Diageo plc - Special Call

May. 9.13 | About: Diageo plc (DEO)

Diageo plc (NYSE:DEO)

May 09, 2013 10:00 am ET

Executives

Syl Saller - Global Director of Brand Innovation Group

Andrew Fennell - Chief Marketing Officer

Luca Lupini

Analysts

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

Melissa Earlam - UBS Investment Bank, Research Division

Trevor Stirling - Sanford C. Bernstein & Co., LLC., Research Division

Andrea Pistacchi - Citigroup Inc, Research Division

Chris Pitcher - Redburn Partners LLP, Research Division

Ben Hunt - Oriel Securities Ltd., Research Division

James Isenwater - Deutsche Bank AG, Research Division

Alicia Forry - Canaccord Genuity, Research Division

Thomas M. Paulson - Cornerstone Capital Management, Inc.

Operator

Good afternoon, and welcome to the Innovation Webcast Question-and-Answer Conference Call [Operator Instructions] Just to remind you, this conference call is being recorded.

Today, I am pleased to present Syl Saller, Global Innovation Director. Please begin your meeting.

Syl Saller

Thanks, Christie. Good morning, good afternoon or good evening, depending on where in the world you are dialing in from. I'm Syl Saller, and I head up Diageo's Innovation team. I'm joined today by Andy Fennell, our Chief Marketing Officer; and Luca Lupini, who leads our R&D function. We appreciate you taking time out of your day to view the webcast and join us for this session.

Just a few words from me summarizing the key themes from the webcast before I open it up for questions. Interestingly, it's our first ever on innovation, and we did it because we wanted to share our story of how we built a deep and systemic capability in generating growth from new products. Diageo and its predecessor companies have had a long history of innovation, but as I've said in the webcast, they'd be characterized as one of periodic home runs that happen generationally.

Seven years ago, we set out to change our strategy, our organization and our culture to enable innovation to deliver a steady stream of sustainable growth year-on-year. I'm sure you've seen Paul Walsh in the press recently describing this capability as an innovation machine.

We measure our annual innovation sales of products as sales of products launched in the last 5 years. Now given that our brands generally last for decades, if not centuries, this is a relatively short time horizon. Innovation accounts for about 11% of Diageo's NSV. It's not a target we set. It's an output of doing the right innovation to help keep our brands vibrant and healthy and access new consumer opportunities. And remember, these brands keep on growing even after we stop defining them as innovation. They generate growth for Diageo.

In the webcast, I outlined 5 factors that have been critical to our success and gave examples on each from across the globe. To recap them briefly, we have a superior model, which maximizes global and local benefits, and that's just to say we are a global function and that enables us to share insights and best practice, but our resources are based in market and deliver to their business needs. Two, our breadth and our range of brands and innovation capabilities allow us to create the right product for the right consumer occasion to access growth across diverse geographies and price points. The third thing I talked about was that we put great design at the core of everything we do because we believe this is a key purchase driver for our aspirational drinks category.

Luca gave you an inside look at our fourth key success factor, our R&D program. We have skilled liquid crafts people backed by a robust long-term science agenda, which enables us to develop consistently great products. And finally, but to me, most importantly, across the globe, we have world-class talent operating in an entrepreneurial way. They are passionate about what they do and have a laser-like focus on creating products that will delight consumers and generate substantial Diageo -- value for Diageo.

My sincere hope is that the website gave you real insight into why we are seeing success with innovation. We really wanted to give you a behind-the-scenes peek at how we operate. And I hope this Q&A session helps further deepen your understanding of our approach and the passion we have for what we do.

Christie, that's it for me for now. Would you please open up the line for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ian Shackleton from Nomura.

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

I've got a couple of questions. The first one was just going about the fact -- you think about a 5-year period versus 1 to 2 years, that normal FMCG would you use when it's sort of trying to measure the innovation success. I just wondered if you'd talk a little bit about how you see the life cycle of innovations moving, presumably downwards, i.e. life cycles are getting shorter as we see more and more innovation in the marketplace.

Syl Saller

I think the life cycle of a product depends on the category it sits in. So we see spirits having relatively long life cycles; and ready-to-drink life cycles are shorter. Comparing us to consumer packaged goods is a question I get asked a lot, and I think it's important to be clear that purchase cycles in packaged goods are short, trial is relatively inexpensive. So we can build -- they can build innovation fast. Think about Gillette. They are -- how many blades can you put on a razor, different gel strips, that's a pretty fast churn that consumer packaged goods can generate. We have one active ingredient. Our products are relatively higher priced, so innovation takes real time to build. And therefore, consumer change -- the consumer need for change is less. So we're less prolific, and we launch innovations that we think are appropriate for our brands with the intent that they will last. So if you think about it, Cîroc took over a decade to build to its current level, Singleton is already 7 years old and still growing very strongly. I think 5 years is a relatively short time span to call something new, particularly given the long expectations that we have for innovation.

