment, when stout sales tend to fall off.

SND: Our understanding is that it’s being test marketed in San Diego and Chicago, with a national rollout planned for the fall. What marketing is Diageo planning?

McDONOUGH: We’ll invest what’s necessary to make this a success—not an A-B or MillerCoors level of investment, but I don’t think that’s required. Engaging consumers with a thoughtful proposition and a great brand like Guinness allows us to use very targeted television advertising, a digital campaign and social media. In our on-premise sampling, people love this brand. There will be a lot of hand-to-hand selling, with much more engagement than there would be with broad, awareness-building television advertising. But there will be a fully invested marketing campaign, involving television, radio, at-home, and digital and social media. This product will become a substantial foundation within Guinness.

SND: In terms of innovation, how do you see the vodka space developing in the U.S. market?

McDONOUGH: Looking at the next three- to five-years, around 60%-70% of the value creation within spirits will come in the vodka space. There’s a lot of clever thinking going on, including different ideas on provenance and provocative new flavors. About 15% of the overall vodka category is in flavors. Historically, they’ve been in fruits and other natural ingredients like vanilla and chocolate. But they’ve now moved into some spaces that make the flavor profile more approachable for shots and mixing. So there continues to be very powerful growth in vodka. We have several new entries, including Moon Mountain small-batch crafted vodka and Rökk vodka, our import from Sweden. We’re also blessed with Smirnoff, Ketel One and Cîroc—three powerhouse brands within that space.

SND: How do you avoid cannibalization in vodka? Can this abundance of flavors and new products really produce organic growth?

McDONOUGH: It can, and that’s because people aren’t yet fully brand loyal. My opportunity is to have a portfolio of consideration, so that someone can say to me, “Ketel One is my favorite brand, but I also really enjoy this new Smirnoff flavor,” or “I’ve tried Cîroc, and that Cîroc Red Berry is a taste I can’t get anywhere else in vodka.” So it’s additive, not cannibalistic.

SND: What are the prospects for the new Jeremiah Weed RTD, which is rolling out now? According to our research, the core product has been slumping.

McDONOUGH: Jeremiah Weed is one of my favorite trademarks. It has a very approachable, masculine appeal with Southern charm. Jeremiah Weed Sweet Tea was a terrific success, and the sweet tea (vodka) segment had a rapid rise. We aimed to build category value at a price point of $18, and several players followed at $13 or $14. They’ve taken some value out of the category, and that has slowed down Jeremiah Weed Sweet Tea. But it’s still a very viable brand. So we looked at the flavored malt beverage area—the RTD and the single serve proposition—and saw a powerful opportunity for Jeremiah Weed. The flavored malt beverage space provides greater access, and we can advertise on television in a way we can’t with spirits. We introduced it just over 60 days ago, and the feedback we’re getting thus far has been fantastic. The line currently has three flavors: Lightning Lemonade, Spiked Cola and Roadhouse Tea. It’s in a single serve format within convenience stores, and the six-pack is in food stores. We have very high hopes for this brand.

SND: Captain Morgan Lime Bite is a product that got off to a strong start last year. How’s it doing in 2011?

McDONOUGH: It’s growing. It got off to a great start, as we discovered that Captain Morgan had an appeal in and of itself that caused trial. People found it was a great way to enjoy Captain Morgan in ways that they weren’t enjoying it before. They were mixing it with tonic, soda, or juice, which isn’t traditionally how original spiced rum is consumed. So Lime Bite has been a continued success for us. Our depletion rate in the last three months is on an upward swing, so there’s steady momentum building on Lime Bite. Its depletions are up by nearly double-digit rates versus year ago.

SND: Diageo recently rolled out Seagram’s 7 Honey. Are you planning more products in the flavored whisky space?

McDONOUGH: I’m very excited about the opportunity for new flavor profiles within brown spirits. The addition of honey makes a brand much more approachable in terms of providing sweeter notes and a more flavorful finish. We’ve had great success with Seagram’s 7 Honey, and we’re now introducing Seagram’s 7 Stone Cherry as well. We’ve got other flavor ideas in the pipeline.

SND: In your innovation projects, is premiumization still the byword?

McDONOUGH: Absolutely. Premiumization remains a very important strategy. We know that consumers will continue to have a sense of indulgence in seeking their favorite spirit. As the economy improves, we’ll be seeing more innovation that’s driven toward premiumization. We previously focused on the super-premium and ultra-premium segments for much of our innovation, but we’re now more broadly spread across premium opportunities as well. Last year, the Cîroc flavors, an ultra-premium play, were one of the biggest innovations in the category. But the recent work on Rökk vodka, Seagram’s 7 Honey and now Seagram’s 7 Stone Cherry are within the premium segment. So we’re competing more broadly now.

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