Distributor of Premium Alcohol Beverages - Term Paper Example

Table of contents Introduction 2 The strategy adopted by the company 3 Financial analysis of Diageo 4 Market analysis 9 Human Resource Management Analysis 10 Operation analysis 10 Porter’s Five Forces 15 Critical Success Factors of Diageo 16 Proposed Future Strategies for Diageo and selection of Winning strategy 17 Win-Win strategy for the company 18 Reference 19 Bibliography 20 Appendix 21 Introduction Diageo is the world’s leading manufacturer, marketer and distributer of premium alcohol beverages. Its famous brand includes Smirnoff, Johnnie Walker, Captain Morgan, Baileys, J&B, José Cuervo, Tanqueray, Guinness, Crown Royal, Beaulieu Vineyard and Sterling Vineyards wines, and Bushmills Irish whiskey (Diageo-a, 2009). In the years 1997 the company was formed by merger between two markets giant namely: Guinness plc and Grand Metropolitan plc. In the FTSE, the company has 18th raked in June 2009 and its market capitalisation touches over £ 23. Initially the company was engaged in many businesses but with passage of time, it concentrated on the beverage business and divested other business like Pillsbury and Burger King. At present the company’s portfolio consist of mainly alcohol based beverages. Presently the company is operating many major strategic business units (SBUs) like spirits, Beer and Wine. Among them the most extended one is the spirit SBU because it comprises of many sub units like Scotch whisky, Vodka, Ready to drink, Liqueurs, Whiskey, Rum, Gin and Tequila. To understand why spirit SBU is so vital for the company, its last year’s sales break up has to be undertaken. BSU Percent of Net sales Spirits 73 Scotch whisky 28 Vodka 9 Ready to drink 9 Liqueurs 6 Whiskey 6 Rum 5 Gin 3 Tequila 3 Other 4 It can be clearly understood that the spirit SBU contributes the maximum in the company’s sale, so for the company it is the most important strategic business unit. The strategy adopted by the company As per the Diageo’s annual report 2007-08, the company’s is to focus on its premium drinks as these are the major source of income. In the last few years, the company’s revenue has increased marginally, but operating expense has also gone high. Thus Diageo has made a strategy to enhance its operating profit along with growth in organic sales. From the very beginning, the company has followed an aggressive acquisition strategy. At present the company has its operation in different part of the world, where they have strategic partnership with many other players of this industry. When a company plans for enhancing the profitability, its main motto remains increasing the shareholders value. In the last year certain changes has came in the consumption patter in alcoholic beverages in different part of the world, hence the company will target the growing market of alcoholic beverages in BRIC countries. Undertaking all these facts and figures, the company has planned to continue its cost cutting strategy. Diageo will continue to operate under four business areas, it will develop its local brands and to overcome the growing pressure from governments, it will come forward and will promote responsible drinking of alcohol, also participate in reducing the misuses of alcohol (Diageo-b, 2005). Financial analysis of Diageo To analyse how successful were the company’s strategy were toward spirit SBU, a financial analysis of the company financial performance was conducted. For this analysis certain financial ratios were calculated and are presented below: Liquidity state: The current ratio trend is showing an upward movement from 2008 onward, so it can be said that the company has enough current assets to balance the current liability. The acid test indicated that company’s ability to pay the short term (current liabilities) has grown from 2008 onward. So it can be concluded that Diageo has a good liquidity position and it is able to manage its short term solvency. In the coming years the company will enjoy amply liquidity. Profitability state: From 2006 onward the company’s gross profit was increasing at a steady rate, but due to economical recession and increase in operating expense, gross profit has sharply declined in 2008-2009. The profitability of the company is complimentary to its gross profitability state, and it has also declined sharply from 2007 onward. As the company’s profits has declined sharply, in the coming days the company will follow more stringent policies to maintain the operating and other costs within control. The market condition is improving and in future the profitability may go high. Return to investors The ROCE has gradually fallen from 2007 onwards and still it is showing a down trend. Though the company’s profits have gone down in the last few years, but earning per share has been increased. This shows that the company is trying to attract the investors and hence distributing the profit to the shareholders. So it can be conclude that company is unable to use the capital in an efficient way but to attract the investors, it is distributing higher profits to the investors. It might happen that in future return to investors might go down and company’s growth rate declines (Diageo-c, 2005, 2006, 2007, 2008, 2009). Undertaking all the ratios into consideration, it can be concluded the company had a firm financial position in the past, but due to slowdown in the world economical state, its profitability has gown down, but the company is maintaining a fare financial strategy of keeping the expanses under control so that net profitability can be increased automatically (DIAGEO plc, 2009). Market analysis The company