Good morning and afternoon. Welcome to the Diageo North America President's Q&A call. This is a live Q&A session for 30 minutes following the pre-recorded presentation uploaded earlier today to diageo.com. Today's conference is being recorded. Your call today will be hosted by Diageo's North American President, Debra Crew. To ask a question, please press star one on your telephone keypad. Please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We are now ready to start the call. Our first question comes from Simon Hales from Citi.
Oh, thank you.
Please go ahead.
Thank you. Thanks so much. Oh, hi, Debra. Hi, everyone. Congratulations on your new role, Debra. Thanks for the presentation today. I had a couple of questions, please. You highlighted, obviously, in your presentation, and we've seen this clearly, the acceleration of the premiumization trends during 2020 as COVID has hit, especially in that super premium plus segment. How are you thinking about what happens when we get into 2021 and perhaps we start to lap in calendar Q2 those acceleration in trends? Consumers perhaps have other alternatives once again to spend their disposable income in terms of other leisure or social activities. Do you think you're going to be able to sustain the level of penetration and premiumization growth that we've seen? Just a broad question around that. Secondly, can I ask you about stock levels now in the U.S.?
You've clearly seen some stock replenishment at the wholesaler level in fiscal Q1. Has that continued at all into the second quarter? I appreciate this bit's probably a little bit difficult to answer, given it varies by brand and geography. Broadly, where do you think inventory levels are now within the wholesale chain compared to this time last year?
Great. Thanks, Simon. I'll start with the premiumization question. I think you would have seen from the chart this morning, this premiumization trend has been going on for a decade. Certainly, at the very beginning of COVID, we had a couple of months where we didn't see that premiumization, but then it quickly sort of went back on course. We would expect that trend to continue as it has been, and in particular in that kind of super premium area. As far as when you start to lap and as different things are going on with consumers, one of the things that we're seeing is that consumers are wanting to drink better. Not more, but drink better. We think that's just an ongoing consumer insight, and that is going to continue to drive those premiumization trends.
As far as stock levels, what I would say is we've seen a modest level of restocking at the retail level. Recognize, if you look at Nielsen trends and other sort of public data sources that are out there, demand is really strong right now.
Got it. That's great. Thank you.
Great. Thanks.
Thank you. Now we take our next question from Olivier Nicolai from Goldman Sachs. Please go ahead.
Hi, good morning, Debra. Just got three question on my side, if I may. First, could you give us a bit of an update on the on-trade channel today? Are we running at, let's say, 50% of where we were a year ago? As the on-trade reopens progressively in 2021, do you expect the off-trade growth to slow down substantially? Do you think that some of that shift from on-trade to off-trade will stay? That's my first question. Second question is actually more follow-up on one of your slides, where you talk about the level of household penetration for spirits. I think you mentioned the number, which was 64%. First, where was it 10 years ago? Is it realistic to get the same level of penetration for spirits than you have for beer, which I think is about 20 points higher?
Just a last question on your brands. Johnnie Walker is perhaps not performing as well as the rest of the whisky portfolio. Could you just perhaps remind us what the key demographic are for the brand, and what's next for Johnnie Walker after that Game of Thrones extension, which was successful, but that was, I think, a couple of years ago now. Thank you.
Perfect. Yeah. Let's just start by talking about the on-trade, I think, first. Look, what we're seeing, it really is different state by state. In fact, it's actually changing probably by the minute as we're talking, because certainly some states are putting in curfews. We do see some states actually closing some of the indoor kind of dining, and that type of thing. I would say it ranges anywhere from, you have some states, I think, in fact, I just was reading something this morning. Texas is only down around 10%, so that's probably a state doing really well in on-trade. You've got some that are still down 60% of what they were. You really have a kind of different environment out there, depending upon where you're at.
