Diageo India CEO Hina Nagarajan: Consumers are not necessarily drinking more, but they are drinking better

The pandemic had a huge impact on the liquor industry when out of home consumption came to a hard stop. It's been well over a year now since the world opened up and consumption levels got back up again. So how has the year fared for one of the biggest alcobev companies? In a wide-ranging exclusive interview with Storyboard18, the managing director and CEO of Diageo India, Hina Nagarajan, shares insights on Diageo’s premiumisation drive and the strategic review that saw the culling of over 30 brands by September 2022. She also shares key future-back consumer trends shaping Diageo India’s portfolio and M&A strategies going forward, the advertising approach and how she’s embedding sustainability principles in the company's culture. Read on.

How has the year fared for Diageo India so far and what does the report card look like?

I'm very happy to share that our business is bigger and stronger compared to the pre-pandemic levels of 2019. We've delivered a net sales growth of almost 18 percent. This last quarter was underpinned by continued growth momentum and big improvement coming from our recent innovations and renovations like Royal Challenger and American Pride, our launch in craft through our single malt Godawan and some very powerful brand renovations on Signature and Black Dog.

The larger consumption story is anchored in premiumization that continues quite strongly. The prestige and above business has grown by 23 percent and that's the highest growth we've had in the last 24 quarters. So premium products now exceed 70 percent of our portfolio, and we are continuing to focus on prestige and above to capitalize on this rapidly growing premium segment and changing consumer trends. So we feel very confident with the strength of our reshaped portfolio, the investment we are putting in; we will be able to grow the business in a consistent and sustainable manner to create long term value for all our stakeholders.

We expect competition to actually bring category expansion and growth and drive penetration, which has a long way to go.

The company sold about 32 brands by September 2022 as part of a strategic review and is now focused on a range of Scotch whisky brands and strengthening presence in upper prestige and craft spirits. Tell us more about the rationale behind the strategic review of the portfolio and are you happy with the progress so far?

The sale of our 32 popular brands, as we call them, and then we franchised another 11 brands, was to enable us to unequivocally focus on prestige and above and capitalize on the premium position of our industry and really capture the changing consumer category trends that we're seeing. This was totally in service of the new mission and strategy that I launched last year. It is backed by sharp, future-back consumer insights, understanding where the consumer is going to be in the future, understanding of where the future profit pools are going to lie in this industry, as well as an assessment of where we as Diageo India have the right to win.

I'm actually absolutely delighted with the progress on our strategy and the focus that we had on premiumization. We've grown 23 percent in prestige and above, which is well above three-four times what we were growing in the past. This is the highest growth over 24 quarters. We see that the organizational bandwidth now to focus on prestige and above is much higher. We expect that going forward, a good 6-7 percent mixed benefit will continue to come in steady state in our portfolio. So we will be able to deliver our mission of delivering double-digit top line growth, while delivering the margins of mid to high teens. So I feel very good about the progress.

What are the key shifts in consumer preferences and behaviors that are also informing your growth and marketing strategies?

There's been a structural shift in consumer choices and behavior over the last few years. The first thing we find is that consumers are drinking better. So the whole premiumization shows that people are looking for high quality brands, and they're not necessarily drinking more, but they are really drinking better. That fits perfectly with our purpose of driving moderation.

Consumers are living in the physical and the digital world now. So we've had some new channels like home delivery open up and that model is gaining momentum in some states. It's still early but definitely phygital living and digital engagement has gone up.

Consumers are really experimenting. When everything was locked down, in-home experimentation, different types of drinks, and cocktail making became quite big, and socializing changed. In-home drinking has now become quite normalized.

We've got 100 million new consumers who are coming into this category in the next five years, and these younger consumers are repertoire-drinking. So you'll see, in addition to whiskey, gin and vodka going quite fast.

The retail environment and shopper experience has changed dramatically, and consumers are definitely looking at sustainability in brands. We are being driven by sustainability in particular. All these trends reshape our choices of innovations and renovations.

Watch here: Diageo India's CEO Hina Nagarajan on liquor premiumisation strategies, consumer trends and more

Inflation is an issue you are facing like all of your peers. How is the alcobev industry and Diageo in particular affected by inflationary pressures and what’s your outlook going forward?

We have been facing double digit inflationary pressures and we expect these to continue in the near term. This is basically driven by sequential surge in prices of inputs going into glass, which is one of our critical raw materials, as well as extra neutral alcohol (ENA). We are however seeing some green shoots now, after about a year, in paper prices and crude linked commodities. We have raised pricing in some states already and this will start ramping up as we go into the second half of the year. With our revenue growth management and very deep productivity agenda that we have across our value chain, we think we can partially combat these inflationary headwinds.

There's been a structural shift in consumer choices and behavior over the last few years. Consumers are drinking better, they are living in the physical and the digital world now and really experimenting.

