Transcript of Diageo Global Rum Conference with Analysts

Diageo Rum Conference
Ed Pilkington
Global Category Director, Vodka, Gin and Rum
Thank you very much. Good afternoon. Good morning to those in North America, the other side of the Atlantic. My name is Ed Pilkington. As was mentioned, I am the Global Category Director for Vodka, Gin and Rum.
You may have seen myself and Joey Bergstein, who is our Senior Vice President for our Global Rum, business on the webcast earlier. Hopefully you did. We’re here also with Catherine James who is here to help and support us to talk about Rum and Diageo and Rum and the Rum category in general.
We think it’s an amazing category. It’s a category that we love participating in. It’s a growth category. As you saw earlier, it has grown extremely well in the last five years. It will continue to grow well. We think we’re extraordinarily well positioned with some fantastic brands. We’ve got great assets in this category. It’s a fun category. It balances fun with tremendous tradition and heritage, which is great. Our brands are made in some amazing parts of the world, some exotic and fun parts of the world across the Caribbean, Latin America and Queensland, Australia. We come from some great parts of the world.
The category itself is pretty unpretentious and fun. The liquids mix brilliantly, which makes it very sociable. They’re perfect for many occasions. So it’s just a great category and one I would say we really enjoy participating in and we’re really looking forward to the next hour and talking to you about the category and about our brands.
So with that I would just like to open this up.
Question and Answer Session
Ian Shackleton – Nomura
Yes, good afternoon gentlemen. Two questions. Firstly, I think the Virgin Island distillery is just coming on stream now. I wonder whether you could just remind us what type of benefits that will bring in terms of cost over the next few years?
And the second question was really I know we’re talking about rum here, but obviously Casasha, to some extent is also a rum. Is that also part of the strategy and is there scope to involve in Casasha, particularly in Brazil?

Thanks Ian. Tell you what I might do, I’ll pass over to Joey who has been the most involved with the Virgin Islands. He was down there last week when we opened the state-of-the-art distillery and I’ll pick up a little bit on Casasha as well.
Joey Bergstein – Diageo
Okay. Thanks Ed. Thanks Ian for the question. The distillery is up and running. We’re starting to make rum and thrilled to report we won’t start shipping that rum though until 2012 because we lay it down to mature for a year.
The cost savings that we’re going to see coming out of the distillery are significant. I’m not going to quote a specific number on the savings that we say, but we receive cost savings through the actual production of rum as well as through the marketing subsidies which will enable us to further step up the way that we support and invest behind the Captain Morgan brand going forward.
Ian Shackleton
When you talk about the marketing subsidies, does that mean you actually got to reinvest some of that in to additional marketing spend?
Joey Bergstein
Yes, the marketing subsidies come to us in a way that requires us to invest that behind the marketing of the brand. So there is a portion that comes through the cost of goods and a big portion that comes through the actual marketing spend as well.
Ian Shackleton
Can you just give us an idea of roughly how much of say Captain Morgan will come out of that distillery because roughly you’re selling what, it’s not far off nine million cases per annum now of Captain Morgan globally? How much of that?
Ed Pilkington
That distillery is going to supply our US production. So the entirety of our Captain Morgan supply out of the US which is six to seven million cases is going to be coming out of that distillery.
Ian Shackleton
Okay, thank you.

Great Joey. Ian, you want me to touch on the Casasha question. We look at the category differently, you’re right. The subtle difference between rum and Casasha, as you may be aware, is rum is basically molasses based and Casasha is made out of cane syrup base. So it’s the cane juice which is then distilled. So that’s sort of the technical difference.
It’s a huge category. Well over one million cases as you know in Brazil. We are participating in Brazil and we’ve got a great business in Brazil which is growing. We’ve got a small brand called Fulo which we participate in. We wanted to play at the premium segment and we’ve got some investment behind that. So relatively small at the moment, playing in the premium segment where there is some quite attractive margins to be made and that’s where it is at.
Our main game though is the Rum business globally.