is operating throughout the work. To analyse the company’s spirit SBU’s performance, its market was analysed. The company’s market comprises of four basic markets, which are North America, Europe, International and Asia pacific. As per the net sales of 2008, North America has maximum market share and its profitability is also high. It has been found in the last year the company’s market value has gone down in UK and US, where as it has shown an upward movement in Russia, South-East Asia and countries like China, Brazil and India. In courtiers like China and India market share of domestic alcoholic beverages are quite high, so there is a huge unexplored market which can enhance the company’s sale many fold in future. Product: the company’s spirit section has a well diversified portfolio that comprises of many premium brands. Price: Diageo has its business throughout the world and with passage of time; company is trying to expand and to acquire many unexp0lored markets. Place: the spirit beverage market is highly competitive. Day by day many new entrants are entering into the market, so Diageo has reduced the prices of many well known brands. Promotion: the company is a well known name in the international alcohol beverage market. Thus it does not requires extensive promotion, but as the company is concentrating in many new emerging markets, hence there they uses different promotions tactics like advertisements, promotion as well as other product promotion strategies. Diageo considers the customer as heart of their business while designing the marketing strategy. The company has made many ads to warn the consumers against misuse of the alcohol (Ethical Corporation, n.d.). Human Resource Management Analysis Diageo is considered as one of the best company to work with out of 100 companies in working mother magazine (Yahoo Finance, 2009). The company’s employees policies are so designed that it attracts and retain highly talented employees. The company offers a well balanced working culture which motivates the employees to put their level best effort. The employees have the choice to select the market in which they want to perform, they actively participate in strategy development and business goal setting, they have excises to all vital information of related to company’s operation. In the company’s top 22 market a share purchase plan exists through which they can avail financial stake. During the last 3 years, numbers to full time employees has grown, and staff cost has gone high from £ 993 million in 2006-07 to £ 1,073 million 2007-08. But this has enhanced company’s operating margins reduced profitability. Operation analysis The company is operating in almost 180 international markets and it is mainly engaged in production, marketing and distribution of different alcoholic beverages among them spirits beverage are of vital strategic importance. SWOT analysis for Diageo Through SWOT, the internal strengths and weakens as well as external opportunities threats were determined (Danca, n.d.). Weakness and strength The major strength of the company can be summarised as follow: Large market share in the international alcoholic beverages Strong brand image and high popularity of many products Well developed networks resulting from extensive strategic partnership with other major player Large and diversified portfolio The major weaknesses are discussed as below: Expensive and unplanned acquisition Declining profitability of the company Uncontrolled operation expanses The opportunities existing in the market are: Improving market condition Increase in the rate of alcohol consumption in BRIC countries Government stimulus for improving the market condition Increasing purchasing power of consumers in many developing countries The threats which Diageo is facing from external market condition are discussed below: Growing numbers of competitors Growing health concern among the individuals in developed nation like UK and US High duty imposed by the governments PEST Analysis The PEST analysis is a technique though which macro economical factors in a particular industry can be identified (Morgan Community College, n.d.). Political: High duty rates and Excise duty imposed by the government Ban on smoking in the pub Decline in the use of alcohol due to limits on the strength Providing better taxation policies toward domestic alcoholic beverages producing companies Economic: Worldwide recession Fall in the purchasing power of consumers Drastic fall in the share markets that misbalances the economy all major countries Social: Sharp increase in unemployment rate throughout the world Gradual decline in the demographic configuration of many major developed countries as the percentage of individuals in the age groups 15-64 will decline. Increasing awareness toward health will result in fall in consumption of alcohol Technology: Introduction of more advanced and comprehensive technology in the manufacturing sector Use of technology to efficient utilisation of the raw materials and substitution of costly raw material with the one which gives same output but cost comparatively low Recycling of the by-products to reduce waste and enhance the production by proper use of advanced technology Porter’s Five Forces Porter’s Five Force is a technique to understand the industry conditions in a better and one can understand the risk which a company faces from outside market (Wisconsin, n.d.). Threat to new entry: The Company has a low risk from the new entrants as entry barriers are high. The cost for starting the company is high, the customers are highly loyal to the existing brands, getting new licence is not so