Allied Domecq, the UK's second largest player, was claiming last week that a 16% rise in turnover supported its strategy to focus heavily on wines. Reporting a year-end trading profit of £610m, up 12%, the figures were in contrast to its larger rival, Diageo, which has reported a 12% dip in turnover.
While Allied Domecq is focusing on getting a return on its heavy investment in wine from the over-30s, Diageo is going all out to corner the youth market, whose taste for Ready To Drink (RTD) spirits made its Smirnoff Ice an overnight hit.
Buoyed by this success, Diageo, which spends a massive $1bn a year on marketing and advertising, is now working to extend its reach with a second wave of RTD launches. It is also planning to split this youth audience into niche markets by factors such as gender and interests.
Diageo's quest to reach this younger generation has gone so far as a £1m investment to set up text-marketing specialist Nightfly, which sends out offers and promotions to students and 20-somethings who are too busy going out to notice television advertising.
Diageo has also launched Translucis, targeting selected pubs and clubs with plasma screens that receive streams of ads by satellite.
Graham Sumeray, managing director of Diageo New Ventures, the arm behind the moves, claims that Translucis hits a million 'eyeballs' each week, making it "more effective than the cinema".
But Allied Domecq is not blind to the lure of the young audience, and is using Translucis for the first time this Christmas to promote its Tia Maria and Malibu brands.
"We'll be using different versions of our television ads to make sure we're not just offering the same experience for people," says marketing director Cathryn Sleight.
"Text marketing is another area we'll be pushing for some of these brands, using SMS to let people know where they can go to try the brands."
Alongside this, however, Allied Domecq is clearly focusing on more mature wine drinkers, who are likely to have passed the 30-year milestone.
According to Loraine McKinnon, managing director of Allied Domecq Wine UK, the sector is appealing because it shows strong growth, but has yet to be colonised by the dominant brands associated with spirits.
"Wine is showing growth of around 6% a year, far better than beer," says McKinnon. "And as people start to discover wines their palette starts to mature and they look for better quality. That's why we're entirely focused on the £5 bottle-plus market."
This accounts for the top 10% of the UK market. In contrast, the average price of a bottle in the UK is around £3.70. "We're not so interested in that price point, because wine is notorious for small margins, so at that level it's very hard to make it worth our while," she says.
The company was formed after Allied Domecq bought heavily into New World wine through the purchase of Montana Wines last year, but then decided to keep the acquisition an independent, specialist company.
The wine market's lack of big brands requires an expert team to try to bring value from an overcrowded market place. Indeed, the latest research into the wine on-licence trade from ACNielsen, reveals the UK's leading wine brand is only available in 23% of outlets and the second most popular brand in just 10%.
According to McKinnon this is what prevents the company from carrying out much marketing or advertising, apart from attending the Good Food and Spirit of Christmas Shows. But with rival wine specialists launching higher profile marketing campaigns - such as Jacob's Creek's sponsorship of C4's Friends - she admits a lack of marketing spend could see Allied Domecq lose out.
"The margins aren't there to justify major advertising or marketing campaigns," she says. "There is a risk other brands could spend a lot and become very strong, but they're largely operating at a price point below us, which is just too competitive."
Growing wine brands
This year the only two major movers in ACNielsen's off-trade Top 100 drinks chart were wines. Blossom Hill, owned by rival Diageo, doubled in sales to reach 16th position, while Rosemount increased 50% year on year to make it to the 19th slot.
It means that, for the first time, six wine brands are in the country's off-trade Top 20 which, according to the researchers, "would have been unthinkable just a few years ago". In particular, they describe the growth in New World wines as "the most spectacular long-term development in the drinks market in recent years".
The same survey shows that the largest overall impact on the Top 100 has been RTDs, dominated by Bacardi Breezer and Diageo-owned Smirnoff Ice and Archers Aqua.
But since the figures were compiled, Diageo has launched a second wave of RTDs. As well as acting as line extensions, these latest offerings - Smirnoff Black Ice and Gordon's Edge - will test whether Diageo can not only reach young drinkers, but also further define age groups and even separately target genders.