Ian Shackleton
Thanks very much.
Melissa Earlam – UBS
Good afternoon. I have two questions please. The first one is regarding the Cacique and the discussion around your interest in taking a 50% stage in that brand. If you could give any details on that.
Then the second question was regarding the opportunity you saw for super premium rum. Apart from the obvious Zacapa, are there any ways that you can tap into that segment through extending brand ladders for Cacique or Pampero or even Captain Morgan? If you could give us some insights into your strategy there, thanks.
Ed Pilkington
Joey, do you want to talk about Zacapa? Maybe we could do the same again. I’ll pick up on some of the super premium stuff.
Joey Bergstein
Yes, sure. Thanks for the question Melissa. We are really thrilled with Zacapa and how Zacapa has been growing. We saw it grow in our last fiscal year about 54% in volume terms around the world and we’re seeing continued really strong growth coming into the current fiscal year. So really thrilled with Zacapa and how it is doing. We’re finding pretty much everywhere we take it the consumers love the liquid, they love the story and we’re finding it to be a really strong and buoyant brand and a really big part of our, a growing part anyway, of our reserve portfolio.
We do have an option to buy half of the business and we’re currently in conversations with the brand owners at that time.

And Melissa, just to say on super premium rum in general, one of the reasons we’ve been in conversations and we went into the original deal with Zacapa is we see a huge opportunity in super premium rum. As you know, in super premium spirits in general, the super premium rum category is under developed. There are a number of small brands out there. We think we’ve got an absolute jewel in Zacapa and the deal that we’ve got there.
We’ve got another jewel actually in Pampero and in [Vesario] which we sell in Pampero markets and we wanted to make sure we had a first mover advantage as the category grows. I mean you’ve seen what has happened in premium, super premium vodka. We’ve seen what’s happened in super premium whisky and we believe, as the rum category is grown globally, the super premium category in rum will grow and we believe we’re extremely well positioned within that.
Melissa Earlam
So Zacapa and Pampero will be your two approaches into that segment basically?
Ed Pilkington
Yes. Zacapa is the lead play. Pampero we, and in [Vesario] we will use where we sell Pampero which is basically in four or five markets globally. But the primary focus will be Zacapa. We’ve rolled out to quite a number of markets globally.
Melissa Earlam
Can you give us an idea how many cases of Zacapa you sell globally?
Ed Pilkington
Joey, do you want to go into where we’re at?
Joey Bergstein
[Inaudible] the question I’m launching into. That was yes?
Melissa Earlam
Yes, Joey.
Joey Bergstein
Okay, sorry. I just wanted to check to make sure I don’t get myself into trouble. We’re selling, last fiscal year we sold about 100,000 cases of Zacapa globally. In and around that range. As we’ve said, it’s continuing to grow at a very rapid rate. So it is a relatively small business within the totality of our portfolio, but a very profitable one and as I said, a high growth one.

The point I was going to make around the comment on participating in super and ultra premium rum, I think Ed is absolutely right in terms of where we’re seeing the core growth, but we also see innovation as yielding more opportunities for us to continue to participate in that segment.
Melissa Earlam
Great. Thanks a lot.
Ed Pilkington
And then one thing I’m going to say as well to build on Joey’s comments, I think the great thing Melissa on Zacapa is, as Joey said, it is about 100,000. Where we’ve activated the brand, it has really worked. We’ve rolled out to well over 40 markets and we’re seeing tremendous success. So there is a number of markets where we’ve really got the growth drivers, some of which you saw on the webcast earlier and it’s really working, so we feel very confident about this. As you know, a lot of spirit brands take time. Work them on the ground, make sure you’ve got the basic growth drivers, really build them and then they start to take off and that’s what we’re excited about.
Melissa Earlam
Thank you.
Simon Hales – Evolution Securities
Good afternoon everyone. A couple of questions if I can. Firstly, I was struck Ed really, in your presentation you didn’t really talk much about Asia. Do you not see the Asian region as an opportunity, perhaps not immediately, but down the line for particularly some of the dark rums that you were talking about? Interested on any comments and some light you can shed on that.
