The Diageo Companies in Global Business According to Randall Haase - Literature review Example

Diageo is one of the largest alcoholic drinks companies worldwide. It is active in branded beverage alcohol business on the global scale. It is operational in producing, distilling, brewing, bottling, packaging, distributing and marketing a number of popular brands in more than 180 countries. It has been a leader in flavoured alcoholic beverages like Smirnoff Ice and spirits. Diageo faces business rivalry from Allied Domecq, Pernod Ricard or CCU, as these companies have a vast range of alcoholic drinks portfolios. Diageo differs with its competitors only in lagging behind in competition in wine business and putting greater stake in its global brands, mainly spirits and flavoured alcoholic beverages. Diageo has been practicing the strategy of acquisition and merger in a big way to capture a big chunk of global business share. Earlier, it was into food products in a big way but changed its focus on drinks. In 1997, Diageo shifted its focus from food to drink products assuming that operating synergies between the two were over-hyped. According to Arthur H. Rosenbloom, “Diageo has since begun divesting its food holdings and targeting liquor and beverage acquisitions to further to increase its scale in that area, exemplified in its purchase of a piece of Seagram and divestiture of Pillsbury”. An acquisition or cross-border merger is a business practice to get a firm foothold in the market. Divestment, on the other hand, provides a business opportunity to get rid of recurring and future business losses due to a number of reasons like competitors’ strategies and fluctuating market conditions. Acquisition, divestment and cross-border merger started in the global wine industry in a big way, and the industry is yet to settle after a storm of mergers and acquisitions. Diageo is no exception to the trend, starting with its acquisition of Chalone – in the background of other wine market acquisitions of BRL Hardy by Constellation Brands that started in 2003, consolidating the acquisition environment further till 2005 with the acquiring of Barefoot Cellars by E & J Gallo and Robert Mondavi merging into Constellation Brands’ fine wine division (Diageo Plc, 2005). Diageo also sold part of its stake in General Mills in the year 2004 to fund buyback of its own shares. Diageo had 20% stake in General Mills. About 79 million shares of General Mills were acquired by Diageo when it bought Pillsbury company from Diageo in 2001 (The New York Times, Sunday, 1 March, 2009). Coming back to the acquisition of Chalone Wine Group, gained in February 2005, it resulted in the addition of a number of premium Californian wines to Diageo’s portfolio. This acquisition enhanced Diageo’s profile in the wine segment. The reason behind wine market consolidation has been to tap the emerging opportunities in BRIC nations – namely Brazil, Russia, India and China. According to Global Market Information Database, March 2005, the growth of red wine market in Brazil would be around 14% because of rise in wine drinking due to rise in domestic production as well as health reasons. Markets in India, Russia and China are yet not fully developed and by the year 2009, wine drinkers are going to increase in numbers as it is becoming quite trendy to consume wine instead of alcohol. Acquisitions help in consolidating the industry globally. As a result, there is a surge in geographical and sector-wise expansion via acquisitions (Global Market Information Database, Sep 2005). Acquisition of Chalone wine group in February 2005 has widened Diageo portfolio with premium Californian wines. As a result of this acquisition, Diageo profile in the industry has brightened. Diageo needs to expand its reach by owning some Australian brand and should also focus on Chilean and Argentina’s wine industry. Diageo commands a premium position in spirits but there could be a risk o its position if South Korean company Jinro is acquired by Diageo’s rival company Allied Domecq. In such a scenario, a merger or acquisition with Pernod Ricard could be a possibility for Diageo as consolidation of Jinro with Allied Domecq would leave no scope for Pernod Ricard but to involve in an alliance with Diageo. Acquisitions and mergers are risky propositions and need to be made strategically to get a firm footing in the global market share of a business. By broadening its wine portfolio, Diageo has insured its interests from unwanted downfalls in consumer habits by providing both – reasonably affordable as well as premium wines. Let’s have a glimpse of Diageo’s acquisitions in the last five years, from 2004 till 2009. Diageo restructured its United States joint venture with Moet Hennessy. Business reorganisation into three divisions, namely Diageo Europe, Diageo North America and Diageo International happened in the year 2004. It was followed by acquisition of Chalone wine group. Bushmills Irish Whisky was acquired in 2005. In the year 2006, Diageo entered into joint operations with A 1, an Alfa group company to expand business in Russia, enabling penetration with Smirnv brand. It invested £ 100m to promote Scotch whisky. In the year 2007, Diageo created Asia Pacific region from within its existing Diageo International region by reorganising Asia, Greater China and Australasia markets. The same year, 2007, Diageo acquired 43% of the equity of Sichuan Chengdu Quanxing