The Famous Grouse. Small Guys Have To Think Big For Long Term Success. IPA Advertising Effectiveness Paper 2006

Transcription

1 The Famous Grouse Small Guys Have To Think Big For Long Term Success IPA Advertising Effectiveness Paper 2006 Authors: Andrew Barnett, Edrington Group Michael Davidson, AMV BBDO Sam Dias, ROI Word Count: 4000 (excluding appendices and figures) 1

2 Case Summary This is the story of a small brand that had to think big to succeed. Trapped in the middle of the whisky market in the UK; with its sector (Blended Scotch) declining while single malts and own label brands experienced strong growth. Trapped in middle as a corporate entity; a small Perthshire company with global ambitions but without the scale of its global competitors. The Famous Grouse had to outperform the market. The solution we came to in collaboration with our agency AMV BBDO was to build a brand-centric advertising platform one that engaged the consumer, made them love the brand and helped The Famous Grouse stand out from the crowd by innovating the category s approach to brand advertising. We invested in our brand equity in the UK while other brands retreated, and having developed a campaign that more than returned on our investment. We opened up the role for brand advertising internationally. This paper will show our course of action provided us additional business value in excess of over 513m in the UK. 2

3 Small Guys Have To Think Big Section One: Section Two: Section Three: Section Four: Section Five: Section Six: Section Seven: What This Paper Will Show Staring Down the Barrel of a Gun Our Flight to Glory Success is Sweet It had to be the Advertising Success in the UK Success Overseas 3

4 Section One: What This Paper Will Show This paper will demonstrate how advertising built the brand over the long term It will show how we overcame the disadvantages of being a relatively small player in a fiercely competitive marketplace to improve our position at home while also expanding overseas. 2. It will show how investing in brand advertising for the long term has strengthened our position in the UK; building share, relative distribution 1 and price premium while also opening up new possibilities overseas. 3. In our home market, we can prove through a combination of financial modelling, market research and econometrics the incremental revenue derived from advertising. 4. In select international markets, we will show how the same campaign has built a strong brand despite facing radically different cultural contexts, providing us additional value 2. 1 The 1998 Famous Grouse IPA Effectiveness Paper focused on the short term effects of our launch advertising. 1 in relation to other brands 2 Additional Value savings from not having to produce local copy and pay local agency fees. 4

5 Section Two: Staring Down the Barrel of a Gun Origins of the Brand The father of The Famous Grouse brand, Matthew Gloag, launched the brand on its unconventional path when he hatched the idea of a house-label blended whisky in the late 1800 s and named it after Scotland s national bird. Modern Day Challenges This paper will look at the effectiveness of advertising activity that ran between Christmas 1996 and the present day in propelling the brand to second place position in the UK. And from Christmas 1997 in Greece, propelling the brand to number 5 and from 2003 in Taiwan, propelling the brand to third position. The UK Situation The Famous Grouse entered 1996 facing a difficult set of circumstances 3 for a number of reasons. (i) Under Pressure We were in a market that was experiencing long-term decline; with a drop in volume of 36% in just 16years (Figure 1), the bulk of our consumers were over 50 (Figure 2) and the number of whisky drinkers as a whole was in decline (Figure 3). 3 As Dyson & Weaver recently demonstrated (Admap; February 2006) two of the factors we faced increase the difficulty of using advertising to build brands. Being in a declining market is harder because it results in lower interest & less attention from consumers. And being in market with older consumers is harder because they are more set in their ways and less likely to notice your advertising message. 5

6 Figure 1: Blended Scotch Whisky Consumption In Long Term Decline Volume, 8.4 Litre cases % decline Source: IWSR Figure 2. Age Profile of Famous Grouse Drinkers in 1996 Number of Famous Grouse Drinkers Share of Grouse Indexed against All Adults Source: TGI Aged under k 42% 74 Aged over k 58% 135 Figure 3: Declining Consumer Franchise Blended Scotch Whisky Number of Blended Scotch Whisky Drinkers Source: TGI k k 6

7 (ii) The Difficult Middle Being Squeezed at Both Ends The marketplace for whiskies had evolved from a single one in the early 1980 s into a highly stratified one by the mid 90 s. Where being in the middle meant you were squeezed: - by the growth of the super premium single malt category - by the highly price competitive private label blends - by whiskies from the North America and Ireland Figure 4. The Difficult Middle Malt 282k Malt 550k Irish & N. American 431k Blended Scotch Whisky 14, 641k Blended Scotch Whisky 9,410k Irish & N. American 923k Own Label 1,693k Source: IWSR Data. Volume (8.4l cases)

8 For the market leader Bell s, the problem was even more acute. Famous Grouse had the advantage of being able to grow its share in the 80 s (Figure 5) through distribution gains something that was much harder for the market leader to achieve. Figure 5. Blended Whiskey Volume Share in UK % Volume Share % 25% 20% 15% 10% 5% 0% Source: IWSR Low Price Own Label Share Bells Share Famous Grouse Share By the mid-90 s our strategy of gaining incremental sales through additional distribution was no longer working. In the 1980s, The Famous Grouse continued to stretch its footprint south from its native Scotland into England and Wales, supported by an increasingly large national Sales and Marketing team. By the mid-90s, The Famous Grouse was enjoying very competitive national distribution coverage but it was clear that future growth would have to come from something other than organic distribution growth Highland Distillers Sales Team member, 1990s 8

