Pictured left to right: Jeff Keane, executive VP marketing, Schieffelin &Somerset; Ron Anderson, executive VP commercial strategy, Diageo

North America; Paul Clinton, CEO, Diageo North America; Mark Waller, executive VP, consumer strategy and marketing, Diageo North America;

John Esposito, president, Schieffelin & Somerset; Ivan Menezes, president and COO, Diageo North America.

The executive teams of Diageo and Schieffelin &Somerset talk a lot about the focus on improvingefficiency, about new alignment with customers and

consumers, and creative strategies for increasing the valueoffered by each of the companies’ brands. What you won’thear anyone talk about is size. Diageo is the world’s largestsupplier of beverage alcohol, but no one within the organi-zation seems to dwell on that.

“Our goal is to be a resource that retailers can look tofor innovation, creativity and tremendous brand support,”says John Esposito, president, Schieffelin & Somerset. “It isnot about size; it is about being best in class, and leading anindustry towards the future.” From an operations stand-point, Ivan Menezes, president and COO, Diageo NorthAmerica, also finds size to be irrelevant. “We have to earnour business every day with every customer by demonstrat-ing we can execute better than anyone else,” he says.

But sometimes size may have its advantages. It enablesyou to effect dramatic change, and in the case of Diageo andSchieffelin & Somerset, it’s allowing them to transform anindustry. The companies created a big buzz over a year agowhen they began a process to select a strategic distributor ineach state and build dedicated sales forces within them thatfocus entirely on their brands.

Although much of the industry was anxious about thesechanges, Diageo North America’s CEO, Paul Clinton,believes they will improve wholesaler relations in the long-term. “When we deal with our customers, we want them to

deal with us because they want to; because they like ourbrands and the way we do business,” he says. “Our goal isto develop a single-minded approach to the marketplacewith regard to wholesalers. By working more closely withour strategic distributors, the relationship can grow closer,communication and social responsibility programs willimprove and all three tiers can achieve growth.”

Understanding how Diageo got to where it is todayrequires a study of its past. Diageo was formed in 1997 by themerger of Grand Metropolitan and Guinness. For manyyears, GrandMet operated under old familiar industry namessuch as Heublein and Paddington. GrandMet was a highlydiverse company with more than half of its income generat-ed from well-recognized brands in food and retail. In 2000,Diageo announced a new strategy, which focused the compa-ny on its premium drinks business. Since that time, Diageohas concluded major transactions including the sales ofPillsbury and Burger King, and the acquisition (jointly withPernod Ricard) of the Seagram’s spirits and wine business.

Schieffelin & Somerset was established in 1794 as anapothecary in New York City. During prohibition,Schieffelin & Co. as it was then known, was granted per-mission to import medicinal liquor and began its associationwith Moët & Chandon Champagne. Business was so goodthat Dr. William Schieffelin decided to create a wine andspirits importing division immediately following repeal.

In 1980 Moët-Hennessy, a holding company formed bythe leading Champagne and Cognac houses, acquired con-

EarningyourBusiness

The Industry’s Largest Supplier Knows It’s Better Execution,

Not Size, That Keeps Licensees Coming Back.By Kristen Wolfe | Photographs by Andrew Kist

trol of Schieffelin & Co., exclusive importer of the twolines. Today, Schieffelin & Somerset Co. is a joint ventureof Diageo and LVMH (Moët Hennessy Louis Vuitton).

Today, North America represents 40-percent of allDiageo’s business. The company has a 25-percent volumeshare of the US spirits market, but that number is evenhigher in dollar terms (since a big part of the nation’s busi-ness is done in low-end spirits). Yet in spite of the successof Diageo and Schieffelin & Somerset in the marketplace,the leadership believes progress has been hindered by inef-ficiencies within the system; inefficiencies often driven bysuppliers at the distribution level that prohibited their

brands from reaching full potential. “We had all theseDiageo companies operating independently, all using dif-ferent wholesalers. There was very little synergy amongthem,” explains Ron Anderson, executive VP commercialstrategy for Diageo, who is the key architect of the com-pany’s wholesaler consolidation initiative.

Anderson began the process by surveying 23 leadingwholesalers from around the country so that he couldlearn from them how to improve efficiency and effective-ness. He set out to find where value was created and wherevalue was destroyed and he discovered that suppliers wereresponsible for much of the confusion and wastedresources. “Wholesalers and retailers could not captureefficiencies because of the way that suppliers conductedtheir business,” he explains. “Even in a simple customerservice situation, different suppliers have different policiesand the distributors have to deal with this.”