group in China. The year 2008 witnessed 50/50 collaboration with Nolet family for sale, marketing and distribution of Ketel One Vodka. Joint ventures with Heineken and Namibia breweries for South Africa were made. The year 2008 also saw Diageo signing distribution and joint marketing agreements worldwide for Zacapa Centenario Rum. The same year Diageo acquired Rosenblum Cellars. Through such strategically beneficial practices, it has been successful in stabilizing its global business to the extent of making it attractive for fund managers to find market value in consistently stable companies the like of Diageo, which has not been extra-ordinarily affected by market ups and downs and is not at the whims of the wavering market, according to Randall Haase, manager of the Baron Fifth Avenue Growth fund. Diageo needs to consolidate its wine business by creating a brand that has worldwide appeal. Currently, Blossom Hill is infected with underinvestment, which is a big hurdle in making it a world class brand and recognition. To get lucrative offers for joint ventures and alliances with big companies, it should increase the marketing and brand promotion budget. As a way, it can acquire a smaller company with one or two brands and leverage its branding skills to make it popular worldwide. If Diageo is lagging behind its competitors, it is because of not making optimum efforts in promoting its wine business as it has been making to strength its global priority brands. The strategy of acquisitions and mergers with other market leaders can be a way out in establishing Diageo presence in the premium wine segment and be a truly a leader in all segments of its business. Diageo has been practicing this strategy earlier; in 2008, it let go a bid on Swedish brand Absolut Vodka and collaborated with a Dutch competitor in Vodka – Ketel One (World Business Briefing. Europe; Britain: Diageo Drops Bid for Absolut Vodka (New York Times: February 7, 2008). References: Diageo Plc. (2005) www.diageo.com. [Accessed 1 March 2009]. http://www.diageo.com/en-row/AboutDiageo/OurHistory/. [Accessed 1 March 2009]. Global Market Information Database (Mar 2005) Diageo Plc. Euromonitor International. [Accessed 1 March 2009]. Global Market Information Database (Sep 2005) The World Market for Wine. Euromonitor International. [Accessed 1 March 2009]. Haase, Randall. (2007) ‘Managers See Basics as a Buy in Risky Times’ The New York Times. [Online]. 4 August 2007. Available from: http://www.nytimes.com/2007/08/04/business/04values.html?_r=1. http://query.nytimes.com/gst/fullpage.html?res=9F02E5DC1430F934A35751C0A96E9C8B63. [Accessed 1 March 2009]. Rosenbloom, Arthur H. (2002) ‘Due diligence for global deal making’ [Online]. Available from: http://books.google.co.in/books?id=DkkVXp-fkmUC&pg=PA26&lpg=PA26&dq=DIAGEO+ACQUISITIONS+DIVESTMENT+CROSS+BORDER+MERGERS&source=bl&ots=_Ys3vFKJC2&sig=O63JBjCey7ip--MANRVqxJO8MxU&hl=en&ei=WZKpSbOvJ5j07AP335C0Bg&sa=X&oi=book_result&resnum=4&ct=result#PPA37,M1. [Accessed 1 March 2009]. Critically evaluate the impact and relevance of the Environmental Report and/or Social Responsibility Report in the Financial Statements of the company in the past three to five years. Diageo’s business activities affect the stakeholders and the consumers alike. This creates a feeling of social responsibility of becoming a socially responsible corporate entity. Diageo is very much into becoming socially and environmentally responsible and showing such behaviour not only in its actions but deeds as well. The company has been making efforts in the right direction where the communities are benefited the most. As is evident from the company’s commitment to invest 1% of its operating profit to social and community causes, it invested £23.9 million in the year 2008. Diageo has been partnering actively with non-profit organisations and government agencies wherever it has been doing business to make sure that the stakeholders get a feeling of being taken care of. Environmental concerns are reflected in Diageo’s environment policy. All production sites follow the rules laid down in the company’s environment policy. The number of such sites is growing that adhere to and are certified to ISO14001. Relevant with Diageo’s policy aim of taking precautionary measures based on current scientific and technical aspects without asking proof of environmental damage has been the company’s approach. Diageo has been making efforts to minimise climate risks due to greenhouse gas emissions. Company guidelines are strictly followed regarding water management. This approach of Diageo is well reflected in yearly financial statements. In its operating review of the region for the annual review year 2007 in which the company registered 37% operating profit, it is mentioned that Diageo got industry recognition for its social responsibility efforts. In Canada, a major customer, four awards included one for the cause of responsible drinking. Diageo has been a supporter of Federal Trade Commission’s campaign “We Don’t Serve Teens”. The purpose behind such initiative was to remind sellers of alcohol not to serve to those who are below the standard age of consuming it. Another such programme “Safe Ride Home was advertised as a step to offer a secure and safe free ride to NASCAR audiences. Cautionary statements or forward looking statements are made by Diageo in each of their financial reports. Environmental factors and social