And secondly, just touch on the cost side. I appreciate it’s probably a very small part of the cost base within rum, but can you just sort of comment maybe on how the price of molasses and things is moving? I assume it kind of tracks the world sugar price more or less.
Ed Pilkington
Okay, on Asia, Asia is important actually to us. By definition of Asia, I mean in India, which is obviously a priority market if you look at the BRIC or the BRIC markets. We’ve really started to put some investment behind Captain Morgan. Joey has actually been out there quite a few times and we see a lot of possibility there. So absolute focus in India where we see there is a big slice of the prize. And actually, India of course, has got a huge domestic rum business. I think about 14 million cases or something, so it’s a huge domestic business so we see a big opportunity there.
In terms of Zacapa, we absolutely see it as a big opportunity and it has probably been a case of business priorities and focus. But you’re absolutely right, I mean most people who drink Zacapa absolutely love it and therefore, if you think how it plays in that super ultra premium price point, the price point is around $50 for a bottle of Zacapa 23, huge opportunity in that space. So we really do see a big opportunity.

The business itself we’ve been quite focused on. Obviously building the Whisky business. We’re really getting going on vodka as well. But absolutely putting plans in place for Rum and we really see in the super premium ultra premium the big opportunity absolutely.
On price in molasses, Joey, you might have more details on this actually because you’ve been closer to the manufacturing side, especially with the USVI.
Joey Bergstein
To be honest, I don’t have a lot of the details on the prices of molasses at my fingertips, but you’re right, it moves with the cost of sugar and it really is a relatively small component cost within the total cost of goods per product. In fact, in a lot of the products, it is quite a minor cost in total.
Simon Hales
Okay, thank you so much.
Gerard Rijk – ING
Yes, good afternoon. A couple of questions. First is about the global market share in Rum. Maybe you can give some numbers on that?
I also have a question on the Asia exposure. How much of Rum is now sold in, specifically in China, as a percent of the total rum market?
The third question is about the relevance of rum in Diageo’s total sales value. Can you give a percentage for that?
And finally, I didn’t see the growth number of Rum recently in Diageo. I saw it for the total market, but I didn’t find it for Diageo specifically.
Ed Pilkington
Hi Gerard. I’m just trying to write the questions down in order. Joey, do you want to take some of the share of Rum and I’ll pick up maybe some of the stuff on growth of Rum in Diageo? Joey, as well, because you’ve been out to China talking to the Chinese as well, maybe you pick up on those.
Joey Bergstein
Yes, Gerard, sorry your questions were the global market share of rum, I caught that. Rum represents about 5% of the world spirit market today.
Gerard Rijk
I mean Diageo’s share in the global rum market. Sorry, it was the other way around.

We sell about 13 million cases of rum a year Gerard. The total Rum category is about 135 million, but you’ve got 40 million cases in India. You’ve got about 23 million cases in the US. So we’ve got about an 8%, 9% share of global rum and that’s including all of that. So we’re well positioned if you look at it like that and growing.
Gerard Rijk
Okay.
Ed Pilkington
And again, if you look at it within Diageo, you might know our volume in Diageo. That positions us well within Diageo as well. Not as big as our Vodka business at about 33 million cases or the Scotch business, but growing well.
Gerard Rijk
Yes, okay.
Ed Pilkington
Talking to China, it’s a small category at the moment in China. Not a lot of it. I mean the Chinese spirits market, international spirits market, as you are aware, is very strong in Cognac, strong in Whisky which is coming in as a big one. It was our primary focus as we came in as Diageo and clearly obviously working with our partners at Moet Hennessey.
And Vodka, the Vodka category is starting again at that and starting to get interesting at the premium end and we’re now looking at what is the opportunities for Rum. So at the moment the category is very small in China.
Do we see opportunities? Absolutely and the obvious one is the comment I made earlier about Zacapa. We think Zacapa could be a very interesting brand there.