All of that being said, one of the things that we have learned during COVID is that as you see the on-trade closures and that type of thing, those occasions are simply moving home. We're not really seeing a big impact to our kind of business as we're seeing that on-trade shut and then those occasions are coming home. I think, as we're looking at it, we're trying to support on-trade as it opens, and we're also trying to make sure that we're investing the right level of off-trade, to kind of keep all the channels, opportunity for us open as well as don't forget e-commerce in this as well, which is also still small, but certainly growing. We're seeing a lot of movements of these occasions, but it doesn't really change necessarily what we're seeing on our net sales. I think, you asked about household penetration.
I'd have to get back to you on what it was 10 years ago, because I'm not sure I've got that at my fingertips. I'm not sure exactly what we even have going back 10 years, but we can certainly get something for you. I will say, look, we have seen it is continuing to grow. Could it get to beer? I mean, look, it is growing faster, and I do think that as consumers get a kind of a stock level in their house along with mixers, absolutely. You could change out those occasions, and I think that's how we're thinking about it. We're looking at one of the reasons we're starting to look at our share on a total beverage alcohol basis is anytime anyone wants an alcoholic beverage, we would like them to consider Diageo. We want to be part of that equation.
I'm just getting a note from someone here with me. It looks like in the last five years, we do have data going back to the last five years, it's between 28% and 32%. Kind of in that, call it 30%. You have seen a really fairly large uptick in spirits over the last five years. Finally, on your Johnnie Walker question. Look, we definitely had a tough year in fiscal 2020 on Johnnie Walker, mostly because we were lapping the "Game of Thrones" White Walker, which was incredibly successful for us. Also the closure of on-trade really impacted that brand more so than some of our other portfolio. That being said, what's next for us? Demographics on Johnnie Walker are actually very positive from when you look at sort of the appeal.
Hispanic consumers, Asian consumers, these are two kind of growth demographics in the U.S., and both have over-indexed on Johnnie Walker, so we feel great about that. It is, right now, the core of the business. It's a little bit older cohort, and one of the things that we're really doing is we want to increase our relevancy with that younger, legally drinking aged kind of consumer, that 25- 44 year-old. We've got a lot of activity. Hopefully, maybe you even saw, if you happen to be watching in the U.S. election night, we had a new ad that launched on Johnnie Walker, really trying to get the Keep Walking tagline kind of reestablished in the U.S. It was Brittany Howard from Alabama Shakes singing "You'll Never Walk Alone." Great song, really appropriate for 2020.
Really a great way to bring Johnnie Walker part of the conversation for today and bring it real relevancy. I should add, we're doing great on Johnnie Walker on the higher mark. Johnnie Walker Blue, Johnnie Walker Black doing extremely well. We really feel great, and we're seeing really nice retail sales trends improving, and we do see share sequentially improving as well. Thank you.
Thank you very much.
Thank you. Now we take our next question from Sanjeet Aujla from Credit Suisse. Please go ahead.
Hi, Debra. A couple of questions from me as well. Just here, I recall in Q4 fiscal 2020, Diageo lost share on spirit. How has market share evolved in the past quarter as the industry has accelerated? My second question is just on A&P. You spoke a little bit at the end about stepping up A&P levels. Is it reasonable to assume A&P now starts to run ahead of NSV after growing below NSV last fiscal year? Thank you.
Yeah. Q4, we're definitely seeing sequential improvement on spirits. What we are seeing that we're very excited about as well is we are gaining share in total beverage alcohol. We are seeing really improvements across the board, and we feel great about that. On A&P, look, A&P, we're definitely reinvesting as we're seeing the increase in consumer demand. We've been on a trajectory of this really since 2017, continuing to try to build back our A&P levels. Really the only time we pulled back was at the beginning of COVID. We really kind of zero-based our A&P, as you would imagine, and really re-look everything we were doing. We had a lot of money that was going towards sampling and experiential, frankly, things that just weren't going to pay out, so we did cut our A&P in that second half.