9 (iii) Being Squeezed From All Sides Alongside increased competition in the whisky category, white spirits were growing 4 (Figure 6) and enjoyed sustained advertising support (Figure 7) Figure 6. Sales of Vodka and Rum, Volume Sales (litres) Blended Scotch Vodka & Rum Source: IWSR 4 Vodka sales alone increased by 14% between 1980 to 1996, while blended Scotch Whisky sales declined by 36% over the same time period. 9

10 Figure 7. Advertising Investment Prior to 1996 (All Spirits excluding Whisky) Million GBP Source: Nielsen (iv). David fights Goliath Small Brands Have to Think Big The scale of challenge facing Edrington Group (or Highland Distillers, as then) was immense, unlike brands such as Bells we didn t benefit from the financial strength of being part of a large holding company (Figure 8). Figure 8. Turnover in , Turnover in 1996 (Million GBP) 2,000 1, United Distillers Allied Domeq Highland Distillers Source: Edrington Group 10

11 The Challenge we faced was twofold: At home, the challenge was to grow profits having exhausted our existing strategy of share gains through sales force led gains in distribution. The second challenge was to find a low risk way of expanding into new markets in the most cost effective manner possible. 11

12 Section Three: Our Flight to Glory The Fork in the Road Given the enormity of our situation, we could easily have retreated and turned Famous Grouse into a cash cow, as others were doing. Teachers, the number 2 brand in the 1980 s, largely pulled their advertising support and did just that. We took the other fork in the road and invested in a long-term brand strategy. Problem In the declining UK market, we could not possibly hope to see a short term pay back from advertising. We needed a long-term strategy for building business value. Overseas, we needed to efficiently build the brand in markets with much greater growth potential than the UK. Requirement We needed a campaign idea that would: - drive involvement with the brand - support a choice made on brand preference not price - help us stand out in a cluttered market - maintain distribution in the On Trade 5 - build a price premium against competitors in the Off Trade 6 - could travel internationally Strategy The iconic nature of our brand was the source of our inspiration: - Instead of holding a mirror up to the consumer and reflecting every passing fad and cultural difference, we turned to the brand as our source of inspiration. 5 In the On Trade, a declining sector results in fewer brands being listed we wanted to be one of those brands. 6 In the Off Trade where all brands are available, strong brands command a price premium we wanted to be one of those brands. 12

13 Creative Development Story For those unfamiliar with the highlands, it is worth pointing out the grouse is a funny bird; shy and retiring, a bad flier that doesn t like to venture far from home. The Grouse on our label (Figure 9), exhibited an entirely different personality. It is to be found proudly standing on its rock, willing to face the world. It was this Grouse that inspired us as a business and gave us our advertising idea. Figure 9. The Famous Grouse Bottle Label Idea We took the Grouse from our label and turned it into a brand campaign capable of engaging consumers, making them feel affection for the brand and creating stand out at the point of purchase. The tone of the campaign is fundamental to the advertising through it we express the personality of the brand and provide consumers with a strong point of identification. The campaign s use of distinctive music and stark white background has helped drive campaign stand out. 13

14 Media In the UK, we have invested 15.4m in above the line advertising support since 1997 (Figure 10 &11). Bell s - the only other brand of blended whisky to invest significant advertising support ( 23.9m over this time period) outspent us by 55%. Figure 10. Media Spend since 1997; Famous Grouse and Bell's 4,500 4,000 ATL Investment (000's GBP) 3,500 3,000 2,500 2,000 1,500 1, Bells FG Source: Nielsen Figure 11. Media Spend Famous Grouse, Bell s & Teachers in the UK (000 s GBP) Total Indexed FG 2,018 1,681 2,415 1,730 2,111 1,567 1, ,842 15, % Bells 2,283 3,671 3,042 1,381 2,727 4,179 2,924 3, , % Teachers Source: Nielsen 14

15 Stretching Our Wings We launched the Icon campaign in Greece at Christmas time in 1997 and in Taiwan 7 in In both instances the culture and consumers could not be more different from the UK. But with an advertising vehicle that was light on product facts and cultural / consumer based insight we were able to overcome these differences and run the same work. One of the advantages of our brand-centric creative idea was the added efficiency it gave us, in terms of cost savings from reduced production costs and local agency retainer. 7 In Taiwan we launched a blended malt product 8 Media Tables are in the Appendix 15

16 The Work The following stills taken from TV ads demonstrate the Icon campaign s strength our pool of some thirty pieces of print and TV advertising each true to the brand ran in multiple markets. The Famous Grouse personality and bird Icon are central to each and powerfully connects with consumers despite different cultural context. Figure 12. With Water Figure 13. On Ice Figure 14. Best Loved 16

17 Section Four: Success is Sweet Since 1997, we have built value for the Famous Grouse Brand in three ways: 1. Growth in Share - On And Off Trade 2. Increased Distribution Relative to the Competition - On Trade 3. Increased Price Premium - Off Trade In these results, there are a number of recurring themes worth highlighting upfront: The two brands, Famous Grouse and Bell s, with significant advertising investment consistently outperformed those with little or no support. And of the two brands with significant advertising investment, Famous Grouse consistently outperforms Bell s on all measures, despite Bell s out spending us by 55% since Growth in Share - On And Off Trade Famous Grouse has increased its market share steadily over the past decade (Figure 16), even managing to close the gap with Bell s. Figure 16. Blended Whisky Volume Sales in the UK, % 25% Campaign Launch Low Price Own Label Share 20% Bells Share 15% 10% 5% 0% Sector Share % Famous Grouse Share Source: IWSR 17

