Smirnoff’s pricing in US is ‘too high’

Diageo CEO Ivan Menezes has admitted the group priced its mid-range brands in North America “a little high”, resulting in declines for Smirnoff vodka and Captain Morgan rum.

Smirnoff vodka’s strict pricing strategy has negatively impacted sales at a time when the category is becoming increasingly price competitive

The UK-drinks group has “substantially” expanded margins on its mid-priced brands in North America over the last three years in a company-wide effort to premiumise its portfolio.

However Menezes admitted the pricing strategy on Smirnoff, at a time of increased saturation within the market, has resulted in a loss of market share.

“The space that got most competitive is the mid-market. particularly in vodka, and Smirnoff which has been underperforming has lost share,” he said.

“We took a lot of price increases in North America over the year at a time when our competitors didn’t move. Captain Morgan is up to a 25% premium to the other big rum brand. That clearly has had an effect so we are going through a bit of a correction there and we are putting more effort and investment behind the big brands like Sminoff and captain.”

In its financial update for the first half of the 2014/15 financial year, Diageo saw sales of Captain Morgan decline by 8%, while Smirnoff dropped by 7%. Coupled with a decline in Johnnie Walker, due to higher shipments in the previous period, Diageo saw sales stagnate in North America, its largest market.

Time to moderate prices

Menezes added that Diageo now intends to “moderate” prices to return the brands to growth.

“We won’t take the kind of price increases we did before; we’ll slow it down and promote more, but we won’t reduce prices,” Menezes said. “You’ll see Smirnoff more on promotion right now, pulsed from time to time as we get that balance back with volume and market share.”

Speaking at a media conference in London yesterday, Menezes also revealed that Smirnoff Red, the brand’s original, unflavoured product, has improved its market share following the launch of new packaging and marketing campaign last year.

On the flip side, Diageo’s Reserve Brands portfolio “is doing extremely well”, with sales of Bulleit up 59%, Ciroc up 27% and Don Julio up 21%.

“We have every intention to get our business performing [in North America] as it has for many, many years,” Menezes said. “We’ve gone through a period where we’ve slightly underperformed the last 12 months, but I’m very confident we’ll get it back.”

Diageo recorded a 0.1% decline in organic net sales for the six months to 31 December 2014, while profits dived by almost 40%.