Alcopop tax forces Diageo rethink

THE ready-to-drink beverages category in Australia remains a growth-free zone due to changing tastes and a 70 per cent rise in tax imposed on the sector by the federal government four years ago.

Diageo Australia, the local offshoot of the global spirits and beer giant that owns beverage brands like Johnnie Walker and Smirnoff, has reported that sales of RTD products, or alcopops, fell by 1 per cent in the first half of 2012-13, after the drinks category had flat-lined for years.

Diageo's local managing director, Tim Salt, said the company would need to innovate to create more interest in the category, offering drinkers new ranges from its popular Bundaberg Rum label, while directing more marketing dollars towards other beverages such as gin and rum.

"We are doing some new RTDs and we are really trying to change the way people perceive RTDs," he said.

A new Bundaberg Rum and soft drink pre-mix product is being tested in the Queensland market. It uses brewed soft drink from a regional supplier.

"It's a test but I think what it does is tap into authenticity."

Mr Salt said Diageo would not resort to price discounting to attract drinkers back to the RTD market, despite many flocking to ciders. The latter is taxed at a much lower level by the federal government, giving it a strong price advantage to pre-mixed spirits.

"The challenge for us is to make sure we have offerings that the consumer wants to buy - short-term price discounting might give you a short-term kicker but that's not the game we are going to play," he said.

"We have to work out how do we get consumers back into our RTDs and get that category growing through authentic products, great tasting products and products that, at whatever price, consumers recognise the value."

A few years ago, Diageo launched a range of pre-mixed spirits packaged in casks, combining quality ingredients like cloudy apple or blood orange with its branded vodka, Smirnoff.

However, that category has also suffered, hit by intense price competition from "me-too" brands trying to grab market share at any price.

There was some good news for Diageo in the first half, as its overall group sales in Australia rose 2 per cent as a renewed push in spirits and premium labels helped drive a 3 per cent sales improvement for the half in spirits.

"The area we have seen a whole lot of growth in the first half was in what we call the 'super premium' area," Mr Salt said. "And that's grown for us around 48 per cent in the first half - we have had fantastic growth."

He said this portfolio included products such as Johnnie Walker Gold and other spirits, which sold for more than $50 a bottle.

In an effort to bolster its premium and super premium earnings, Diageo has also decided to invest further this year in its gin brand Tanqueray as well its premium rum range under the Bundaberg branding.