“If you look at the value chain, our business systemwas relatively inefficient from the supplier base to the endconsumer,” observes Menezes. “As we are studying oursupply structure we will be doing collaborative forecasting

and planning with the distributors instead of planning sep-arately and telling them what to do. We will work with ashared vision of how to grow the business.”

Just how will all of this benefit the licensee? “Forretailers, there is less waste, more unity, and a clear under-standing of the amount of support they are getting fromeach brand,” says Esposito. “Communication with theretailer will be enhanced through the dedicated sales forceswithin our strategic distributors and brokers, and that pro-vides the opportunity to grow this business for the long-term for all three tiers. Because all three tiers will bealigned with a similar vision.”

When described in theseterms, Diageo and Schieffelin &Somerset’s new way of doingbusiness makes sense. After all,most other industries work thisway, and it is clearly a moreorganized way of utilizingresources. And while thesechanges seem dramatic, thecompanies are quick to empha-size that they are a means to amuch more profitable, efficientend. "One thing that is impor-tant for us is to ensure that ourcustomers understand that ourgoal is to make as little disrup-tion as possible, and they startto see the benefits as soon aspossible," Clinton stresses. “It isabout making things happenthat are good for the business,”says Esposito, adding that evolu-tion is a natural and healthy

process. “As this industry starts to understand that whenall three tiers work together to achieve a common goal, itis better for each tier. That will really start to benefit ourbrands and the retailers’ bottom line.”

One of the main motivations behind consolidatingtheir brands was to create a dedicated sales division withineach wholesaler that will know the brands intimately anddrive growth. “Having dedicated teams gives us a group ofpeople that understand and appreciate our brands insideand out,” says Menezes. “The difference that retailers willsee from this arrangement will be better focused and tai-lored programs. There were so many costs built into theold system that are far better used toward innovation andbuilding new brands.”

With these teams, Diageo and Schieffelin & Somersetfeel more comfortable sharing information that it used tokeep close to the vest. “Aligning our brands with one dis-tributor allows us to be totally open, and to share our con-sumer insights and plans for each brand, which is thenshared with retailers,” explains Esposito. Traditionally,the role of marketing was left to the distributor, Esposito

“Our consolidation process

is nearly complete, but

the real work is about to

begin as we work more

closely with our strategic

distributors and get closer

to the consumer.”

— Paul Clinton, CEO, Diageo

explains. “In the past, we would be doing things for theconsumer that the retailer would not be aware of, there-fore he wouldn’t know how to take advantage of it.”

Studying the MarketplaceThere are advantages to size when it comes to gainingmore consumer knowledge. For the last five years, Diageoand Schieffelin & Somerset have been conducting market-by-market research to find out what consumers want, andhow they can meet their needs with various brands. “Weare uniquely positioned to take advantage of this informa-tion and we have the infrastructure to do something withit,” says Mark Waller, executive VP consumer strategyand marketing. “Another advantage is that our researchexposes us to a greater number of consumer opportunitiesthat we are able to execute against, locally and nationallyas a whole.”

In place of narrow, more traditional research, Diageoand Schieffelin & Somerset cast a wide net. They havecompleted numerous consumer behavior studies that aimto benefit the entire supply chain. “We want to grow thewhole pie, not just our share of the pie,” says Clinton.“We need to find new ways to build business.” Recently,the companies conducted a study on the retail environ-ment for the Texas Package Store Association. In an effortto help the retailer be more effective, the study revealednumerous ways to create a better shopping experience,particularly for female customers. “Our studies showedthat the consumer was treating the liquor store shoppingexperience as a convenience store shopping experience; inand out with a particular purchase in mind. We foundways to hold that consumer longer to shop the entirestore.” Waller believes offering this kind of intelligenceand support “builds trust with the retailer and has a meas-urable impact on everyone’s business.”

While this research can provide valuable informationabout what consumers want, it also enables Diageo andSchieffelin & Somerset to understand what kinds of socialresponsibility messaging is most effective. Research hashelped Diageo and Schieffelin & Somerset develop what isto date the most stringent social responsibility marketingand advertising code in the industry. Says Clinton,“There is no question that we have a huge responsibilityto promote responsible use of our products, because it isthe right thing to do. As an industry, we have a lot ofwind at our back because of recent media reports thatpoint to the positive aspects of beverage alcohol con-sumption; on the other hand we know that this is a prod-uct that has a unique place in America and has to thereforebe dealt with in a very disciplined way.”

