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Thank you Mark Good Morning, I am Anna Manz, Groups Strategy Director for Diageo. I have been with Diageo for 16 years and prior to that Unilever.

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• Thank you Mark

• Good Morning, I am Anna Manz, Groups Strategy Director for Diageo. I have been with Diageo for 16 years and prior to that Unilever. Of those 16 years I have spent less than 6 of them in the UK, and have lived and have worked across the Ireland, US and Asia in a wide variety of roles. I have enjoyed every minute of it.

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• Today I am going to talk about the exciting and fascinating topic of mainstream spirits in the Emerging Markets.

• I will show you why I believe this will be a significant growth opportunity for the category and why Diageo is uniquely well positioned to take advantage of the opportunity.

• I will share with you the track record of success we have already had in mainstream spirits and our clear strategyn for delivering out-performance going forward.

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• This presentation is structured in three sections:

• Mainstream spirits consumers. Who they are, what they drink and where they drink.

• Why this is a strategic opportunity for Diageo.

• How we are going to tackle this opportunity, what we have already done and are planning to do to out perform.

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• I would like to start with a short video to take you out of a conference center in autumnal Manhattan and into the world of mainstream spirits consumers.

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• As you can see there is no one world of the mainstream spirits consumer; in fact it is a vast and extremely varied space encompassing consumers who earn – from $2.5k to $20k a year. We call this middle class.

• It is just too broad a description – so using wealth and consumer behaviours we break it into three groups:

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• Lower Middle Class consumers:

• These are daily workers with irregular income doing jobs like working on building sites. They are more likely to be rural. They are concerned with the daily challenges of rent, food and kerosene, they think about purchasing alcohol only once these costs are covered. Much of the time they are consuming informal or homemade alcohol, like the chibuku or local brands of beer.

• When they buy formal spirits they buy single servings sachets or small pack. They are consuming on their way home from work in a relaxed local bar or with their family and friends at home.

• Day to day drink safety and cost per unit is an important concern – unsafe drinks are a very real risk and a topic of conversation. I am not just referring to unsafe informal alcohol here, safety concerns extend into the formal sector. Counterfeit and the refilling of bottles is an additional risk. For this consumer, safety is not at all certain and assured safety commands a premium.

• On special occasions like weddings or if someone else is buying, they will trade up to brands we associate more generally with the Middle Middle Class Consumer.

• Lower Middle Class consumers:

• These are daily workers with irregular income doing jobs like working on building sites. They are more likely to be rural. They are concerned with the daily challenges of rent, food and kerosene, they think about purchasing alcohol only once these costs are covered. Much of the time they are consuming informal or homemade

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• When they buy formal spirits they buy single servings sachets or small pack. They are consuming on their way home from work in a relaxed local bar or with their family and friends at home.

• Day to day drink safety and cost per unit is an important concern – both in the informal and formal alcohol. For this consumer, safety is not at all certain and assured safety commands a premium.

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• Mid Middle Class consumers typically have a regular income and are often urban. They work in factories and aspire to white collar work. Educating their children is a high priority. They are relatively price sensitive, but quality is important to them, and as such they buy into trusted brands like McDowells for every day occasions. Status matters; it is not uncommon for these consumers to have a bottle of Johnnie Walker Black on display in their home, although not necessarily for drinking! And again for weddings, an occasion where status is displayed they will they are likely to trade up as far as they can afford for example Johnnie Walker Red. Equally at more traditional family gatherings and ceremonies they are likely to consume local informal spirits such as Palm Wine. Their outlet of choice is usually in the city, close to their place of work with colleagues or at home with friends.

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• Upper Middle Class consumers are relatively well off, typically living in cities and working in offices. They are already highly successful and are looking outward at the world. These consumers are value seeking rather than price-driven. They care about reputation and status. They are highly brand conscious, and they understand global brands and aspire to own them. These are consumers that we understand well, as they are already buying our international brands, particularly when they are in situations where they want to impress. However every day they are consuming better value products like Vat 69.