responsibility factors also determine the success of such forecasting as changes in environment laws and health regulations among others are critical to the business success of a company. Diageo is no exception. Consumption of alcohol, which can become an abuse because of its negative effects on a person’s health, creates common social fears of its ill-affects. As a result consumers are advised to remain away from alcohol. Social anti-drinking/driving campaigns are run in traditional wine drinking countries like Spain, a Diageo market, laying emphasis on not drinking. In the financial year 2006, Diageo in financial statements has disclosed its strategy of fighting irresponsible patterns of alcohol consumption. In its desire to be the front-runner in promoting responsible drinking, fight misuse and alcohol misuse, it has decided to tackle the issue on two principles: define responsible marketing standards and encouraging common understanding on what is meant by responsible drinking and how to minimise alcohol related losses. It has been made mandatory for new directors to receive orientation training from the senior directors in the context of assurance processes, environment policies, and social responsibility policies and practices. It is also mentioned that corporate citizenship committee will publish on the company’s website social and environment policies. Committee is supported by alcohol and responsibility executive working group. According to financial report 2006, social acceptability of Diageo products is very crucial so that its sales volume and business is not affected in the wrong way. In the matter of risk management and internal control, processes such as system implementation are applied. Risk management includes not only operational risks that include health and safety but environmental risks are also tackled. It has been made clear in the notes to the consolidated financial statements regarding new accounting policies that the International Financial Reporting Interpretations Committee (IFRIC) has not covered the environmental rehabilitation funds for rights to interest accrued on them. In the cautionary statement concerning forward looking statements, environmental laws have been included for being out of control and range of the company. Charitable and political donations in the financial year 2006 were made to the tune of £20.2 million, whereas in the previous year i.e., 2005, the figure was higher than 2006 – to the tune of £22.6 million. Considering UK group companies donations to the social causes, the year 2005 saw £14.4 million in donations whereas in the year 2006, the figure decreased to the tune of £11.8 million to charitable organizations. Diageo Foundation received £0.7 million in 2006 whereas in the year 2005, it was £1.4 million. The Thalidomide Trust was donated a grant of £6.5 million in the year 2006 whereas in the year 2005, it was to the tune of £7.2 million. There was not much difference in the grants to the rest of the world for the consecutive years – 2006 -- £8.4 million and 2005 – £8.2 million. In Europe, where operating profit for the year 2007 was 32%, a number of consumer responsible drinking programmes were inaugurated. Such collaborations included DrinkAware Trust in Great Britain and MEAS in Ireland. Taking such initiatives, Diageo became founding member of the EU Alcohol & Health Forum and is a sponsor of European Transport Safety Council, working for the cause of minimizing drink driving in all EU nations. To effectively communicate the message of responsible drinking, Diageo propagated a consumer education programmer with Tesco on their website and retail outlets. Another industry level responsible drinking fund to the tune of €20 million was led in Ireland to create consumer consciousness through education, research and training to promote positive attitude towards sane drinking. In Africa, Diageo run its Water of Life programme to more than 500,000 people. In the financial report for the year 2008, the company has provided report on corporate governance, relations with shareholders, charity and political donations. In total, charitable donations by Diageo were £23.9 million while in the year 2007 such donations were £20.7 million. In the year 2008, UK group of Diageo companies made donations of £10.7 million while in the year 2007, it was £10.6 million. Out of total donations, Diageo Foundation received a grant of £1.0 million, which in the year 2007 was £0.5 million. It also included a grant of £7.1 million to the Thalidomide Trust from £6.8 million in the year 2007. This donation is a part of original 1973 settlement by the Distillers Company (DCL), now Diageo Scotland Limited, and a subsidiary of Diageo plc. To serve the cause of social responsibility for the rest of the world by the group companies in the financial year 2008 amount to the tune of £13.2 million in charitable donations was spent. In the year 2007, it was to the tune of £10.1 million. In this regard, it is important to disclose that Diageo made no political donations to the EU member states’ political parties but donations were made non-EU political parties to the tune of £0.3 million in the financial year 2008. Such political donations were higher in the year 2007 – to the tune of £0.3 million. These donations were made to federal and state candidates of the US committees for promoting better business environment and understanding. After analysing the