Diageo: Profile and Market Study - Coursework Example

Diageo - Profile & Market Study The report gives a detailed study of the profile of one of the biggest alcohol companies in the world, Diageo. The company produces and distributes a leading collection of multiple brands in over 180 markets across the globe. The report also studies the competition within the beverage industry with a concentration on three of the foremost international beverage companies, Pernod Ricard, Brown Forman and Fortune Brands. A PEST and SWOT analysis has been carried out to examine the business environment that influences Diageo. The political, social, economic and technological risks that revolve around the business have been examined and the strengths, weaknesses, opportunities and threats listed out to get an extended analyzes of the company. Finally, a market study of the beverage industry has been prepared that highlights the statistics within the industry today. The companies that are on top of the business have been identified with the help of a graph. The current developments of the company have also been provided as a conclusion to the report. Introduction - About Diageo PLC Diageo PLC is a multinational British alcohol company, and one of the biggest alcohol companies in the world. The company was formed in 1997, with the merger of Guinness PLC, its primary parent company, with Grand Metropolitan PLC (GrandMet), a hotel chain with brewing interests (diageo.com). At that time, it was a large multinational with a share in food as well as drinks industry. Today, however, the company has shed most of its food business and concentrates on alcohol, acquiring new spirit brands. Diageo is a global company, with a presence in over 180 markets around the world. It has manufacturing facilities across the globe including UK, US, Canada, Africa, Australia, India, Ireland, Spain, Italy, Latin America and the Caribbean. Diageo produces and distributes a leading collection of branded premium spirits, beer and wine. The wide range of premium brands it produces and distributes includes Smirnoff vodka, Johnnie Walker Scotch whisky, Guinness stout, Baileys Original Irish Cream liqueur, J&B Scotch whisky, Captain Morgan rum, and Tanqueray gin. In addition it also has the distribution rights for the Jose Cuervo tequila brands in the United States and other countries. Diageo is the leading premium spirits business in the world by volume and net sales. As on August 29, 2007, Diageo is the seventh largest publicly quoted company in the UK in terms of market capitalization. Diageo is engaged in a broad range of activities within the beverage alcohol industry. Its operations include producing, distilling, brewing, bottling, packaging, distributing and marketing a range of brands, including some of the world's leading spirits and beer brands. Being a part of the alcohol industry, Diageo is involved in various development programmes that focus on spreading awareness regarding alcohol abuse, drunken driving and misuse of alcohol and conducting workshops to prevent such social evils. Diageo projects an image of itself as a clean, friendly and ethically oriented company with a commitment to corporate social responsibility (diageo.com) 1. Competitors Diageo's major competitors include Pernod Ricard, Fortune Brands and Brown-Forman, which have several brands that compete directly with Diageo's brands. Over the long term, Diageo's strategy is to continually focus on driving growth and increasing shareholder value. Pernod Ricard - Pernod Ricard is the world's second largest in wines and spirits. This Paris based company was formed as a result of 1975 merger between two French distillers. The company focuses on sustained development founded on organic growth and successive acquisitions. Pernod Ricard's purchase of Seagram in 2001 and Allied Domecq in July 2005 landed the company in the second position it enjoys today. The company adopts a decentralized management structure so as to ensure that decisions are taken closer to its customers. The company's brands include Chivas Regal, Martell, Malibu, Ballentine's, Kahlua, Montana, Perrier-Jouet and many more. The company concentrates on strengthening its position around the globe, with a special focus on the emerging markets. The acquisition of Allied Domecq helped reinforce the company's presence in Asia, Europe and South America. Brown-Forman Corporation - Founded in Kentucky in 1870, it is one of the largest American-owned spirits and wine companies and one among the top 10 spirit companies in the world. The company imports wines from all over the globe and offers a portfolio of over 35 brands. The company has a global presence in over 135 countries. Old Forester Kentucky Straight Bourbon Whisky, its original brand, was America's first bottled bourbon and remains one of Brown-Forman's finest brands even today. Its major brands include Jack Daniel's, Fetzer wines, Virgin Vines wines, Chambord liqueur, Don Eduardo tequila, Finlandia vodka, Southern Comfort and many more (brown-forman.com). Fortune Brands, Inc. - The fourth largest premium spirits company in the world. Its global premium brands include Jim Beam (the world's number one bourbon), Sauza tequila (the world's second largest and fastest growing global brand), Courvoisier cognac, Canadian Club (the number two Canadian whisky in the world), Laphroaig (the world's number one Islay malt whisky). Additional leading brands include Knob Creek, Teachers Scotch whisky, Harveys, Sourz, Starbucks liqueurs, Fundador, Windsor Canadian and many more (fortunebrands.com) 2. PEST Analysis Political - Like other companies in the alcohol business, Diageo is also subject to class action or other litigation relating to alcohol advertising, alcohol abuse problems or health consequences from the misuse of alcohol. Such litigations could lead to damage of reputation to the company and its brands. Diageo's operations are subject to extensive regulatory requirements and changes in laws, regulations or government policies could cause Diageo additional material costs or liabilities which would adversely affect its business. Alcohol products are subject to national import and excise duties in most countries and the increase in either of these would affect the profitability of the company. Economic - To maintain Diageo's competitive position, the company has to offer products that continue to have a strong appeal to consumers. Changes in demographic and social factors, health related issues, weather conditions, changes in travel and leisurely activities, lifestyle shift and downturn in economic conditions can unfavorably affect consumer preferences. The raw materials used by Diageo in its operations are subject to price volatility caused due to changes in global supply and demand and government control. Increase in costs of raw materials or shortage in its supply could lead to increase in product prices and reduction in volume of sales. Similarly, Diageo's profitability can also be adversely affected by labor shortage, increase in wages, and disruption of production facilities and business service centers of the company. Social - Social and political attention towards the alcohol industry has increased in the recent years as a result of public concern over issues such as abuse, drunken driving, underage drinking and adverse health consequences. Technological - To improve effectiveness and efficiency of end-to-end operating, administrative and financial systems and processes, the company designs change programmes which involves moving transactions from different markets in which it operates to business service centers. In this process, there could be disruptions which lead to failure of information systems, which in turn adversely affects the productivity of Diageo. 