As we've seen demand come back, and as we're seeing opportunity, we are definitely putting back our A&P levels. Thanks.
Thank you. We'll take our next question from Trevor Stirling from Bernstein. Please go ahead.
Hi, Trevor.
Sir, if you're on mute, please press the mute button or pick up the handset. Sir, we're unable to hear you. May I move to the next question?
Yeah, I think I would go ahead and move to the next question.
Mr. Stirling? Thank you, ma'am. Mr. Stirling, please press star one again to get back into the queue. Thank you. We're taking our next question from Edward Mundy from Jefferies. Please go ahead. Mr. Mundy removed himself from the queue. We'll take our next question from Andrea Pistacchi from Bank of America. Please go ahead. Andrea Pistacchi from Bank of America. Ma'am, your line is open. Please go ahead.
I'm wondering if we're having an issue with the line.
It can be. May I go to the next question, ma'am? Mr. Pistacchi can press star one again to queue a question. Perfect. We'll take our next question from Rob Ottenstein. Please go ahead, sir.
Great. Thank you very much. Are you hearing me?
I am hearing you. Thank you.
Okay. Well, maybe it's because I'm closer calling in from New York. Look, first of all, congratulations and welcome to the team here. Traditionally, a lot of presentations for Diageo North America have spent some time talking about the competitive advantage of your route to market in North America, and your distributor relations. I was wondering if you can kind of maybe give us an update on where that stands, what may be new or different that you're doing with the distributors in the U.S. as opposed to in the past, where things look in terms of their inventories and the whole sort of trade-off between sell-in and sell- out that you've been engineering over the last few years. Thank you.
Sure. Thanks, Rob. Yeah, we didn't mention it. It was kind of getting to be a long video, so we couldn't talk about everything we were excited about. Clearly, we do still see it as a competitive advantage, our route to market and our distributor relationship. In particular, you can't think about COVID and sort of the stresses that put on the system, and we do feel really great about our ability to respond to what was occurring. That is really in large part to those relationships, and how we were able to get through the various shifts that occurred from on-premise to off-premise, even as things are going back and forth, as you would be aware, being in New York. We do feel great about those relationships.
What I would say is what's new and different, you would have seen some of our route to market change in New York, which we actually were able to execute really well in the middle of all of this. We do feel great about where we're at with all of our distributor partners. As far as inventories, this comes back to we've got a lot of data now in the system, and we are able to very quickly respond in a very agile way to that. We have not seen outsized sort of inventory build up in different things, which you might expect as you're trying to do all the shifting. We've been able to manage that extremely well. I think, as I mentioned earlier, we've seen a modest level of restocking at retailers.
Given the strong demand, and given how kind of close and we're playing this with distributors, we don't have outsized inventory sitting anywhere.
Is it in fact maybe the reverse for Crown Royal and some other brands? At least we read that a lot of retailers are actually having a hard time getting some key products.
Yeah. Look, the demand, we've really had incredible growth on Crown Royal for the last six to seven months, well above what any forecast would have had for us. Absolutely, we've had to manage that, going on kind of an allocation process just to make sure that we get the Crown through the system. That's one area. I would say tequila is another area which I'm sure you've read or heard things about. That's another one that you could absolutely say that's running reverse.
Great. Thank you very much.
You're welcome.
Thank you. Now we take our next question from Richard Withagen from Kepler Cheuvreux. Please go ahead.
Yes. Good morning and good afternoon. Thanks for the question. I missed the part of the call, so if this question has been asked, I'm sorry about that. I have two questions, Debra. First of all, you became responsible for the U.S. since July. In what areas of the business do you plan to step up efforts and allocate more resources? The second question I have is on, in beverages in the U.S., a lot is going on with different growth rates in channels, different category growth rates. What do you think will be the biggest game changer in TBA, in the next five years?
