A brand apart: protecting premium spirits from counterfeit stuff

3 July 2018

Counterfeit alcohol spoils revenue, goodwill and places the public at risk. Ivan Menezes, CEO of Diageo, speaks with Beverage Packaging Innovation about the importance of growing and protecting a major global brand.

As one of the world’s largest spirits companies, occupying multiple leading positions in global markets across the brand portfolio, it is not a surprise that Diageo spends a lot of it’s time defending the growth achieved and reducing the risk of incursion or theft of brand, product or reputation. Brand protection is a catch-all term that is increasingly used to describe the process used to apply the latest technology and strategy to reduce or remove the threat of brand erosion or public condemnation that would result if grey marketers were left to their own devices.

Cîroc and role

“The crux of our role is to deliver premium-quality spirits worldwide, from the most local markets to the widest global platforms. We would like to grow this business in line with spending power and increasingly eye the millennial market as the next dominant purchasing force in the industry. Our strategy is to support premiumisation in developed markets and increase our participation in emerging markets through categories that give us access to the growing consumer base. Our broad portfolio means we have leading positions across many of our markets, enabling us to serve consumer occasions with our brands, across price points. Everywhere we operate, we do so in a responsible and sustainable way.” This was the introduction by Ivan Menezes, CEO of Diageo, during an investor performance review earlier in the year, which leads to the main focus of this article – how to reduce the risk so that the company remains able to deliver premium spirits, without being hamstrung by external forces.

While imitation might be the sincerest form of flattery, in this highly connected world of hyper-engaged consumers, experience is the currency of the day. A bad experience can derail a global brand in a dizzyingly short span of time. Menezes explained, “Great risk management drives better commercial decisions, creating a growing, resilient and sustainable business. We believe that great risk management starts with the right conversations, to drive better business decisions. We assign accountability when managing our risks. It is the responsibility of each market and function to manage the risks directly, and then report on them. These risks are growing and must be mitigated in order for us to continue to succeed as a growing business.”

Internet worth

Menezes elaborated on the nature of these risks, “One major issue is the cyberthreat and misappropriation of our most important digital assets. The impact of this is not only financial loss, operational disruption and reputational damage but also non-compliance with statutory data protection legislation. We can mitigate this by embedding policies and standards on all data-sensitive applications, mandatory elearning and regular phishing exercises to global workforce. Further, we can use external monitoring of key security logs and events to proactively identify and respond to suspicious activities, and use advanced malware and two-factor authentication for cloud-based applications. Another major issue is physical theft or counterfeiting, which can be an outright replacement of our product attempting to sell off of our brand name, or can be through diversion of products into a market they were not designated for. There are numerous issues and ongoing ramifications, chief among them are the obvious threats to consumer health, as well as lost reputation and revenue for the brand.

To outsiders, the alcohol industry appears to be mature and stable. There is some truth in that, as Menezes acknowledges, “We are lucky in this business that it takes ten years to build a truly global brand.” Even though an Uberesque threat to the core business is unlikely, Diageo has identified innovation as one of its six key performance drivers. Last summer, it took a minority stake in Seedlip, a UK start-up that strictly distils non-alcoholic drinks, which are designed to appeal to millennials.

The magic of Diageo

Innovation and security are twin topics that Menezes takes great personal interest in. “The biggest challenge I give myself is how do you keep a large company feeling small? I write a blog – and I do it myself – for our 32,000 employees across the world. I encourage everyone in Diageo to act as if they own the business. We always say, ‘You bring yourself through the door.’ That’s part of the magic of Diageo.”

“Due to the volatility in the markets, my goal over the past few years has been to put consumers at the heart of our business. Consumer trends are moving faster than ever before and the companies that thrive will be those who interpret and quickly deliver against those insights. As part of a drive to improve productivity and everyday efficiency, we have committed to saving a projected $800 million over the next three years, and two thirds of those efficiencies will be invested back in the business to drive growth. It is also important that we develop our global innovation capability, are strong in R&D and have a strategic lens about the big trends and where they are heading.

“At Diageo, we have three priorities – creating a positive role for alcohol in society, building thriving communities, and reducing our environmental impacts. The targets we have set ourselves are stretch targets and we are making progress – for example, during 2012–15 we reduced the amount of water required to produce a litre of product. We aim to have 100 of our key suppliers and thirdparty operators disclose their water management practices.”