3. SWOT Analysis Strengths - Diageo's collection of brands include some of the world's leading beverage alcohol brands as well as brands of local prominence. Product innovations as well as growth of existing products are a significant aspect of Diageo's growth. With a focus on premium drinks brands, Diageo is constantly implementing systems change and cost savings programmes in order to improve efficiencies and add value to products. Weaknesses - Diageo employs over 22,000 workers in its various operations around the globe. The company is therefore subject to several labor issues and cultural concerns that can have serious consequences on the business. Diageo's operations are subject to regulatory control and any negative publicity arising due to litigations can adversely affect the company's reputation and its business. Threats - Diageo faces substantial competition from several international companies as well as various local and regional companies in which it operates. Diageo competes with other beverage companies across a wide range of consumer drinking occasions. Therefore, increased competition and unanticipated actions by competitors or consumers could lead to fall in prices and market share of Diageo. Increased social and political attention directed towards the alcohol industry poses a threat to the growth of the industry. Diageo's business can be adversely affected by unfavorable economic and political conditions and other risks in the countries in which it operates. Opportunities - Diageo's strategy is to focus on premium drinks to grow its business along with the acquisition of premium drinks brands that add value for shareholders. With Diageo's overwhelming presence in many categories of beverages to grace different consumer occasions, there are ample opportunities for consolidation or realignment within these various categories. Also, the strategic focus on premium drinks could give rise to further acquisitions, joint ventures or partnerships. 4. Market sector In 2005, the top five spirits brands in the world were all nationally specific. The only major spirits brands to feature in the world's top 10 in volume terms in 2005 were Bacardi rum and Diageo's Smirnoff vodka. There has been ongoing consolidation of the spirits market through numerous merger and acquisition activities and the geographic expansion of major multinational players. The top five spirits players are estimated to account for about 48% of the global premium spirits market and the top five beer players for 46% of the global branded beer market. The top global spirits producers account for 60% of the volume of premium Western-style spirits produced, but only approximately 20% of the total global spirits market. For example, as highlighted in the graph below, by volume Diageo produces 14.7% of the global Western-style spirits, but only 4.4% of total spirits volume. Since the 1960s, there has been a strong trend towards consolidation of the alcohol beverage industry. The increasing pressure on companies to diversify their portfolios and geographic presence is driving mergers and acquisitions as well as strategic alliances within the industry. The large majority of beverage alcohol is produced by a plethora of small domestic manufacturers catering to local traditions and tastes. Termed as "commodity" drinks, these are produced and consumed locally and are estimated to account for 99% of total recorded consumption in China; 94% in Russia; 92% in Thailand; 89% in Brazil; and 75% in India. According to survey done in 2004, branded alcohol accounts for 37.5% volume sales while "commodity" alcohol accounts for 64.5% volume sales. 5. Results & Conclusion Through the study conducted above, it is understood that the spirits industry thrives on acquisitions, mergers and partnerships to get ahead in the business along with the promotion of already existing brands. As on February 5, 2008, there are talks of a possible 50/50 partnership between Diageo and Nolet for super-premium Ketel One Vodka. Diageo, the world's leading premium drinks business, and the Nolet family have agreed to form a new 50/50 company, which will own the perpetual exclusive global rights to sell, market and distribute the successful super-premium Ketel One vodka. This transaction would open up opportunities for global growth in the super-premium vodka segment for Diageo (diageo.com). British drinks producer Diageo PLC and Dutch brewer Heineken SA announced that they intend to form a new joint venture to build a brewery and bottling plant in South Africa, challenging the dominance of SABMiller PLC. The brewery will be 75 percent owned by Heineken and 25 percent owned by Diageo (iht.com). Thus, Diageo is well prepared to seize the future with its strategies in place for further expansion and promotion of brands. The company is well placed with its corporate social responsibilities towards the society and public as well as its responsibilities towards the government and law within the country it operates. References Diageo website, www.diageo.com - viewed on March 14, 2008. Diageo Annual Report 2007, http://www.investis.com/reports/diageo_ar_2007_en/ p. 1 - 18 - viewed on March 14, 2008. Pernod Ricard website, http://www.pernod-ricard.com - viewed on March 14, 2008. Brown Forman website, http://brown-forman.com - viewed on March 14, 2008. Fortune Brands website, http://www.fortunebrands.com/brands/spirits.cfm - viewed on March 14, 2008. ICAP Reports 17, http://www.icap.org/portals/0/download/all_pdfs/ICAP_Reports _ English/report17.pdf, p. 3 - 7, March 2006 - viewed on March 14, 2008. Diageo website, http://www.diageo.com/en-row/NewsAndMedia/PressReleases/2008/ DiageoandNolett.htm, February 5, 2008 - viewed on March 14, 2008. International Herald Tribune, Diageo and Heineken to build brewery and bottling plant in South Africa, http://www.iht.com/articles/ap/2008/03/07/business/EU-FIN-COM-Britain-Diageo.php. Published: March 7, 2008 - viewed on March 14, 2008. Read More