Yeah. No, I haven't answered these questions. Thank you. As far as for July and for since July, where have I kind of focused resources, I mean, a lot of this has been, we're very focused on the here and now, just given everything that we have going on. We are trying to respond, with agility across where we're seeing the opportunities. With that said, I would say, look, we're clearly putting more effort against the off-trade and e-commerce because that's really where we're seeing the growth right now. Hopefully you saw from the video this morning, you see we've got a portfolio that's really oriented towards some very great growth areas. U.S. whiskey, Canadian whisky, tequila, these are all great growing parts of our portfolio, and we're really doubling down against that momentum.
Of course, we are continuing to, because in the off-trade, we're seeing such tremendous results. We are using tools like EDGE, which I think we talked a little bit about in the video. Certainly, you would have heard Deirdre talk about it in the past. We're using tools like this to really make sure that we can target down to the zip code. Given COVID is creating all these different situations across the country, something like EDGE really gives us a big advantage, and we're certainly putting resources behind that. Also, you would have seen the M&A that we did with Davos, bringing Aviation into the portfolio. We're very excited about that brand. Where we've seen opportunities for M&A, we're definitely investing there. You would have also seen some of the investments that we're making in supply chain.
That's been a big piece of making sure that we've got a good, efficient, sustainable supply chain to support the growth we've got. You've asked about what we see the biggest changer in Total Beverage Alcohol in the next five years. We talked a little bit about things like e-commerce. That's something that with COVID prior to COVID, I mean, nobody even knew you could get alcohol almost online. It was only one in three, I think, consumers knew before, and I think it was less than 2%. Now you see Drizly, they're predicting things like more than 20% could be in e-commerce in the future. You think about the opportunities that are there, that would certainly change things within the industry. Certainly, we're seeing, I already mentioned some of the categories that we're seeing a lot of growth on. I haven't mentioned things like cocktails-to-go.
Hopefully, you saw in our innovation, we see a lot of opportunity there. We think there's a big opportunity to kind of drink better in this on-the-go occasion, and ready-to-drink occasion. We see a lot of opportunity there as well. Hopefully that kind of answers your questions there.
It does. Thank you, Debra.
Great.
Thank you. Now we take our next question from Edward Mundy from Jefferies.
Hi, Debra. Morning. Afternoon, everyone.
Hi, there.
Actually, on e-commerce, your rate per case is 15%-20% higher versus bricks and mortar. Is that because you're selling more premium skewed brands, or is that because you're able to capture a greater share of the value chain? My first question. The second question is, to what extent you think or you'd be willing to share what you think is your medium to longer term top and bottom line growth ambition for North America? My third question is, you worked in a number of FMCG. You've been privileged enough to be both at the non-exec level and the exec level at Diageo. What do you think are the two or three things that Diageo could do to become an even stronger business in both North America and more broadly, based on your exposure to broader FMCG?
Yeah. First, on e-commerce, you're exactly right. It really is about more premium SKUs. When you think about the buyer in e-commerce, it's the sort of this younger, legally drinking age kind of consumer, that is a little more urban, and they are looking for higher marks in brands. It really is about more premium SKUs kind of driving that. Look, as far as medium to longer term, I mentioned we are very focused on kind of the here and now, and really emerging stronger from this crisis because this is one of these moments that we really think consumers, if you think about your own life, you're just reassessing sort of everything. We think it is very important to come out of this stronger.
That being said, I think Diageo North America has had a terrific story over the last three to kind of four years of just this consistent delivery. That's certainly something that I want to build upon, because I think that's really important. We do see ourselves as providing kind of outsized growth within the broader group. That's something that, certainly medium to longer term, I would want to continue to grow on. I've been super impressed by the tools that Diageo really has and has been building up these capabilities over the last several years. There's been a lot of investment. I know looking back through the prior presentations that Deirdre had talked with many of you guys about on the investments into Catalyst, into EDGE, and Trax. There were all these tools.
