Diageo plc - Special Call

Oct.27.11 | About: Diageo plc (DEO)

Diageo plc (NYSE:DEO)

October 27, 2011 8:00 am ET

Executives

Sarah Paul -

Andrew Morgan - President of Diageo Europe

Guy Escolme -

Analysts

Nicolas Ceron - Societe Generale Cross Asset Research

Melissa Earlam - UBS Investment Bank, Research Division

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

PJ Davies

Edward Mundy - Nomura Securities Co. Ltd., Research Division

James Edwardes Jones - RBS Research

Nico Lambrechts - BofA Merrill Lynch, Research Division

Olivier Delahousse - Natixis S.A., Research Division

Jamie Isenwater - Deutsche Bank AG, Research Division

Mitch Collett - Goldman Sachs Group Inc., Research Division

Andrew Morgan

[Audio Gap]

webcast some time earlier today. And I'm actually here with Guy, our Category Director for Whisky, who you will have seen on the video earlier. And without further ado, I think I'm assuming you've seen that. We'll go straight into questions. So operator, perhaps you'd explain how the questioning process works.

Question-and-Answer Session

Operator

[Operator Instructions] There appears to be no questions at present.

Andrew Morgan

What I'll do while, I think, we're waiting for questions to come through, as I'm sure they will, is actually have one question here received by e-mail already from Gregory Jette at Oddo Securities.

Gregory asks about what I described on the video this morning, the fast Europe -- faster-growing European markets of Russia and Eastern Europe as being fully resourced, developing markets. Does this mean, he says, that these countries are still vertically organized, i.e. with dedicated HR and finance, et cetera?

And the answer to that is absolutely yes. Indeed, what we've tried to do with our large emerging markets is to resource them even more fully and, if you like, independently than they were before. So there is no regional structure supporting these markets. They're fully resourced in the country, the idea being that we have really great experienced individuals able to fully understand local customer and consumer needs in the territory itself.

So in contrast to what we've done now with Western Europe, where we've got much of the functional resource at a Western Europe level rather than a country level, in Russia, Eastern Europe and indeed in Turkey, we're moving in the other direction and making them better resourced locally and more independent if you like. Gregory, I hope that answers that question for you. I'm not sure operator if we've yet got any questions coming through on the system.

Operator

There are no questions at present. [Operator Instructions].

Andrew Morgan

Operator, it looks like we may have a technical problem. Mitch Collett from Goldman Sachs is trying to ask a question. Could you please open up his line for us?

Operator

Nick Jones, your line is open.

Sarah Paul

Mitch Collett.

Andrew Morgan

It's Mitch Collett from Goldman Sachs.

Operator

Mitch Collett, your line is open.

Mitch Collett - Goldman Sachs Group Inc., Research Division

I'm sure I won't be the only one who wants to ask a question, so it must be a technical issue. But I just wanted to ask Guy about the layer of category managers who have been removed. What do those people essentially do now within the organization? And secondly, how is he finding it, spreading himself as it sounds like over a wider area, or I guess having removed the layer, does he find it easy enough to be able to influence the category as he would want to in order to drive sales growth?

Guy Escolme

Yes, Mitch. Effectively, we have, as you say, removed a layer. As we were organized before, we had a hub structure in Western Europe, and we had 5 hubs. We've now, of course, gone through a single market structure. So the approach is a very different one. I would want to emphasize that actually we did in fact trial a similar approach in Northern Europe where we were working across 9 different countries and really tried to understand whether at a category and as a brand level, we were going to be able to activate successfully our brands across multiple countries. And our experience in that trial in Northern Europe was a very positive one. We found activating many of our brands such as Johnnie Walker, Captain Morgan, Smirnoff, et cetera. That with strong consumer insight, finding common groups of consumers across Northern Europe, we were able to get large-scaled campaigns away across all of those countries in a way that was both very effective and also quite efficient from our standpoint. So it certainly gave us the confidence to move forward and apply that model across Western Europe.

Andrew Morgan

So Mitch, this is Andrew. Essentially now, we still have category directors, but they're at a Western European level rather than a hub or country level. The other thing to note is that they are located remotely. So these people sit and their teams sit all around Europe, but they're orchestrated and organized, if you like, and their reporting line into a Western European head. And in this case, in Guy's case for Whisky, he's based in London.

Mitch Collett - Goldman Sachs Group Inc., Research Division

And the layer that's being removed, are those people essentially being redeployed elsewhere in the Western European business?

