Measured Thoughts: Rob Malcolm, CMO, Diageo

A dialogue on marketing measurement, featuring Rob Malcolm, president of global marketing, sales, and innovation, Diageo

You may not know Diageo, but you surely know several of its brands. The London-based company is the world’s largest spirits manufacturer, with core brands such as Johnnie Walker, Smirnoff, Bailey's, Guinness, Tanqueray, and Jose Cuervo contributing to Diageo’s $15.7 billion in revenues in 2007. As the company’s president of global marketing, sales, and innovation, Rob Malcolm has the enviable (and challenging) task of overseeing this broad portfolio of brands. Malcolm sat down recently with MarketingNPV managing partner Dave Reibstein to discuss marketing’s role at Diageo and his methodical approach to measuring marketing’s effectiveness. The interview, part of MarketingNPV’s Measured Thoughts webcast series, can be viewed here. An edited version of the transcript follows.

Dave Reibstein: Tell us a little bit about you.

Rob Malcolm: I'm a native of Southern California and I’ve been a marketer and brand builder all my life. I spent the first part of my career at Procter & Gamble, where I learned all of the marketing disciplines that I've since taken with me to Diageo.

Reibstein: How many years did you spend at Procter & Gamble?

Malcolm: 24 years at P&G. A fair number in Cincinnati, and then I was lucky enough to go overseas for seven years. I joined Diageo about eight and a half years ago and have been looking after the marketing, sales, and innovation piece for Diageo for the bulk of that time.

Reibstein: How would you define marketing’s role at Diageo?

Malcolm: Very simply, we think of marketing as the place that drives growth. We use kind of a trite expression: “the engine room of demand creation.” What we’re about is growing our brands by making them more relevant and more powerful [to] consumers.

Reibstein: Would your CFO [Nick Rose] describe the role of marketing in the same way?

Malcolm: I think he would. He’d also hope to say, “And doing so delivers a good return on investment.”

Reibstein: And how about your CEO [Paul Walsh]? How would he view it?

Malcolm: The CEO is a big advocate for marketing and a big advocate for brand building. And I think we have quite a bit of alignment on our executive team of what I'm supposed to be doing for a living.

Reibstein: You just said he's a big advocate for brand building. Brand building and growth are one in the same?

Malcolm: Since the growth comes from the brands, almost by definition building and growing the brands are what builds and grows the top and bottom lines for the company.

Reibstein: And when you talk about growth, are you talking about on the top and bottom line?

Malcolm: Absolutely on the top and bottom line.

Reibstein: So how are you measuring how well marketing is accomplishing that role at Diageo?

Malcolm: There are a number of measures. The first measure is, are we meeting our top- and bottom-line objectives? The second measure is, how strong and successful are the brands? Are they hitting their growth objectives both in top-line growth and bottom-line growth? A third measure is brand health. We have a number of measures that determine whether the brands are healthy. And the last measure is what we do to measure the effectiveness of our brand spend. So there are quite a number of measures.

Reibstein: I'm going to ask you about each one of those. But before we get into that, I’m trying to get a sense of how you go about determining the overall size of your budget.

Malcolm: The marketing budget actually starts later in the process, once we determine the overall financial goals for the company in terms of the top- and bottom-line growth, return on investment, and cash flow. Those are the four big measures that we have. Once we’ve determined what those are, we do an analysis of our portfolio.

Reibstein: Where do the goals come from?

Malcolm: The goals come from the financial goals we have for the company. What kind of growth goals do we want to deliver based on the expectations of our investors? We have aspirations to be one of the top consumer goods companies. We measure ourselves against a peer group of 17 other consumer goods companies. Our goal is to be consistently performing in the top third of those 17 companies. You work backwards from that and say what does history tell you the growth needs to be in order to consistently be in the top third — and that begins to frame the overall goals of the company.

Reibstein: I know all of my students aspire to be in the top half of the class. I know that's really difficult and for you to have achieved that against the premier companies is a great accomplishment. I'm going to take us back to the question about how you think about putting together your budget.

Malcolm: We start with the financial or growth goals, then we begin to look at the portfolio and the makeup of our portfolio of brands. Which mix of brands in which geographies with which level investments are most likely to generate those kinds of top-line growth rates and financial returns? So we look at the allocation of resources on a categories basis, on a brand basis, and importantly on a geography basis.