We do feel that the challenging period continues for a while but we are confident in the resilience of our business and strategy. This premiumisation strategy also gives us a mixed benefit, which helps us counter inflation. So we are confident in our ability to be able to navigate headwinds.

You have asked governments to allow price increases. Where are you on that?

We've been talking to the state governments, presenting the inflation that is hitting our industry and some governments have started giving price increases. So we have seen price increases come through, for instance, in West Bengal and Assam, and Karnataka has given us some prices. We have work ongoing in every state to be able to get as much pricing as we can because it is a very difficult year on inflation.

Are you witnessing any patterns emerging in terms of your stronghold states?

We’re seeing premiumization in every state. There are some states where we had a larger share of what we call the popular business. Therefore, now that we have divested and franchised some of our brands in popular, obviously, some of the states where this had a larger share, we see a slight shift from there. But fundamentally, not a major shift. Growth and premiumization is coming from most states.

How will the India-UK free trade agreement impact the drinks market in India?

First of all, we are delighted that import duty reduction is part of the discussion between the two countries. We are optimistic that a deal will go through. We know that if the import duty comes down, consumer prices will come down and it would benefit consumption overall. How much growth is difficult to say. We don't know the quantum of duty reduction at this stage and we also don't know the phasing. But it will be a positive outcome for the industry. The quantum we have to look at once we know the exact amount.

There's a raft of new brands which have entered the category in the past few years. What's your view of the competition - the well-entrenched players and new emerging alcobev companies?

India has one of the lowest penetration levels of alcohol and also the lowest per capita consumption in the world. So with growing consumer aspiration and income, there's a lot of headroom for this industry to grow. We expect competition to actually bring category expansion and growth and drive penetration, which has a long way to go. The premiumisation trend is accelerating rapidly and it is providing all players with ample opportunity to launch new products, to enter and grow sustainably in the long term.

The differentiator will be transformational innovation. At Diageo India, we've invested significantly in building capabilities on future-back consumer insights - looking at where this market headed, where consumers are going to be going in the future.

We’re looking at liquid development which is quite critical because the consumer is looking for new offerings. Distillation and maturation capability and also partnering and collaborating with craft spirits ecosystem because craft has become quite big as a trend in India. We are providing support to develop, nurture and mentor smaller companies. We believe that this will go a long way in both supporting our growth ambition as well as giving industry an impetus. So we feel very optimistic about the growth of the industry with the new entrants.

Our marketing communication is often purpose-led and not brand-led. It is about responsible drinking, inclusion and diversity and we are frankly quite happy to build our brands that way.

What's your acquisition strategy going forward?

We are open to evaluating interesting opportunities, which we call our new engines of growth. Taking a stake in Nao Spirits, which makes Greater Than and Hapusa gin, is one such reflection of our strategy. We will review any M&A opportunities and other strategic opportunities as they arise.

What we're also open to is partnerships and alliances, which bring innovative products and solutions both on the portfolio side as well as to support our ESG agenda - whether it is to tackle counterfeit or to track our sustainability. We recently partnered with a company called Source which is helping us to extract water from air and Godawan our Indian single malt is going to be the first brand to use this.

We also have a blockchain based track and trace system that we have launched on some of our brands, and we'll extend it to the fuller portfolio. This is one of the partnerships we have to help us track from the start to the end journey of our whisky - the sustainability metrics.

We've set up a state of the art craft and innovation hub at Ponda, Goa. This is an investment of Rs 45 crore and it is with the view to accelerate our innovation and strengthen the crafts and premium portfolio.

We are a cash positive company and we have the money to invest where the opportunities are.

Alcohol brands have had to come up with unique ways to advertise given the restrictions on communication. But advertising soda and music CDs no longer work either. Surrogate advertising has also come under fire from governments and, to an extent, consumers. So what have you done to work around these restrictions?

Diageo, globally and in India, strongly believes in self-regulation and we have multiple self-governing policies, such as the international alliance for responsible drinking, our own Diageo marketing code and digital code. Our brand extension products that are being advertised are widely available. They are distributed in India and we strictly adhere to ASCI guidelines of revenue, distribution and investment to ensure their legitimacy. Our marketing communication is often purpose-led and not brand-led. It is about responsible drinking, inclusion and diversity and we are frankly quite happy to build our brands that way.

What are some benchmark communication pieces in your view?

The first one is something called the Drink IQ India's website and it's dedicated interactive platform to encourage people to make informed choices about drinking, to really know the facts and myths about alcohol, the effects of alcohol on the body and mind and resources to support moderation. We have very wide reach with this and it absolutely plays to Diageo’s purpose and values.

The other one is about progressive portrayal in our advertising. We have developed a very comprehensive framework for progressive portrayals. So, for instance, representation - who's been featured in the communication, who is framing the story, the depth of character, how are we really communicating to that cohort, etc. More than 42 percent of our brand communication and content now has women not just represented but leading the narrative.

My message to everyone who's trying to build a career: Focus on great results. You're a professional. So just be one and move on in your journey.