• The description I have just given is more true for men than women. Across the emerging world it is generally less acceptable for women to drink that men. When women do drink they are far more likely to consume less of more highly priced products; upper mainstream and above. The more status-full the choice the more it makes their consumption more socially acceptable.

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• Today there are 2.3B middle class consumers across the emerging markets. • However, the relative size of these groups varies significantly by market.

• In Africa, India and some Southeast Asian markets the weight of the market today sits at the lower end. However, across the rest of the emerging world, it is skewed to the Mid and Upper range.

• Our focus reflects this; we are focused against the mid and upper middle class across the emerging world, and the lower income range only in Africa, India and parts of South East Asia.

• Today there are 2.3B middle class consumers across the emerging markets. • However, the relative size of these groups varies significantly by market.

• In Africa, India and some Southeast Asian markets the weight of the market today sits at the lower end. However, across the rest of the emerging world, it is skewed to the Mid and Upper range.

• Our focus reflects this; we are focused against the mid and upper middle class across the emerging world, and the lower income range only in Africa, India and parts of South East Asia.

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• Now we have talked about the consumer, let’s get into the products that they drink. • Broadly these are spirits-based drinks which cost a similar amount per serve to

mainstream beer or local spirits. A serve cost between 10 and 60cents and a price which equates to about 10mins work.

• These products are definitely brands, but sit along a continuum of increasing sophistication. There is a table set up outside with the real thing.

• Although we think of the consumers and their needs and behaviours in 3 groups, we categorize the brands they consume into just two groups.

• The simplification of two groups here reflects the two different business models required to make and sell these brands.

• On the left - Lower Mainstream products cater for Lower Middle Class consumers. They are the entry level to the formal sector and price leadership is critical.

Aspiration here is demonstrated through product safety, the label and the bottle quality. Activation is predominantly at point of sale. They require real scale and very broad distribution to deliver margin. This is quite a different business to our

premium spirits business; in fact this business model is much closer to beer. • Upper Mainstream products cater for Upper and Mid Middle Class consumers.

These are products we recognize and sell today – they are highly branded products but at accessible price points and more broadly available than our premium spirits portfolio. They do require some media as well as POS activation. This business model is an extension of our existing one.

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• Now let’s look at where mainstream consumers are drinking these products. • Here is a diagrammatic representation of the outlets by price tier. On the left is

Nigeria, however the picture is true across many emerging markets, and on the right is GB as a developed market example.

• For markets with intermediate wealth levels such Russia, Mexico or Turkey the outlet profile sits between these two extremes.

• Participating in upper mainstream means expanding our presence from limited international premium spirits outlets into a broader adjacent set of upper mainstream outlets. These are outlets that our premium brands should be in- to cater for those trade up occasions like pay-day. Participating in upper mainstream gives us the scale to do that.

• On the other hand, participating in lower mainstream means much greater outlet reach, across the formal spectrum, similar to beer. Wider distribution of safe lower mainstream spirits at an accessible price point allows trade up from the informal sector.

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• So let me summarize:

• Upper mainstream is a consumer opportunity across the emerging world. • Our brands are there already, but not yet at scale. We know how to do this; it is

about finding the right balance between branding and value. Scale in upper

mainstream will get our premium brands into these outlets to capture the trade up occasions.

• Lower mainstream is a consumer opportunity for us in India, Africa and some parts of Southeast Asia. It requires a very different model, based on extensive scale. Lower mainstream is about recruiting consumers into the spirits category from informal alcohol and beer, and framing consumption habits for the future.

• Achieving lowest cost of goods is critical here to allow us to offer accessible price points and it requires scale and distribution reach. Our beer platform will support us with this in Africa, and in India USL gives us scale at these price points.

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• So now you have a sense of who the mainstream spirits consumers are in all their many forms and the range of brands they drink, let’s look at the opportunity they create.

• First, a couple of definitions; when I talk about spirits in emerging markets I am excluding Chinese White Spirits as it is a category which has different characteristics and we are learning about it through our Shui Jing Fang business. Mainstream spirits refers to spirits priced below Standard Spirits.