Gerard Rijk
Is there a specific reason why Rum is still so small and why it is so far behind the Cognac Whisky categories in China?
Ed Pilkington
I’ll kick it off and then maybe hand over to you Joey. Yes, it is often a lack of activation and what has been happening in the market place. I mean often it is historically to where the activity goes in the market place. Cognac has been very active for 10, 15 years now in the Chinese market place. Scotch got active a few years ago. Probably 10 years ago and then it is actually active in the last five years. So it’s almost category by category we’re starting to see sort of the major players in the drinks business come in.
Rum has not been as successful going forward, but do we see opportunities? Absolutely and as you know, it’s a huge spirits market, so absolutely we see opportunities. It’s just about picking up on the priorities and then seeing the right opportunity. I think we, as I said with Zacapa, going forward, we definitely see an opportunity and I would say going forward as well, as we develop in the market, there will be opportunities for brands like Captain Morgan as well which is a conversation we are looking at.
Gerard Rijk
Okay and the last question is about the maturity of Rum. You said you had just one year before the product of the new factory will be on the market. What’s the average maturity of your Rum portfolio?
Ed Pilkington
Again, Joey, you might want to. It really varies because rum, the definition of rum depends market by market. So depending on where the age of rum. So it really does vary around the world because you can grow one definition. In Australia with Bundaberg Rum, it has to be two years old, for example. In Venezuela it has got to be two years old as well. There is a category below that. It does vary market by market.
Gerard Rijk
Okay.
Joey Bergstein
That’s absolutely right.
Gerard Rijk
Thank you.
Graeme Eadie – Unicredit
Hi guys. Two quick questions. First of all on Captain Morgan, it seemed to me, maybe I was wrong, that it took quite a long time for the brand to gain any momentum outside of the core markets and the US and the UK. But according to your presentation this morning, it looks like that’s changed quite a bit recently. What has been behind that? What’s been the catalyst if you like for stronger growth finally to start to come through in some of the other key markets?
Secondly, just on Zacapa, I wasn’t actually aware until this morning that this isn’t a brand that you own. Why did you decide to go down the road to actually look to do an agency agreement rather than actually developing a premium brand from scratch yourself because obviously you’ve got the
capability to do that? So I was a bit surprised why you decided to go down using somebody else’s brand rather than developing your own one. So your thoughts on that would be interesting.
Ed Pilkington
Great. Joey, do you want to kick off with Captain Morgan?
Joey Bergstein
Sure. Absolutely. I think on Captain Morgan we’ve seen some real tremendous growth behind that brand particularly over the last 10 to 15 years. I think at the heart of it, it comes down to a couple of things. First, that it really is a very simple, clear formula that works really well and everywhere we’re taking it, we’re seeing that same formula actually work. It’s amazing. You go to bars all over the world and it’s amazing to see how consumers respond to the Captain and the Morganettes and the activity that we do in the bars as well as how they respond to the whole proposition in our advertising. You know in our TV advertising, our digital advertising. We’ve actually just built our Facebook presence to over a million fans right now, which has become a huge new tool for us to be able to drive growth behind the brand.
I think in the US over the last 10 years a lot of the growth has been driven by the fact that we have gotten more and more access to media and we’ve been able to have some pretty powerful television programmes or campaigns that we’ve been able to execute in the US that have really driven growth. So that has been tremendous and then as we’ve taken it out into other markets in the world, it’s really been a matter of focus. We’ve been really clear, really simple. The slides I showed in the presentation that show the four key growth drivers and the recipe for success is exactly the kind of conversation I have with every market I go visit around the world. It’s one of these brands which people just understand it really quickly. It resonates with the consumer. It sits with the times today which is that in a lot of places there is tough economic environment and people just looking for a bit of a break and a little bit of fun and the Captain plays really well into that. When you get the whole programme right and then invest behind it, we’re able to create real growth.