Guy Escolme

Yes, that would be correct, Mitch. What we've done [indiscernible] in my structure. So I manage the Whisky category. I have a brand Director for Johnnie Walker who sits in Greece, one director for J&B who sits in Spain and one who's looking after Bushmills in Belgium and our malt in Turkey is run from someone sitting in Paris. So we redeployed these individuals, but as you've identified, they are now working across the total Western European market, whereas before, they would have worked in a hub. Example of a hub being for instance Great Britain, Ireland, Northern Europe, Southern Europe, et cetera.

Mitch Collett - Goldman Sachs Group Inc., Research Division

Okay. And then I guess while I still got the line open, a couple of questions for Andrew. You mentioned that you now have a reserve brand sales team. And does that mean there wasn't a group of people pushing specifically the reserve brands before in Europe? And then secondly, if you could maybe comment on inventory levels at present as we head into the Christmas trading season.

Andrew Morgan

Yes, okay. Mitch, on reserve, we have had for several years now dedicated salespeople in each country on the reserve brand portfolio. Difference now is that we've moved the reporting line to a Western Europe reserve head. The clear conclusion that I reached was that this is a rather different business in many respects. It benefits from our scale in terms of our ability to roll out growth drivers and best practice globally, but there's a different set of outlets. There's a rather different style and character to this business that we feel now is benefited by having a dedicated team with a hard line reporting into the Western European level. And so far so good. We had a very good first quarter on the reserve business.

Mitch Collett - Goldman Sachs Group Inc., Research Division

Are there any other subsets of brands that have a dedicated sales team in Western Europe or the other people have sort of [indiscernible]?

Andrew Morgan

Yes, outside of GB and Ireland, we have a dedicated organization for beer because what we found was that beer in continental Europe tends to be, for us, pretty low on the materiality list for our individual country organizations. And so when we -- if we pull those people out and have them report at a European level, they are more expert in the growth drivers we need for our beer business. And in fact, the beer business in those markets gets more time and more focus. So that's probably the only other example.

Mitch Collett - Goldman Sachs Group Inc., Research Division

Okay. And the question on inventories?

Andrew Morgan

Yes, absolutely. I mean, the key area here to talk about, I think, is Spain and Greece where we've had fairly significant movements over the last couple of years. In -- let me talk a bit about Spain first. We've had a good first quarter in Spain relative to last year, and that's because there was a de-stock in the Spanish wholesale trade this time last year. And we've not suffered from that de-stock this year. That will reverse out in Q2 because what actually happened last year is that you had the normal seasonal kind of stock up in the Spanish market in the Christmas quarter, if you like, and we're not expecting to see that this year. So there will be a reverse of the benefit that we've got in Q1, in Spain in Q2. Greece, I mean, there's been a gradual de-stock in the wholesale channel over the last year, I would say, and we -- our plan assumes that, that will continue. If you think about what has been announced overnight and the implications for the Greek banks, there is not going to be any credit available in the Greek market. And so we certainly would expect stocks in the wholesale trade to continue to reduce for the rest of this financial year I would say. Elsewhere, there are no particularly big movements. And the only other sort of one-off here is in GB where the grocery channel interestingly has been holding one of the highest stocks in Q1 than it did last year. And so that's overstated our sales a little bit in Q1. But that, again, we expect to reverse out in Q2.

Sarah Paul

Hello, everybody. We have got -- we think the phones have been sorted. So if you'd like to have another attempt at registering your call, then please do so. Alternatively, please e-mail me your questions. I'm sitting in the room with Andrew here. So if you'd e-mail sarah.paul@diageo.com, and I will forward your questions on. Oh, we've got lots of questions that have suddenly popped up. So, operator, could you open up the line for Melissa Earlam please, from UBS.

Operator

Melissa Earlam, your line is open.

Melissa Earlam - UBS Investment Bank, Research Division

Sarah and Andrew, it's Melissa from UBS. Three questions, please. Firstly, is it fair to assume that you'll deliver positive operational leverage at the EBIT line for this year, fiscal '12? Then on your presentation, you talked about the measures you were taking to drive gross margin improvement. What kind of timeframe do you think they might kind of deliver that goal over? And then the third question was, are you seeing any pricing opportunities at all in your region?