• Mainstream Spirits account for 85% of the spirits volume consumed in emerging markets.

• The manufacturer revenue associated with these drinks is also substantial. We estimate it to be over half of the total revenue associated with spirits sales and to be £12Bn or so.

• What is more volume has been growing steadily at 2% CAGR over the last decade. Growth has been skewed towards high price points, with upper mainstream growing at ~4-5%CAGR over the same period.

• Looking at this geographically; India accounts for just under a third of total

mainstream spirits volume and has been growing at 12% CAGR over the last decade. • As yet Africa accounts for only about 5% of mainstream spirits volume, but has been

growing at double digit.

• In short, this is a substantial opportunity and one that is growing particularly at upper mainstream price points.

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• Looking forward solid medium term growth will continue, irrespective of the economic environment. Let me explain:

• We will see an absolute increase in LPA population of nearly half a billion in emerging markets over the next decade. These people are already born so it is a fact.

• Second, these people aspire to progress in life, and they aspire to drink formal safer products.

• These two factors alone drive ~1-2% volume growth in mainstream spirits over the medium term, consistent with the historical growth we have seen.

• And these people are becoming richer; the only difficult thing to predict is how quickly that will happen.

• The pace of income growth will vary over time due to all sorts of macroeconomic and political factors.

• It will accelerate that ~1-2% volume growth, particularly at higher price points. How fast that acceleration is in any given year will vary.

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• That is mainstream category as a whole, so now let’s look at Diageo. This map depicts where we see the opportunity for growth in Diageo’s business over the next 5 years.

• You would expect Diageo to grow ahead of the market, due to our strong footprint in India and Africa and across the emerging world in upper mainstream, and

particularly with Scotch. These are the fast growing areas in Mainstream Spirits. • As you can see upper mainstream is an opportunity across the map, with Lower

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• We are already doing this. Over the last 5 years we have built the foundation of a strong mainstream spirits business, both organically and inorganically.

• Organically net sales grew 11% over the period, and with USL, Ypioca & Mei Icki we have built a scale business

• In fact today mainstream spirits accounts for more than 40% of Diageo’s volume and 11% of our net sales.

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• This gives us a head start.

• Our current volume market share is around 12% in total mainstream spirits, and we are a number 1 player in mainstream spirits in India, South Africa, Kenya, and Turkey, and a fast growing number 3 player in Nigeria.

• Where we are not number 1, it is predominantly local players that are in front, and competition is getting more intense.

• This is a vibrant, fast-paced space; we have a head start but there is a much greater opportunity ahead.

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• Mainstream spirits are not low margin products. Mainstream spirits are in aggregate lower margin than our premium spirits portfolio, however not to a significant

degree. We understand the value drivers which are; cost leadership, A&P investment and increased scale.

• We will participate in mainstream spirits opportunities only when we can see delivery of sustainable Operating margins in excess of 20%. Mainstream spirits are not low margin products. Mainstream spirits are in aggregate lower margin than our premium spirits portfolio, however not to a significant degree. We understand the value drivers which are; cost leadership, A&P investment and increased scale. • We will participate in mainstream spirits opportunities only when we can see

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• Here is how our CAAP margin looks by country, and you can see there is a big variation.

• As we get into mainstream further, we have established which markets have strong margin and which markets we need to work harder to improve margin either through building scale or through driving out cost.

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• We are now very well positioned to accelerate mainstream spirits. • We now have the route to consumer:

• In the last 2 years we have transformed our RTC across markets with a scale business in many of the fastest growing economies.

• We are in an especially privileged position in Africa, where we are the only spirits company with an established beer business, and in India, where we have USL platform.

• USL has brought us valuable mainstream expertise, knowledge and capability. Vineet Chabra, our head of mainstream spirits, comes from USL and has a background in entering markets.

• We now have the scotch liquid to fully access the profitable and fast growing primary scotch opportunity.

