Market Performance of Diageo PLC - Essay Example

Diageo PLC Diageo produces and distributes a large collection of leading branded premium spirits, wine and Beer (Diageo - About US, 2009). The company has strong presence in the US and Europe market and has maintained steady growth internationally. The company’s headquarter is located in London, UK and as on June 30, 2008, it had a strong work force of around 24,400 (Diageo - Annual Report, 2008). The company’s revenues for FY2009 were around ?9,311 million which was an increase of 15% over the FY2008 revenues of ?8,090. The operating profit of the company was ?2,443 million during FY2009, an increase of 3.1% over FY2008. The net profit was ?1,621 million in FY2009, an increase of 2.1% over FY2008 (Diageo - Annual Report, 2009). Diageo was created in 1997 as a result of the merger of Guinness and GrandMet (Diageo - Our History, 2011). Diageo rapidly expanded in next few years through both organic and acquisition channels. In 2001, Diageo also acquired the spirits and wine business of Seagram. In 2004, the company acquired Ursus Vodka. In 2005, Chalone Wine Group was acquired. Later, the company also acquired Bushmills Irish whiskey which included Bushmills' Distillery, which is amongst the oldest licensed distillery in the world. In 2006, the company made its first acquisition in China. The company bought a 43% stake in Sichuan Chengdu Quanxing, parent of Swellfun (Diageo - Our History, 2011). In January 2007, Diageo Asia Pacific was created to target a new geographic location. January 2007 marked the trial of new Guinness Red brand in 142 pubs in Great Britain. In February 2007, Diageo invested ?100million in expansion of its Scotch whisky operations in Scotland, in order to meet its future demand. In April 2007, as a part of brand extension, the company launched Johnnie Walker Blue Label and King George V Edition in duty free channels of Europe, the Americas & the Middle East. As a part of its global innovation strategy, the company made minor investment in Nuvo (brand), a new ultra-premium effervescent blend of fine French vodka, French sparkling wine, and exotic fruit nectar created by LLC (Diageo - Our History, 2011). In May 2007, the North American division of the company launched Smirnoff Source, a new premium malt beverage that combines pure spring water with alcohol. In Oct 2007, Diageo announced strategic alliance between Sean 'Diddy' Combs and Ciroc vodka. Under the terms of the deal, Combs and Sean Combs Enterprises took the lead on all brand management decisions for Ciroc, while sharing in the future profits of the growth of the brand. In November 2007, Diageo invested ?5 million in J&B brand's package redesign to give it a more contemporary look. The new pack highlighted the brand's role as the ultimate party whisky with a design to party goers (Diageo - Our History, 2011). Diageo acquired Rosenblum Cellars in early 2008. In February 2008, Diageo and the Nolet Family formed a 50/50 company which owns the perpetual exclusive rights to sell market and distribute Ketel One Vodka (Diageo - Our History, 2011). In March 2008, Diageo, Heineken and Namibia Breweries reached agreement to form a new joint venture for their combined beer, cider and ready-to-drink (RTD) businesses in South Africa. In May 2008, Diageo reached an agreement to buy all the Constellation Brands' distillery and bottling facility at Valleyfield, Quebec, Canada. In the same month, Diageo made a capital investment of E650 million in a new brewing centre in Ireland to support the growth and development of its global beer business (Diageo - Our History, 2011). Diageo also underwent a brief period of divestment, like that in 2003, which resulted into the selling of its Czech division, Diageo Ceska Republika, to Global Spirits. It also shut down its marketing subsidiary Nightfly (Diageo - Our History, 2011). SWOT ANALYSIS OF DIAGEO Strengths Weakness Wide range of Products Continuously Declining margins Market Leader   Opportunities Threats Ever growing presence in Asia-Pacific region Litigations and liabilities Acquisitions and disposals The Industry has been continuously shrinking STRENGTHS Wide range of Products Diageo has presence in wide range of activities within the industry. Its operations include producing, distilling, brewing, bottling and packaging, distributing, a range of brands in over 180 markets around the world. In 2010, 17 of the company’s owned brands were among the top 100 premium distilled spirits brands worldwide (Diageo - About US, 2011). Thus wide range of products enables Diageo to reach out virtually every kind of customer. Market leadership Diageo is the world's leading premium drinks business with a wide collection of international brands. Diageo was the 17th largest publicly quoted company in the UK as in August 2010 (Diageo - About US, 2011). Diageo is the leading premium spirits business in the world by volume, by net sales and by operating profit and it manages eight of the world's top 20 spirits brands (Diageo - Annual Report, 2009). This kind of market leadership gives Diageo considerable advantage while launching new products as it can make use of its existence customer base and marketing channel. WEAKNESSES Continuously Declining margins The operating profit margin of the company has declined from 21.8% in FY2008 to 20.9% in FY2009. The net profit margin of the company has been registering decline from the past three years. It decreased from 19.7% in FY2007 to 14.3% in FY2009 (Diageo - Annual Report, 2009). Declining operating margins indicate increasing cost pressures and continued decrease in net margins would affect the profitability of the company. OPPORTUNITIES Ever growing presence in Asia-Pacific region The Asian spirits market is driving growth in the global spirits market. It already accounts for nearly 60% of the world's spirits consumption. It is expected to record a 17% volume growth by 2010, over 2008 (Diageo - Annual Report, 2010). The company has also strengthened its presence in India through a joint venture with Radico Khaitan and is dominant in china after 43% of the equity in Sichuan Chengdu Quanxing Group Co., Diageo Highlands Holding B.V. in China (Diageo - About US, 2009). Acquisitions and disposals Acquisitions resulted in a net increase of sales of around ?1 million, in 2010 (Diageo - Annual Report, 2010). All these acquisitions and disposals have been successfully done by the company to drive efficiencies. Diageo’s unique ability to understand business opportunities to drive growth gives it a competitive advantage and this offers amazing opportunity for the company. THREATS Litigations and liabilities With regards to Pillsbury, Diageo has guaranteed the debt of ?101 million until November 2010 (Diageo - Annual Report, 2010). Additionally the company is facing litigation in Turkey. Similarly the company continuously faces threat from customs authorities round the world and hence litigations are a constant threat. The brewing industry has been consolidating to secure brands and national positions. For e.g. Allied Domecq has been taken over by Pernod Ricard, Heineken has taken 49.99% stake in Tunisian company, Societe de Production et de Distribution des Boissons (SPDB), SABMiller recently acquired Foster's India, Bacardi acquired 42 Below, a New Zealand spirits, Labatt acquired Lakeport etc. Hence one can see that the industry is accustomed to a large number of acquisitions. Increasing competition and industry consolidation could lead to a loss of market share of the Diageo, which in turn, would affect its profitability (Datamonitor- Spirits in United Kingdom, 2008). Works Cited Datamonitor Report (2008). Spirits in United Kingdom. Industry Profile. November 2008. Diageo. 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