figures of donations made for the social causes by Diageo in UK and outside UK, it comes to notice that donations in the year 2005 were higher in figures than made in the year 2006. So it has not always been an upward trend although figures for the year 2008 were higher than the year 2007. It can be understood as the company has committed to spend 1% of a year’s operative profit on social causes. One can see clearly the impact and relevance of social responsibility reports and environment reports in the financial statements of Diageo – a committed partner of the stakeholders. References: http://www.diageo.com/NR/rdonlyres/090F0C25-72C2-494E-A8B3-7D6A72046D00/0/EnvironmentalPolicy2009.pdf. [Accessed 1 March 2009] http://www.diageo.com/en-row/CorporateCitizenship/Communityandenvironment/Environment/. [Accessed 1 March 2009] http://www.diageo.com/annualreview2007/north_america.html. [Accessed 1 March 2009] http://www.diageo.com/annualreview2007/europe.html. [Accessed 1 March 2009] http://www.diageo.com/NR/rdonlyres/3952ED09-CF22-4A2C-818E-5F5CB9ED0188/56851/Diageo_AnnualReport_08.pdf. [Accessed 1 March 2009] http://www.diageo.com/NR/rdonlyres/1815FC48-623E-476B-85A1-43A40E4DDAEF/0/DiageoAnnualReport06.pdf. [Accessed 1 March 2009] Evaluate two of the additional statements of the company Diageo with two additional statements included by AstraZeneca PLC in its Annual reports or Financial statements; linking your answer to the quotation below and commenting on the effectiveness of these additional statements in meeting Corporate Government requirements and/or the need of the stakeholder groups. “Legislation (such as the Companies Act 1985 in the UK) requires that additional information in the Annual Report such as a Director’s report. As well as statutory information many companies choose to give additional information such as Operating Reviews, Chairperson’s statements or Business Summaries. Around the world the names and formats of additional information do vary, but the actual information included is of similar nature.” Source: Elliott B &Elliott J., (2006) Financial Accounting, Reporting & Analysis, International Edition, 2nd Edition, p.78 The practice of providing additional information to the stakeholders about the company’s business activities is prevalent. Companies provide such useful information to all stakeholders so that their confidence on its business activities remains intact as inside environment can be mirrored to the outside people; it remains opaque no more. Legislation such as the Companies Act 1985 makes it obligatory on the part of company’s directors to provide information about the business in summary form, company’s operating reviews and through the Chairperson’s statement. Diageo’s business transparency is reflected in its annual reports and related financial statements. The company provides a total internal view and forecast of its business activities by issuing Chairperson’s statement, Chief Operating Officer’s statement, and information to the shareholders disclosing important stats in the operating reviews and summarising important facts. Chairman’s statement Let’s evaluate Diageo Chairman Dr. Franz B Humer’s opening statement in the light of Elliotts’ remarks for the year 2008. His opening remarks tell the earnest with which the company has been treading the path of corporate and social responsibility in the context that it is an alcohol producing and marketing company, consuming of which in some nations of the world is a social stigma. Instead of shying away, Diageo has been an active partner in creating a common understanding that social responsibility cannot be shed away while drinking. Diageo’s share in global market premium spirits is highest – 28% as per Impact Databank. The Chairman has pointed out the need of following and adhering to corporate standards of governance in the wake of performing on a global platform. Adhering to regulations and transparency in accounts and business dealings and auditing are mandatory for the interests of all stakeholders. Such a close examination of company’s affairs of business increases costs and management’s responsibility. Next comes his social responsibility statement that being in the business of beverage alcohol, regulations and taxes need to be strictly adhered to and paid. Further, Dr. Humer has outlined the achievement of his predecessor Chairman Lord Blyth by reviewing – how he transformed Diageo’s premium drinks business, recounting all the sales and acquisitions happened during his tenure – how efficiently he dealt and fulfilled all the responsibilities attached while performing on the international arena. The Chairman Humer’s statement caters to the need of following corporate governance and stakeholders’ issues strictly while showing total concern for social responsibility. AstraZeneca being a pharmaceutical company, its Chairman Louis Schweitzer has at the outset shown concern for patients, shareholders and society through its R & D work, business performance and operations efficiency in his 2008 statement. He has devoted the next Para of his statement on company’s business performance through the success in recording profit, dividend for shareholders to 10% for the year 2008, providing figures of cash distribution to shareholders through dividend and share repurchase. He has shown through a comparison of London-listed share price that increased to 30% in the year 2008 with FTSE 100 index that