Diageo-Marketing - Case Study Example

Diageo- Marketing case study Introduction Marketing the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to satisfy customers. The current business conditions are highly competitive. Companies compete with more efficient strategies. Technology has added another dimension to the concept of marketing. Customers have more choices and better access to different cost options. Strong marketing strategies will determine the success or failure of an organization operating in these dynamic conditions. Company Overview The word Diageo comes from the Latin for day (dia) and the Greek for world (geo). The company wishes every day, everywhere, everyone celebrates with their brands. As proclaimed on its website, "Diageo is the world's leading premium drinks business with an outstanding collection of alcohol beverage brands across spirits, wine and beer categories. These brands include: Smirnoff, Johnnie Walker, Guinness, Baileys, J&B, Captain Morgan, Cuervo, Tanqueray, Crown Royal and Beaulieu Vineyard and Sterling Vineyards wines." Diageo is a very well-known brand globally and markets all over the world that includes including Great Britain, Ireland, United States, Canada, Spain, Italy, Africa, Latin America, Australia, India and the Caribbean. The company is listed on both the London Stock Exchange (DGE) and the New York Stock Exchange (DEO). (Source from website: http://www.diageo.com/en-row/AboutDiageo/Diageoataglance/) Company History Diageo was formed in 1997 and is headquartered in London and was the result of a merger between Guinness and GrandMet. Although well known for its alcoholic beverages, few know that Diageo started off in both food and drinks. However, it divested itself of the Pillsbury Company that dealt mainly with packaged food and in 2003, sold off Burger King in the fast food industry. It sales now is solely from its alcoholic beverages. Diageo - Competitors Analysis Key competitors include Allied Domecq, Constellation Brands and Fortune Brands. Allied Domecq: The company is the world's #2 distiller, after Diageo. Its spirits and wines unit produces a number of brands at or near the top of their respective categories, including Ballantine's scotch, Beefeater gin, Kahlua liqueur, Sauza tequila, Canadian Club whiskey, and Courvoisier cognac. The firm has distilleries in Europe and North America. Allied Domecq's retail operations include the Baskin-Robbins, Dunkin' Donuts, and Togo's Eateries franchises. Allied was acquired by Pernod Ricard in 2005. (Source from website: http://www.hoovers.com/allied-domecq/--ID__50001--/free-co-factsheet.xhtml) Constellation Brands: The Company makes and distributes about 200 brands of beer, wine, and spirits in the US and the UK. Its Constellation Wines division is the global leader in wine sales, offering brands such as Almaden, Banrock Station, Hardys, Inglenook, Vendange, and Arbor Mist. Constellation also makes premium wines including Estancia, Ravenswood, and Simi. Constellation Brands imports beers such as Corona and Tsingtao, markets distilled spirits such as Fleishmann's and Barton, and produces and distributes cider, wine, and bottled water in the UK. (Source from website http://www.hoovers.com/constellation-brands/--ID__11800--/free-co-factsheet.xhtml) Fortune Brands: The holding company is a leading US producer and distributor of distilled spirits (Jim Beam, DeKuyper, Knob Creek, Absolut) and golf equipment (Titleist, Cobra, FootJoy, Pinnacle). Bacardi, Adolph Coors, Carlsberg, Fosters, SABMiller and Pernod Ricard. It also has a diversified non-alcoholic product mix and has added former Allied Domecq brands Sauza, Courvoisier, Canadian Club, and Clos du Bois to its fold. (Source from website: http://www.hoovers.com/fortune-brands/--ID__10075--/free-co-factsheet.xhtml) Data from website: http://www.diageo.com/NR/rdonlyres/E8BFE3FB-B7D8-461B-8E27-4D8449A1C350/0/DiageoFactSheet2006.pdf. Diageo is the leader in terms of revenues and global market share. In 2005, had a market share of 60% of the world's market. Diageo - PEST Analysis Political The advent of the European Union and with more and more countries scheduled to join in bodes well for the industry. This will offer a wider customer base and younger demographics will benefit the alcoholic beverage industry. The European Union has also brought in a single currency that does away with conversion rates and exchange hassles. Also a more politically stable Union is undeniably helpful. Economical An improving economic health bodes well for the industry. This puts more money into the pockets that will increase the spending power of the public. Growing per capita income will be beneficial to the industry. European Union has now enabled the free trading of stocks across all the countries and this is bound to generate an increased interest in the companies. Lower taxes generate more leverage for the companies. Mergers and Acquisitions are increasing and the strongest player ends up surviving. This creates a balance of power that keeps shifting constantly. Gas prices are fluctuating and in the future rise in fuel prices will