18 This is a result of share gains in both the on and off trade, as Figure 17 shows. Figure 17. Share Growth for Famous Grouse in On & Off Trade 32.0% 31.0% 30.0% New Campaign 13.0% 12.0% 11.0% On Trade Share 29.0% 28.0% 27.0% 26.0% 10.0% 9.0% 8.0% 7.0% 6.0% Off Trade Share 25.0% On Trade Off trade 5.0% 24.0% Source: Nielsen % 1. Increased Distribution - On Trade Teachers and Grants (brands that took the other fork in the road and largely pulled advertising investment) lost distribution in the On Trade while we maintained ours - boosting our relative advantage (Figure 18). Figure 18. Distribution of Key Brands in the On Trade Bells % FAMOUS GROUSE TEACHERS HIGHLAND CREAM GRANTS WHYTE & MACKAY SPECIAL Source: Nielsen 18

19 The efficiency with which we maintained our distribution versus Bell s is illustrated in the Figure 19 a scatter plot which also shows the strong correlation between advertising investment and the ability of the brand to maintain distribution in this sector. 10.0% Figure 19. Advertising Investment v % Change in On Trade Distribution % Change in Distribution 0.0% -10.0% -20.0% -30.0% -40.0% -50.0% -60.0% Grants Teachers Whyte and Mackay Famous Grouse Advertising Investment m Bells Correlation = 0.95 (Significant) Source: Nielsen, Meal Source: Nielsen 2. Increased Price Premium In The Off Trade The Off Trade is more price sensitive than the On Trade due to its greater price transparency, the presence of more competitive brands and powerful retailers committed to reducing prices. Despite this, since 1997 we have seen an increase in the relative price premium between Famous Grouse and sector as a whole (Figure 20). 19

20 Figure 20. Relative Price Premium for Famous Grouse v Sector in the Off Trade Famous Grouse Price / Sector Price New campaign Source: Nielsen 20

21 Section Five: It had to be Advertising In order to demonstrate advertising was responsible for share growth we need to first explore and then eliminate other possible sources of success 9. We will look at the following possible contributing factors in turn: 1. Price 2. Distribution 3. The Product 4. Packaging 5. Consumer Franchise 1. Ruling Out Price a. In the Off Trade Both Famous Grouse and Bells maintained a healthy price premium over other players in the sector meaning we can safely eliminate it as a causal factor (Figure 21). We have also in Figure 20 are relative price increased. 1.3 Figure 21. Off Trade: Famous Grouse Price Relative to Competitor Brands Famous Grouse Price / Competitor Price Parity Line v Sector Average Price v Bells Price v Teachers Price v Whyte & Mackay Price Source: Nielsen 9 Whilst have an econometric model, we will use inspection methods here. Unfortunately we do not have a consistent and comprehensive data set to inspect from 1997 for both Off Trade and On Trade Sectors. We will use the data we have available. 21

22 Promotions in the Off Trade In fact, there is recent evidence of other brands being more heavily promoted in the Off Trade than Famous Grouse (Figure 22) 10 Figure 22. Aggregate Distribution of Promotions / Aggregate Distribution of Brand 40% 35% 30% 25% 20% 15% Famous Grouse Bells Grants W&M Teachers 10% 5% 0% Source: Nielsen 10 Aggregate Distribution of a brand is defined as the sum of each of SKU s weighted distribution. In this category SKU s are bottles of different sizes (1 litre, 0.75 litre, etc). Aggregate Distribution therefore measures the brand s breadth and depth of distribution. Aggregate Distribution of Promotions is the sum of each SKU s weighted distribution of promotion, and measures the extent of a brand s promotional activity. The ratio of the two measures (Aggregate Distribution of Promotions / Aggregate Distribution), indicates the proportion of a brands product range (or % of front stocks) that is being promoted. We see from Figure 22, having adjusted for distribution differences between brands, that in 2004 and 2005, competitive brands promoted more than Famous Grouse 22

23 . b. Eliminating price in the On Trade As we have discussed previously, price is not as important in the on trade due to a lack of consumer transparency. We only have pricing data back to 1999, but as Figure 23 shows, we have actually grown our price relative to the sector average and can eliminate it as a causal factor of our share growth. Figure 23 On Trade Relative Price (Famous Grouse / Sector) On Trade Famous Grouse Price / Sector Price Indexed 1999= Source: Nielsen 23

24 Ruling out Distribution c. In the Off Trade Prior to 1996/7, distribution gains in the Off Trade helped keep Famous Grouse sales buoyant. However distribution peaked in 1997 and since then there have not been any significant movements for Famous Grouse (Figure 24) 11. Figure 24. Off Trade Distribution fg_dist_weight bells_dist_weight grants_dist_weight wandm_dist_weight ownlabel_dist_weight teachers_dist_agg WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE WE Source: Nielsen 11 We do not have distribution growth back to 1997, but all brands in the off trade had good distribution throughout the time period in question. 24