• Finally, as an industry leader, we see a strategic role for mainstream spirits to recruit consumers into spirits today and shape drinking habits for the future.

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• So we have talked about the consumer, who they are and what they drink. We have established there is a considerable opportunity here. Now let’s get into exactly what we are doing to execute against it.

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• We have consolidated our experience into a simple checklist – a formula for success. This should be used when evaluating participation. We are applying it with the consistency a pilot does his checks before take-off.

• While it is at one level very simple there is real power in its consistent application. When applied in rear-view, our historic brand launches have rarely complied with all the points, which has led to real-time course correction and occasional failure. Going forward that learning will be short cut.

• I will give you an overview of the key points, here, and then I will bring them to life with examples on subsequent slides.

• First, mainstream spirits is about scale. These are brands which need scale to deliver healthy margin and secure sustainable competitive advantage – and they need to get to scale quickly. These brands don’t grow their way to success they explode their way to success - reaching scale in 12-18months.

• Second, disruptive consumer propositions. The product needs to offer the consumer something different to their existing drink to disrupt their behaviour; a price point, confidence in safety, a genuinely different and aspirational offering.

• Third, scale at a market level is also important, to support a broader route to market at low cost. In markets such as these, where resources are scarce at each step along the route to consumer, having the scale to command more than our fair share is critical

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• Next is cost leadership – In mainstream, “every penny counts”, and in particular in lower mainstream.

• Finally but not least; right culture and capability. It requires a different mindset. It is about continuous productivity, fast results, and rapid reaction to changes in the external environment.

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• Let me take you to South Africa and Smirnoff 1818.

• This is a brand which today is 2.3m cases and is drunk both in the more traditional formal market and in the townships.

• It is a disruptive proposition as it is an aspirational international brand at an accessible price point.

• We know that Smirnoff thrives when the price of a serve plus a mixer is roughly half to three quarters of that of beer. For the consumer in South Africa this means that the 200ml bottle must cost less than 3quart beer pack. We could not get to that with Smirnoff 21.

• Smirnoff 1818 is a locally produced product, re-formulated to allow us to hit that price point, and delivers a healthy margin.

• Our route to consumer has very high penetration and in the township taverns we have activated at scale..

• Smirnoff 1818 now has a 70% share of vodka in South Africa and strong momentum. The head room remains enormous as it is sourcing volume from beer consumption.

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• Now let’s turn to Mexico and Black & White.

• In 2013, Diageo had 11% share of the fast growing primary scotch segment in Mexico, although we had an 88% share in premium and above, led by Johnnie Walker and Buchanan’s.

• To tackle this opportunity we chose to invest in Black & White. Black & White is positioned at a premium price to other primary scotches, but differentiates itself through its heritage as “from the House of Buchanan’s”. The consumer disruption here was a combination of accessible pricing with the Buchanan’s heritage.

• The rest of the formula was there too: the package, the broad RTC, scale in execution • Collectively the Mexican leadership team decided that participating in primary

scotch would bring vibrancy to the category as a whole rather than cheapen our Reserve and premium portfolio – and it has.

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• Today Black & White in Mexico is the 3rd largest primary scotch brand and more importantly, it is the fastest growing spirits brand - its retail sales have been growing at well over 50% for the last 18 months are consistently accelerating. This has contributed to a category value share increase of 8 ppts. And the premium scotch portfolio has also benefited with the additional reach and supporting above category growth +20% growth.

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• It is important to participate across the price ladder in mainstream spirits for three reasons.

• The first is market level scale provides competitive advantage through driving better margins

• The second is given easiest brand differentiation in mainstream spirits is price, it is important to play across the price ladder as otherwise competitors will.

• Thirdly, given how volatile these markets are economically, as we have seen recently with the impact of oil prices, it provides consumers with lower and higher price alternatives depending on their level of disposable income. This protects our scale benefit irrespective of the environment.

• The slide gives you an example of where are doing this - this is the mainstream brand price ladder for Kenya. The orange bars are Diageo, all the other brands (the grey bars) are single brand companies.