I can tell you, it is truly impressive, and certainly through COVID, it's been great to be able to come in and to leverage the insights there to be able to respond to the market situation and down to the zip code level. Great tool there. I would see that once we get out of this crisis, those tools are going to continue to serve us really well. I think between the insights, the innovation, the investment into marketing, I really see our ability to be able to accelerate growth from where we've been. I see us continuing to grow share and total beverage alcohol. I'm seeing sequential improvement in spirit. I think that's probably as far as I'll go right now about in a year where we don't have any guidance out there. I'll just leave it at that.
We really do feel great about the opportunities for the business.
My third question.
Oh, yeah. What else?
In terms of things that you think that Diageo, I mean, it's obviously a strong business and strong brands and good execution, but are there any areas that you think, any gaps for Diageo to close, as you look across both North America and the broader business based on your exposure to other FMCG?
Yeah, look, I don't think it's a gap per se. I just think it's really leveraging the opportunity with the portfolio that we have. Really doubling down behind places in the portfolio where we have momentum. I've grown up around things that I've been kind of relentlessly focused on share, and so, certainly that's going to be a focus of mine. I would say really getting out there with If you look at what's going on with the consumer right now, there's a lot going on, I think, in these really emergent spaces for spirits that are quite different for us. Things like gifting, things like the ready-to-drink and all these areas. I think, for spirits, we haven't really gotten into that so much. I think there's a real opportunity for those to create more occasions for spirits than what we've had in the past.
Great. Thank you.
Great. Thank you. Now we take our next question from Trevor Stirling, from Bernstein. Please go ahead.
Hello, Debra. Apologies if these questions were asked before I got docked off the call. Two things. One, if I look at the latest NABCA data, it looks as if in NABCA at least, industry volumes are growing roughly 10%, and price mix is running at mid-single digit plus. Do you think that's representative of the broader industry? The second question is, you understandably talked on some of the great success stories in the portfolio at the moment, but a little bit less about Smirnoff and Captain Morgan that are still very significant brands. What do you think you can do to turn those around that arguably may be a little bit more tired in the lower growth part of the industry?
Yeah. You asked about NABCA data and sort of if that's more representative. I think, look, and I mentioned this earlier, all of these states have a lot of different things going on. I think that's probably about in the neighborhood of what we are seeing out there. Recognizing that it can be vastly different sort of state to state. I think in general, that's probably a good way to look at it. On Captain and Smirnoff, because we haven't talked as much about those areas. I will say we are seeing, certainly on our vodka portfolio, we're seeing improvement there, and we're now gaining share. In the latest Nielsen, we're actually gaining share of vodka. Now granted, vodka is part of the overall spirit, is shrinking, but it's good for us to see.
Admittedly, it's mostly on those premium marks of Ketel One and Cîroc are actually driving that share growth. Smirnoff is sequentially improving. Look, vodka, we certainly have opportunities there, and I think a lot of it is around innovation. I think in the video, we did highlight some of our Smirnoff innovation that we've got coming the second half, which we're very excited about. I do think with Smirnoff it is about keeping really relevant and having some news and kind of talk value to it. I think that's what's helped us. If you go back and look in places where we've gained share on Smirnoff, it's usually when we've done really great innovation that connects with the consumer. I should mention, Smirnoff, on our Smirnoff Ice portfolio and on our malt beverage, Smirnoff's actually doing really well.
From a trademark perspective, we know that Smirnoff does work with that kind of younger legally drinking age consumer. We know it from the Smirnoff Ice and malt beverage portfolio. I feel really good about Smirnoff. Captain, look, Captain's still one of the top brands in the U.S. still has really broad appeal. Actually this year for 2020, actually, both Smirnoff and Captain gained household penetration. I think that's during COVID, people wanting to return back to these big brands that they're familiar with and they know. Also, Captain makes great cocktails, great simple cocktails, which when people are making cocktails at home, that's what they're really looking for. I think there's more opportunity there on just focusing on the great, I'll call them yummy cocktails, because they really are. Captain makes a really great, simple serve.