25 d. In the On Trade Famous Grouse s on trade share increased from 27% in 1996 (pre Icon) to 32% in One may argue that the increase in Famous Grouse sales was inevitable, given the decline in distribution of the unsupported brands. So, to rule this factor out, let us consider Famous Grouse s on trade share divided by its on trade share of distribution 12. Figure 25. Famous Grouse Sector Share / Distribution Share (On Trade) Famous Grouse On Trade: Sector Share / Distribution Share 1.4 Share of On Trade / Share of Distribution (aggregate distribution of all major Brands) New Campaign DJ94 JJ94 DJ95 JJ95 DJ96 JJ96 DJ97 JJ97 DJ98 JJ98 DJ99 JJ99 DJ2000 JJ2000 DJ01 JJ01 DJ02 JJ02 DJ03 JJ03 DJ04 JJ04 DJ05 JJ05 Source: Nielsen The metric (Figure 25) we have created, increases post Icon campaign launch, and carries on increasing. This suggests that Famous Grouse has increased market share faster than the increase in share of distribution. 12 Share of distribution is defined as Famous Grouse Distribution / Sum of the each brand s distribution. Of course technically it is meaningless to define a share of distribution, but the concept we are trying to prove is that Famous Grouse Market share increased at a faster rate that the rise in Famous Grouse s relative distribution advantage. 25

26 2. Ruling Out Packaging Famous Grouse packaging changed in However, this was a minor change - with all the important elements unaltered in fact, the label moved closure to the advertising idea. We have been unable to measure either econometrically or in tracking any noticeable difference that coincided with these minor changes to the packaging at the end of the period under review. 3. Ruling Out Product The product has not changed it has always been made to the same tight specification. 4. Ruling Out Consumer Franchise Early in this paper we have shown the sector was declining (Figure 16), in part due to a loss in the consumer franchise. Figure 26 shows Famous Grouse also suffered a loss in franchise but at a slower rate than the sector 13 Figure 26. Decline in Consumer Franchise, indexed on Blended Whisky Famous Grouse Source: TGI 13 Proving we were not relying on a cohort of customers to support our sales growth. 26

27 Conclusion Having eliminated all other possible causal factors for our success we can safely conclude the Icon Campaign was the responsible for the growth in share in both On and Off Trade. 27

28 28

29 Section Six: Success in the UK 14 We will now build the case to show the Business Value built by advertising using the payback model as shown in Figure 27. Sales (On & Off Trade) Ads Strong Brand Distribution (On Trade) Business Value Price Premium (Off Trade) Figure 27. The Payback Model Furthermore, by benchmarking against Bell s 15 we are able to show the Icon campaign has been critical to our success rather than just the fact we invested in advertising. 1. Proving the Effectiveness of Icon Campaign Figure 28. Contribution of Advertising Sales Ads Strong Brand Distribution Business Value Price Premium 14 The majority of the data available to us is from the UK and therefore the majority of our results sections will focus on that side of the story. But just as we built a campaign in the UK before taking it overseas, we will first build the case for effectiveness in the UK before showing (albeit with much more limited data) how that success was replicated in other markets. 15 Why Bell s? We will benchmark ourselves against Bell s because it is the only other brand with significant TV support. The only difference between the two brands is the copy we ran and the fact they have outspent us by 55% since

30 The Icon campaign was successful at building ad awareness and brand image attributes at launch (Figure 29 & 30). Figure 29. Prompted Ad Awareness (Pre/Post Launch in 96/97) The Famous Grouse Bell's Source: System Three, 1997 Pre Post Figure 30. Impressions of Famous Grouse 50% Famous Grouse 45% Bells 40% 35% 30% 25% 20% 15% 10% 5% 0% Witty Memorable Innovative Unusual Traditional Source: System Three Research UK

31 Changes in tracking company make it impossible to compare data from the launch period with that post 2000, but it is possible to show the positive effects of the Icon campaign working right up to the present time (Figure 31). Figure UK Prompted Advertising Awareness Awareness Bell's The Famous Grouse Source: IPSOS Ipsos Source: Ipsos By comparing Prompted Ad recall per of Media, it is possible to show our advertising efficiency. Figure 32. Advertising Efficiency UK Prompted Advertising Recall Average MEDIA SPEND Advertising Efficiency: Advertising Recall per Media Spend Index FG=100 The Famous Grouse 44% 7 621K 100 Bells 20% K Source: IPSOS 17 Source: Nielsen MMS 31

32 Brand Image As a result of the positive brand impressions and the involvement consumers have with our advertising, we have the highest brand equity score of any whisky in our tracking study. Figure 33. Brand Driver Perceptions UK Brand Driver Perception Index The Famous Grouse 171 Bells 164 Teachers 94 Wm Grants 68 Source: Ipsos External Proof of Brand Strength In Christmas 2005, Famous Grouse reached Number 4 in Campaign s Adwatch Survey (Figure 34). Putting us in the same league as the big-spending retailers, all on 1.9m. Figure 34. Adwatch Source: Campaign 18 Source: Ipsos; The Brand Perception index is an algorithm of 5 key measures these vary according to the brand attributes desired in each country. For the UK these are: Reputable, Fun, Presence, Established, Modernity. 32

33 In the YouGov Brand Index League Table, we again punched far above our media weight (Figure 35). Figure 35. YouGov Brand Index League UK YouGov Brand Index League Table Sep/Oct 2005 Index Media Spend Guinness m 2 Bailey's m 3 Smirnoff m 4 Stella Artois m 5 Gordon's m 6 The Famous Grouse m Source: YouGov, Nielsen Proving Icon is a Superior Campaign As Bell s has outspent us, in terms of their advertising investment, by 55% since 1997 while achieving worse results, it is possible to infer our copy was better. i. Benchmarking Against Bell s Market Share We have shown that advertising has driven market share gains for Famous Grouse in the On and Off trade. By comparing our share relative to Bell s it is possible to demonstrate the greater effectiveness of our advertising (Figure 36). Figure 36. Total Market Share for Bell s and Grouse % 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Sector Share % Bells Share Famous Grouse Share Source: IWRS 33