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

And the other question I had was about the time to bring to market. And I think on the webcast, you talked about, for the beer brand, Ruut Extra getting there in 8 weeks, which actually is quite a short period. I mean, what would you normally assume for some of the spirits innovations in terms of time to get to market?

Syl Saller

It does vary enormously. So Ruut at 8 weeks, and Malta Guinness were very quick. What we found is, when we see a consumer need or a competitor move that we want to counter, we can operate lightning fast. There are times we choose to go more slowly, and Johnnie Walker Double Black would be an example of that. What we did on Double Black, is we did our testing across multiple markets right from the beginning, so we would have had teams in different markets trying to build the proposition that could go global. We had to build something that we knew would work in many different places. So we took our time with that. And then we tested it in a number of different airports to see how in real life consumer environments, how does it operate? We had great success with that. And therefore, we were able to roll quite quickly into multiple markets because we were very certain of the results that we had, had from all that pretesting. So Johnnie Walker Double Black would have taken about 2 years to develop. There is no set standard. We operate with the right pace for the right project.

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

And just a final question from me. You didn't really mention social media much in the webcast this morning. I just wondered if that was influencing the way you think about -- particularly about how you actually brought them to market.

Syl Saller

Yes. As Andy has talked about, social media is not a separate strategy for us. It is a part of everything that we do. It underpins our innovation launches and from time to time, we choose to use social media as part of developing our products. So right now, we have a very exciting competition in Western Europe called Show Your Spirit, where we've invited bartenders to create brands that they would like to see in our reserve portfolio, and then we opened it up to the public to vote for the brand that they wanted the most. It will then be screened by a panel of judges, of which I am one. And so that was a really interesting way of involving our expert bartenders and the public in creating something that we think will be very new and very exciting.

Operator

Our next question comes from the line of Melissa Earlam from UBS.

Melissa Earlam - UBS Investment Bank, Research Division

I've got a couple of questions, please. Firstly, could you elaborate a little bit what your innovation plans are in the U.S. regarding tequila and bourbon? And then you gave the very impressive statistic that half of Diageo group NSV growth over the last 5 years had been driven by innovation. Do you see that as sustainable? Or have we seen really an exceptional innovation pipeline over the last couple of years, especially in the U.S.?

Syl Saller

Thanks. Let's talk about the 50% number. We do see that as a sustainable level of innovation, not least because that's been consistently our track record. And as we look at our pipeline going forward, we see the ability to continue to contribute that amount. The mix may shift. The mix in innovation, like Diageo's footprint, is moving more towards emerging markets, and we have a very exciting pipeline for both our developed and our emerging markets. But we think that, that is a sustainable contribution to growth. In terms of tequila, as I'm sure you've heard us say in the press, Don Julio is our play there. We're very excited about that. And I hope that one of the things that you took out of the webcast is that our ability to both extend our brands into new spaces or create new brands to generate organic growth are well honed, very deep, and we will apply those to tequila as needed. Bourbon is a very exciting category for us in the States, and we are thrilled with how Bulleit is going. So you would have perhaps seen recently the launch of Bulleit 10, a 10-year-old bourbon that has been exceptionally well received. And not a bourbon, but Bulleit Rye is universally loved by bartenders and continues to grow like a train. So we see a bright future in North American whiskey, driven by our brands and by our innovation agenda.

Melissa Earlam - UBS Investment Bank, Research Division

Perhaps just to follow-up on your tequila points, obviously, Don Julio plays in the super premium segment. Are you looking at innovation in the premium tequila segment for the U.S.?

Andrew Fennell

Melissa, it's Andy here. I'm sure you know that our contract with Jose Cuervo is continuing until the end of June. We're committed to that contract, and I can't wait to talk to you about our future plans once we get into the new fiscal year.

Operator

Our next question comes from the line of Trevor Stirling from Sanford Bernstein.

Trevor Stirling - Sanford C. Bernstein & Co., LLC., Research Division

Two questions on my side as well. The first question, as you're looking for sources of ideas, Syl, what role does the "copy and improve fast" play in that innovation pipeline?

