Diageo (NYSE:DEO) announced last month that it will begin selling an alcohol-free version of its Guinness brand of beer in Indonesia this year. There is some risk to hurting the brand, but if executed properly the upside more than justifies the move.
Why alcohol-free Guinness in Indonesia?
Indonesia has the largest population of Muslims in the world. Because of religious restrictions in the country, beer sales were restricted in mini markets. While still being sold in supermarkets and restaurants, many Indonesian people choose not to consume alcoholic beverages. Since these restrictions went into effect, sales of Guinness and Diageo's other alcoholic beverages have fallen 40% year-over-year, according to CNBC.
Indonesia is an important market for Diageo, ranking fifth in sales for the beverage giant. The creation of Guinness Zero, its alcohol-free offering, will help ensure that it remains a major market, if not become an even more lucrative one.
Concern about brand damage
My initial concern about this product is that it would damage the image of Guinness, one of Diageo's best-known brands. It's possible that Guinness purists will be put off by the creation of a non-alcoholic version, or that other customers would purchase it by mistake -- though, the latter is certainly a minor concern. While it may have been safer to produce an alcohol-free stout and call it something else, a different color scheme and selling exclusively in Indonesia will reduce customer confusion while allowing the alcohol-free version to benefit from the Guinness brand.
Diageo management has said that it has, "no plans to roll out Guinness Zero beyond Indonesia." It's hard to say whether or not Diageo will stick to this, as the global market for non-alcoholic beer is larger than one might guess. Sales of no-alcohol beer topped 18.7 million barrels last year, according to Esquire. This is larger than the combined sales of the entire U.S. craft beer industry.
Diageo tailors its products based on ingredient availability and local tastes. The use of sorghum in Guinness Foreign Extra Stout in Nigeria serves as a case in point. Sorghum is a species of grass that's an important food source for subsistence farmers in parts of Africa and Asia. Nigeria is one of its largest producers and when barley imports were banned for a few years in the late 1980s and early 1990s brewers began to use sorghum instead. The ban was lifted, but the preference for beer with sorghum remains. The company should continue to follow this blueprint -- be it including sorghum or removing alcohol to cater to local tastes.
Cost is minimal
Diageo's goal is to increase its share of the Indonesian alcohol-free market from 7% to 10%. The company's financing ability and scale allow it to operate in ways that smaller competitors can't. It currently produces Guinness Zero in Ireland and pays a 10% duty along with transportation costs. Diageo has invested around $1 million to launch Guinness Zero and is building a new plant in Bali that will improve the margins for its Indonesian offering by reducing transportation costs and import taxes.
One small piece of the puzzle
This won't be a needle-mover on its own for Diageo, but these kinds of localized products are what make the company special. Diageo has global appeal with brands like Smirnoff, Captain Morgan, and Johnny Walker. And it uses its resources and operational expertise to succeed in local markets with products such as Yeni Raki and Crown Royal.
Guinness Zero is another example of Diageo using this strategy. It should improve sales in Indonesia, and if we get to a point where there is adequate demand from people in Western countries for the taste of Guinness without the effects of alcohol, Diageo management may choose to test it here as well.
I'm happy with the current path the company is on and look forward to holding my shares for a long time.