cause costs to go up impacting the bottom line. Alcoholic beverages are always prone to taxation laws because they are considered a luxury rather than a necessity and always impacted by increased levies. Social and Cultural People are becoming more conscious about their health and consequently life style changes are emerging. People are willing to spend more time in outdoor activities and are aware about what they consume. Alcoholic beverages are now being looked at in a newer light. Growing population, especially in the developing nations constitute more opportunities. Technological Technology has grown in leaps and bounds and has therefore ushered in changes. Increased efficiencies are now possible in the manufacturing, distributing and marketing processes due to technology utilization. These have lowered costs and increased margins for the companies. Early adapters have been enormously benefited. The explosion of Internet and its growing number of users has made E-Commerce a primary marketing tool with enormous potential. Companies have embraced it with zeal and have been benefited. Diageo - SWOT Analysis Strengths The greatest strength of Diageo is its brand value. It has several globally recognized brands. It is able to leverage on its brand power to diversify into newer brands. Guinness Extra Cold is a good example. It has used technology to differentiate its product packaging successfully. Its varied distribution channels due to the mergers have been efficiently integrated leading to lower administrative and marketing costs. Its strategy of granting licenses to local production facilities has helped its market penetration with comparatively lower costs and risks. Weaknesses Its brands are available globally but its niche market is still in Europe. Also emphasizing an " Irish" component of its brand "Guiness" may not cater to a global audience. Its total revenues are from alcoholic beverages only and this complete dependency might take a beating in case of economic downturns. Since it has no other non-alcoholic product to balance the falling sales, it might be very risky. Market trends are changing and consumer preferences towards differentiated beverages need to be catered to. Diageo is lagging in these segments like specialty beers and lagers, and this may be its downside. Also, although it licenses overseas production, it will create loss of tight control over quality that may prove disastrous for it. Opportunities The forming of the European Union, the growing population contributing an increased customer base, the wider appeal of beer to the younger demographic segment and targeting developing nations like China and India for untapped potential are huge opportunities. Threats Supermarkets are bringing in their own " store brands" that are competitively priced and vigorously promoting them making branded products lose valuable market share. This takes away one of the popular distribution channels. Local players may bring in new flavours on an experimental basis due to their smallness of scale that allows them to quickly cater to changing needs. An increasingly health conscious society raising questions about the effects of alcohol on health will be very detrimental. Also regulations on advertising and increased taxation laws on luxury items will impact its sales. Industry Analysis Porter's Five Forces Analysis is an important tool for assessing the potential for profitability in an industry. It works by looking at the strength of five important forces that affect competition. (Porter,1980) Let us now apply it to the alcoholic beverages industry. Supplier Power: This is the power in the hands of the suppliers that affects the industry. In the alcoholic beverages sector, the power of suppliers of grain, grapes etc that is the raw material for beer, wine etc and the packaging suppliers like cans, bottles, etc to drive up the prices will affect the cost structure. At the same time, better sales of the beverages creates an increase in demand for the raw materials, so suppliers are also required to remain competitive because the manufacturers can easily switch to another supplier with minimum impact if the prices are driven up. Also these products are universal and readily available, and therefore suppliers can easily be switched making them vulnerable with a low power. Buyer Power: This is the power of the buyers of the product. Since supermarkets are marketing their own brands due to increase in margins, they can source from any local brewer making it harder for the bigger players. This will drive down the prices. Also, the consumers may easily switch from one brand to another impulsively or if the product is lower priced or not stocked. Especially in the conditions of economic downturns, price may be a determining factor. Competitive Rivalry: The strength of competition in the industry is also dependent on the number of players in the market. When volumes remain the same, increase in the number of players provides increased pressure to maintain market share due to over supply and lower demand. A new entrant would have to take market share from the already