Syl Saller

Yes. We both lead -- we choose to lead sometimes in innovation. And sometimes, we choose to be fast followers. Let me give you an example of each. In non-aged declared scotch, where -- we're the market leader in scotch. We had done an awful lot of consumer insight work that said that consumers are looking for benefits beyond age, and I think it was down to us as the market leader to pioneer some of those new benefits. And that is a new and very exciting way to generate consumer interest. So Buchanan's Master, Johnnie Walker Double Black, Johnnie Walker Gold Reserve, those are plays that we chose to lead. Confectionery vodka in the U.S. is an area where we chose to follow. We watch very carefully the movements of Pinnacle and other competitors, the reactions of consumers before we came in and launched our own brands. And I think that's pretty smart. Let's let someone else take the risk of, "Is this going to get consumer appeal? Is it going to get traction?" And when we come in, we come in with a number of advantages that I think are compelling: one, the strength of our brands; two, the power of our distribution network; and third, our development capabilities, which I believe are second to none. And with the benefit of Luca here, I'd love it if you'd just say a little bit about our approach to, say, the confectionery category and why we feel we can build better liquids.

Luca Lupini

Yes. Thanks, Syl. So we would -- Syl mentioned we sometimes decide to take a fast follow approach. But in terms of flavor trends and keeping ahead on the liquids, we would stay as close to the cutting edge as possible through flavor houses and the trends that they uncover through leading-edge consumer groups or with bartenders. And we proactively develop products kind of ahead of the curve. And then when we decide to launch those would be a business decision. But just around the confectionery, as Syl mentioned, this is an amazing opportunity for our developers. We've got the chance to play in a space where there are multitude of levels of different characters within the products. And if you just take the kind of confectionery stroke cake angle, you've got the toppings, which is the icing. It's giving you those real top notes down to the juiciness of the dose and the cake all the way through. And it's an opportunity to not only bring out the best in our developers but one I think we've got a real right to win in.

Trevor Stirling - Sanford C. Bernstein & Co., LLC., Research Division

And the second question, how do you balance design for innovation for variety with the potential for confusion?

Syl Saller

Very carefully. So you'll see, of course, more innovation in vodka flavors than you would, for example, in brown spirits. The benchmark we set for our brands is, is it going to pay rent to the parent? Is it going to add to the brand's equity? And oftentimes, people assume that line extensions are the easy part of innovation that we do. And I have to say that they are not. Because when you set hurdle rates like it has to build brand equity, it has to get scale, we need to be able to support it, it has to make sense to the consumer and not generate confusion. It's actually quite hard to meet all those criteria, but those are the things we're considering when we put together our new products. The other thing we look at is the market angle. So if you look at the Johnnie Walker line up, particularly with the new addition of the exciting Explorers' Club, you might say, "Well, how's the consumer going to digest all that?" And the answer is there isn't a market where they typically have to digest all of it. There are different emphases on different products in different countries and different channels. And that's why you'll see Explorers' Club, for example, as exclusive to Global Travel.

Operator

Our next question comes from the line of Andrea Pistacchi from Citigroup.

Andrea Pistacchi - Citigroup Inc, Research Division

I also have a couple of questions, please. First one is if you could talk a bit about the cost of the innovation, how do you measure it? And if you could give us a sense of how much the cost sort of has gone up as a percentage of sales maybe in recent years? And then the second, I'd be interested in your thoughts about flavors in scotch, how Bacardi is launching with Dewar's Highlander Honey? I mean, do you think flavors in scotch can work? Or does the category simply have too much heritage in your view for it to work?

Syl Saller

Yes. Let's take flavors in scotch first. It's been very interesting watching this debate, and you would have seen perhaps David Gates, our Global Whiskey Innovation Director, saying this is something that needs to be debated by the SWA. And I think that, that is so that we as an industry are aligned on the role of flavor in scotch. We are clear that the regulations say you cannot add flavors to scotch. And further, we believe that there's many opportunities to bring different flavor profiles and different benefits to consumers without resorting to a straight flavor play. So let's take Talisker Storm as an example of that. And Luca, I'll ask you to describe that liquid to people so they have a flavor for it. Talisker has a fantastic and unique position as being a product from the sea. And so we're able to bring real excitement to the scotch -- the malts category by bringing a new variant that has those flavors exaggerated in the way in which we create that product. So there's no need for a straight flavor play. We're leveraging the history, the authenticity, to get a product that is very exciting and very unique. Want to talk about the flavor profile there?

Luca Lupini

Yes. I mean, what they've done, the malt distillers for Talisker Storm, as Syl mentioned, is exaggerate those flavors. So the kind of nutty smokiness that comes through from the wood is really accentuated, and it's offset with some of the flintiness. Now normally, you would find some flinty nutty in whiskey. They've pushed this almost to -- the description that the master blender would use is almost "struck matches" almost. So you can get a sense of the intensity. And then somehow, they've managed to bring through levels of brine, kind of peppery notes that offsets it. So it's a really full-flavored embodiment of something you would imagine coming from or being very close to the sea.

Syl Saller

Thanks, Luca. Your other question was our....

Andrea Pistacchi - Citigroup Inc, Research Division

The cost of innovation.

