Pass The (Cassava) Beer: Diageo’s Response to Water Scarcity
How Diageo is relying on drought-resistant crops to improve their water efficiency and increase sales in emerging markets
Diageo and Water Stress
Diageo is one of the largest liquor producers in the world and a major producer of beer, with Guinness being its most well known brand in the category. Climate change threatens multiple levels of Diageo’s supply chain, with water scarcity and water efficiency being of key concern [1]. Diageo operates more than 130 manufacturing facilities in 30 countries, and 43 of Diageo’s manufacturing sites in 11 countries are in water stressed regions [2]. Water stress means that in a given region demand for water is greater than supply or poor quality restricts its use. [3] Additionally, harsh climate patterns and droughts have led to a global decrease in crop yields. [4] For example, wheat yields are expected to decrease up to 17% by the 2050s. [5] This should be of concern to Diageo for two primary reasons: they need access to freshwater to brew beverages (90-95% of beer is water) and water is vital for growing raw materials such as barley and wheat.
Diageo takes water scarcity and improving efficiency extremely seriously. Released in 2015, Diageo publicly laid out their strategic approach to water stewardship with goals set for 2020. The main goals include a 50% improvement in water efficiency in direct operations and a plan to return 100% of wastewater from their operations to the environment safely. [6] An additional practice Diageo has undertaken is accounting for the social and environmental costs of water when setting internal prices on water. [7]
Given the increasingly dire threats of water scarcity to its full portfolio, Diageo is focusing on creating more sustainable products for the long term. Beginning in 2012, Diageo started exploring with beer brewed using Cassava [8] and in 2016 Diageo’s Uganda Breweries Limited started production of cassava-based Ngule, which has captured 7% of the beer market in Africa’s Great Lakes region within 5 months. [9] Additionally, in 2015, Diageo purchased United National Breweries beer business in South Africa, which produces Sorghum beer. [10] Cassava is exceptionally drought tolerant [11] and Sorghum is also tolerant to dry conditions and requires minimal land to grow. [12] Diageo’s investment in Cassava and Sorghum-based beers highlights a long term commitment to invest in less expensive and water-reliant raw materials, particularly in emerging markets.
These investments extend further into the community, as Diageo is hoping to encourage more farmers to enter the Cassava growing market. [13] As part of their water stewardship plan, Diageo also intends to help farmers improve and measure their water usage. [14] Because Cassava is already such a significant crop in the region—Cassava production and harvesting represents about 40% of Ghana’s agricultural GDP—this allows for prices of Ngule and other Cassava beers to be significantly lower to consumers and Diageo. [15] The popularity of these lower priced beers is evidenced by the segments growth: in 2016, the emerging beer segment in Kenya grew by 112% while the mainstream beer market declined by 6%. [16]
Remaining accountable and innovative
While a focus on emerging market supply chains is vital, Diageo must also intensely focus on improving water efficiency, waste, and pollution in its existing plants. Between 2007-2015, Diageo reached goals it had set out regarding efficiency and waste, however, it only managed to reduce the pollution of its wastewater by 3.1% against a stated goal of 60%. [17] Given that Diageo has aligned with the UN and publicly declared itself an industry leader in water sustainability, it will become even more vital in the short term that they meet their sustainability goals by 2020 in order to remain a reputable leader. [18]
They should consider investing further in R&D to discover additional drought-tolerant grains for brewing liquor and beer. While more developed markets are unlikely to drink Cassava beer in the short term, it is likely there will be demand for more sustainable liquor and beer in the long term due to price increases. Building a reliance on sustainable liquors and beer in more developed markets can also help offset future financial impact due to raw material price increases from drought-sensitive crops or water shortage issues.
Finally, given the proliferation of early-stage agribusiness startups, Diageo could seek out partners, such as Indigo Agriculture, to create increased-yield crop seeds and help foster partnerships with Diageo’s existing farmers.
Lingering questions
Some lingering questions include: are developed markets willing to adapt their tastes to new liquors brewed from more sustainable crops as prices increase? Additionally, will Diageo prove they are truly all-in on water stewardship by investing heavily in water waste technologies at their most expensive plants?
Thus far Diageo has made significant progress in its commitment to water sustainability, but achieving its 2020 goals and setting even more ambitious goals for the future will be the next test.
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[1] Jane Wardell, “Alcoholic Drink Makers Lead Way on Climate Change Adaption,” Reuters, October 16, 2014, https://www.reuters.com/article/us-climatechange-summit-alcohol/alcoholic-drinks-makers-lead-way-on-climate-change-adaptation-idUSKCN0I52RP20141016, accessed November 2017.
[2] Diageo, Diageo’s Water Blueprint, p. 5, https://www.diageo.com/pr1346/aws/media/3791/diageo_water_blueprint_april_2015.pdf, accessed Noevmber 2017.
[3] European Environment Agency, https://www.eea.europa.eu/themes/water/wise-help-centre/glossary-definitions/water-stress, accessed November 2017.
[4] Toshichika Iizumi and Navin Ramankutty, “How do weather and climate influence cropping area and intensity?” Global Food Security 4, March 2015, http://www.sciencedirect.com/science/article/pii/S2211912414000583, accessed November 2017.
[5] Jerry Knox et al, “Climate Change impacts on crop productivity in Africa and South Asia,” June 20, 2012, http://iopscience.iop.org/article/10.1088/1748-9326/7/3/034032/pdf, accessed November 2017.