34 ii. Benchmarking Against Bell s - Rate of Sale (On Trade) Famous Grouse has held distribution relative to Bells (Figure 18), while our relative rate of sale 19 performed better than that of Bells post the Icon campaign (Figure 37). Figure 37. Relative Rate of Sale in the On Trade Famous Grouse v Bells Sector Share / Distribution New Campaign Bells FAMOUS GROUSE Source: Nielsen iii. Benchmarking Against Bell s - Consumer Franchise We showed early there is a declining consumer franchise in the sector (Figure 27), our advertising has been more successful at slowing down the rate of loss (Figure 38) when compared to Bells. 19 We have defined Relative Rate of Sale as sector volume share per point of distribution (Sector Share / Distribution) 34

35 Figure 38. Relative Size of the Consumer Franchise Famous Grouse v Bells Bells Famous Grouse Source: TGI 35

36 The Benefit of Good Advertising It Builds Strong Brands Sales Ads Strong Brand Distribution Business Value Price Premium Figure 39. Contribution of a Strong Brand The benefits of having a strong brand affect Famous Grouse in a number of ways 1. Our sales are less sensitive to short term declines in advertising support Econometric modeling 20 shows a temporary reduction in ad investment resulted in only a small decline in share (a 0.23 of a share point per 100 TVRs). 2. Our sales are less sensitive to Bells advertising Our model also shows that when Bells is on air there is only a small (negative) impact on Famous Grouse sales in the short run (0.08 share points per 100 TVRs). 3. Famous Grouse is relatively immune from Bell s price promotions 21 The strength of the Famous Grouse Brand also results in low cross price elasticity. The econometric model suggests that a 1% reduction in the price of Bell s reduces Famous Grouse share by 0.51 share points. This suggests that there is a loyal consumer base for Famous Grouse who are not tempted by Bell s promotions. 20 In 2004 the Edrington group commissioned econometric model from ROI. The model was used for strategic planning and updated in Feb Some of these results will be shared in this paper. Technical Details of the model are available in the technical appendix 21 Strong evidence of low cross price elasticity is shown in Figure 39 & 40. During Christmas 2005 Bell s engaged in unprecedented price promotion, The Famous Grouses share remained buoyant. 36

37 Figure 39. Price in the Off Trade Famous Grouse v Bells k, per 8.4 Litre Case Famous Grouse Price Bells Price Heavy Price Discounting by Bells /07/ /09/ /11/ /01/ /03/2002 Source: Nielsen 21/05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/2003 Figure 40. Volume Share in the Off Trade Famous Grouse Famous Grouse Off Trade Volume Share 21/01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/2006 Same Time Period 25% 20% 15% 10% 5% 0% 21/07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/2006 Source: Nielsen 37

38 Quantifying the Contribution In this section we attempt, through various financial analyses, to quantify the financial value of Famous Grouse sales. 1. Modelling the Impact on Sales Figure 41. Contribution of Sales Sales Ads Strong Brand Distribution Business Value Price Premium We have used econometric modelling (Figure 42) to demonstrate the effect of advertising on sales 22. Advertising from July 2001 to January 2006 has generated incremental sales of 245k 8.4 litre cases. This represents 7.2% of volume sales. Figure 42. Econometric Model Effect of Advertising on MAT Volume Sales Litre Cases Famous Grouse Vol Sales Simulation with No Advertising /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/2006 Source ROI 22 An interesting property of the model is that is captures both the short term and long term effects on sales. 38

39 To ascertain an estimate of the long run effect of Icon advertising on volume sales, we have used the model to backcast sales to Figure 43. Effect of Advertising ( ) on Volume Share 12.0% Actual Share Share without Advertising 10.0% Volume Share 8.0% 6.0% 4.0% 2.0% 0.0% Source: ROI Econometric Model Simulation, Nielsen Source: ROI, Nielsen The model estimates that Icon advertising generated 13% 24 of volume sales. When we scale this up from the Off Trade model to ex-factory sales, this represents 285m of incremental revenue from an advertising investment of 15.4m since This is likely to be a conservative estimate since the On Trade has fewer brands making it a less competitive environment 25. Figure 44. Contribution of Sales 285m Ads Strong Brand Distribution Business Value Price Premium 23 Details of how this was done are documented in the technical appendix. 24 In the Off Trade this equivalent to an incremental 783k 8.4 litre cases from 1997 to Thus Icon advertising is likely to be more effective in the On Trade than in the Off Trade. 39

40 2. Estimating the Impact of Distribution (in the On Trade) 26 Figure 45. Distribution in the On Trade (Distribution %) Loss of distribution we didn t suffer Famous Grouse Distribution Teachers Distribution Implied Distribution (If Famous Grouse Declines similary to Teachers) DJ97 AM97 AS97 DJ98 AM98 AS98 DJ99 AM99 AS99 DJ2000 AM2000 AS2000 DJ01 AM01 AS01 DJ02 AM02 AS02 DJ03 AM03 AS03 DJ04 AM04 AS04 DJ05 AM05 AS05 Source: Nielsen Having worked out the difference between our actual share and the share that would have resulted had we declined in On Trade distribution at the same rate as non-advertised Teachers (Figure 46), it is possible to calculate a value of this advertising effect. A 14% decline in sales would have occurred in the On Trade This is equivalent to 189m. 26 If we use Teachers as a benchmark for the decline in distribution Famous Grouse would have encountered without advertising support, it is possible to infer the consequent impact this would have had on sales. 40