Reibstein: I can understand the allocation going to brand, going to different geographies. But in terms of the overall size of the budget?

Malcolm: The size of the budget comes from two different dimensions. One is a sense check: What sort of reinvestment rate makes financial sense in our overall model? Historically we've been able to grow and deliver our financial goals with an advertising and promotion budget at somewhere between 15% and 18% of our outside sales. Sometimes it's been a little bit more when we’ve stepped up investment in new geographies; sometimes it’s a little bit less. But around that 15, 16, 17% of what we call “net sales value,” or NSV, is the overall number that works in the Diageo metrics.

But we don't apply that model to how we build up marketing budgets by brand or by country. We look at the growth rates that we need to achieve and what we know about the levels of investment on each brand in a given geography, and we build the marketing budget from bottom up to get to those goals.

Reibstein: So does each brand manager create a budget, which ends up aggregating to your level?

Malcolm: It's the bottom-up and top-down process. The brand manager or brand director (if it's a global brand) will be looking at the overall growth goals and what they know about what it takes to grow and achieve those goals. And they’ll build a budget from the bottom up. Then we’ll add them all up — and everything the brand managers want to do always add up to more than what the company can afford — so then we go through a process of making choices.

Reibstein: And that process?

Malcolm: That process is based on what kind of returns we see being generated by those investments. How believable or credible or how much proof the brand manager or brand director has that the proposed plan will deliver what he or she says it will. What our history and what the competitive environment suggests. All of those come into play.

Reibstein: Can you share with us a little bit about the analytics and other tools you use for trying to assess the budget levels on the brand?

Malcolm: All of our brand planning actually starts with a consumer metric. What change in consumer behavior do we need to achieve to deliver the growth aspiration that we have for a brand? So if we are setting an aspiration of growing the brand 10%, how many consumers need to change how much behavior to generate that growth?

Reibstein: Is that in terms of how many more drinks per consumer or how many more consumers?

Malcolm: It depends upon the brand. If our analytics suggest that [consumers] are participating in our brand for some of the relevant occasions but the best way to grow is to capture more occasions, not necessarily more users, then the metrical drive is to more frequency of consumption — “share of throat,” if you will. If it's a brand that is new, we’re building the franchise and the metrics suggest the strategy will be driven more by acquiring new users. So once we've decided on the consumer driven strategy for each and every brand, we then begin to look at the different marketing tools and how much to invest that can drive that behavior change. That's where the metrics come in.

Reibstein: And is there a standard set of metrics that you use across the entire portfolio of countries and brands?

Malcolm: There's a standard set of processes that we use to calculate the consumer behavior change that we need to get there. And we use a similar research methodology on every one of our brands around the world that segments our consumers based on their level of loyalty to the brand and their level of consumption frequency. And all of our brands use that same scale — we call it the 4 A’s scale from awareness to adoration – which allows us to look across the world through a similar set of metrics that we can use to influence our investment choices.

Reibstein: What I've heard is, there are loyalty levels that you look at, there is the number of consumers, and there’s the degree of maturity of the brand. What else can you add to that?

Malcolm: On every single brand, we’ll say the best way to grow this brand based on our analysis of the loyalty scale will be some change in behavior among some consumers. Then we will go into the experience on the brand and say, what do we know is able to cause that change? Is it advertising? Is it some elements of promotion? Is it some elements of trial? What are the vehicles that we have experience with that have proven effective at beginning to shift that level of behavior? And because we start with metrics — how many consumers need to shift how much behavior — our experience will begin to tell us how much money behind a certain activity is sufficient to achieve that numerical change in behavior.

Reibstein: Do you look retrospectively at the return that you've had from your expenditures?

Malcolm: We do. We start with the strategic framing of what we're trying to accomplish with the tools. Then we go back and look at the return we've gotten in the various investments, whether it be advertising or a digital piece or experiential marketing. We look every year in our annual cycle at what worked last year, what didn't work, which of those elements achieved the consumer shift in behavior that we were looking for through our annual business review cycle.

Reibstein: And are you held accountable to the return?