We know that's the way to go there. You'll be seeing some new kind of look and feel to Captain in the future as well.
Great. Thank you very much, Debra.
Great. Thanks.
Thank you. We have time for one more question. Our last question comes from Laurence Whyatt from Barclays. Please go ahead.
Hi. Good morning. Good afternoon. Thanks very much for the questions. I was wondering, the first one, just look at the cost savings that you were able to take out of the business towards the end of last fiscal year, and how much of those do you think you will be able to maintain as we emerge from the COVID situation? Secondly, on your distribution costs, we've seen quite an uptick in costs of trucking, in particular around the U.S., I'm just wondering if either the costs are going to impact you or the availability of trucking drivers, and have there been any logistical problems on the back of that increase in trucking costs? Finally, slightly different, just drawing on your experience from Reynolds. As we talk to investors more and more, we're being asked about ESG type credentials.
Obviously the tobacco industry is largely removed from any fund that focuses on ESG. There are a few funds that are starting to talk about alcoholic beverages in the same light, and I was wondering what you think would be the best defenses for the alcohol industry when it comes to being a force for good in the world and in the world of ESG. Thank you.
Okay. Yeah, I'll take the cost savings one first. Definitely, if you go back to fiscal 2020, we did cut out some A&P. I talked about that earlier. We reduced marketing by about 6%. We had a reduction in other kind of expenses that really offset. Actually, we had lower fixed cost absorption, we had an adverse channel mix. That's kind of how our margins came together for fiscal 2020. Clearly, without really providing a whole lot of guidance, at the same time, I think you can think about this going forward, as some overhead savings will clearly continue as people aren't traveling this year yet. That's one way to think about it. Our fundamentals are strong. Premiumization is a long-term trend. We are seeing volume growth that drives operating leverage. All of these are good guides.
On the negative, I would say, we do have an orientation to invest. I've talked about A&P. We definitely want to continue to strengthen that because we know that helps to drive our top line and our share growth. Hopefully that gives you a little bit of sense for cost savings and where we're at on margins. As far as distribution, look, this is something that I mentioned earlier. There was someone who had asked about our relationship with our distributor partners. We feel great about those relationships, and we are keeping close to make sure that we can get the lanes we need, and that we can get product out into retail. The industry is certainly seeing stress on supply, and the cost in some of these lanes are certainly up. We are managing through it, I would say.
I wouldn't expect service interruption type of thing. We're able to deal with it. Look, as far as ESG, I mean, ESG is super important. I actually think Diageo does a tremendous job in this area. I think things like promoting positive drinking is really important. We take that very seriously. That's not just talk, too. That is something that we really do believe people should drink better, not more. We have a lot of activity going on to make sure that we're trying to reduce the harm out there. The drunk driving, the binge drinking, the drinking underage, all of that, we make sure that we absolutely do everything we can to eliminate that, because that's where you fall into the hole of having problems. Look, I think we take that really seriously. The grain-to-glass sustainability, we also take really seriously.
It is one of our six strategic objectives along with positive drinking. We are trying to be a force for good on inclusion and diversity as well. You'll be hearing more from Diageo on our 2030 targets, which I think are really bold, and I think they're bold in the sense of even if you look across any other FMCG. We're not just comparing ourselves to other players in the alcohol industry. We are really looking at goals that will set us apart across FMCG. Stay tuned for that. But yeah, we do take it seriously, and we want to make sure that people know what we're going for there.
Super. Thank you very much.
Thank you.
Thank you. In the interest of time, this will conclude today's Q&A session. Ms. Crew, I'd like to turn the call back to you for any additional or closing remarks.
Great. Thank you for your time today and your interest in Diageo. Thanks.
This concludes today's call. Thank you for your participation. You may now disconnect.