Andrew Morgan

Good. Okay. Operating leverage, that's certainly the goal. We suffered, I guess, from following the kind of structural headwinds in the business over the last couple of years, so negative channel mix, our more profitable geographies declining in places like Greece and Spain and greater sort of discounting pressure from some of the customer base. But we are, I guess, now doubly determined to arrest that decline, and we've got a number of initiatives in place to do just that. So part of that will be about promotional strategy, where we'll be looking to have a brand's -- a smaller proportion of our volume on promotion throughout the year. And indeed, in some markets, we'll be looking for less depth for promotion as well. In terms of the mix of our business, we think we can get back to premiumizing our product mix. And one of the ways we're looking to do that is through innovation of higher margin entries. And then of course, we've gotten some real efficiencies from our real [ph] and new operating models. So the obvious one in terms of taking cost out to the overhead line. But also we've got real efficiencies in areas like marketing spend. So when you do things at the Western European level, you can buy more efficiently. We think we can spend more efficiently as well in terms of more consistently spending on stuff that works. And we've been doing quite a lot of quite sophisticated work around identifying where we get the best ROI on our marketing investment, plus we can talk about that a little bit later on. I'll get Guy to touch on that as well. So yes absolutely, the aim in the financial year will be to deliver some gearing between our NSV line and the operating profit line. And I'm hoping that we can get somewhere near that in the half as well. That hopefully answers your leverage question, Melissa. In terms of margin improvement, I think I've answered that as well.

Melissa Earlam - UBS Investment Bank, Research Division

Sorry, just to clarify. On the gross margin leverage, is that a more of a kind of 3-year program, or do you think that can already be delivered in 2012 fiscal as well?

Andrew Morgan

Getting the business back into growth in general, at the sales line?

Melissa Earlam - UBS Investment Bank, Research Division

The gross margin leverage.

Andrew Morgan

Oh, gross margin. Well, some of the levers that I referred to a minute ago were -- are obviously going to come through at the gross margin level. So that certainly -- yes, we're looking to, let's put it this way. We are looking to stop the decline in this financial year. As you know, we had a decline last year in our gross margin percentage. We're looking to stop that decline within this financial year, yes. It's probably one of the tougher challenges we face quite frankly because of those headwinds. But we've got a lot of initiatives in place, and it is a big priority for us this year. On pricing, Melissa, yes, selectively, we are getting some pricing around the track. A lot of that will come through in the February sort of timeframe. And it tends to be in the region of 2% to 3% and with a sort of net effect from that where we do get the pricing of around 2% as some of it does get dealt back. So yes, there are territories where we're getting some price. And again, it's part of what's going to contribute to that margin improvement.

Operator

We will now take our next question from Jamie Isenwater from Deutsche Bank.

Jamie Isenwater - Deutsche Bank AG, Research Division

Andrew, 3 questions please. Firstly, I know it's very early days in terms of the customer collaborations and some of those. Just wondering if you could give us your thoughts on how it started and whether you've had any sort of surprises as to reactions from your customers? Second question, just following on from your last comments about A&P. I was just wondering if you can give us a percentage that is nonworking A&P spend? And then lastly, just a clarification. I think I heard in the webcast that certain challenged countries, as you described them, are to prioritize margins and profits exclusively and won't get remunerated on sales growth. Did I hear that right?

Andrew Morgan

Okay. Let me cover that one off straight away. No, not quite right, and I hope that didn't mislead. What we've done is flex the proportion of bonus, which is on sales and on profit. And so what you get is a different proportion for markets where we're going to prioritize profit over sales to the ones which are higher growth and more about top line growth. So nowhere is sales -- either sales or profit not remunerated at all. It's just a proportion that varies. On the customer collaboration center, yes, we've had a really great start. We've had about -- last count, about 20 customers spend time with us in the center during this first month. That includes people like Tesco, Carrefour, Asda, Metro, so all the big guys. And it's been fantastic. I mean, we're generating a lot of shopper insights. I think probably the sort of aggregate reaction was probably summed up by one of them. I won't tell you which one who said, "Well, this will definitely give you a big edge in terms of our collaboration with you compared to your competitors." And that's very much what we're trying to do here is generate stuff that excites shoppers but also gives us an edge with our biggest customers. So yes, so far so good. It looks like a good investment. On nonworking A&P, I mean, Guy can add to what I say. I don't know what the total add-up of that would be across Europe. But what I do know is we've managed to identify about, depending on the territory, 10% to 15% of our spend that we feel we can reallocate more effectively over the next 12 to 18 months. Maybe I should touch a little bit on the piece of work that we've done that's been quite, quite sophisticated. So we've taken all of that, the spend that we can kind of analyze and get our arms around, which is about 70% -- represents about 70% of our NSV in the business. And we've kind of done a full piece of analysis on the effectiveness of that spend. So we've looked at market attractiveness. We've looked at our right to win in each of those markets. So that's look to the scale of our business in each of those territories. The growth in the category, the size of the profit pool, have we got momentum in the business is our route to market advantaged? Then we've used some quite sophisticated econometric modeling with regression analysis that actually identifies which are the pieces of spend that have worked best, that have given us a real return. And that can identify, not only by brand and category and country, but also types of activity which are the types of activity that work best and give us the short- and/or long-term response that we're looking for. And then there's another element, really, which is about the sort of S-curve of our spend in terms of the life cycle of the business or the brand. So spend gives you disproportionate levels of return depending on how much you've spent already or how mature or developing is the category or the brand itself. So you bring all that together and it's given -- it's thrown out for us some very interesting conclusions around where we may have been spending not enough and can get a lot better return if we spend a bit more and where we may have been spending more than is ideal, if you like, in certain areas. And it's meant that we've moved quite a bit of money around looking forward over the second -- for the second half of this year and into the following financial year. And the great thing about the new structure in Western Europe is we can do that quickly. We haven't got -- have a long kind of protracted negotiation with each country. Those investments by and large are now held at the West European level, and we can reallocate and flex where the investment lands very, very quickly. Guy, I don't know if you want to add anything to that?