Malcolm: Absolutely. Every year, I’m measured on the productivity of the investment in marketing. I'm held accountable for the growth levels we've committed to the brand and that's associated with the level of investment. So if we achieve growth levels better than or equal to what we set out with and spent equal to or less than at an overall level, that suggests we’re on track. But then we have more detailed metrics by brand, by country, that go underneath that.

Reibstein: And you hold everybody else down the line accountable in an equal manner?

Malcolm: Absolutely. So my guys who look after the brands globally have a set of “key performance indicators” for their brand every year. And they are not just held accountable, but a good part of their compensation is tied to their delivery of those metrics.

Reibstein: So we've talked about your budgetary process. I want to get a sense of how you try to capture short-term affects vs. trying to think about long-term effects.

Malcolm: We have a very simple tool — and one of the things at Diageo we believe in is that simple tools get used. Complex tools don't get used. So we have a very simple 2x2 matrix where we look at, on one dimension, what the return on investment is based on the return we see in the business. The other dimension is the effect on consumer attitudes or behavior. We call that the “equity measure.” So we evaluate every year on every meaningful brand 80% of the A&P spend against its return on investment and its equity effect in our 2x2 matrix.

And then we begin to look within that and see what that tells us. If we have something that is performing very effectively in brand equity change but is not delivering the financial return on investment, we look at how we can make that more efficient because it’s a good thing. If we look at something that is generating a return on investment, a short-term push, but not building the equity, we look at it and say, “How can we get more equity value? What are the changes to the program?”

Those that are up in the upper right-hand corner — that get return and equity build — we call Stars. Those in the lower left-hand corner, that neither affect equity nor return, are the Dogs. And we affectionately know this analysis as the Dogs and Stars chart.

Reibstein: How do the different growth rates and penetration by country affect how you look at this?

Malcolm: When we do the allocations and set up the corporate strategy, we look at the size of the profitability in each of the geographies, the likely growth rates or decline rates that began to influence where we want to invest or over-invest or where we want to cut back and be more efficient. So the larger profit pool and faster growth rates attract a lot more money than shrinking economies or declining growth rates. Within the overall Diageo strategy, that leads to a very high level of commitment to the U.S. business, which is very profitable, and the premium end of our business, which continues to be very healthy due to the demographics of the Baby Boom generation and the “boomlette.” Equally, in the developing markets — what we call the BICRM markets for Brazil, India, China, Russia, and Mexico — the economies are growing at such a fast rate that premium businesses are developing very quickly. And even though the profit pools may be relatively smaller now, we can see the potential and the growth rates and fast returns.

Reibstein: How do you translate the value of something like brand equity into subsequent financial value?

Malcolm: I'm not sure we've actually been able to predict a financial return in future years based on a shift in brand equity this year. There are a lot of reasons for that, not the least of which is that economies are quite volatile. And therefore we have seen brands that have been phenomenally successful run into an economic disaster, whether it be Korea or Latin America five or six years ago, that we can't just predict. And so I don't have a crystal ball. Maybe at Wharton if you can come up with that crystal-ball analytical tool, we might pick it up and trial it for you.

Reibstein: We can talk. But how does your CFO feel when you say worry not about the return …?

Malcolm: It's not “worry not about the return,” because if you look at it on a macro basis, if we’re achieving or exceeding our top-line growth numbers and hitting or being below our spending numbers, we’re generating an ever-improving rate of return. That's number one. Number two, he will be looking at the gearing of the business. Are we increasing profit margins over time? Are our more valuable brands growing faster than our less valuable brands? Are the A&P investments becoming more efficient over time? So he’ll be looking at those metrics. He’ll also be looking at the 80% of the A&P spend that we analyze every year and track whether we are getting improvements in the yield out of that spend based on our analysis of the spend.

Reibstein: And do you also think about other non-financial metrics? You mentioned loyalty — do you look at the value of a customer?

Malcolm: There are a number of measures that we look at under what I call the brand health measure. First, going back to the loyalty scale, the 4 A’s. Are we moving consumers up the loyalty scale? Are we building more loyalty to our brands over time? We do measure awareness, trial, repurchase, frequency of repurchase, on a quarterly basis. And then we measure some key image attributes that we've learned over time are the most important leading indicators of brand health. And then lastly we’ll be looking at image measures that track the effectiveness of the messaging that we're doing. Are consumers remembering and taking on board the key messages of the brand?