One of the great examples we have is in Germany. We’ve spent a couple of years in Germany just building up distribution, activating the brand in the on-trade and the bars and then last fiscal year we put a TV campaign on air and saw the business just completely take off. It grew about 200% last year in Germany alone and we’re seeing that happen in a lot of different markets where we take the brand today.
So hopefully that gives you a bit of a better understanding for what’s driving that success.
Graeme Eadie
Yes. Maybe I didn’t phrase the question very well, but what I was meaning was that it was always quite big in America and the UK and recently, as you said, in Germany it has exploded. Do you think the catalyst behind that was increased investment behind the brand or was it just a whole accumulation of different factors coming together at the same time?
Joey Bergstein
I mean it has been a big and growing brand. I think that the growth we’ve seen has been investment behind the right growth drivers depending on the market you’re talking about, over the last 10 years in the US, over the last two years in Germany. In the UK we’ve really stepped it up over the last couple of years and that’s really what has been driving the growth.
Graeme Eadie
Great.
Joey Bergstein
Does that answer your question?
Graeme Eadie
Thank you very much yes.
Joey Bergstein
Then on Zacapa, your question there was why we were interested in working on Zacapa rather than developing our own?
Graeme Eadie
Yes because clearly you have the capability to develop your own brand from scratch. I just was wondering why you chose not to do that but to engage somebody else’s brand.
Joey Bergstein
Right. I think on Zacapa we saw a real jewel. Well we certainly have the capability to develop our own brand. What the team in Guatemala have done there is created just a real spectacular remarkable brand that would be very difficult to replicate I would say anywhere. They have also created a very strong supply of matured rum stock which we’re confident is going to be able to fuel expansion because the rum that goes into Zacapa is aged somewhere between six and 23 years. I described the process a little bit in the video about how it works, but that’s certainly an important future for identifying a great rum that we would be able to grow around the world. Those are the big motivators behind doing that work.
Graeme Eadie
Great. Thanks for answering the questions.
Joey Bergstein
Pleasure.
Antoine Belge – HSBC
Hi. It’s Antoine Belge at HSBC. Three questions. First of all, in terms of the price and mix opportunities in Rum versus other spirit categories, could you comment on the potential and also remind us how this price and mix has evolved during the crisis?
The second question regarding the profitability of Rum versus other spirits, especially are there any specifics to be aware of in terms of gross margin and also maybe the A&P to sales ratio compared to let’s say Vodka and Whisky mainly?
And finally, what’s your view regarding barriers to entry? I think in answering a previous question about entering the category yourself there has been example like so far to launch a 10 cane. I’m not sure it was very successful though, but when do you think that it’s easy to launch a new brand in Rum?
Ed Pilkington
Okay, thanks Antoine. I will kick that one off. In terms of price and mix versus other spirits and probably mergers into your next question about profitability in comparison to other spirits, the category has kept growing. I mean through the recession, spirits in general slowed a little bit, but spirits as you know is a bit pretty resilient category in general. Having said that, we need to make sure we keep active in the market place and we did. So the category itself has stayed buoyant and actually, if you look at the category itself, what we’ve done in the last two or three years is we have partnered with Zacapa. We have done more innovation on Captain Morgan. More of our competitors have come into the market place and have got more active. We got more active with our Latin rums in certain parts of the world. So actually there is a lot of vibrancy in the category which is really helping the category to grow, which is what we want. So I think that’s really important.
Price and mix, I think price has held up pretty well. I mean in terms of you look at the US, where we sit with Captain Morgan is strong in general and we’re maintaining that position. Where we get into other markets is good. Then I think interestingly, at the top end of the price and mix equation, one of the reasons we did go to Zacapa and Joey said is a complete jewel is it plays in a very interesting price point. It plays at a $50 price point and as we grow that, that’s great and it helps our overall margins within the Rum category, which of course is what we’ve done in the other categories.
If you then look at Vodka, what’s been great in Vodka over the last 16 years in the category and then for us as well is the growth of super premium and ultra premium which has helped us stretch the margins. So we want to do the same.