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• Now let’s talk about why a disruptive proposition is important.

• Recruiting mainstream spirits consumers with a ‘me-too’ product and a pretty label does not deliver the explosive growth to scale required.

• The product needs to offer the consumer something different; a price point, a pack which provide consumers with the reassurance that the product is safe or heritage as with Black & White

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• Tetra pack in India has been a huge success in the states where it is legal –from a consumer perspective it is perceived as high quality, and extremely safe – consumers see the pack as protecting against counterfeit as it cant be refilled and against

impurities and germs.

• From a trade perspective it is convenient and efficient to ship and manage as a case is 50% lighter than glass and takes up half the space.

• From Diageo’s perspective it is more cost efficient than glass or PET. • We now do 20M EU of tetra pack in India. States that have tetrapack have

outperformed those that don’t have it.

• A second example would be the 1.75ml format of Black and White. This format was introduced cash and carry, which is a critical source of secondary distribution for smaller restaurants and bars. A new format in the market, the pack is perceived as a great value and practical. Our share in this channel now significantly over indexes our share in the rest of the market. It is absolutely flying.

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• Product safety is an ever present concern.

• Chrome in Kenya is a good example, here. This was launched before our guidelines were developed as a ‘me-too’ to compete with Blue Moon and MoonWalker

similarly priced vodkas.

• You can see it on the slide here – while you may not see it as stylish pack by western standards, in the market context the consumer sees it as having real stand out and ‘cool’.

• Being a cool ‘me-too’ is just not enough to get to scale fast.

• So what has changed that? Over the summer the Kenyan government lead a crack down on illicit and sub-standard products.

• In response to this the Kenyan team used simple local dialect radio spots and a scratch and win promotion to reinforce the quality credentials of our entire mainstream portfolio from Kenya Breweries.

• You can see the poster here.

• Until then it was not widely known that Chrome was from Kenyan breweries and that association and quality campaign has increased sales 600% in the last three months.

• Across the mainstream spirits portfolio our aggregate volume share has increased over 10 points over this period.

• This also underscores the pace of change in these markets and the need to participate in a flexible agile way.

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• Orijin is an example where we brought disruption to a local category.

• Bitters is a large category in Nigeria with deep cultural associations. However, the category was getting out-dated.

• Orijin captured this insight and brought a modern twist with great liquid and modern packaging.

• Orijin built on local convention with familiar formats in relevant outlets and occasions.

• As a result, Orijin reached 500K cases in only 4 months after the national launch and grew the mainstream spirits category by 9% in that period.

• We have learnt from experience that the RTD category needs continuous refreshment and we have plans to launch new variants in Nigeria and are also expanding the Orijin concept to other markets.

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• Wide RTC reach is an essential enabler in achieving scale and as you know we have spent the last two years improving the efficiency, effectiveness and reach of our route to consumer.

• In Africa and India we already have strong RTC platforms through our leadership positions in Beer and USL. This gives us 90%+ coverage of the outlet universe in India and key Africa markets.

• Across the rest of the emerging markets, we have been systematically extending our RTC reach. As our upper mainstream outlet distribution expands it will also benefit our premium brands as they become more accessible in those trade-up occasions.

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• I want to look a little further at the value of our beer business in driving mainstream spirits in Africa.

• Scale beer businesses give our nascent mainstream spirits: • They give us scale to attract the best local talent • They give us scale across back office costs • They give us Procurement scale

• They give us an existing production infrastructure

• They give us scale to have a broader conversation with government and other stakeholders

• AND they give us RTC scale and reach as I have mentioned.

• The graph here simply demonstrates the fact that where we have beer platforms, we have consistently seen significantly faster growth in our spirits portfolio vs markets where we have just spirits.

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• We have talked about physical availability and getting our products to where the consumer will buy them.