"With Smirnoff Black Ice, we've gone for a stronger, more masculine taste so we can make it predominantly a man's drink," explains Philip Gladman, marketing director for Smirnoff and Archers at Diageo. "That would mean Smirnoff Ice would be more for women, as Archers Aqua tends to be. And as Archers Aqua and, to a lesser extent, Smirnoff Ice has a footprint of 18- to 25-year-olds, we've also introduced Gordon's Edge, designed more for the 25- to 35-year-old market."
The Gordon's brand was something of a challenge and Gladman says the whole gin market needed a shake-up. "It was seen as an old person's drink, so we worked on a new bottle for Gordon's and a big ad campaign, and then launched Gordon's Edge, which will reinforce the main brand."
Gladman claims sales are "up to expectation" for all the launches but will not be drawn on specifics.
Diageo's RTDs are being heavily promoted through ads on Translucis and promotions through Nightfly. But Andy Bryce, sales and marketing director at drinks consultants Canadean, warns that impressive though these ventures are, such new technology could easily be over-hyped - after all, most people are pretty sure what they're going to order before they reach the bar.
Allied Domecq's Sleight disagrees. "Text marketing has a good response rate, so long as you limit how often you text people and make sure it's relevant information they can benefit from," she says.
Allied Domecq has not been launching RTDs to counter Diageo's new lines, although Stolichnaya Citrona and Sauza Diablo, vodka and tequila RTDs launched in the US in partnership with Miller Brewing, are being closely monitored to see if sales warrant a launch in Europe.
All this underlines the widely held view, says Nigel Popham of stockbroker Teather & Greenwood, that Diageo is chasing youth and Allied Domecq taste.
"Diageo is obviously trying to hook drinkers in earlier and get them used to its brands," he says. "It's an attractive market: younger drinkers are out a lot more and they drink a lot more, but I think the jury is still out on RTDs because they need a strong parent brand to launch them and, outside of vodka, spirit sales are pretty flat, particularly Scotch."
This is borne out by Diageo's failed experience with Captain Morgan Gold.
The £24m flop must have woken it up to the fact that extensions are not a licence to print money.
For Allied Domecq the big challenge is that consumers aren't as loyal to wine as they are to spirits. "It means that Diageo can continue to build scale in its huge distribution capabilities, while Allied Domecq is left operating on a smaller scale, concentrating on pushing its best-known brands. I think it shows the gap is far too big now for Allied Domecq to reach Diageo," says Popham.
"Diageo looks set to continue benefiting from its first-mover advantage in alcopops," adds Tim Green from Brewin Dolphin Securities. "This has given it a dominant market share, making life tougher for new entrants such as Allied Domecq, which is definitely in catch-up mode."
One strategy for Allied Domecq is licensing. Chief marketing officer Kim Manley recently revealed its most advanced plan is to use the Courvoisier name on clothing and luggage as he attempts to follow in the trail blazed by Dunhill. Another idea is to offer long-haul holidays under the Malibu brand.
But Diageo already leverages its brands along similar lines. "In the US we offer holidays to Ireland, themed around Guinness, and we have a Guinness golf competition," says Sumeray.
"Another promising area is interactive gaming and pub quizzes. We're not into gambling per se, but with the widespread availability of Java phones we're looking into how we could get people in different pubs and clubs around the world all competing with one another at the same time."
All this adds up to what looks more and more like an unassailable lead for Diageo.
"Diageo has been successful because it has excellent access to the market," argues Canadean's Bryce. "That's the reason Smirnoff Ice has been so phenomenal, another company could have had the same drink but not done as well with it. It's underlined how important it is to speak directly to the youth market and it's taken a truly innovative lead that puts it well ahead."