decreased 31%. Chairman Schweitzer has briefed his investment strategy by doing R & D work in disease area where healthcare industry is lacking. Speed and safety for new medicines reaching fast to market for the benefit of such patients has been the company’s strategy for the year 2008. The company has laid focus on “delivering differentiated medicines that make a meaningful difference to patients”, who are the major stakeholders of the company. Comparing the statements of both companies’ Chairmen, one thing that comes sharply into notice, is their commitment to serve their stakeholders efficiently and win their confidence although it is contrasting that Diageo is an alcohol producing company being compared to a Pharma company. What you say – drink alcohol and buy medicine to treat the ill effects of alcohol. But shareholders of both the companies are the major stakeholders and both company’s Chairmen have made such statements that are meant to win the confidence of company shareholders. Other than that, both companies have shown their determination in following corporate governance rules and regulations. The Chairman of Astr Plc has discussed the current market scenario of meltdown and its indirect effects on the company business and laid emphasis on managing the risks and opportunities well through strategically beneficial investment, benefiting from the usage of intellectual property and involving stakeholders to the benefit of all – patients, shareholders and society. Another noticeable difference in the statements of both Chairmen is that other than catering to shareholders’ interest which is common in both organisations, acquisition and merger activity is a major business strategy at Diageo while Astra Plc has stressed on R & D productivity, commercial success and operational efficiency besides detailing on the shareholders’ earnings, which Diageo Chairman has not discussed in his statement. Cautionary Statement Diageo has, for the benefit of stakeholders, first of all has defined the meaning and purpose of “Cautionary statement concerning forward looking statement”. Explaining what cautionary statement includes “express forecasts, expectations, plans, outlook and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability or cost of financing to Diageo, anticipated cost savings or synergies and the completion of Diageo’s strategic transactions”. AstraPlc, on the other hand, straightway referred to the “safe harbour” provisions of the US Private Securities Litigation Reforms Act 1995. Saying that forward looking statements “reflect knowledge and information at the date of preparation of this preliminary announcement” showing no concern to update such statements is quite straightforward talk, stressing on the usage of such verbs ‘anticipates’, ‘believes’, ‘expects’, ‘intends’, to make it very much clear that there is no guarantee that whatever is promised will be delivered. Future business risks to Astra Plc are somewhat same other than the difference due to product difference. Astra Plc main stakeholder is its patient for whom new medicines are developed and patent issues while Diageo being in the beverage alcohol business has no such risks of loosing patent. Product competition, pricing pressures, partnerships, acquisitions, future disposals, regulatory approvals for new products, litigation, technological developments are some of the common risk factors described in cautionary statements of both companies. Diageo’s cautionary statement is more focussed on advertising on beverage alcohol, regulations on its consumption, changes in tax laws and accounting standards, environmental laws, health regulations, changes in consumer tastes and preferences, regional tendencies, cost of raw material, labour and energy, economic changes in consumer markets, marketing and innovation costs by Diageo and its competitors, systems change programmes and systems failure, which can lead to disturbance in business activities and adversely affect the forecast made in cautionary statement. Astra Plc cautionary statement has raised concern for product specific risks like the risk of expiry, risk of having a biologics and vaccines business, product counterfeiting, risk of inadequate insurance coverage, difficulty in getting and fulfilling regulatory compliance for new products and the risk that R & D won’t perform up to expectations. Some other specific to product risks faced by Astra Plc include dependence on third parties for supplies and services and risk of not taking productivity initiatives and risk to company’s goodwill. One will definitely agree with Elliotts’ statement that throughout the world just names and formats of additional information vary but the meaning of the content is same. These statements are made with the sole aim of winning the confidence of stakeholders that their business and consumer interests are in the able hands of the management and a promise is guaranteed that corporate governance rules are followed in the true spirit, to clear the doubts in the minds of all stakeholders. References: http://www.diageo.com/NR/rdonlyres/3952ED09-CF22-4A2C-818E-5F5CB9ED0188/56851/Diageo_AnnualReport_08.pdf. [Accessed 5 March 2009] http://www.diageo.com/NR/rdonlyres/4FF891A9-5B3B-4A05-98B4-8F26CAF513C8/0/FinalVersionPressRelease.pdf. [Accessed 5 March 2009] http://www.astrazeneca-annualreports.com/2008/introduction/chairmans_statement.html. [Accessed 5 March 2009] Read More