[6] Diageo, Diageo’s Water Blueprint, p. 5, https://www.diageo.com/pr1346/aws/media/3791/diageo_water_blueprint_april_2015.pdf, accessed Noevmber 2017.
[7] Attracta Mooney, “Big companies invest billions to secure water supplies,” Financial Times, November 6, 2017 https://www-ft-com.ezp-prod1.hul.harvard.edu/content/19e8c8cc-c091-11e7-b8a3-38a6e068f464, accessed November 2017.
[8] Dominic Walsh, “Ruut and branch: Diageo likes the taste of cassava,” The Times of London, December 28, 2012 https://www.thetimes.co.uk/article/ruut-and-branch-diageo-likes-the-taste-of-cassava-tn3dh5ql2nn, accessed November 2017.
[9] Elias Biryabarema and Duncan Miriri, “Global brewers push local beers to quench African palates,” Reuters, July 16, 2016 http://www.reuters.com/article/us-africa-beer/global-brewers-push-local-beers-to-quench-african-palates-idUSKCN0ZV1PA, accessed November 2017.
[10] Reuters Staff, “Diageo snaps up rest of United National Breweries beer business,” Reuters, April 2, 2015 http://www.reuters.com/article/diageo-ma/diageo-snaps-up-rest-of-united-national-breweries-beer-business-idUSL6N0WZ0KD20150402, accessed November 2017.
[11] Mabrouk A. El-Sharkawy, “Drought-Tolerant Cassava for Africa, Asia, and Latin America,” BioScience, July 1993, http://www.jstor.org/stable/1311903?seq=1#page_scan_tab_contents, accessed November 2017.
[12] “Studying Drought Tolerance in Sorghum,” Joint Genome Institute, September 28, 2015 https://jgi.doe.gov/studying-drought-tolerance-sorghum/, accessed November 2017.
[13] Ben Cooper, “Sustainability in Beer – Part II: Local Sourcing,” Just-Drinks Global News, February 18, 2013 https://search-proquest-com.ezp-prod1.hul.harvard.edu/docview/1289050874/B5A9975650B84F2APQ/3?accountid=11311, accessed November 2017.
[14] Diageo, Diageo’s Water Blueprint, p. 5, https://www.diageo.com/pr1346/aws/media/3791/diageo_water_blueprint_april_2015.pdf, accessed Noevmber 2017.
[15] Dominic Walsh, “Ruut and branch: Diageo likes the taste of cassava,” The Times of London, December 28, 2012 https://www.thetimes.co.uk/article/ruut-and-branch-diageo-likes-the-taste-of-cassava-tn3dh5ql2nn, accessed November 2017.
[16] Bella Genga, “Cheap Beer Boosts Full-Year Profit at Diageo’s Kenyan Unit,” Bloomberg, July 28, 2016, https://www.bloomberg.com/news/articles/2016-07-28/cheap-beer-boosts-full-year-profit-at-diageo-s-kenyan-unit, accessed November 2017.
[17] Kristiana Sherry, “Diageo fails to meet all but one 2015 sustainability target,” The Spirits Business, August 18, 2015, https://www.thespiritsbusiness.com/2015/08/diageo-fails-to-meet-all-but-one-2015-sustainability-target/, accessed November 2017.
[18] Diageo, 2020 Sustainability and Responsibility Targets, https://www.diageo.com/en/in-society/our-role-in-society/2020-sustainability-and-responsibility-targets/, accessed November 2017.
To your first question – I am fairly certain that developing markets will become accustomed to the taste of these new liquors and beers. As the price of water increases with a diminished supply, traditional alcoholic drinks will become more expensive. As these markets tend to be particularly price sensitive due to low levels of disposable income, market forces are likely to ensure increased adoption.
We can observe two examples that illustrate this trend: kretek cigarettes in Indonesia (https://en.wikipedia.org/wiki/Kretek) and alcohol substitute abuse in Russia (https://www.nytimes.com/2016/12/19/world/europe/russia-bath-lotion-deaths.html). Assuming the new alcoholic beverages are less harmful and more tasty than either kretek cigarettes or bath lotion, I deem mass adoption as a consequence of low pricing plausible in most developing markets.
While I agree with the comment above mine on the rate of adoption in developing markets, the question asked about already developed markets, and here is where I am more concerned. In contrast to their counterparts in developing markets, consumers in developed markets are likely less price sensitive and have higher levels of disposable income. Furthermore, they will have access to a myriad of different options when it comes to picking alcoholic beverages, and if they don’t enjoy the taste of these new beers, they will simply switch to another traditional brand that they enjoy.
This article (https://www.ncbi.nlm.nih.gov/pubmed/6390555) from the National Library of Medicine, albeit dated, concludes that demand for beer is relatively price inelastic in the United States, but that the price elasticity for distilled spirits is somewhat greater. Perhaps Diageo can target distilled spirits rather than beer when it comes to producing and marketing more sustainable alcoholic beverages in developed markets.
My sense is that there is chance for Diageo to really embrace change on the water scarcity front. Millenials are an audience that increasingly cares about the causes they are supporting with their dollars, as well as the sustainability practices of brands they know, so Diageo may be able to capitalize on this while reducing its water consumption footprint. Alternative formulations that are less water-reliant are a great step in the right direction here, but the company needs to begin actively advertising that as a source of competitive differentiation. Being a first mover in addressing water scarcity and putting it on the radar of consumers could yield significant brand loyalty and repeat purchases, which would make it well worth the while of any company.