Syl Saller

Yes. And do you mean by that the cost of actually developing innovation?

Andrea Pistacchi - Citigroup Inc, Research Division

Something that captures it all, the cost of developing it, but also, for some innovation, you have obviously more -- you were referring to more sophisticated packaging. I mean, all these extensions and new brands, the overall cost of this, if there's a way you can measure it? And whether at the end, you believe that the innovation is accretive to your margin?

Syl Saller

Yes. Okay. Perhaps Andy and I will take this together. Our goal is for innovation to be accretive to the category that it sits in. And that is why, for example, in scotch, you would see us launching products that are generally premium priced to the core variant. There are times where we will launch products that have lower margins than we would typically see in Diageo. Cans in Africa is an example of that. And we do that only when we see that there are completely new occasions we can access like, as I talked about in the webcast, the off-trade consumer which is growing in Africa. But our overall goal is to add to Diageo's efficient growth and be margin accretive. And we're quite happy with our success in doing that. In terms of the cost of innovation, it is surprisingly small. We did up-weight our investment 7 years ago when we changed our approach, but it is still tiny in the grand scheme of Diageo. And we actually like to keep it that way because what that means is we work our resources harder. As a global function, we have the flexibility to move resources around the world according to the needs of our markets and according to Diageo's strategy. So you would have seen us putting more resources, moving resources from developed markets to developing markets over the last 5 years. Luca mentioned we have a what would be considered a relatively tiny R&D team, and the way that team benchmarks their output against other technical groups is really quite extraordinary. Luca, do you want to talk about our benchmarking on the technical function for a minute?

Luca Lupini

Yes. Just to give a context in terms of the investment we've put into R&D, is it's in the tens of millions. In terms of a percentage figure, it would be less than 1%, but it's a really, really efficient percentage that we put in. And the reason why it's so efficient is because we chose to do 2 things. One, we keep our development work in-house, and we learn once and then we reapply that everywhere. And in terms of our long-term research, we don't have many thousands of PhD scientists. We've chosen a very different model which is a small amount of top flight PhD scientists to access the external world. And that combined gives us real efficiency in terms of what we deliver. This team supports all the outputs from the innovation.

Syl Saller

Yes. Thanks, Luca. Andy, anything to add?

Andrew Fennell

I think you've said it, really. Andrea, we're pursuing twin goals of top line growth and margin expansion. And innovation is a key driver of growth, it needs to play its part in that. So it's very important that we have an objective of premium-izing in each of the categories that we operate in. And as we're developing our emerging middle class portfolio, we need to balance the margins that come from that with aggressive innovation at the reserve end as well. So the context of our overall kind of financial goals very much sit with Syl and her team as they think about the portfolio of the pipeline and making sure that, that's balanced.

Andrea Pistacchi - Citigroup Inc, Research Division

Thanks. And if I could please, I've just got a third very quick question. I'd be interested if you could say something on Naked Turtle that you referred to in the webcast. I understand it's a white rum. So in terms of consumer occasion that you're targeting or price point, would it be up against sort of -- against Bacardi? Or how should we think of it?

Syl Saller

It's priced at a slight premium to Bacardi, and it sits in what we think the heartland of rum is for LBA-plus consumers, which is fun. And without talking a lot more about our strategy given how new the product is, what I would say is it is a terrific liquid backed by a very exciting marketing program. I was down in Tampa seeing it come to life. And when you are sitting in those beach bars, understanding the mindset of that consumer and what they're after in that sort of "fun in the sun" occasion, you see the brand come to life. What's interesting is it doesn't even have to be sunny. It's the feel that, that creates. There's a serious side to the brand that we think is important to these consumers as well, and part of our strategy is to work with the Turtle Conservancy. And that work is all about preserving the ever increasingly rare species of turtles that are all over the world. So let me give you an example that combines that fun piece with the serious turtle piece. We have a campaign with our beach bars that says, "turn off the lights." And in these beach bars along the coast, what we've gotten them to do is to agree to change the lights that they have flooding the ocean, to change them from lights that are potentially harmful to turtles when they're spawning to lights that makes no difference to them, and that's been a great campaign for consumers to be excited about. But also, it's the right thing to do for the turtles. So I think you'll see -- you'll continue to see really fun, really innovative entrepreneurial activities from our Naked Turtle brand.

Operator

Our next question comes from the line of Chris Pitcher from Redburn.