“We work very hard with people like The CenturyCouncil in order to make sure that the industry stands forwhat is proper, what is right,” stresses Esposito. “It isimportant that we communicate about proper consump-tion and about a marketing code that is the strictest in theindustry, in order to help the industry remain healthygoing forward.”

The Perfect MarriageEnabling both companies to have such a clear picture ofconsumer behavior is their relationship with one another.“We have a complementary relationship with Schieffelin& Somerset,” says Clinton. “It works because it operatesas a luxury brands distribution and marketing arm. Thereis no overlap with Diageo products and it allows the salespeople to have a range of brands while augmenting thepremium aspect of all of our brands.” Together, Diageoand Schieffelin & Somerset are able to offer an array ofbrands. “We are able to have a total beverage alcohol per-spective and understand that the same consumer that

drinks Champagne is also drinking Scotch and Gin andwine,” says Jeff Keane, executive VP marketing,Schieffelin & Somerset.

Keane believes that the relationship is produc-tive because of the distinctiveness of both compa-nies, and the ability to learn from one another.“Historically, the core competencies of Schieffelin& Somerset have been on-premise and when itcomes to off-premise – particularly chains – that isone of Diageo’s strengths. They have provided theirexpertise in these channels.”

In turn, Diageo has learned from Schieffelin &Somerset how to capitalize on the opportunities inthe on-premise. “The idea of ‘gatekeepers’ of brandsis important,” says Waller, noting that Schieffelinhas perfected this strategy. “I suspect a bartenderor retailer is highly aware of consumer trends, andwe need to spend more time listening to them.”

Together, Diageo and Schieffelin &Somerset represent some of the hottest, mosthistorically successful brands available. Butalthough Moët & Chandon is over 257 yearsold, and Johnnie Walker more than 125 years, consumertastes change and brands need to evolve just as companiesdo. The key to staying on top of the next trend is beingplugged into the market. “I think differentiated packagingis driving consumers right now. There also seems to be amove towards smaller sizes in non-alcoholic beverages,”says Waller. “We need to understand these things in orderto drive innovation in our industry.”

Right now, flavors seem to be driving product growth.This trend is not restricted to beverage alcohol, as Walleris quick to note. “It’s flavor in general that is hot rightnow. Smirnoff is a great example. In the last four years,the brand has taken off because of our knowledge of theflavor marketplace.” Keane agrees, remarking that tasteprofiles are evolving. “It may not be as dramatic as a fla-

vor, but perhaps flavor profiles in Champagne – sweet-ness levels, etc. People are always looking for variety.”

Much of a brand’s success is a reflection of soci-ety’s mood and desires. Why is rum growing as fastas it is? Waller feels it is a drink that promotes a com-munal, convivial feeling. Recently, Diageo has seensales of Captain Morgan sky rocket. Similarly,Baileys is experiencing tremendous growth. “There issomething relaxing and intimate about Baileys,” saysWaller. “It is meeting a consumer moment in time.This is a time that people are looking for things thatare slightly more approachable.”

Reaping the Rewards Diageo and Schieffelin & Somerset have pro-gressed quite far in announcing strategic distribu-tors in 26 states. According to Clinton: “Ourconsolidation process is nearly completed. Thereal work is about to begin as we transition toour new wholesalers, build resources and getcloser to the consumer. The benefits should start

becoming apparent later this year.” Menezes believes the“quantum shift” will take place in July, and retailers willstart feeling the real benefits.

Diageo and Schieffelin & Somerset have no illusionsabout the difficulty of doing business in the current eco-nomic climate, or, for that matter, the stiff competitionthat challenges each brand in the marketplace. “In thisenvironment, we aren’t going to expand our business justbecause we are Diageo,” emphasizes Anderson. “We aregoing to grow because we can demonstrate there is a dif-ference in our brands. Retailers aren’t going to have sup-pliers telling them what to do. We believe that our brandsare positioned better toward the consumer, but we need toconvince retailers and we need to earn their business inevery store.” ■

“As this industry starts to understand

that when all three tiers work together

to achieve a common goal, it is better

for each tier. That will really start to

benefit our brands and the retailers’

bottom line.”

— John Esposito, president, Schieffelin & Somerset

Smirnoff Twist

is the leader in

flavored vodkas

with upwards of

35% of the

market last year .