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Positive outlook for industry says Diageo MD

Taking a year’s sabbatical to drive around Australia with his young family to see a bit of the country was the plan for Angus McPherson at the end of 2019. By May 2020, those plans were on the backburner and he was sitting in the managing director’s chair at beverage multi-national, Diageo, and dealing with a pandemic outbreak that changed the way the company had been doing business.

McPherson has a long history in the beverage business. He grew up in the wine industry with his parents owning a wine bottling business. After graduating from Sydney University with a degree in economics, he held several positions with alcohol-related enterprises including Brown Forman, Casella Family Brands, and then spent the past nine years at Treasury Wine Estates. And while he was looking forward to spending some time with his family, taking on the role at Diageo was a no brainer.

“I finished up at Treasury Wine Estates at the beginning of 2020 and was going to take the trip,” he said. “COVID meant we couldn’t travel around Australia and then this job came up. Jobs like this don’t come up that often so it was one of those situations where it was too hard to say no.”

When he began in the new position, the pandemic was starting to take off and it was not just affecting the way the beverage industry worked, but every industry. There were concerns around how it would pan out. Almost immediately the on-premise side of Diageo’s business was hit as state governments put in restrictions on movement and the ability for bars and restaurants to trade. Did McPherson have a sense of dread when new procedures and protocols came into play?

“When the pandemic hit I knew it was going to be a wild ride and we weren’t too sure what would happen, but I was confident that we would navigate our way through it and we had opportunities come up that we may normally have not pursued so that was exciting,” he said. “Traditionally, when you start in a new role, you get into a good operating rhythm and you get a few variances throughout the year, but you understand what is going to happen and you can plan for it. No one knew what was going to happen. It was a rollercoaster. Thankfully, it’s been a relatively good rollercoaster for us, but it’s been particularly tough on our on-premise partners.

“There were significant shifts in where consumption was happening. On-premise consumption shut down almost overnight, and in places like Victoria it shut for five or six months. There was a shift in terms of where the consumption was happening. Traditionally, we have built most of our brands on the on-premise market. We had to shift how we were communicating to consumers and how we were branding our products – from something that was going to the on-premise to the off-premise.”

The retail wholesale market took off as consumers started to change their drinking habits and Diageo’s marketing plan changed as it went with consumers.

“It took a while for the market to balance itself out, but then we found some really creative ways to inspire consumers on how to make great cocktails at home,” said McPherson. “And once we switched on our marketing efforts around informing and inspiring consumers to make great drinks at home, we started to pick up the sales we lost from the on-premise.”

Manufacturing
Diageo Australia makes about 70 per cent of the products it sells in Australia, which meant it was important to keep its bottling plant in Huntingwood running at its best capacity while putting in place rules and regulations to keep its people safe and that would make sure supplies were coming through. It meant having shift changes where there was no physical changeover. One shift would end, everybody would leave the factory, and then the next shift came in. There were no informative chats between the different shift workers about where the process was at in terms of production – it was a case of making sure runs were well planned so they ended at one shift, and then a new batch would be run as the new team refired up the plant.

“I’m proud of the whole organisation and how it’s handled COVID, but the ones working at our bottling factory are the ones I am most proud of because those that were in other areas were allowed to work from home,” said McPherson. “Those in the supply side of the business continued to go to work every day throughout the whole period. Without them, we wouldn’t have been able to keep the business going. You saw that in retail; you saw that in several different industries, where whole portions of the population was at home, but there was another portion out there continually keeping the economies going, keeping the wheels turning in businesses. I’m incredibly proud
of them.”

When it came to the supply chain, there were worrying signs that shortages might occur, but it had nothing to do with the pandemic. It was industrial action at Port Botany that caused most concern – and not so much the docks being quiet, but the impact on playing catch-up after the issues were resolved.

“The backlog that the industrial action caused in getting products into Australia, continued through the Christmas period and its affected other parts of the business, too,” said McPherson. “Sourcing within Australia has been fine but getting ingredients that could only be sourced internationally – that was the issue. The industrial action didn’t affect just us, it was across multiple companies. We had to airfreight products in which was expensive. If you’re in the business of selling a product, no matter what happens, the number one thing you need to do is make sure it stays available and people can find it on shelf.”

As with a lot of fast-moving goods operations, it’s all in the planning, and while there has been the odd hiccup along the way, McPherson has been pleased with how the company has come through the past 12 months.

“If you think about manufacturing, what we do in Australia is relatively seamless,” he said. “As mentioned, importing ingredients has been a challenge, but we also built up inventory because we were concerned that COVID-19 might have an impact in other parts of the market, and potentially shut down some of our supply partners around the world. We’ve been holding incremental stock. We’ve also been planning for Brexit just in case that had any impact on getting products out.”

But not all products have come through the pandemic unscathed. One of the company’s favourite tipples that is now in short supply is canned Guinness. While Diageo’s Australian operations partner Lion brew Guinness kegs, the canned variety is made in Ireland, and due to pubs and bars being closed in the UK, supplies making their way down under have been non-existent.