Chris Pitcher - Redburn Partners LLP, Research Division

You mentioned that innovations need to be, on average, accretive to your categories, and you mentioned it was 11% of sales. Are you able to share a volume figure to give us an idea for how much of a sort of price premium? And then secondly, you talked about the difference between sort of FMCG line extension, innovation and building new brands, and you used Cîroc and Singleton as an example. And those brands -- and you really sort of take off in the sort of the outer years. Can you talk to what are you -- how you monitor innovations and what allows you to keep sticking with innovation, and what makes you cut innovations? Because obviously, the risk is that you get sort of a skewed proliferation and increased sort of complexity in the business. Right? And just finally, following up from that point on the R&D budget, I mean, the R&D budget really hasn't moved in a decade. Are you really comfortable that you are -- I mean, you've mentioned it, but it is 0.2% of sales. Have you analyzed -- you went to $30 million. Do you see any incremental gains, or this really just the ongoing number?

Syl Saller

Okay. Luca, why don't we actually start backwards and talk about the benefits of keeping a relatively flat R&D budget?

Luca Lupini

Yes. In our F12 annual report, we reported how much we spent on R&D activity, but that is really the activity that we spent on the researching and the developing, and we announced that we haven't reported in the report, which is maintaining the functional end-to-end, including part of our supply organization that is involved in R&D, which is a far bigger figure. But if we have a look at how we compare against total beverage alcohol, we compare pretty favorably with other like companies. And just remember, we have one functional ingredient. You could argue there's one category, which is alcohol, and I think our R&D budget is well placed. Syl also mentioned around 7 years ago the re-look from a Diageo's perspective at innovation, and R&D was a big part of that. And we built up from the ground up what our optimum R&D capability was. And we were very, very conscious to make sure that we kept nimble and we didn't inculcate into the business old-style R&D, which is inflexible and doesn't help us in the growth. So wherever we need money -- I don't have projects that are not unfunded. If I need funding, I've got a mechanism to go and get those fundings. But as a baseline, to keep it more nimble and far more lean is probably a better strategy.

Syl Saller

Thanks, Luca. Let's talk about your question in terms of brand-only take off in the future year and how do we decide what stays and what goes. I think it's a great point that you make. Even though our official cutoff for how we measure what we call innovation is 5 years, we really are building for the long term, and we are aware that brands like Singleton and Cîroc continue to generate important amounts of revenue. That's really what we're building them for. And I'd say, as an organization, we have learned to both be patient and to adjust on-the-fly. So when you think about it, take a Baileys or a Cîroc or a Singleton or a Captain Morgan, none of those brands were sort of judged or launched in the first year, 2 years, 3 years. And we didn't get them right in the beginning. The attitude we had was, we'd launch this thing, we're going to monitor it, we're going to work it, we're going to change as we go and get it to last. And I'd say our attitude is very similar to our innovations, that we have a starting point with the brand and we learn and adjust. You will have seen that on Cîroc, starting with a product-based premium, our product-based positioning in grapes, grape-based vodka, and then moving to, at least in the States, more of a lifestyle ultrapremium positioning with Sean Combs backing it. So the brand changes over time, and we think that, that's terrific. We have very clear processes by which we will make the call that something is not working. So first of all, the thing to understand is that the decisions on whether or not we would draw product from the market are taken by senior management, and that is anyone from one of our general managers of a market, right on up to our executive level. It's taken thoughtfully, and my counsel in those situations is if there is a fatal flaw in the product, something that we cannot recover, let's withdraw it. So let me use an example of a product with a fatal flaw. A number of years ago, in GB, we launched a product called Quinn's. And I'll tell you, it was a fruit-based ready-to-drink product. All of our pre-testing on this product was very positive. What we didn't do in that case was to test it live in-market. And what we didn't anticipate was when you put it on the shelf next to RTDs, it looked like an RTD, which was at the time a declining category. So the product didn't get the cache or the traction we expected with consumers. We didn't see any way of overcoming with that. We withdrew the product. At other times, we'll take a product that we've launched that may not have worked and we'll take the learning. So we tried Guinness Surger as an at-home product, and that's the product that Luca talked about where we nitroginate through -- sorry, I'm blanking on the word you used, how we created...

Luca Lupini

Ultrasound.

Syl Saller

Through ultrasound. That originally was tested in Tesco as a device you could put in your home. That didn't work. But the learning from it allowed us to then take it to our bars which aren't turning -- our bars and pubs which aren't turning enough Guinness to keep it fresh and at the optimum quality that we want. And we were able to put in Surger and serve great-tasting Guinness in the bars that don't have the volume to do that. And as Luca mentioned, that's an additional 20,000 pubs in GB. So we either adjust, we take the learning or we say kill and we pull it. Did that answer all of your questions or was there one more?

Chris Pitcher - Redburn Partners LLP, Research Division

And as far as synergy, do you have the share of volume that is from your innovations to give us an idea so we can characterize what -- how accretive to mix innovations are in aggregate?

Syl Saller

We don't generally share volume. And frankly, I don't even have that number to hand because I focus on the revenue line.