suffering European brewers. Factors leading to increased internal rivalry include low market concentration, excess capacity in the industry and low switching costs for consumers. The Threat of Substitution: With changing consumer needs catering to them will be easier for the smaller players that the larger players due to economies of scale. Similarly consumers may switch to other products like specialty beers with flavour when no established brand is yet available with the traditional players. Similarly newer energy drinks, soft drinks or spirits can be easily substituted for the existing products with a high impact. The Threat of New Entry: The ease with which new competitors can enter the market is relatively high since there are no real barriers of entry. Factors that make possible entry are availability of basic resources and insignificant economies of scale and scope. Anheuser Busch headquartered in the USA may suddenly decide to enter upsetting the synergies of the alcoholic beverage sector in Europe. However, access to distribution channels is increasingly becoming a barrier to entry. Since the existing players will have access to well-configured distribution channels, new entrants may find it daunting. Newer players may give better introductory prices to penetrate the market and they may end up swapping valuable shelf space from the established players. Michael Porter suggested that for an organisation to be successful and obtain a competitive advantage they should follow either one of three generic strategies of Cost leadership, Differentiation or have Niche strategies. (Source from website http://www.learnmarketing.net/generic.htm) Cost Leadership is based on the principle of maintaining lowest costs in terms of manufacturing, marketing and distribution and passing on the benefits to the customer and garnering market share due to offering the lowest price. However this strategy is vulnerable to even slight increases in the cost structure. Having a Niche Strategy means catering to a specified product segment with a specialised product. However, having a very focussed marketing mix makes it vulnerable to cope with sudden changes in customer trends. Product differentiation is a strategy that induces the customer to pay a little more for the same product category due to a perceived value by the consumer who is convinced to pay a little more for quality. Diageo follows this differentiated strategy where it is perceived as a " premium" brand and is targeted at the "up-market" consumer. Diageo - Strategy Analysis and Recommendations Diageo has been very strategic in leveraging its scale and using it as an advantage to the greatest extent possible. It has to be applauded for understanding consumption behaviour across markets and geographical boundaries and bringing in the right product at a right price that is so essential in the business-to-consumer markets. Its top selling brands like Guinness, Johnnie Walker and Smirnoff, it garners almost 70% of its revenues from it and the UK, Ireland, Spain and the US account for over 60% of sales. The downside of a having only a few niche brands is that it is vulnerable to downturns. To counter this, it can tie up with local brewers to market specialty beers that are catching up as a fresh twist on the beer. Also, this will help it to cater to the diverse cultural demographics spread all across its markets and widen its playing field. Diageo has also been scrupulously consistent about streamlining operations an exiting loss making locations. It franchises licences benefiting from the lower risks, better local knowledge and easier exiting when things do not work out. The downside of this is that it has no real control over the production, and the local brewers may focus on their own products. Taking over its own centres will give it more control flexibility and better manipulative power. Diageo also has to keep incorporating newer technology in its manufacturing and distributing processes to increase its efficiencies and keep costs low. Diageo is working to create a more efficient and effective relationship with its distributor network, with an emphasis on delivering better value and more choice for consumers. (Source: http://www.findarticles.com/p/articles/mi_m3469/is_18_53/ai_86630443) Diageo scores high on advertising strategies. Alcoholic beverages are the target of strict regulations on advertisements and press releases. Diageo has cleverly used socially responsible messages to advertise it drinks like using a designated driver after a few drinks. It also uses the bartenders as a means of informed educators by conducting blind taste tests to bring home the fact that their products score the best marks against their competitors. It also emphasizes the fact that bartenders' behaviour contributes a lot to enhance the image of the beverages served. In 2004, Diageo revamped Smirnoff's packaging giving it the award-winning sleek, contemporary look to appeal to its male audience and premium branding. (Source from website http://www.rexam.com/index.asppageid=444&company=smirnoff). Sponsored dance parties, called Smirnoff