“Sales of Guinness in a can have gone through the roof around the world. Those that drink Guinness, want Guinness,” he said. “The demand for Guinness in a can has been exceptional.”

Competition
However, it should not be forgotten that at its heart, Diageo is a spirits business. With worldwide, household names like Smirnoff vodka, Gordon’s gin, Australia’s own Bundaberg Rum, and it’s crowning glory the Johnnie Walker Scotch Whisky range, on its books, the company has a profile that would be the envy of any beverage manufacturer.

In saying that, how does McPherson feel about the plethora of distilleries that have popped up over the past 10 years? By his own reckoning, six years ago there were about 50 distilleries, now there are more than 400. All that competition must have an effect on the bottom line, no? Not really, according to McPherson. In what may seem a strange opinion to some, he welcomes the new players in the market. Why?

“I think that the spirits industry in Australia can be the next wine industry in terms of exporting,” he said. “If you go back to 1985 there were 500 Australian wineries. Today there are 2,500. In 1985, the Australian wine industry exported about seven per cent of their product. Today, they export more than 70 per cent. With spirits, I see a lot of similarities where the industry is today and where the wine industry was 35 years ago. I think it is an exciting time.

“There are a couple of barriers to the challenge. Australia is the third highest taxed nation in the world when it comes to spirits, which is a real roadblock for allowing the Australian spirits industry to really get up and go and invest properly. If you look at the current number of spirits we export versus countries like Ireland, the US and even New Zealand, it’s insignificant and there is a huge global market out there for Australian spirits. Australia can easily do it with spirits. Even to places like China.”

McPherson is adamant that more players in the market benefit the whole industry. It’s not only the potential added value these companies can bring in terms of export dollars, but he believes they make the category more vibrant and interesting.

“The more interesting and exciting you make the category, the more people you bring into the category,” he said. “As one of the leading producers and sellers of gin in Australia for example, if the category gets bigger, then we will get bigger. It’s the same as what makes wine work – all the great small wine producers in Australia make the category more interesting compared to if you only have a few big brands in market.”

Trends
One trend that McPherson has noted – and this was before he got the top job at Diageo – is that while Australians are drinking less, they are going for premium brands. In May 2020, research from Roy Morgan and the Australian Bureau of Statistics showed that Australian’s alcohol consumption had hit a 50-year low.

“Across most categories we are drinking less than we have ever done before, but value is growing because Australian drinkers are drinking better,” said McPherson. “People are being more discerning about what they drink. There is a trend of drinking more premium brands. We think this has happened because demographics in Australia are changing, lifestyle habits are changing, and I think people are more conscious and aware of living a balanced lifestyle. Alcohol can play a part in a balanced lifestyle, and people are more aware. There is less irresponsible consumption and that’s a good thing for our community and our business. All the metrics are positive.”

The same poll showed that the consumption of spirits was slightly up compared to wine and beer, whose market share had decreased.

“During COVID-19, RTDs had a little bit of a resurgence mainly because the on-premise was shut and consumers were instead having a cocktail at home. A premix/RTD was a simple way for them to continue enjoying that experience,” he said.

Another trend that has been noticed is the increase in e-commerce. While Diageo doesn’t have a retail platform, its clients do, and although the trend is a positive in terms of consumption, that brings with it other issues that need addressing.

“We collaborate with creative content with our partners, and it has been fascinating to watch the growth of that,” he said. “However, there are huge supply chain implications for everyone on how to keep up with that, and to make that model as efficient as possible.”

Sustainability
Finally, there is sustainability. As with most manufacturers in this space, Diageo has taken on the mantle of trying to make its business more environmentally friendly, and therefore sustainable into the future in terms of how it can lessen its impact on the environment. It has done this by setting clear targets with regards to reducing emissions, having less wastewater, cutting down energy use, and more importantly for a company in the beverage sector, increasing the amount of recycled glass it uses.

“We have very clear targets around the recycling of all the materials we use to manufacture our products,” said McPherson. “Even in the past few years, in our Huntingwood and Bundaberg bottling sites, we’ve reduced the amount of cardboard going through by 460 tonnes. The one thing we have seen in the past 12 months is that industry and retailers are leading the way in sustainability and having clear visions, when we haven’t necessarily been getting that from government.

“When you look at the developing markets around things like the use of water, use of plastics – trying to get to 100 per cent recyclable plastics in our business – they are very ambitious targets. If governments aren’t going to lead the way, industry needs to. And industry is. Visy’s purchase of OI Glass is an example of a company trying to take their recycled content from 30 per cent to 60 per cent. There’re some companies out there really leading the charge on this front.”

And his overall feeling about the industry as a whole?

“It’s hard not to be passionate in this industry,” he said. “It’s hard not to pick up one of these products – whether it be a whisky, a rum, a vodka, or a gin – and not get excited about the history, the story, and the heritage. It’s an exciting industry to work in.”

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