Likewise in Whisky, clearly, we’ve got to focus on super premium and ultra premium now as well as we’ve looked to grow and stretch our margins and manage the overall margin story. So we think going forward, the category has been good and resilient. We’ve managed to hold price pretty well in
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most places which is good. Where we’ve launched Captain, so in the mainstream area, we’ve launch it at good price points and we really see opportunities as well to innovate and open up in super and ultra premium which will help in the margin story. So I think it’s very good like that.
In terms of A&P comparisons as a percentage compared to Vodka, pretty similar. I oversee those categories and we’re very much in the same ballpark actually. So we’re doing just slightly ahead because they’re both investment categories for Diageo, just slightly ahead of Diageo norms because they’re both investment categories. So we’re investing, we believe we’re investing well in both categories.
They of course are the two fastest growing spirit categories. Vodka has been the fastest growing in the last five years just followed by Rum. I don’t think it’s a coincidence that the more investment that goes in the more activity, the more vibrancy in the category, the more growth you’re going to see. So there is a cause and effect there. So definitely A&P levels are good and as we grow, we’re looking to put more in obviously.
Then I think the final was barriers to entry. I think you can definitely enter this category. Often it’s a case of getting the proposition right. I don’t really want to talk about what our friends and competitors have done, but I would say that we’ve had good success in launching rums around the world.
In many markets, Captain Market is an innovation. It’s a new brand in most parts of the world. We’ve had success launching it and helping to get the market going. So I think you can absolutely get in.
You could have said there is no super premium category in Rum therefore don’t do Zacapa, but we’re launching into markets and we’re having success. I used to be very closely involved with the Latin American markets and there was a view that Latin America was parochial because it was the backyard of rum and you could never launch a brand from another country. Well we’re getting through that perception that actually you can if you’re positioned in the right way and you’ve got the right credibility.
So it’s really all about getting the proposition right, getting very clear and that’s why we love Zacapa and that’s why we’re very clear about what we’re doing with Captain Morgan and that’s why we’re selective in where we play with the Latin rums where we think we have an opportunity to really win.
We expect more people to enter the market actually. I think the market will continue to be a vibrant market and as with any category, not everything that goes in works. Some things work better than others. Our hope is that we continue to be successful.
Antoine Belge
Thank you very much.
Rum Conference Diageo
Good afternoon gentlemen. Thanks for your time earlier today and now. I’ve got a couple of questions actually. One is a follow up on the Zacapa situation. The talks are ongoing and you’ve gotten until April when the three year deal ends. How are those talks progressing and what would be the ideal scenario for Diageo? Have you got an option to take more than 50%? Would you like to take more than 50% or are you happy with how it is just now?
My second question is about Captain Morgan in the US. There has been quite a strong wave of negative publicity towards Diageo and Captain Morgan from your competitors in Bacardi and some of the Porto Ricans based in the US. I wondered if you could tell me what effect that publicity has had on the brand in the US as a whole, in some of the pockets where the Porto Rican population is large. What’s happened there? Thank you.
Ed Pilkington
Thank you Olly. I mean I think Joey touched on Zacapa earlier. We can’t really go into any more detail other than the fact that, as we said, we’re in discussions with the brand owners at the moment. You outlined where we stand in terms of the deal. We’re delighted with how we progress with the brand. It has been a great partnership and as I say, we’re in conversations at the moment. That’s where it is at. But as I say, we’re delighted with the progress we’re making with the partnership.
Olly Wehring
Did you agree a price for the 50% option at the beginning of the agreement, or is that going to be something that is discussed at the moment?
Ed Pilkington
Olly, we can’t go into that, so I don’t think you expect me to give an answer on that one. But what we can say is we obviously went into the deal with certain parameters. We’ve been very, very happy with where it is going and we’re having good discussions at the moment.
Olly Wehring
Okay.
Ed Pilkington
The other question was on Captain Morgan USVIs. Do you want to take that Joey?
