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Diageo Strategizes to Improve Performance with Innovation

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Focus on innovation

Diageo (DEO), a multinational alcoholic beverages company based in London, is focusing on innovation to fight weak demand across various categories. Currently, Diageo derives ~13% of its United Kingdom revenue from innovative products. The company aims to increase this proportion to 20% over the next five years.

Diageo’s research and development costs increased by 14.3% to 24 million pounds in fiscal 2014. Diageo’s recent innovations have focused on the demand for luxury products, flavor extensions, packaging, and the tastes of the growing middle class. The company is also focusing on introducing some of its key brands at more affordable price points.

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Recent innovations

One of Diageo’s notable innovations Crown Royal Regal Apple whisky, which was launched in November 2014. This flavored whisky is a combination of Crown Royal whisky with natural apple flavors. In its press release for the third quarter of fiscal 2015 ending March 2015, the company stated that Crown Royal Regal Apple was the biggest driver of increased shipments for its US spirits and wine business.

Other key innovations include Ciroc pineapple gin, Captain Morgan white rum, Guinness Blonde American lager, Guinness Golden Ale, and Haig Club single grain Scotch whisky.

Competitor Brown Forman (BF.B) has launched some interesting products in the flavored category, such as Jack Daniel’s Tennessee Fire, a cinnamon-flavored whiskey. Brown Forman comprises ~0.1% of the portfolio holdings of the SPDR S&P 500 ETF (SPY).

Constellation Brands (STZ) also launched flavor extensions under its Svedka vodka brand, Black Velvet Canadian whiskey brand, and Paul Masson wine. Constellation Brands makes up ~1.7% of the portfolio holdings of the Consumer Staples Select Sector SPDR Fund (XLP).

The final part of this series discusses Diageo’s inorganic growth strategy.

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