easy, the patents bock use of existing technology by the new entrants. Threat of Substitute: this risk is also low as not much alternatives are available. But it might happen due to recession, many consumers shift to local or cheap brands. The consumers are getting more risk aware toward their health, so they might substitute to soft drinks or health drinks. Bargaining power of Customers: as the customers are loyal to the brands, so they do not have high bargaining power. But the switching cost is low and if in future any new substitute comes out, the risk will increase. Bargaining power of Suppliers: the risk related to the suppliers is not so high at present because the company has already made long term agreements for the supply of glass, raw materials and intermediate product. In future if there comes any problem, the company can go for forward integration. Competitiveness of Rivals: the company has few major competitors in the global market, but at present the company’s market share is highest so it is not facing high threat from them. But there exists a strong price war, the cost of switching for the customers is low and the market is not well differentiated. Critical Success Factors of Diageo The critical success factor of the company can be listed as below: Well diversified product portfolio Large market share in global market Proper pricing strategy Large network Strong brand image and ownership of majority of the premium products Large economies of scales Loyal customers Proposed Future Strategies for Diageo and selection of Winning strategy The present strategy followed by the company has been discussed above, but the issue is what strategy the company should adopt in the Spirits SBU in coming future. The market conditions have changed drastically in the last two years due to economical slowdown and recession. The purchasing power has gone down and customers are shifting to cheaper brands as they cannot pay for their luxury. This has affected the demand patter of Diageo also. In many well developed markets like UK and US demand has follow, but on other side it has shown positive signs in BRIC countries. So undertaking all the factors into consideration, Diageo can follow below given strategies: Strategy Risk/Return Stakeholders reaction Reject/Accept 1. Continue the strategy of aggressive mergers and acquisition The portfolio will enhance further and the average profitability may go down Unfavorable reaction from the stakeholders Reject 2. Increase the market share with existing products Company market share will grow in emerging markets Sales will go high and stakeholders will be benefited Accept 3. Start aggressive marketing to increase sales where it has gone down The cost of operation will go high and profitability will reduce Stakeholders will give negative reaction Reject 4. Diversification of less profit making brands and concentrating Enhance the net profitability Stakeholders will give mix response as the company’s market share well go down Accept 5. make no major change in the existing plan till the economical condition comes to a stable state Till then the condition of the company might go worst A bad impression on the market image of the company Reject Win-Win strategy for the company For Diageo the best future strategy is to concentrate more on profit making brands and diversify the less popular ones. Following the changes in market condition, the growing markets of BRIC countries should be targeted. Through the rate of consumption of alcohol will go down, but with increasing living standards of developing countries, a new and potential market is immerging out. So the company should concentrate more toward it. Reference Danca, C. A. No date. SWOT Analysis. [Pdf]. Available at: http://www.stfrancis.edu/content/ba/ghkickul/stuwebs/btopics/works/swot.htm [Accessed on December 01, 2009]. Diageo-a. 2009. Diageo at a glance. About Diageo. [Online]. Available at: http://www.diageo.com/en-row/AboutDiageo/Diageoataglance/ [Accessed on December 01, 2009]. Diageo-b. 2005. Our Strategy. About Diageo. [Online]. Available at: http://www.diageo.com/en-row/AboutDiageo/Ourstrategy/ [Accessed on December 01, 2009]. Diageo-c. 2005, 206, 2007, 2008, 2009. Annual report. DIAGEO plc. March 11, 2009. Form 6-K Securities And Exchange Commission. Report of Foreign Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934. [Pdf]. Available at: http://www.diageo.com/NR/rdonlyres/52B9946B-F871-4F76-8629-73F322328A02/0/48541D512184298AsFiledPdfnHnE.pdf [Accessed on December 02, 2009]. Ethical Corporation. No date. Diageo – Marketing to remember. Strategy & Management. [Online]. Available at: http://www.ethicalcorp.com/content.asp?ContentID=5990 [Accessed on December 02, 2009]. Morgan Community College. No date. What is PEST Analysis? [Pdf]. Available at: http://www.morgancc.edu/ABM/curric/SG/Cert3/ABM_132/U1/What%20is%20PEST%20Analysis.pdf [Accessed on December 01, 2009]. Wisconsin. No date. Porter's Five Forces: A Model For Industry Analysis. [Pdf]. Available at: http://research3.bus.wisc.edu/file.php/139/Toolkit/Content/Porter_forces_3.pdf [Accessed on December 02, 2009]. Yahoo Finance. September 23, 2009. Diageo Named One of 100 Best Companies for Working Mothers by Working Mother Magazine. [Online]. Available at: http://au.us.biz.yahoo.com/prnews/090923/ny80397.html?.v=1 [Accessed on December 01, 2009]. Bibliography BNet. No date. Diageo to implement "consumer focused" marketing strategy - Diageo/Guinness UDV - Brief Article. [Online]. Available at: http://findarticles.com/p/articles/mi_m3469/is_18_53/ai_86630443/ Appendix Share price movement from the whole year Source: Diageo Read More