Guy Escolme

I just think I'll build on a couple of points, Andrew. One of which is there's a huge amount of work going on in the marketing community to ensure that we're going to realize some of the synergies that we're seeing by organizing ourselves at a Western European level. So a good example would be the fact that we're really streamlining our agency roster. We're selecting the best of our agencies. We're going to be employing them at a Western European level. Of course, that will give us a reduction in the amount of creation that we're doing. There won't be as much duplication of work. And I suppose another area is because of our focus on getting big scale programs away, we're reducing some of the smaller scale activities that made sense when we were organized at a hub or a country level. And now we're probably not as focused on some of those small scale activities because we really need to shift the dial by getting some of the bigger programs away. So net, net, we have some targets that we are shooting for. Andrew would have shared with you 10% to 15% coming out of these effectiveness and efficiency drives. And our intention certainly is to move as much nonworking spend into working spend as possible.

Operator

We will now take our next question from Olivier Delahousse from Natixis.

Olivier Delahousse - Natixis S.A., Research Division

Olivier from Natixis. I have 3 questions. The first question is relating to the new, let's call it, pan-European marketing structure. I was wondering how you plan to balance this program efficiency benefits with the risk of, let's say, hurting your consumer insights because you mentioned the northern, how do you call it, pilot. But I'm sure you'll agree that consumer, let's say, cultural differences might be bigger in this new territory than they are in the Northern Europe aspect. So that's my first question. How do you make sure that you don't lose your cutting edge in terms of consumer insight within that new structure? The second question is, can you provide us some update on potential tax increases? I'm speaking about Spain, the city, also other markets that -- where we might be at risk of being -- duties increase? And my third question is related to Mey Içki in Turkey. Can you provide us an update on the agenda of merging the portfolios than implementing this new distribution first behind your international brand? How is it as of today? Or when will you feel the benefits of this huge distribution powerhouse for the international brand?

Andrew Morgan

Great questions, Olivier. I'm going to ask Guy to talk about consumers. I mean, the only thing I would say is that this structure was set up for us to better address the needs of our consumers, not for us to do it more cheaply. Doing it more cheaply is a side benefit. And so let me explain -- let me have Guy explain to you how that works.

Guy Escolme

Yes, I want to emphasize that certainly, this is not about a one-size-fits-all approach, but we are looking for similarities and common insights across our consumer base. So we're tending to look at groups of consumers, and our skill is in identifying the common groups of consumers and targeting our brands to meet the motivations of these groups. So a good example would be, for instance, the desire for progression among 35-, 45-year-old men is pretty consistent across Europe. And the insight that Johnnie Walker works against certainly taps into that. So where I say the need for convenient, simple, premium mixed drinks at home, you can see that there will be adult consumers with young families that are looking for these, and pre-mixed cans can satisfy this, again, across countries. So we're looking for the real commonalities at this level. And given the scale of Western Europe, we can target some large groups of consumers very effectively. So as I've emphasized, we did trial this model in Northern Europe and had a huge amount of positive success. I would cite the example of Captain Morgan where we got very clear about the insights, our growth driver programs. We were activating against young men -- young men -- young male adults in cities, for, instance, like Amsterdam, Berlin, Stockholm and other cities and found that actually what they were looking for on a Friday night out was pretty similar and that our growth drivers were working effectively across the various countries. So I would want to emphasize, certainly, our goal here is to identify those common insights and make them work across markets, but we are also very sensitive to our needs to ensure that we also are tapping into local shopper insights, et cetera, which is why the model has country teams operating also at a country level.