• However for mainstream spirits, due to lower levels of A&P spend and little media, the importance of in-outlet execution becomes critical. The store or bar is the “brand’s TV”

• In India the team have defined and implemented 20k ‘perfect outlets’. You can see one of them on the slide. Each outlet has a must stock brand list, defined visibility depending on the shopper profile. More importantly they are audited by a third party. Implementation quality directly impacts the sales teams’ incentives.

• Activation needs to be fit for purpose. Here you can see an example of a very simple but effective execution in South Africa taverns. Effectively, it is a piece of wood, with optics clamped on, which has been attached to the wall by knocking out the mortar between a couple of rows of bricks. We have nearly 10,000 of these in taverns across the townships.

• This is a very different solution to the traditional Diageo premium brand custom made one.

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• A key ingredient of cost leadership is the appropriate A&P investment level for mainstream spirits.

• When we have a strong RTC platform with wide reach, coverage and effective POS execution, we can deliver physical and mental availability with a lower level of A&P spending than premium spirits. The right level of A&P investment is critical in ensuring sustainable profitability, especially for lower mainstream.

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• Now, let’s shift the gear to cost leadership.

• Cost leadership is an absolute requirement for competing and requires disciplined cost management across the value chain.

• It starts with how we design our products, to ensure the specification optimally balances the competing consumer needs of price and value. For premium and Reserve products we start with the consumer proposition and consider the price point later. Whereas for mainstream this needs to be reversed. We start with the price point and margin and we need to engineer a product to deliver that.

• Our approach here is to compare the components of cost of Diageo and competitor packages across markets to challenge variances. It is a mechanism which forces the rapid sharing of cross market learnings and introduces an element of competition! There is some really low hanging fruit here.

• For example, this work highlighted high label costs on orijin bitters in Ghana. Simplifying and right sizing label will reduce label costs by 10%.

• Low cost sourcing is about local sourcing and scale production.

• Tax in its many different forms is the biggest cost in value chain from manufacturer to consumer.

• Local sourcing and production benefits the local economy, minimizes foreign

exchange risk, and is often much more cost efficient as there is not import duty, and sometimes there are tax breaks to incentivize the use of local materials.

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• Local bottling for Scotch and local production for everything else is critical to achieve acceptable margin levels on these products.

• However, our approach will balance this with; asset light where possible as volumes can be volatile, and proving scale before investing.

• As these brands get to scale quickly it is important to have real time flexibility. • We already have local production sites across the globe, including:

• 7 spirits production sites in Africa as well as our existing brewery infrastructure. • 2 in SEA

• In India alone, we have 80 manufacturing sites including 53 3rd party sites.

• Our choice of low cost production solution depends on volume, the level of existing infrastructure, and the cost of labour in the market.

• Therefore we have defined a framework of flexible, asset-light and cost effective solutions for each level of volume and type of market. This framework defines the solution for the market.

• For example in Nigeria where we have an existing brewery infrastructure we installed the Cube. The cube is an innovative modular solution made from 3 shipping

containers. It is appropriate for volumes less than 0.5m cases. The total cost of installing a cube is about £2m.

• As volume grows, the cube will not be the lowest cost solution. So in Nigeria, we purchased and installed a low cost line from India and are planning to purchase another low cost line from China . this was possible because of our existing brewery

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• In Ethiopia, we leveraged our existing brewery infrastructure to install a lighter line, but one that requires a high degree of manual handling. This made sense as the labour cost is low.

• In summary, the scale of our existing production infrastructure and our asset light approach means that we will build our mainstream spirits business with relatively low incremental investment in production.

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• This approach delivers an attractive return • Supporting operating margin

• Short cash cycle resulting in better cash conversion

• Low incremental investment as we leverage the scale of our existing production infrastructure and our asset light approach

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• So to summarize:

• Mainstream spirits is a significant and strategic growth opportunity. • And Diageo is well positioned with a head start and advantaged footprint. • We already have a track record of success.

• We know what it takes to win in this space, a clear formula to deliver out-performance.

• Now is the time to take this forward and accelerate and extend our leadership position in mainstream.

• Thank you.

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