Chris Pitcher - Redburn Partners LLP, Research Division

Maybe just one final question on the development of new brands as opposed to line extensions. If we look at the success of new brands in the alcohol market, it tends to be backed by a single individual, whether it be a private startup or, in the case of Cîroc, you have Sean Combs pushing that brand, not necessarily from a celebrity's point of view but because that was his brand to push. When you bring a new brand like The Singleton or [indiscernible] to market, is there an individual at Diageo who is responsible for the success of that brand, who is going to push it? Or is it part of a group and, therefore, maybe gets less of a focus? I'm trying to understand the difference between a corporate trying to build new brands and sort of single individuals.

Syl Saller

Yes. We admire what individuals do, and we understand the importance of having that person or brand ambassador be powerful in driving the brand forward. So Bob Nolet on Ketel One is a great example of that. Tom Bulleit still continues to go all around the world, driving sales of our Bulleit brand really as an innovation. So we understand how important that is. Where there's not a single namesake or inventor like with Singleton, what we would have in market is brand ambassadors who are really expert in that brand and replicating what individuals do. Because in truth, a lot of our model, if you look at us internally, is based on looking at what entrepreneurs do, not what big corporates do in the way in which they approach innovation. So our innovation teams, for example, are out in bars actually seeing what's happening with consumers, talking to them, trying to sell their product themselves in one case just recently, experiencing the consumer feedback live on the ground. If they don't have passion for the product, they're not working on it. So our model is really built on what we observe, the success of our entrepreneurs to be, but backed by the powerful distribution and investment capability that Diageo has.

Operator

Our next question comes from the line of Ben Hunt from Oriel Securities.

Ben Hunt - Oriel Securities Ltd., Research Division

I was wondering if you can sort of comment on how the innovations contribute to growth across different markets. In particular, those -- the more mature Western Europe, for example, and how that varies.

Syl Saller

Innovation is critical to Western Europe. And Western Europe remains a big and profitable market for us. And I think it's interesting times in Western Europe. We see -- if you oversimplify, you could say the top end is changing, and the consumers lower down the economic spectrum are changing fairly rapidly. So luxury consumers are looking for ever-increasing levels of luxury, and we have foreign consumers shopping in Europe, looking for those luxury products. So we're very active in the reserved space. And that's why you see -- in fact, if you haven't seen the very exciting new product launch of Odyssey, which is a product priced -- from John Walker & Sons priced at about GBP 800 that we've successfully launched in Asia with a tremendous activation program in Voyager, our luxury yacht that travels from country to country, that is coming to Europe because those luxury dynamics are powerful and very exciting. At the other end of the spectrum, we have consumers who have decreasing economic wealth but yet they still want to participate in our categories, and we want to make it affordable for them to do so. All of our products and brands are aspirational. So how do we enable them to be part of it in the easiest possible way? And that's where the example of premix cans and frozen pouches -- less than GBP 2, you can get of great serving of a drink, can buy it easily. And I think that, that's an important strategy for Western Europe. So Western Europe will continue to be a dynamic market for us, and we are very focused on getting growth from innovation in our developed market there. In North America, where our economic conditions are brighter, you see from all the numbers in all of our activities that we have an exceptionally vibrant program that is really adding value to our brands and to our top line growth. And in emerging markets, as Andy mentioned, reaching those emerging market consumers is critical for us. They often have different needs than the consumers of our international spirits. So we're building a suite of brands, a suite of brand variants that are just right for them. And you'll see more of that activity from us in the future.

Operator

Our next question comes from the line of Jamie Isenwater from DBG.

James Isenwater - Deutsche Bank AG, Research Division

Three questions, I'm afraid, please. First one, from an industry point of view, is there ever such a thing as too much innovation? And if so, what are the sort of signs of that, do you think? Second question, you showed a slide in the presentation about where the innovation sits, and it seems to be significantly less in Europe than other regions relative to your own size. I'm just wondering whether that's driven by the companies, consumers or the retailers as to why it's less important in Europe than the U.S. for example. And then lastly, in terms of innovation failures, and you've touched on a couple, is there a common theme that runs through them in terms of the things that haven't succeeded over the last 5, 10 years? Or is it very much case-by-case specific?