41 Figure 46. Famous Grouse Actual v Implied Share with Distribution Decline (On Trade) 35% 30% 25% 20% 15% Famous Grouse Actual Share Implied Share with Declining Distribution 10% DJ97 AM97 AS97 DJ98 AM98 AS98 DJ99 AM99 AS99 DJ2000 AM2000 AS2000 DJ01 AM01 AS01 DJ02 AM02 AS02 DJ03 AM03 AS03 DJ04 AM04 AS04 DJ05 AM05 AS05 Source: Nielsen 41

42 3. Estimating the Impact of our Price Premium in the Off Trade Figure 47. Contribution of Sales & Distribtution Ads Strong Brand 285m 189m Price Premium Business Value Elsewhere in this paper we have demonstrated the share growth of the Famous Grouse (Figure 16). Growth was achieved at an off trade price premium to Teachers and at parity to Bells (Figure 48). In this section we attempt to quantify the financial value of The Famous Grouse brand price premium by benchmarking against weaker brands, looking specifically at Teachers 27. FIGURE 48 Figure 50. Off Trade Average Price per Litre Total Std Blends Price Famous Grouse Price Bells Price Teachers Price Source: Nielsen 27 Why Teachers? In the distant past Teachers had been a major brand in the sector (number 2 after Bells in the early 1980s). Teachers, now largely an unsupported brand that still has a moderate price premium over the sector average, is a good example of the fate that may have befallen Famous Grouse had the latter not been supported by advertising. We believe that by benchmarking Famous Grouse against very weak brands (like Own Label), would be an unfair comparison since much of the Famous Grouse residual equity would not have eroded to the levels associated with very weak brands. 42

43 On closer inspection it is evident that the price premium versus Teachers increased post advertising (Figure 49). FIGURE % Figure 51. Famous Grouse Off Trade Price Premium versus Teachers 16.0% 14.0% Price Premium 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% New Campaign 0.0% Source: Nielsen The table below estimates the monetary value of the price premium since 1997 in the Off Trade. Figure 50. Value Created from a Sustained Price Premium 1997 to 2005 (in Off Trade) Value Sales of Famous Grouse 844m Value sales of Famous Grouse at Teachers price (i.e. without price premium) Monetary Value Created from Price Premium Source: Nielsen 727m 117m Given that the price premium over Teachers existed prior to the Icon advertising, a more realistic estimate of the Famous Grouse brand premium created by the Icon advertising, would be to consider the change in the premium since 1996 and not the absolute value of the premium. 43

44 Figure 51. Increasing Price Premium v Teachers 20.0% 18.0% Price Premium Change v 1996 Actual Price Premium Famous Grouse v Teachers 16.0% 14.0% Price Premium 12.0% 10.0% 8.0% 6.0% New campaign 4.0% 2.0% 0.0% Increasing Price premium vs Source: Nielsen By applying the increasing price premium to Off Trade volume sales, we estimate that an incremental 39m of sales value was generated. We will apply this number to the third prong of our financial framework. 44

45 Figure 52. Contribution of Sales, Distribution and Price Premium Ads Strong Brand 285m 189m 39m Business Value = 513m The Icon campaign received 15.4m of advertising investment and has been shown to have generated 513m of business value meaning the break even margin of just % We are not at liberty to disclose our actual margin, but are pleased to have demonstrated the payback even if our margin was one of the lowest in the category. 45

46 Additional Sources of Business Value Net sales value generated more efficiently The Famous Grouse Icon advertising was more efficient at generating net sales value than Bells, Teachers or unbranded tertiary label products. To demonstrate this phenomenon, we first need to define Net Sales Value in this instance 28 Net Sales Value = Retail Sales VAT Excise Duty Media Cost Bell s generates a higher absolute net sales value than The Famous Grouse due to higher overall volumes. However, the greater efficiency of the Icon campaign results in a rate per case of 48 for The Famous Grouse versus 44 for Bells. 29 Figure 53. Net Sales Value Insert whizzy bottle chart Source: 28 Net Sales Value is a well established metric in the spirits sector. Given the high excise duties that exist in the sector, a significant proportion of retail sales do not go to the retailer, distributor and manufacturer. Net Sales (is retail sales less VAT, excise duty and media spend) is a measure of how much sales is left for retailers, distributors and manufacturers. 29 The Famous Grouse also generates higher net sales than Teachers and tertiary brands at an absolute and per case level. This is principally due to the fact that unlike VAT, excise duty is levied on a volume rather than a value basis and the cost of advertising is less than the additional value generated through higher demand. 46