1998 1999 2000 2001 2002
pounds pounds pounds pounds pounds
Turnover 12.02bn 11.79bn 11.87bn 12.82bn 11.28bn
Trading profit 1.94bn 1.90bn 1.98bn 2.12bn 2.11bn
FINANCIALS: ALLIED DOMECQ
pounds pounds pounds pounds pounds
1998 1999 2000 2001 2002
Turnover 4.3bn 4.1bn 2.62bn 2.87bn 3.33bn
Trading profit 721m 671m 500m 590m 610m
TOP TEN DRINKS (OFF-TRADE)
Rnk Brand Manufacturer 2000 2001 %
(pounds m) (pounds m) change
1 Stella Artois Interbrew 302.99 337.29 11.3%
2 Carling Coors 161.21 188.34 16.8%
3 Foster's Scottish Courage 97.77 117.66 20.3%
4 Budweiser Anheuser-Busch 104.72 117.00 11.7%
5 Bells 8 yr Diageo 113.29 112.03 -1.1%
6 E&J Gallo E&J Gallo Winery 91.57 106.02 15.8%
7 Jacob's Creek Pernod-Ricard 86.59 100.46 16.0%
8 Smirnoff Red Label Diageo 93.14 99.55 6.9%
9 The Famous Grouse Highland Distillers 88.00 93.13 5.8%
10 Bacardi Breezer Bacardi Martini 70.32 80.45 14.4%
Source: AC Nielsen
WHO WINS WHICH SECTOR?
Diageo has several world number ones - liqueur, Baileys; tequila, Cuervo; gin, Gordon's and whisky, Johnnie Walker (Diageo's Bell's is the UK's top seller, while its J&B Scotch is first in Europe).
Allied Domecq's Ballentine's is the first or second Scotch brand in 18 European markets (Teacher's is number three in the UK). Sauza is the second-largest tequila in the world, as is Kahlua in liqueurs and Courvoisier in brandy, but only in the UK and US. Allied Domecq claims Beefeater is the world's leading imported gin.
Ready to drink
Estimates suggest Diageo's RTD line-up adds up to £800m in annual sales. Although Smirnoff Black Ice has only just been added, many analysts are already referring to the family as the largest RTD brand in the UK. The company had a scare in the US where the rum-based Captain Morgan Gold lost some £24m.
Very little for Allied Domecq in the UK outside of Kahlua-based RTDs that have been available for a few years. Stolichnaya Citrona and Sauza Diablo RTDs were launched in the US this summer with Miller Brewing Company.
Diageo's wine star is Blossom Hill, which has doubled off-trade sales year on year. It also lays claim to France's biggest wine export brand, Piat d'Or, as well as Barton & Guestier and Beaulieu Vineyard.
Allied Domecq Wine UK focuses heavily on New World wines which, like most of the sector, cannot claim to be world conquering. They include Clos Du Bois, Callaway and Montana Wines and Mumm and Perrier-Jouet champagne. Harvey's Bristol Cream remains the world's best-selling sherry, while Cockburn's port is the UK's top brand.
TIMELINE - DIAGEO
1759: Arthur Guinness opens brewery in Dublin.
1935: Maxell Joseph launches hotel business that later becomes Grand
1997: Grand Met and Guinness merge to form Diageo.
1999: Smirnoff Ice is launched in the UK and within a couple of years
starts to make as much money as its mother brand.
2000: Diageo and Pernod-Ricard buy Canadian wine and spirits giant
Diageo is forced to sell Malibu to Allied Domecq, but picks up Captain
Morgan rum and Crown Royal Canadian whisky.
2002: Sells Burger King so it can concentrate on its core business of
Commitment to RTDs underlined with Smirnoff Black Ice and Gordon's Edge.
TIMELINE - ALLIED DOMECQ
1961: Tetley Walker, Ind Coope and Ansell's merge to form Allied
Brewers. Buys J Lyons ice cream firm in 1978, becoming Allied Lyons in
1994: Allied Lyons buys Spanish spirits firm Pedro Domecq; becomes
1998: Sells its half share in Carlsberg-Tetley so it can concentrate on
wines and spirits.
1999: Sells its pub chain to Punch Taverns for £2.75bn to become
the world's second largest drinks and food group investing heavily in
2000: Buys Mumm and Perrier-Jouet champagne houses.
2001: Series of wine acquisitions includes Montana Wines, which forms
core of Allied Domecq Wine UK.