Andrew Morgan

Yes, the customer and shopper teams are very much very, very local, Olivier. And I think the combination of that with more pan-European consumer insights seems to be very powerful. On tax, yes, we -- obviously, historically, the one that hit us hardest was Greece where tax resulted in about an 80% increase in our shelf price, and that was earlier this calendar year. That's an extreme case. Obviously, in the U.K., we've -- now, it's been established, this escalator, which essentially means the tax will go up by inflation plus 2 points each year. We're not happy with that, and the government is aware of that. But as of now, that's the status. To kind of new news on it, I guess, would be France. We are expecting a tax increase in France in January, and we've recently had announced a tax increase in Turkey. So those are the new news. I mean, generally speaking, as I've said before in this era of the need to reduce country deficits, we have been something of a soft target. And we do a lot to point out that, in many cases, the overall tax take will not improve for finance ministers as a result of the impact on volume elasticity. And in some cases, we get that argument across well and in other cases, it doesn't stick. So I think we'll continue to suffer from governments looking to our sector for ways to get revenue to reduce deficits. And that's something very much built into our planning. Let's put it that way. On Mey, yes, it is very timely you asked that question because we're -- Mey is actually selling Diageo's international brands on the market this week for the first time. We've been going through an integration process there, and we're now effectively operating as one portfolio in the Turkish market with the Raki and other local brands, vodka brands, for instance, of Mey's local business alongside our international branded products. So that's now fully integrated.

Operator

We will take our next question from Nico Lambrechts from Merrill Lynch.

Nico Lambrechts - BofA Merrill Lynch, Research Division

Andrew, Sarah, I've got 3 questions. I apologize if it might sound like 5 questions. But the first one is just on your European organic sales growth potential, Andrew. If one takes into account the historic growth of 0% to 3%, the new structure you put into place and the fact that probably your high-growth markets are forming a bigger proportion of the sales split for Europe, should we expect the future growth potential to be higher than the 0 to minus 3 we saw over the last 5, 6 years? That's the first question. Secondly, is it possible to give us an idea of what proportion of your sales are currently from Greece, Spain and maybe Russia? And thirdly, in terms of your -- the cost savings given by the group of $80 million, what proportion -- over 3 years, what proportion of that will be realized in your region in Europe? I presume a fairly big portion.

Andrew Morgan

Nico, your usual very imprecise questions. Sales growth potential and trend, clearly, we've just reported a plus 6% Q1. Don't expect that to sustain.

Nico Lambrechts - BofA Merrill Lynch, Research Division

Maybe I've got to clarify. The question is in relation to your 6% organic top line growth medium term for the group. So I'm not asking for the next quarter, et cetera. It's more in relation to the contribution to the 6% target that's been set. Sorry, I should have clarified that.

Andrew Morgan

That's all right, Nico. I was just enjoying saying that we grew 6% in Q1.

Nico Lambrechts - BofA Merrill Lynch, Research Division

My apologies. My apologies.

Andrew Morgan

And yes, I mean, the answer is you're right. That's not an indication of the level going forward. Yes, you're also right. We were, last year, a minus 3%. Yes, we're looking to improve that. And then in the medium term and all I will say is I want to get that back into growth. So I would say as a team we will certainly be looking to get that into a growth number, and we'll be looking to improve on the minus 3% in this financial year. But frankly, there is so much uncertainty around you, and you got to read the press this morning for me to say where that's going to come out. We have got some confidence from our staff over the -- from the last 3 or 4 months. I would say underlying that Q1 is a sort of 2% to 3% growth story. But I don't -- there are some very good reasons why that won't sustain through to the half. As I say, in the, what I would call the medium term, following this financial year, we absolutely want to be back in growth at the top line. And I want to deliver some operating profit leverage as I said earlier to Melissa at the bottom line. So that's what I can give you on that at this point.

Nico Lambrechts - BofA Merrill Lynch, Research Division

I missed the comment about the 2% to 3%. Did you say the underlying portion of the first quarter growth was 2% to 3%?

Andrew Morgan

Yes, about that. I can take out -- particularly take out the stock impact from Spain. Yes, that's right. But do not expect that on the half year. There are a number of reasons why that will get diluted in Q2.

Nico Lambrechts - BofA Merrill Lynch, Research Division

But it is a fair assumption to assume that Paul is expecting from you to deliver at least moderate or some growth in order to achieve the medium-term target set for the group?

Andrew Morgan

Over the medium term, absolutely, and that's my goal, is to get this business back into growth. But that's -- as you say, that's got nothing to do with this half year.

Nico Lambrechts - BofA Merrill Lynch, Research Division

For sure. Okay.

Andrew Morgan

Okay. I have not done the math while I was talking about that on Russia, Spain and Greece. Russia and Eastern Europe was 10% of our business at the top line. When we start to consolidate Mey in the organic numbers, that will double the proportion of our business that is coming from emerging markets up to 20%. Perhaps I can get -- and to be quite honest with you, Greece and Spain have moved around so much in the last year. Perhaps I can drop you an e-mail with the exact proportion that, that represents.

Nico Lambrechts - BofA Merrill Lynch, Research Division

Okay. Your share of the cost savings?