In communication coming from brands like Black & White, Black Dog and Johnnie Walker, women are the lead storytellers. 8 percent of our creators, influencers and partners are on the gender orientation spectrum and brands like Smirnoff, Gordon's, etc., feature gender fluid protagonists. Going forward, we are really committed to driving these numbers up and setting progressive portrayal benchmarks for the industry.

The third one is creating awareness on hazards of drunk driving and risks of underage drinking. We have brand-led campaigns that do purpose-led advertising. Last year we reached out to 60,000 students on the risks of underage drinking. We reached out to 84,000 consumers on the hazards of drunk driving. We're working with regional transport offices, for people to take modules on understanding the risks of drink driving even before they get their licenses. These are the pieces of communication I'm really proud of because they communicate our ethos as Diageo.

On the subject of ESG, what’s top on the agenda right now, keeping in mind the economic climate?

I'm actually very proud of the progress we've made over the past year on our Society 2030 goals that we call our Spirit of Progress goals, which are about ESG. We made immense progress on water stewardship, waste management, circularity, safety, performance, corporate governance.

With Water for Life, we have really worked across locations to be able to restore water, create capacity for replenishment of 4.6 lakh cubic meters of water annually and 84000 liters per day of potable water for communities that we are operating in. We are now extracting water from the air to conserve groundwater. We are accelerating our journey to a low carbon world. We have moved almost 98 percent to renewable fuel, we have stopped the use of fossil fuels in our manufacturing units. We are basically doubling our solar energy capacity.

We have just announced the removal of mono cartons from our bottles and this is a very big initiative that is going to happen in a phased manner, resulting in saving 10,000 tonnes of paper and reducing 7000 tonnes of carbon emission every year. We are becoming plastic waste positive now and are well positioned to deliver 100 percent recyclable content in our plastic by 2030.

Then there is inclusion and diversity, a topic that I'm very passionate about. We want 50 percent women in our leadership by 2025 and we are hiring about 50 percent women every year in roles that open up. We have also extended our inclusion and diversity programme to people with disabilities. We now have 62 people in our manufacturing units from this cohort and we are expanding the narrative to LGBTQ+.

Society 2030 is something that people are really proud of. It's really embedded in our culture, and everyone participates in taking it forward.

How do you embed it in culture and be sustainable by design?

Becoming sustainable by design is a journey. It's going to be a long one with external and internal challenges in the journey. On the external side, we really have to engage with various stakeholders to give shape to a more sustainability-driven agenda across India and the globe, and helping people set up that capacity and mobilizing people through partnerships and alliances.

Regenerative agriculture is going to become quite important in our scheme of things because we use a lot of barley and crops to make drinks. The external tasks ahead of us are investment incentives and public-private partnerships to make this happen as soon as possible.

Internally, the challenge is to deeply embed sustainability in our decision making processes and our operational processes. We are driving this agenda through cross-functional teams, with representatives from various functions to manage our ESG performance across operations. The first thing is it has to come from the top. Everyone sees me and all the conversations I’m having, so that's quite important.

This cross functional team tracks performance every month on 25 clearly identified ESG goals, and we present the progress to our CSR and ESG board committee every quarter. That keeps us honest to our objectives and on track. We have started linking the achievement of ESG goals with the variable compensation of our top management. Our top executives have six ESG goals with top materiality that are linked to our long term incentives.

It's a process of really reshaping your internal processes, decision making and accountability systems, to be able to bring ESG in every conversation.

You are one of the few women CEOs in an industry dominated by men. Any tips for women to pursue a career in the drinks market?

I have faced exactly every challenge that a woman faces in her career and it is not necessarily brought in by other people. These are just life stage challenges like when I got married and I had children and balancing the role of mother, wife and career woman. When I was doing that I think infrastructurally companies were not geared for this. Today, companies are more sensitive. What really kept me going was the support of my family that I had mobilized. I asked for help when it was needed. I didn't try to do everything myself.

Whether it's alcobev or any other industry, I think these tips would be relevant anywhere.

Firstly, choose your company wisely. I was very particular about choosing my companies. I came to Diageo because of its culture and the focus on inclusion and diversity. I knew that I could be my authentic self here. If I needed some time off for the family, I would get it and everyone was supportive of that.

Secondly, I took a go-fast-go-slow-go-fast approach. I was growing fast when I was not married. When I got married and had children, I slowed down a little bit. When my children were a bit grown up and independent, I accelerated my career again. That really helped me.

Thirdly, I feel quite often that we also psych ourselves on gender discrimination sometimes. Frankly, I've never thought in my professional life that I'm a woman. I'm only focused on great results and said my results will take me forward. I derived strength from all my supporters rather than getting derailed by detractors.

My message to everyone who's trying to build a career: Focus on great results. You're a professional. So just be one and move on in your journey.

The interview first aired on CNBC-TV18. Read and watch Storyboard18 on Moneycontrol, CNBC-TV18 and Forbes India.