47 Future Value The valuation below evaluates the relative brand premium of the Famous Grouse brand versus Teachers in the Off Trade. The brand premium reflects the 12% average price premium commanded by Famous Grouse over and above Teachers. The valuation is based on the following assumptions: 1. Sales of Famous Grouse in the Off Trade from 2005 to 2010 are forecast to decline by 3% per year. This is in line with sector. 2. Famous Grouse advertising investment is 1.7m per year (this is the average investment per year from ) 3. Sales beyond 2010 are expected to decrease by 2% per year. 4. The discount rate used is 12%. This is consistent with Edrington s Weighted Average Cost of Capital. 5. The price premium of 12% versus Teachers will continue indefinitely into the future. The valuation model below calculates the net present value of the additional brand margin 30 created by a sustained price premium over Teachers. Therefore, by definition, this is a relative brand valuation (relative to Teachers), not an absolute brand valuation. 30 We calculate the additional brand margin on Net Sales (ie the value to the manufacturer, retailer, and distributor). A formal brand valuation would estimate the additional brand margin to the brand owner (ie the manufacturer), but for us to do that cost structures of the production chain would have to be disclosed. Given the confidential nature of such information we have based our calculations at a Net Sales level. 47

48 Figure 54. Relative Brand Valuation v Teachers Model 2005 (Known) Off Trade Retail Volume 1000 Litres Price Per litre ( /litre) Off Trade Retail Sales m = Retail Volume * Price Duty m ( 7.83 per Litre) Media m (Assume average Media Investment pa from 97-05) Nett Sales m (after Duties, VAT and Media) Relative Brand Premium v Teachers (Price Premium) 12% 12% 12% 12% 12% 12% Additional brand margin m = Nett Sales * Brand Premium Discount Rate Discounted Brand Margin m Relative Brand Calculation Brand Value Brand Value into Perpetuity Total Relative Brand Value 16.0m 16.4m 32.4m The Famous Grouse brand commands an excess value of 32.4m (over Teachers) reflecting the discounted future expected additional brand margin at today s values that customers are willing to pay to experience and enjoy the Famous Grouse brand in the off trade. 48

49 Section Seven: Success Overseas Finally, we will look at the international story 31. Market Share When we compare advertised markets with non-advertised ones, (Figure 55A) we can see markets with advertising fair better. Partly due to higher distribution, but as our share per distribution point analysis shows that alone could not explain our success. Figure 55A. Famous Grouse Market Share and Distribution Markets with Advertising Markets without Advertising Average Sector Share 12% 1% Average Distribution 65% 18% Share per Distribution Point, Indexed Advertised Markets = Source: Edrington Figure 55B Sector Share: 2 years pre Advertising Sector Share: 2 years post Advertising Share point change pre v post Greece 5.8% 7.2% 1.4 Monetary Value of Share Point Chat Taiwan 3.0% 6.0% 3.0 While this lacks the rigour of the UK, it is encouraging especially when looked at in conjunction with the strong intermediate measures. 31 We have much more limited data and can only show through intermediate measures and market share comparisons (in advertised versus non advertised markets) the effectiveness of the Icon campaign overseas. 49

50 Intermediate Measures 1. Greece Strong Growth in Ad Awareness and Brand Equity. Figure 56. Prompted Advertising Awareness % Source: IPSOS The Famous Grouse Johnnie Walker Red Cutty Sark Figure 57. Brand Driver Perception Index Brand Drive Perception Index Source: IPSOS 50

51 Taiwan Ad Awareness and Brand Equity was successfully built by Icon. Figure 58. Prompted Advertising Awareness Source: IPSOS The Famous Grouse Johnnie Walker Black Matisse Figure 59. Brand Driver Perception Index Source: IPSOS

52 Business Value of One Global Campaign If the Icon campaign had not been an animated brand-centric advertising vehicle, it would have been necessary to develop separate copy to run in Greece and Taiwan. Assuming a production to media ratio of 10% and local market retainer fees, it is possible to estimate the additional spent that would have been required to serve these two markets and hence savings we gained from running Icon in Greece and Taiwan. The Business value to the brand of a global campaign can be estimated to be 3m Media Spend in Greece since 2000 is 17,881k Euro and in Taiwan since 2003 is US$2173k. Calculating production at a ratio of 10% to media spend and converting to GBP = 1775k. Assuming a conservative retainer fee of GBP 100k per year per market = GBP 1200k. Total saving = 2975k GBP 52

53 Conclusions Our Icon campaign when benchmarked against Bells our closest competitive is shown to have outperforming it on tracking measures and its ability to build a strong brand. We have eliminated all other causal factors other than advertising and have therefore proved advertising helped us to close the gap in market share with Bell s, to increase our rate of sales more than Bell s and been more effective at slowly the death in our franchise. All while being outspent by Bell s by more than 55%. By benchmarking against teachers, we can show that our advertising has added an additional 189m of business value by boosting distribution in the On Trade and an additional 39m of business value by boosting our price premium in the Off Trade that wouldn t have happened if we had taken the other fork in the road and pulled our advertising support. Our Econometric Analysis has shown that advertising gave us 285m additional Business Value through additional sales. 53

54 IPA Advertising Effectiveness Awards 2006 Famous Grouse Technical Appendix Section 1 Model Description In the summer of 2004 the Edrington Group commissioned an econometric modelling project through ROI Consulting for Famous Grouse sales in the UK Off Trade. The modelling successfully isolated and quantified the key variables that drive sales and the econometric model had been used for strategic planning on an on-going basis. The model was updated in February 2006 and the results from the model have been used in this paper. Due to commercial sensitivity, we are not at liberty to disclose the full specification of the model; however this appendix should contain sufficient information (both technical and non-technical) for third party auditing. The model was estimated using Off Trade Nielsen data from July 2001 to January 2006, using 235 weekly observations. The dependent variable is Famous Grouse volume share of the off trade blended whiskey category, defined by dividing Famous Grouse volume sales (in 8.4 litre cases) by total blended whiskey sales (also in 8.4 litre cases). The dependent variable was transformed into natural logs, as were some of the explanatory variables. 54