Reibstein: I would normally ask you about share of wallet, but since I heard you refer to it as “share of throat,” let me ask is that a measure that you look at, and what role does it play for you?

Malcolm: I would say “share of throat” is a colloquialism for “share of occasions.” The way that will play out on a given brand is we’ll have a target of where we think that brand is going be most effective in growing, and we've done consumer segmentation work to know the different places. Let’s take a brand like Guinness, which may compete in an affiliation where guys are getting together enjoying each other's company. And we will look at the number of occasions and therefore the number of units of beer that guys will consume in those occasions, and we will measure Guinness's share of those occasions. That's the closest thing we have to what I’d call share of throat.

Reibstein: Do you see the role of research in supporting all these decisions changing over time?

Malcolm: Yes, I do. We have a terrific consumer planning and research group, and they are partnered with our brands in both developing the brand strategies and developing the best practice measures. They do two things: They work on what the best methodologies are, then once we determine the best methodologies and practices for measurement, they're responsible for rolling those out worldwide and ensuring the quality of those measures are adhered to and practiced in every geography.

As time goes on, we look at new potential measures, new leading indicators of brand health through the analysis usually of what's gone on before. And oftentimes when we find a brand that's performing much better than expected, we’ll go back into the data to try and understand why and we might learn some new things. Interestingly, that's where the measure “brand is becoming more popular” came into play. Because we found in beverage alcohol, which is a “social” category, that emerging popularity is a leading indicator for social momentum and growth. And that wasn’t something that we would have had in our tracker four or five years ago.

Reibstein: What sort of analytics are you using to support your analysis?

Malcolm: We do regular research summaries, such as a representative sample of beverage consumers. We'll do quarterly brand-health measures of all of the big brands in all of the markets. We will measure habits and practices. We also use a fair amount of diagnostics in pre-testing some of the activities. In advertising, we're always looking for the next predictive technique to evaluate what consumers' response to an advertising message will be. And we have quite a database now of tests around that begin to tell us when we're effective at a pre-testing stage as well.

Reibstein: So do you use any sort of planned experimental design in testing out various different approaches?

Malcolm: We do a lot of test marketing. We tend to believe that in-market testing in our kinds of categories is more valuable than some of the laboratory testing. There's no substitute for real-life market testing where we will test different variables of the marketing plan, different levels of spending, and look for the response to those different measures.

Reibstein: Do you use marketing-mix models?

Malcolm: We do. Although as you and I have talked on earlier occasions, more of those models are driven by, what’s the consumer behavior and attitude change driving the choices of vehicles, rather than simply modeling and trying some different things. So usually there is a strategic reason why we try different things and then indeed we will experiment with them.

Reibstein: Who within the organization is responsible for measuring the performance of marketing, and then how is that communicated throughout the organization?

Malcolm: The marketers have primary responsibility for evaluating the effectiveness of what they're doing. They’re supported by the planning and research function, which are always the honest brokers because every brand manager naturally has a certain bias. It's also supported by some of our finance people who are in the decision-support function working with our brand people.

I’m a firm believer that brand people need to be not just creative and not just idea-based but also be strongly analytical and strongly metric-based. I started my life as an accounting major before I came into marketing, and I'm very keen on metrics on financial returns and on marketers being full businesspeople, not just creative marketers.

Reibstein: So are there some metrics of performance that are visible, like in a dashboard or in some report that goes out throughout the organization?

Malcolm: Yes, primarily for our big global brands. Our top eight to ten brands account for about 75% of the overall business at Diageo, and we have a dashboard that looks at the financial performance in total and then by a major geography. That dashboard also reports brand health measures for a brand across the major geographies. The last thing the dashboard looks at is tracking how we are doing against the things that we have said we're going to invest in or create to support that growth, which is almost a project dashboard.

Reibstein: What aren’t you doing that you wish you were?

Malcolm: The thing that I yearn for most is to get the quality of data out of what consumers are doing on premises — representing restaurants, bars, nightclubs where consumers are forming most of their early associations with alcoholic beverages brands — as we get from off premises. There isn’t a tracking or measurement mechanism for that. And so we have to rely on word of mouth, observation, after-the-fact research. If I could get hard ongoing data from that, it would be a great Christmas present.