Diageo CEO comments on structural vs cyclical debate
Are changes to drinking trends such as health-conscious moderation and the rise of cannabis cyclical or structural? Diageo’s interim CEO weighs in on the debate, calling “bullshit” on some Gen Z assumptions.
Nik Jhangiani, Diageo’s interim CEO following the departure of Debra Crew in July, hosted a ‘fireside chat’ for investors at the Barclays Global Consumer Staples Conference on 4 September.
During the conversation, Jhangiani commented on the cyclical versus structural debate currently being discussed in the spirits industry, as well as giving further insights into the company’s cost-saving Accelerate programme. The Johnnie Walker owner aims to save US$625 million in the next three years.
Regarding the cost-saving efforts, one point Jhangiani noted was around trade investment and the company’s A&P dollars, which he said “have both grown at a very high rate – and in some ways, they’ve grown at a much higher rate than our NSV [net sales value] growth”.
“We’ve allowed that to continue happening because it was almost this vicious cycle around, well, I need to continue investing there to get growth. And if I’m not getting the growth, I’ll put more money there and I’ll hope that the growth will come,” he explains.
“I’m not saying that we want to look at that and in any way cut what is the brand-building element of it, because if you look at those numbers we’ve got about US$3 billion of addressable spending, trade investment, and if I look at the US$3.6bn that we spend in A&P dollars, only about 40% of that – rough numbers – is actually spend on media scale and reach. Another 40% was being spent on commercial A&P, which is also linked to trade investment.
“It’s really feeding more on the media-scale-reach piece, through more digitisation and digital media that we can leverage, where we can track better returns and move quicker in terms of how we allocate those dollars to where the growth is, and actually pull out inefficiency in these other buckets to be able to reinvest.”
Since Jhangiani joined Diageo a year ago, he has been set on switching the company focus from the percentage margins to the dollar margin.
He explained: “There was such an obsession with gross margin percentage that we were actually driving some of the wrong behaviours in the business. We were getting out of categories or businesses because the margin percentage was low – and I’m not talking about RTDs. I’m also talking about, let’s say, whisky.
“We were so focused on premiumisation or because we were so focused on margin percentage, that meant, how much more can I premiumise? Then I was forgetting, or not focusing on what might be primaries or lower-age liquid. And in some instances, I was actually selling off those brands where, if I came from the last place, I would kill and chop my left arm and leg off to get a business that had that type of gross margin. It was leading to the wrong decisions that we weren’t going after the growth.”
He links this to the company’s strategy of having a “brand ladder” where people can trade up within the brand, such as in the Johnnie Walker blended Scotch portfolio. He shared an example from a new MD in Mexico, formerly based in Great Britain. On the cusp of launching Don Julio Ceniza at MEX900 pesos a bottle, the MD wanted to switch up his business plan to ensure Don Julio Blanco, at MEX600 pesos a bottle, was not ignored.
Why was this important? “The size of the Don Julio Blanco market is probably 10 times as larger as the Ceniza market,” Jhangiani explained. “And, more importantly, what have you lost by not playing in that profit pool? An opportunity to build Diageo brand Don Julio from Blanco, which naturally then leads to brand affinity. And if you’ve got a brand ladder, you can move people up, like we do with Johnnie Walker for instance.”
‘Flawed choice’
“That was a flawed choice,” he said about the focus on margin percentages, “because it was a margin percentage-led decision to be able to do that. That’s why I turn that metric around because there’s these profit pools and dollar pools that we’re not going after, where the absolute growth is great and we have a right to win. That’s why, in some ways, that’s very liberating for the organisation, who [was] told, ‘Well, you can’t do it if the margin is going to come down a percentage’, even though if we’re focused on operating dollars and if I’m growing my operating profit dollars at a faster rate.”
Looking ahead, Jhangiani said Diageo’s work will be centred on the portfolio being “led very much by the consumer occasion and the experience, and choice that they’re looking for”.
Does Diageo have the portfolio to do this? “I think we largely do but I think there’s work that we need to continue doing, and there are areas that indicate maybe this isn’t a part of our portfolio going forward and do we have gaps we need to think about? That gives me more flexibility if there’s either M&A [mergers and acquisitions] or partnership opportunities.
“We feel we can maximise value for Diageo and our shareholders, but also allow us to get more focused. That’s what we’re doing.”
Commenting on structural and cyclical challenges in the spirits trade, Jhangiani highlighted “structural issues” such as cannabis, GLPs, Gen Z drinking less due to health reasons, and the continuation of moderation.
He said: “When you think about moderation, it’s interesting because are people moderating because I’m more focused on health and wellness, or am I more focused on how much I’m consuming, and how I’m going to wake up the next morning? Are they also moderating [because] they just don’t have enough money to spend? Is that a trend that’s a continued one, or is that a trend that will reverse because that’s linked to more of the cyclical or the macroeconomic issue?”
Covid-19 has played its part in this development, he said, where people bought more and traded up to more premium products due to having more disposable incomes, but today’s cost-of-living crisis presents a stark contrast.
‘I call a bit of bullshit’
Referring back to Gen Z and the wider discourse about this demographic being more health-conscious, and therefore drinking far less than older generations, Jhangiani felt this was not so cut and dry.
“Even when you look at the Gen Z cohort we’re talking about, you know, a group of people, some of whom have not even reached legal drinking age, some of who are in the earlier part of their legal drinking age piece, and they’re probably the most cash strapped,” he said.
“When people say it’s all about health and wellness and the younger generation, I’ll call a bit bullshit on that.
“There probably is, don’t get me wrong, but it’s not every one of those is suddenly the healthiest person overnight. And that’s all that they’re focused on. When you look at it, as they get into the higher age cohorts, there’s probably a different level or type of socialising that happens, and then they’ll probably get back to more normal levels.”
Reflecting on the US market, Jhangiani said there was “still a large period of continued flux and uncertainty”, exacerbated by the ongoing tariff situation.
He added: “For ’26, for our fiscal, we haven’t necessarily planned for an improving consumer environment, but we plan for further duration in that environment. Again, we remain very much focused on what we can manage and control for now, but also at the same time building a more robust and inclusive growth algorithm that we can start leveraging sooner than later.”
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