Joey Bergstein
Sure. What’s clear on Captain Morgan USVI, I think you’re right Olly there has been quite a bit of press on it. Most of the press has actually been in the business press and we haven’t seen, and we do a lot of work with the consumers and constantly developing new marketing campaigns. We’re not really seeing the consumer being concerned at all about what they’re reading in the press. So we
don’t see that having a negative impact on the business. In fact, everything about what we’re seeing in the USVI has all been positive. It gives us a really great platform to control our own destiny, create really high quality rum that we’re sure that the US consumers are going to be thrilled with as and when we start to ship that come January.
But from the consumer standpoint, as I’ve said, while there has been a lot of press around it, we’ve really not seen the consumer himself pick up on that and be concerned about it.
Olly Wehring
Thanks a lot gents.
Trevor Stirling – Sanford Bernstein
Three very quick questions please. Hopefully quick. The first one is you mentioned that the USVI will supply the US. Where will the rest of Captain Morgan be supplied from?
The second one is I’m just a little confused around the molasses and rum question when it relates to Zacapa because I think from the video you said that the uniqueness of Zacapa was that it wasn’t molasses, it was actually based on cane juice. So if you could just clarify that, that would be great.
The third thing is in the range of Zacapa, is the primary focus then Zacapa 23 and XO was there for, if you like, once you got 23 established it gives another leg up to the brand?
Ed Pilkington
Joey, do you want to kick these ones off?
Joey Bergstein
Sure. On the first question around where we supply Captain Morgan, we actually supply Captain outside of the US from a whole variety of sources. We’re trying to take the best of the rum from the Caribbean. In fact, that has been a long tradition of the Captain Morgan Rum Company. Quite a bit of rum comes out of a facility that we have in Jamaica. Rum comes from Guatemala and it comes from a number of the different islands. It has been blended and made into Captain Morgan and the expectation is that that’s exactly what we would continue to do into the future.
Then on the molasses question, sorry I was answering the question really directly at both molasses. Most rum is made from molasses and what makes Zacapa so unique is the fact that it is made from first pressing of the sugar cane. What they do is they actually press the sugar cane into this virgin sugar cane honey. What’s really interesting is the Industrias Licoreras de Guatemala, which is the company that owns the brand, is very vertically integrated and they grow their own sugar cane. So they have got a lot of control over the production and the extraction of the sugar cane juice that’s then used in the fermentation and distillation process. Starting right from the very beginning you start out with really remarkable raw ingredients that lead into this remarkable rum over time.
Then on the question around Zacapa 23, we really do see Zacapa 23 as being the heart of that business. XO is a great added value variant which we’re having some success, but it’s a much smaller part of the total portfolio. Obviously at a much higher price point. So we love XO and some markets, actually in particular in Asia, we see a very, very big opportunity for us behind XO. But everywhere we go we really want to get the consumer focused on Zacapa 23 as the heart of what that brand is about.
Trevor Stirling
Understood. Thank you very much.
Joey Bergstein
You’re welcome.
Ian Shackleton
Yes, thanks for taking the follow up. You did talk in the webcast obviously about the Captain Morgan and Cola product and obviously that’s very much designed as a beer competitor. Now I just wonder to what extent you did see in the US in particular that Captain Morgan could take on beer. I know where you are filling in a draught product that is based on Captain Morgan, but obviously some of the selling, for example, in the supermarkets, is aimed at if you buy a large pack of Captain Morgan and buy the Coke, it can be effectively cheaper than buying the 24 pack of beer. Really just how explicit can you be on that type of marketing message?
Ed Pilkington
Joey, you’ve been leading a lot of this. That’s pretty explicit actually, but Joey you’ve been driving that. What you said is exactly what you see. You know Captain Morgan alongside Cola brands merchandised together and it’s a fantastic deal, but Joey, do you want to talk a bit to it?