Andrew Morgan

Yes, I mean, we're looking at an annualized level, and this is sometimes misleading because what I don't include in any of my numbers is the supply-related cost savings. But it's an annualized level. I won't get all of that in this financial year. We'll be looking to get something like GBP 15 million out of our SG&A in Europe. As I say, that doesn't have any of the supply-related stuff, and I don't really have the numbers here on supply. Perhaps, again, if you want me to get those for you looking forward, we can get something back to you through Sarah.

Nico Lambrechts - BofA Merrill Lynch, Research Division

Okay, great. Maybe if you want to close, what is your feeling, Andrew? We've heard from -- at the first quarter trade update, et cetera, that underlying trends, you're not seeing any inflection point, anything negative? Obviously, markets feel very different when you open the newspapers. Is it still -- after the close of the first quarter, it's still business as usual? You're not seeing a significant deterioration yet?

Andrew Morgan

No, we're not seeing a deterioration. There are -- as I say, don't mix that up with some of the stuff that will reverse out of our numbers between Q1 and Q2 which will happen. But no, in terms of trading, we're not seeing any improvement. But I don't -- we don't have in our plans any significant deterioration. Obviously, we've been waiting to hear what happened around the European announcements today. One of the things I've been trying to do is to build in some mitigation for potential further declines in Greece. I mean, the 2 risks we have there: One is there's no credit in the marketplace; the other is I think the austerity measures in Greece are going to start biting even harder, and so we may see some consumer impact. But generally around Europe, no, we're seeing very good trading in places like Germany and France and Russia. We're kind of just fine in GB and much of the rest of Northern Europe. And then slower -- or lower levels of decline in Spain and Greece than we saw last year. That would be the summary of kind of where it is right now.

Nico Lambrechts - BofA Merrill Lynch, Research Division

And why is this remaining so resilient? I mean, I think the market -- everyone looking at the consumer questions, why is there sort of premium for this affordable luxury staying so resilient?

Andrew Morgan

Well, we can only speculate like you. I mean, I think we have been taking some market share by the way which is -- helps the case. I think on the premium end, our reserve business is performing extremely well. I do think people -- when times are tough, if the cash ring of the affordable luxury is at the right level, i.e. not too high, it's not a $10,000 diamond ring, if the number is right, then I think people are, if anything, even more likely to treat themselves to something special to kind of take their minds off of what a tough week it's been. So getting out there and buying a lovely single malt whisky or a nice bottle of wine on the weekend or at the end of the month I think is something people psychologically are, if anything, more likely to do when times are tougher. And that's certainly reflected in our reserve brand numbers right now.

Operator

We will now take our next question from Edward Mundy from Nomura.

Edward Mundy - Nomura Securities Co. Ltd., Research Division

Andrew, 2 questions from me please. First of all, on Turkey, special consumption tax price of about 23% on Raki. I mean, how does that impact your business plan there? I think you'd previously guided to getting single-digit volumes and double-digit revenues. And are we still very much in line to do that? And secondly, I think on the earlier pre-release presentation, you indicated that you want to be a Top 3 CPG organization. Whereabouts are you now? And what do you need to do to sort of get there? Or what are the key things you need to do to get there?

Andrew Morgan

Yes, great questions. You are spot on with the numbers on the special consumption tax in Turkey. Yes, I mean, it's very early days for us to calculate any impact on that. That's very, very recent. All I will say is 2 things: One is, we've been -- that business has been trading, if anything, slightly ahead of the business case that we used in the acquisition; and the other point I'll make is that we had tax increases in Turkey before, we passed them on to consumers, and the businesses continued to grow. Beyond that, we haven't rerun the numbers to reflect the tax situation just yet. But I'm not expecting that to affect our medium- and long-term projections for the business. On Top 3 CPG, yes, I think this is a business that has been for many years world-class in consumer marketing, and I think right up there with the very best consumer package goods companies in terms of our insights on our consumers in our category. The area historically that we have not been as good as the Procters and the Colgates and the Nestles of this world has been in sophisticated and collaborative customer management. And that's where I've been putting a lot of my efforts over the last 2 years is actually to change that. And we use independent surveys to test what our customers think of us all around Europe in all the countries. And I would say the sort of generic change that we've seen has gone from being -- if you put us amongst all of those blue-chip consumer goods companies, typically, 3 years ago, we tended to be sort of 15th out of 18. We're now up at about fifth or sixth. I mean, in some cases, we're rated top but in aggregate, I would say we're sort of fifth or sixth. So we made a big, big amount of progress in this area. And that's about really understanding our customer's needs, not just telling them what we want for our brands and our business. And it's about building categories together with our customers. And the customer collaboration center that was alluded to earlier is a great example of that where -- which is all about getting the customer to sit down with us for a day or 2 days and really understand what they're trying to achieve, understand their calendar for the year. What is it they're trying to achieve next Easter and how can we contribute to that and be a part of that, et cetera, et cetera. So it's on the sales and customer management side that we still need to improve, but we're making a lot of progress.