Syl Saller

Okay. Why don't I take the failure question, and Andy is going to take the too much innovation question as you look across all patch. Part of the answer is we don't fail very often, interestingly. And let me give you some insight into why and what sits behind, for example, that NABCA data, that over 70% of our innovation remains in the market after 5 years versus 32% for competition. The way we construct our innovation pipeline is we actually start with relatively defined strategic territories. So you'll hear companies saying they have a big funnel, loads and loads of ideas at the front end and loads and loads of projects, and they whittle them down over time. That is not our approach. Our approach is to be very clear on the consumer territories that will have the most promise for us, those are prioritized; and what our business needs are. When you combine those 2 things, you get a very clear understanding of those strategic territories. So we'll put a lot of effort into those as opposed to having a scattergun approach. And then, yes, in a strategic territory, we will generate a lot of ideas and we'll discard very quickly, like in one ideation session, most of those. And we'll start to work the ones that matter, and then we'll take those through to test. And what that means, by being very thoughtful strategically upfront, by testing in a robust method before we roll, not in all cases, but generally, that means our success rate is higher and our products stick. So I think that's a winning model for innovation for us. So there's not enough failures across which I would draw themes, but we do diagnose what sits behind every one, and we do share those learnings globally, which I think is part of what contributes to our success. Andy, you want to talk about...

Andrew Fennell

Yes, sure. Look, I think innovation is a good thing for any consumer industry and certainly for us. And I don't think you can have too much good innovation. And good innovation, as defined earlier by Syl, as drives revenue growth and drives equity for the brands that you do it from. As long as you're ticking both of the boxes, then bring it on. Too much bad innovation is, of course, a bad idea. And the lens that we really look at is not just the commercial one, but also the kind of what are we doing to our brands. And Syl talked earlier about the most senior managers presiding in judgment on the degree of stretch that we'll place on each of our brands, and that's absolutely right. We really think deeply about how far we can stretch Smirnoff and Johnnie Walker and Baileys and Captain Morgan; and we track equity, of course, to aid us in those judgments. But you can't get too much good innovation, and I am delighted with the contribution it makes to growth. I think it creates dynamism, energy and strength for our brands. I also love the entrepreneurship that's happening in our sector. It kind of makes it a little sharper and creates new ways of delighting consumers. So actually I feel really good about our sector and our company right now, and we take the responsibility to make sure that it's good innovation very seriously.

James Isenwater - Deutsche Bank AG, Research Division

And sorry, the third point, the less innovation in Europe relative to the U.S., is that driven by companies, consumers or retailers, do you think?

Syl Saller

It's a combination. We have consolidated ourselves into Western Europe, but that doesn't mean that we've taken all -- that doesn't mean that you remove all the complexity of duty regulations, route to markets, different channel needs. So we can roll products across markets, but there is more complexity than in North America, for example. So you'll see in our premix cans, they will vary in actual product formulation from some countries to other countries, depending on the regulations. And our route to market in the U.S. is one of the strongest in the world, and that gives us real scale in our launches there.

Operator

Our next question comes from the line of Alicia Forry from Canaccord Genuity.

Alicia Forry - Canaccord Genuity, Research Division

You have talked about how you prioritize your innovation, so I was wondering if you could perhaps give us some numbers around how you decide which innovation ideas move forward to launch stage in terms of, is there a certain return on investment required within a set time line or some other rigorous framework? Or is it, in fact, a great deal more flexible than that? And then in addition to that, how does your team work with the M&A team at Diageo if you decide, during the course of your research, that it makes sense to acquire an innovation rather than continue on down the organic path? And then just a final question on the number of employees that you employ in your innovation R&D departments, if you could give us that, that would be useful, and also how that has trended over the last 7 years or so.

Syl Saller

Okay. Let's see. Lots of questions there; I'm not sure I've got all of them. Let me start backwards with your easier ones. The number of employees directly employed by innovation, we have around 200 employees, and that's all across the globe. That does not include the technical people that we have in supply who are absolutely critical to commercializing our brands, nor the marketing teams that we work with very closely in developing marketing programs. So sometimes I say we have 25,000 employees involved in innovation because it really is a total company effort. But 200 of those would have innovation specifically in their title. That trend has been flattish over the last 5 years, and that's deliberate. We did up-weight our efforts 7 years ago when we made a significant step change. And as I mentioned before, what we tend to do is to redeploy our resources so that we're always force-ranking our priorities to go after the largest growth opportunities that we see. That's not imposed on me in any way. That's just what I think is right. I do work with the M&A team. The perspective I have in my role is very broad. My goal is not to build innovation. My goal is to grow Diageo. So I'm in frequent conversations. Are we going to grow this with an existing brand? Are we going to acquire? Or are we going to create something new? So that would be an ongoing conversation with our M&A team. Another conversation I'd be having is when we're looking at a potential acquisition, they'd be asking me what do you think innovation potential is in this company, and that gets built into the business case. So in working backwards, I think I've missed your first question. Can I get that again, please?

Alicia Forry - Canaccord Genuity, Research Division

Sure, sure. I was asking about how you determine which innovation ideas move forward to launch stage. Do you have preset, rigorous criteria that must be met? And if so, could you give us some sense of what those might be? Or is it really quite flexible and depends on the situation at hand?