Experience, around the world, accompanied the relaunch. It is also trying to give a fresh look to the Guiness brand and has set aside 150m in marketing. Unlike its competitor products like Bacardi and SABMille, that have a better resonance with the youth, Diageo has a more mature image and it should try to appeal to a younger consumer to expand its customer base. In April 2006, it is launching "Quinn's, a totally new type of alcohol drink, into the UK On and Off Trade. The fruit drink where everything, even the alcohol, is made from 100 percent fruit is the first of its type. Quinn's, developed for people in their mid to late 20's, is Diageo GB's biggest new product launch in five years. The launch will be supported by a marketing campaign worth in excess of 8.5 million in the first year. The campaign will include TV, cinema and digital advertising, PR and below-the-line activity, including in-store sampling. (Source from website: http://www.diageo.co.uk/) Diageo has also grown by acquisitions or partnerships. Its deals to sell Don Julio and Tres Magueyes tequilas, and a joint agreement with Heineken to buy 30% of Interbrew's Nambia Breweries in Africa, and the introduction of Baileys Glide, a low-alcohol version of its Baileys Irish whiskey-and-cream drink to cater to the low-calorie drinks trend are all sensible measures that Diageo has adopted to keep pace with market needs. (Source from website: http://www.eiu.com/index.asplayout=IWArticleVW3&article_id=1837681783&refm=iwIndustry&industry_id=290000029) Increasing awareness about health concerns and changing views about alcohol use are all issues Diageo needs to play close attention to. Drunk driving, binge drinking may make it prone to litigations. Diageo has proved itself to be a responsible marketer in an industry that is known for being under scrutiny for social and health problems often. It has intelligently positioned itself as a "community partner" in portraying its understanding of the dangers of over indulgence, it has earned respect for itself by its marketing strategies and that has contributed to success in a highly volatile industry. It has formulated its own Diageo Marketing Code. As stated on its website, this Diageo code applies in addition to industry codes and government regulations, and it sets the minimum global standards of practice for all Diageo marketing activities around the world including advertising, promotions, brand innovation activities, consumer PR and the development and content of websites. (Source website http://www.diageo.com/en-row/ValuesAndPolicies/ResponsibleMarketingandInnovation/) Conclusion With promising healthy growing economies in developing nations, it has great plans to conquer newer markets and launch premium luxury brands. "As part of our innovation agenda we will be putting an increased emphasis on premiumisation, and will build the best luxury brands collection in the industry. We will invest more in longer-term market opportunities - Brazil, Russia, India and China are current examples, there will be others. In ten years time these emerging markets must and will account for a far bigger percentage of Diageo's profitability than they do today." Source from website: http://www.diageo.com/en-row/AboutDiageo/Ourstrategy/). This is definitely a great move that is bound to benefit Diageo enormously due to a wider target base contributed by untapped potential. Diageo has always been in tune with the dynamic environment and has been able to strategize accordingly. This has made it a success story and a created a place for itself in the alcoholic beverage industry which is open to numerous sensitive and volatile issues. Selective acquisitions to support brand growth, on-going innovation and customer focus strategies will continue take Diageo on the path to success. Sources Michael Porters Generic Strategies Learnmarketing.net [Online] Available from Accessed on 20 Feb 2006 Porter, Michael E (1980) Competitive Strategy, Free Press Viljoen, John, Dann, Susan Strategic management 4th Edition Prentice Hall Diageo at a glance Diageo.com [Online] Accessed from website on 17 March 2006 Diageo launches Quinn's - A Totally New Type of Alcohol Drink Diageo.com [Online] Accessed from website on 17 March 2006 Celebrating Life Everyday, Everywhere- Diageo [Online] Accessed from website on 17 March 2006 Murray Barbara Allied Domecq PLC Overview Hoovers.com [Online] Accessed from website on 17 March 2006 Murray Barbara Constellation Brands, Inc. Overview Hoovers.com [Online] Accessed from website on 17 March 2006 Murray, Barbara Fortune Brands Inc. Overview Hoovers.com [Online] Accessed from website on 17 March 2006 World Drink- Key Player Diageo 15 October 2004 [Online] Accessed from website on 17 March 2006 Our Strategy- Diageo [Online] Accessed from website on 17 March 2006 Responsible Marketing and Innovation Diageo [Online] Accessed from website http://www.diageo.com/en-row/ValuesAndPolicies/ResponsibleMarketingandInnovation/ On 17 March 2006 Reexam PLC Smirnoff Ice [Online] Accessed from website http://www.rexam.com/index.asppageid=444&company=smirnoff On 17 March 2006 Read More