Guy Escolme

And I would emphasize that we have the whole business focused on brilliant customer management. So a good example would be last year, we would have written out brand plans in January, February. This year, we're writing them next month. The reason for this big shift and why we're taking our timeline forward is because we want to get on the same cycle as our customers. So whereas, historically, I think there was an expectation that our customers would have possibly had to work with Diageo on our own timelines. I think we are now -- even the consumer marketing community is very conscious of the importance of collaborating with customers, and we're making some major adjustments to the way we planned for our annual activities.

Operator

[Operator Instructions] We will now take our next question from James Edwardes Jones from RBS.

James Edwardes Jones - RBS Research

I only have one question actually which is, it looks as though your European business is going its own way on restructuring compared to the rest of the group. Is that fair? And I'm just wondering what you're doing that the other bits of the business might be able to learn from?

Andrew Morgan

The reality is we are in line with the rest of the business. In that, we are now looking at Western Europe as a market. And so the resourcing of the Western Europe as a market is, if you like, similar to the resourcing of our North American Spirits business or a business in, say, Australia or et cetera, et cetera. So I think it's within that market structure that we've now said that we go actually to something which is pretty similar to our U.S. business. So actually, I don't think it's so very different, which essentially has consumer marketing and much -- and all of the functional expertise in the U.S. at a national level. And if you kind of equate that at a Western European level, et cetera, it is at that Western European level. Clearly, the countries of Europe are very different to the states of the U.S, but that's pretty much the model that we've kind of followed, which is a successful U.S. model in that respect. So and I mean, frankly, the other model for us really here is -- back to great consumer goods companies in Europe, a number of whom, as you will know, actually manage categories in particular, right across Europe rather than country-by-country. And we haven't copied any single one of those models, but we've got kind of a hybrid of many of the models used by the likes of Procter or Kraft and people like that, Coca-Cola. So hopefully that answers your question, Edwardes. It's similar in many ways to what's happening in the U.S. in our business. And I mean, most importantly, we are absolutely convinced this is the right model for our business in Western Europe.

Operator

We will now take our next question from PJ Davies from Pioneer Investment.

PJ Davies

In the last 3 years, I've calculated that you've cut your European marketing spend by 22%, which is about a bit over 3x the rate of your volume decline and about 2.5x the rate of your sales decline. Now you're saying that this new one year of strategy will allow you to cut the number even more. So how much do you expect the marketing spend in absolute terms to fall in the next 3 years?

Andrew Morgan

Yes, that may historically have been the case. But that's -- if we've suggested that is going to continue to fall, then we've given you the wrong idea. I mean, if I even go back to last year, outside of Spain and Greece, we increased our marketing spend by 8% last year. So where we've taken investment out is frankly where we've decided not to spend against consumers that are just not turning up. So it's been a very selective set of choices that we have made here. And the fact that we're getting efficiencies out of our marketing spend this year does not mean that we're going to spend less. Indeed, across total Europe, we expect to spend more this year than last year. So let me be clear, we are going to get more efficient. We're going to make better choices and polarize our investment in a better way, but we will actually still spend more money.

Operator

We will now take our next question from Trevor Stirling from Sanford Bernstein.

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

A lot of questions have been asked already, but there's one thing with Captain Morgan. I heard Guy referring to the decision to push it out being related to realizing the critical mass across Northern Europe. But arguably, Captain Morgan has been such a huge success in the United States for at least 10 years. The question is almost why didn't it happen sooner? And what's different now that has actually prompted you to push the button of Captain Morgan at this stage?

Guy Escolme

Trevor, it's a great question. And I think one thing we haven't referenced as we talked about this new structure has been the agility and speed of decision-making that it's going to give us. And Andrew mentioned some of the econometric modeling that we've been doing where we are able to see either at a geographic level or a brand level where there are growth opportunities. And frankly, I would have argued that Northern Europe did give us that new faster decision-making approach, that agile approach, which caused us over a relatively short period of time to move from what was a successful launch, for instance, in Austria and the Nordics to a massive acceleration in Germany. We have in the last 2 years now launched in the Netherlands and Belgium as well. So I would attribute some of this to the way we are organizing ourselves and certainly have a high level of confidence that you're going to see increased activation and increased growth over the next 12, 24 months as new countries come online.