Syl Saller

Yes. In understanding the relatively lower scale of our innovation agenda relative to packaged goods where they might be changing a flavor, a format, a size at quite a prolific rate, we have no need for kind of a one-size-fits-all approach to our innovation hurdle rates. So it is tailored for each and every project. But there are very rigorous criteria in what we call a Gate 5, what you might call a business case. And in every one of those, we would have a 5-year revenue projection that we would need to hit. We would have a cost-of-goods target that is set out at the beginning of the project. We would have investment rates. We would have key performance indicators, KPIs for distribution builds. So those business cases are very rigorous and they are bespoke for each launch, and we measure quite rigorously how we're meeting those as we go and as we get into the launch. And as I've said before, that's not with an eye to say a yes or no, is it working or is it not. But are we on track? If we are on track, great. If we're not on track, how do we rapidly respond and adjust in-market?

Operator

Our next question comes from the line of Thomas Paulson from Cornerstone.

Thomas M. Paulson - Cornerstone Capital Management, Inc.

I had 3 questions and I'll -- one on innovation, one on bourbon and one on gin. And just taking them one at a time, you had noted that about half of your organic growth over the past 5 years has come from innovation. Do you have any sense for what it is for the industry in total?

Syl Saller

I don't, actually, and I think it would be interesting for you to ask various people in the industry how they measure it, what their answer is. I can see -- what I look for when I'm out in market is what do I think good innovation is. And I think, for example, what our partners in Moët Hennessy are doing, is very good, particularly in their champagne area. So I think coming out of this call, it'll be a very interesting question to ask of other industry players.

Thomas M. Paulson - Cornerstone Capital Management, Inc.

And your innovation is any new SKU that's been in existence for 5 years?

Syl Saller

Yes.

Thomas M. Paulson - Cornerstone Capital Management, Inc.

Okay. Second, on bourbon. Bulleit, could you share just where Bulleit is from a market share perspective or relative to any leads like Jack or whatever, and what your additional thoughts are around bourbon as it is more than a one-product category?

Andrew Fennell

Thomas, it's Andy here. I haven't got the Bulleit share number in front of me. It's relatively small. It's growing very rapidly. And indeed, we expect that to continue both in the United States and beyond. And we're excited by American whiskey more broadly. As you'd know, our big play in American whiskey is Crown Royal, which is showing super growth, and we're very pleased with that. So Crown Royal is our big play. Bulleit, Syl mentioned some of the innovations. They're growing very rapidly. We're pleased with that, and we see some further opportunities, too.

Thomas M. Paulson - Cornerstone Capital Management, Inc.

And is small batch a friend or a foe for you?

Andrew Fennell

A small batch is another way of indicating quality. So I think it's good for the industry.

Thomas M. Paulson - Cornerstone Capital Management, Inc.

Okay. And then lastly, on gin, just what's your thoughts around the category and your success there? And to be perfectly blunt, how is it that Hendricks is able to capture the magic in the bottle in that category relative to Diageo?

Andrew Fennell

Yes. Listen, gin is in a good place right now, isn't it? And we're capitalizing on that trend with big brands like Tanqueray and Gordon's. You'll see that the world over. We're very pleased with our performance there. And I have to say, I'm impressed with what Hendricks have done. It's still a relatively small brand, I would hasten to add. But they've done some good marketing, it's a good product. And we've got some great brands and some great products too, which are of significantly greater scale.

Thomas M. Paulson - Cornerstone Capital Management, Inc.

And so would one expect -- for example, I think it was, I don't know, maybe a year ago, you had put some around -- put some marketing and put some muscle behind Tanqueray 10. I don't have the data for that specific SKU, but overall, Tanqueray per NABCA has been in decline. What's your kind of forward view on what you're putting in the market this coming year or in 2013?

Andrew Fennell

Yes. I mean we've got Tanqueray in quite healthy growth now actually as a total brand, and we see the trends that you see. We're very close to them as you'd expect, and you can expect more news from us in that category.

Operator

As we appear to have no further questions, I would turn the conference to you.

Syl Saller

Thank you very much. I really enjoyed that session. The questions were great, and I take real learning from the opportunity to chat people who are external to us, who bring a different perspective. And I think a lot of our approach to innovation is, it is about always learning. We are hugely proud of what we've achieved, but it's always about setting the bar higher, and that's core to driving the momentum we have on our brands now, both in our world-class marketing and in innovation. And I -- and you can absolutely count on that continuing in the future.

Thanks again for taking the time to watch the webcast and dial in. I really enjoyed it. Bye now.

Operator

This now concludes today's conference call. Thank you for attending. You may now disconnect your lines.

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