Joey Bergstein
Yes. We really see beer actually as a great source of volume for the brand and in fact, when you do the source of gains and loss analysis to identify where consumers are coming to, what they’re choosing Captain over or Captain Morgan instead of, in fact, 70% of our business, the last time I looked at this data which was probably about a year and a half ago comes from domestic beer.
So because if you look at the total alcohol beverage market, because beer is such a big part of that market, pointing Captain Morgan against the beer consumer and the beer opportunity has been a real way that we’ve been able to drive growth. What’s been interesting is the data is a little bit difficult to come by. A sophisticated market like the US you can track those things easily. Other markets it’s a bit more difficult to track. But we’re seeing in some other places like Germany for example, that a lot of the growth that we’re seeing is coming from beer. So we think that the brand, because of its easy drinking nature, Captain and Cola is just very easy to drink, it tastes great; it is a great competitor to beer. So we have certainly merchandised the brand and marketed the brand to go after that beer consumer, so in-store merchandising Captain and Cola. We’re actually doing that in the US. We’re doing that in markets around the world and that seems to work really well. The value equation works for the consumer and it’s a very simple proposition for them to take home to those high energy occasions where it’s just a better alternative than beer often.
Ian Shackleton
Are you actually offering any sort of draught product Captain Morgan and Cola, for example, on draught?
Joey Bergstein
We haven’t that on draught. We have it in pre-mixed Captain and Cola. In particular South Africa we’ve had a huge amount of success behind that as well as in Europe we’re having quite a bit of success.
We’ve run a test market on it in the US and at a relatively limited scale had a (limited scale being in a few cities where we ran the test) it was quite successful, but that’s not an innovation that we’ve rolled out.
Then doing it on tap, we actually do a Bundy and Cola on tap in Australia and we’ve had some good success behind that, but it’s not been something that we’ve rolled out yet. As yet anyways into any of our other markets.
Ian Shackleton
Thanks very much.
Jonathan Cook – RBS
Thank you. It might be nothing, but I was noticing that all of the rums that you have there are dark rums. Obviously your main competitor is a light rum. So I just wanted to check if there is any difference from a consumer or a market perspective, or if there is an opportunity there?
Ed Pilkington
Yes and yes I think. I think I mentioned in the webcast that the growth in rum basically has been in dark rums and golden rum and in spice rum. So in rum with rum flavoured products with spices. So that’s really where it has been. That’s where we’re participating and that’s where we’ve been upping our investment and being active in the market place. So that’s kind of where it is going on.
You’re right, our biggest competitor is a white rum and the white rum segment has only been growing around 2%, so it has been a slower growth. Clearly, there is a huge opportunity in white rum. We do have some white rums. We sell a bit of Captain Morgan White in Canada. There is a Pampero White. But it has not been our focus at all. Our focus has been on the dark rums, the golden rums.
Consumers like those. There is a taste profile to them. There is a mixability to them. There is a richness to them as well. Tend to lead into the heritage stories as well which is interesting in terms of the production. So if you look at the maturing aspect of the brands which again brings that extra level of quality.
As I say, white rum is a good category, strong category. It has not been growing as quickly. Our focus has really been on the golden rums and the spice rums.
Jonathan Cook
Okay, thanks.
Ed Pilkington
Thank you. Well first of all thanks to everyone for your time. Thanks for a lot of you who looked at the webcast and then for dialling in because it’s really appreciated. Thanks for some great questions. It’s really great to engage in the dialogue with you on the Rum category. It’s great. We really appreciate your interest. We really appreciate your interest. We’re passionate about it. We love this category. At Diageo we’re committed to growing and winning in the Rum category. I think you’ve seen that in the last few years in terms of the investment we’ve put behind Captain Morgan, the fact that we’ve taken Captain Morgan out of the US and grown it successfully in many markets around the world. The fact that we’ve been active in how we’ve played with our Latin rums and in terms of how we’re now participating with Zacapa as well. So we’re absolutely delighted with what we’re doing. It’s great to get your questions and I hope everyone has a fantastic weekend.

Thank you very much.

Saturday, May 27, 2:21 am

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