55 Discussion of Explanatory Variables The modelling process was based upon the well established general to specific methodology. The explanatory variables in the final specification include: Price of Famous Grouse, Price of Bells, Aggregate Distribution 33 of Famous Grouse, Aggregate Distribution of Bells, Aggregate Distribution of Own Label, Famous Grouse Advertising (short run effect and long run effect), Bells Advertising, and Xmas-New Year Seasonality (represented by Seasonal Dummy Variables). Given that we are modelling sector share, the inclusion of Xmas-New Year seasonal dummy variables may seam counter intuitive. However, it is apparent from inspection (see actual-fitted plot) that there is a strong positive seasonality in Famous Grouse share of sector at Xmas time. (The positive Xmas seasonality also applies to Bells, but it is negative with respect to Own Label. We believe that during the festive season consumers buy into strong brands more than less expensive competitors). Two structural terms capture the Famous Grouse advertising effect. The first is a short run advertising effect with an adstock retention rate of 60%. The second is a long run advertising effect with an adstock retention rate of 99%. Together these two variables capture both short and long run effects of advertising on incremental sales. All of the coefficients of the explanatory variables in the model have the right sign and are of the expected order of magnitude. All of the coefficients are statistically significant at the 95% level of confidence. 33 Aggregate distribution is the sum of each variants (in this case different size bottles) weighted distributions. It measures the breadth and depth of a brands distribution. Aggregate distribution can be greater than

56 Actual, Fitted and Residuals le c a S g o l L ra tu a N N a tu ra l L o g S c a le Residual Actual Fitted Statistical Properties of the Model The model describes 97% of the variation of Famous Grouse sector shares (adjusted R- squared =0.97). Before we tabulate the statistical output from the model, we will comment on out of sample forecasting performance, since this is an intuitive way of ascertaining whether model structure, inclusion of variables and functional form are correct. The model was estimated using a restricted sample of 183 observations from July 2004 to January The remaining 52 observations were used to test the out of sample forecasting properties of the model. 56

57 70000 Famous Grouse Volume: Actual v Forecast s e s c a litre FG_VOLFEQUATION1 FG_VOL The results are encouraging. The model forecasts sector share very accurately and when converted to volume sales, it can be seen that the underlying movement s in sales are being picked up by the model. Over the forecasted period, the forecast error is 2.7%, and the mean absolute forecast error is 5%. The statistical properties (the first 4 moments) of the forecast error variable are similar to the residuals (when the model is set up on volume form). 57

58 Other statistical properties of the model will now be reported. R-squared Mean dependent var Adjusted R-squared S.D. dependent var S.E. of regression Akaike info criterion Sum squared resid Schwarz criterion Log likelihood F-statistic Durbin-Watson stat Prob(Fstatistic) Series: Residuals Sample 28/07/ /01 /2006 Observations 235 Mean 2.89e-15 Median Maximum Minimum Std. Dev Skewness Kurtosis Jarque-Bera Probability

59 Breusch-Godfrey Serial Correlation LM 1 Test: F-statistic Probability Obs*R-squared Probability Breusch-Godfrey Serial Correlation LM 2 Test: F-statistic Probability Obs*R-squared Probability Breusch-Godfrey Serial Correlation LM 3 Test: F-statistic Probability Obs*R-squared Probability Breusch-Godfrey Serial Correlation LM 4 Test: F-statistic Probability Obs*R-squared Probability White Heteroskedasticity Test: F-statistic Probability Obs*R-squared Probability Ramsey RESET Test: F-statistic Probability Log likelihood ratio Probability

60 M01 04M07 05M01 05M07 06M01 CUSUM 5% Significance M01 04M07 05M01 05M07 06M01 CUSUM of Squares 5% Significance 60

61 Recursive Parameter Estimates M M M M M M M M M M M M M M M M M M M M0 R e cu r s iv e C ( 1 ) E st i m a t es ± 2 S. E. R e cu r si ve C ( 2) E s t i m a t es ± 2 S. E. R ec u r si ve C ( 13 ) E st i m a t es ± 2 S. E. R ec ur s iv e C ( 4 ) E s t im at e s ± 2 S. E M M M M M M M M M M M M M M M M M M M M0 R e cu r s iv e C ( 5 ) E st i m a t es ± 2 S. E. R e cu r si ve C ( 6) E s t i m a t es ± 2 S. E. R e cu r si ve C ( 7) E s t im at e s ± 2 S. E. R ec ur s iv e C ( 8 ) E s t im at e s ± 2 S. E M M M M M M M M M M M M M M M01 R e cu r s iv e C ( 9 ) E st i m a t es ± 2 S. E. R e cu r si v e C ( 1 0) E s t im at e s ± 2 S. E. R e cu r si ve C ( 11 ) E st i m at e s ± 2 S. E. From the diagnostic tests shown above, it is clear that the model has normally distributed residuals (passes Jarque Bera test), has no serial correlation (Durbin Watson = 2, and passes LM1 - LM4) or heteroskedasticity (passes White test) in the residuals. The functional form of the model is also correct (passes Ramsey Reset test) and the model supports a more than adequate description of the data. Structurally, the model is stable over time as evidenced by the recursive plots and out of sample forecasts. 61