Andrew Morgan

Trevor, it's a really great question and there's not a lot of excuses here. I think in the past, country teams have tended to say having a guy dressed as a pilot -- a pirate running around our bars and clubs and giving out keys to a large treasure chest is just not going to work in my country. Anyway, it turns out it does everywhere, and it's taken us a little while to, what you might call, insist on rolling out exactly that model across all of our geographies. I would say we have been doing it for a couple of years now. So it does take a couple of years to get some traction. But the answer to your question is, it works absolutely everywhere. I mean, Guy is right to reference the modeling, but you don't need great econometric modeling to recognize an opportunity like Captain Morgan. It's a fantastic success for us everywhere that we roll it out, so well spotted.

Operator

We will now take our next question from Jamie Norman from Societe Generale.

Jamie Norman

Andrew, just would be grateful for clarification on your thoughts on the U.K. this Christmas. If I recall correctly in the wake of the August finals, you were quite cautious about the U.K. this year. But taking on board, inventory levels were quite high in Q1 and your comment a moment ago that so far so good in the U.K. I just wonder if you can flesh out how you really think it could pan out this year? It's been such a stalwart within Europe for the last 5 years. I'd be very grateful for your thoughts.

Andrew Morgan

Yes, Jamie. Yes, I'll get the stock thing out of the way first. We do expect to see some stock reversal in Q2 so that will dilute some underlying growth in our numbers in Q2. That's in the grocery channel. But in terms of trading, obviously, we're hearing an awful lot of noise around price, not specifically for our category but in grocery in general. Just about all of the big banners have talked about price leading up to Q2 now. So we kind of -- clearly, we don't control the end price. That's up to them. We will be having as I've implied, I think, through the conversation here more of a focus on margin than we have perhaps had in the past. So that balance between margin and market share and sales growth will be slightly different from our point of view this year. And so that may choke back a little bit some of the market share performance and sales growth that we've seen in prior years. In terms of overall trading, it really does depend on whether or not the big grocers decide to go for very aggressive price stunting or not. We will not be funding that. But in the past, that has not prevented them from going ahead and going to very aggressive retail price points, which tends to drive a lot of volume. We don't like what it does for our brands. But -- so really it's quite tough. It's not a great answer for you Jamie. It's quite tough to call what the actual trading is going to turn out like this Christmas because it will really depend on the decisions that the grocers take on pricing. The noises that they are making at the moment kind of suggest that it might get quite aggressive.

Operator

[Operator Instructions] We will take our next question from Nicolas Ceron from Societe Generale.

Nicolas Ceron - Societe Generale Cross Asset Research

I was wondering, on your premium brands that you intend to push more, which category do you believe have the best potential to grow in Europe?

Andrew Morgan

Yes, Nicolas. I mean, the sort of backbone of our premium business currently is our single malt whisky business and that we're seeing consistent growth in that. We've recently launched a brand called the Singleton, which is seeing a lot of growth in that malt whisky category. We then really are looking to a portfolio of super deluxe brands around Tanqueray 10, around Johnnie Walker Blue Label, Zacapa, which is a rum brand that's super premium rum brand which is absolutely flying for us in a couple of markets and we intend to roll out across Europe. So it's a portfolio of brands, I wouldn't single out one in particular or one particular category. As they say, that whole sector is seeing faster growth than the mainstream spirit sectors pretty much across Europe. Guy, do you want to add anything?

Guy Escolme

No, other than to say we do treat the premium and super premium brands that we folded in the group that we call our reserve brands almost like a category. And within that, we have good positions in vodka, gin, rum, as you say, Andrew. So I would sort of emphasize that there isn't a strong sort of emphasis on any one brand within there. What we do emphasize is some of the growth drivers that we had. So for instance, we've got a program that will benefit from our new structure in Western Europe. The growth driver is called world-class, which is a trade engagement and bartender persuasion program. We'll now be able to activate that across Western Europe. And ultimately, I think be able to really make some inroads into the bartender community and the trade with that program.

Andrew Morgan

Nicolas, actually being able to go to top bars and hotels and restaurants with a full portfolio of great super premium brands is kind of half the battle here. And we find that as powerful as going along with one particular kind of flagship brand.

Operator

As there are no further questions in the queue, that will conclude today's Q&A session. I would now like to turn the call back to Mr. Andrew Morgan.

Andrew Morgan

Okay. So thanks, everyone. Very good questions as usual, although you had me worried at the beginning when we were getting no questions at all, but that turned out to be a technology hitch. So hopefully you enjoyed the new format with the set piece presentation earlier in the day and that allowed for I think more time for your usual highly relevant questions. So thank you everyone and looking forward to seeing you soon.

Operator

That will conclude today's conference call, ladies and gentlemen. Thank you for your participation. You may now disconnect.

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