On the defence

Menezes commented next on the defensive role that needs to be played while chasing these priorities, which centres on the challenges presented by counterfeiting Diageo’s core brands: “Our Scotch whisky business in Asia was impacted in the first half of the fiscal year by rampant counterfeiting in Taiwan. While net sales in Greater China were up and buoyant overall, key brands like The Singleton and Johnnie Walker face increased grey market and counterfeit issues with Taiwan a repeatedly particular hotspot. There were short-term repercussions from counterfeiting across the category, though I do anticipate this will be a temporary issue.”

Asia is an important growth market for most spirits companies, and Diageo is no exception. For example, China accounts for around 40% of total sales, compared with 25% of global sales. Counterfeit spirits is not a national or brand-specific issue but one that reaches worldwide. A recent report by the EU observatory on infringements of intellectual property focused on thecost of rights infringement in the alcohol industry.

Sucker rum punched

The report estimates that the industry loses an eye-watering sum of €1.3 billion of revenue annually, due to the presence of counterfeit wines and spirits in the EU marketplace, amounting to 3.3% of the sector sales. The cost is mainly made up of lost sales due to counterfeit products but the report highlights that in addition to the lost sales, there are other knock-on effects. These include loss of employment, as the industry is selling less; as well as lost public revenue, as the counterfeiters are unlikely to pay any applicable taxes such as income, VAT or excise duties.

Damage control

The UK is the largest producer of spirits in the EU, with production valued at more than €5 billion, so what is the UK Government doing to help? After the horse meat scandal, the UK Food Standards Agency set up a food crime unit. In a multiagency crossborder approach, the aim is to protect consumers from serious criminal activity that impacts on the safety or authenticity of food and drink. These agencies are imperative in the fight against counterfeit drinks but can only deal with the problem after the event, rather than prevent it. By the time they are involved, the drinks company has already suffered economic loss and potentially irreparable brand damage.

So how can brand-owners in the drinks industry play their part to prevent sophisticated counterfeits? Diageo’s Johnnie Walker is among the world’s most counterfeited whisky brands, along with arch-rival Chivas Regal, owned by Pernod Ricard. These companies take counterfeits and protecting their brand image extremely seriously. Simply developing unique bottle shapes and creating distinctive labelling has not been enough to thwart the determined fraudster.

The solution

In 2014, Diageo created Diageo Technology Ventures, a programme specifically designed to solve some of its existing business challenges. It is intended to make it easier for innovative companies to engage with Diageo on briefs such as anti-counterfeiting. Diageo claims to be leading the spirits industry in combatting counterfeits by continually exploring technologies that will enable the authentication of product integrity without breaking the seal, detect instances where genuine used bottles are refilled with cheap liquids and enable consumers to interact with digitally enabled bottles to check for authenticity, and track the identity and origin of their bottles. In 2015, Diageo unveiled its smart bottle, developed in collaboration with Thinfilm. The bottle uses thin sensors, which can tell if the bottle has been opened before purchase.

Advances in printing capabilities have also yielded NFC technology, in which printed electronic pathways act like antennae, engaging consumers via their smartphones and directing them to interactive digital displays. This can provide extended content; for example recommended recipes and important ingredient or allergen information, as well as details on other items in the range. This technology is intuitive and purportedly leads to repeatedly faster brand engagement.

The technology makes use of a smartphone’s NFC capabilities, which enable Diageo to track bottle movements across the supply chain, in-store and to the point of consumption. As the sensor tags remain readable after the factory seal has been broken, the new technology provides an additional layer of security in protecting the authenticity of the product.

Fake wines and spirits are starving the industry of almost 5,000 extra jobs, as legitimate manufacturers employ fewer people than they would have done in the absence of counterfeiting. It is a problem that costs the wine and spirits manufacturing sectors of the EU’s five largest economies – Germany, the UK, France, Italy and Spain – a combined total of €788 million. Italy and Spain – the two smallest of the five major economies – suffer the brunt of this.

In spite of this, with constant improvements in industry technology, authentication systems and tracking capabilities, major brands like Diageo can continue to stay one step ahead of the counterfeiters while continuing to provide consumers with safe and premium-quality alcoholic drinks. Working with their existing colleagues, governments and various auxilliary agencies will, in theory, promise to secure their numerous quality brands for the foreseeable future.

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