Corporate Analysis Report

Corporate Analysis Report

Diageo is a multinational alcoholic beverage company based out of London, England. Diageo is the world's largest spirits producer and a major producer of beer and wine, trading in over 180 countries worldwide. Some of Diageo’s most notable brands include; Smirnoff (world’s best-selling vodka), Johnnie Walker (world’s best-selling blended Scotch whisky), and Baileys (world’s best-selling liqueur). (Refer to appendix I for Diageo’s strategic brands).

Diageo is a relatively new company that was created in its current state 1997 as a result of a merger between Guinness and Grand Metropolitan (a property conglomerate headquartered in England). Diageo is most well-known for acquiring high end brands of spirits, wine, and beer and successfully marketing their brands to high end consumers worldwide. Some of its most recent purchases include brands such as Ciroc Vodka, Haig Club Scotch Whisky, and India’s United Spirits. Its two latest purchases, including Ciroc and Haig Club, have been heavily marketed using celebrity endorsements. Sean Combs endorses Ciroc (record producer, actor, and entrepreneur) and David Beckham endorses Haig Club (international celebrity, former soccer MVP).

Diageo is traded in both the New York as well as the London Stock exchange. In fact it is the 8th largest company traded in the London stock exchange. Diageo employs over 28,000 people worldwide, bringing in total revenue of 17.35 Billion dollars and net sales of 3.78 Billion dollars in 2013. A large majority (34%) of Diageo's net sales came from North America, and 28% comes from Europe. Diageo’s recent strategy has been to penetrate the emerging markets in countries with a growing amount of middle class consumers. Diageo is now the number one international spirits company in Asia Pacific and Latin America, the leading beer and spirits company in Africa and expects to have 50% of net sales from these markets by 2015.

Alcohol is a product that has proven to stand the test of time. It is always in high demand no matter the state of the global economy. The success of an alcoholic beverage is based on success of the company that promotes it. Diageo is a company that excels in the alcohol industry with their marketing and promoting of luxury brands through a strong global network. The results of this are brands that consumers identify themselves with. No matter where in the world they are located, consumers continually seek out Diageo products as a way to identify themselves as luxury customers.

“Location, location, location” has been a motto used for centuries as long as the business men and women have been around.  Where a company is located and who they market to is an obvious advantage, an even bigger one if your market is on a global scale.  Diageo has taken advantage of this with offices in over 80 countries and a global supply to every continent. Trends differ in various parts of the world and Diageo views these trends as opportunities to form new and loyal customers with different tastes and preferences.

In order to be able to continually offer new products that change with global trends, Diageo seeks out and only acquires brands that show high growth potential. One of Diageo’s biggest weaknesses is that our current brands are in the mature state of their life cycle. To combat this, Diageo is constantly seeking out brands that are innovative, profitable, and appeal to our luxury-seeking customers. While seeking out these innovative brands, we must keep our value chain in mind in order to build upon our current successful chain of activities.

Another factor that we can draw from looking at appendix V is that Diageo does not have a “one size fits all” approach to designing efficient supply chains in all of their businesses. Since each product that Diageo manufactures takes a completely different process to make, Diageo sits down and finds the most efficient and cost effective way to move its products from conception, to production and finally to the consumer. What we can draw from this summary is that no matter what the business or product Diageo acquires, you can be assured that great thought and planning will go into making a state of the art supply chain.

We took a look at a few industries that we felt could be beneficial to Diageo’s future as a luxury brand conglomerate and fit with our strong value chain activities. The first industry we looked at was introducing our own luxury clothing line. We found a good amount of similarities and advantages that we currently have in our value chain that would be useful in the clothing brand value chain. Next, we looked at acquiring a luxury cruise line, and in theory it seemed like a wonderful industry where Diageo could really excel. Upon further examination we concluded that there were not many, if any, similarities or advantages that we thought would be advantageous and that could carry over from our current value chains. Lastly we took a look at ski resorts as a possible industry for us to enter.  We thought this would be beneficial to us considering how well our current value chain activities could carry over to this industry. It would benefit Diageo because we could exclusively market and sell our liquor business for the night life of the resort.  It would also benefit the ski resort because we could use the luxurious side of Diageo to create a resort that is attractive to the consumers with disposable incomes. These consumers make up the vast majority of people who ski in this day and age.

Looking at appendix VI you can see that Diageo is an exemplary example of a financially stable company. Although we rely on debt to finance our business operations, we maintain high profit ratios, especially when looking at industry averages. This shows that Diageo is in a situation that encourages us to add more debt, thereby adding more value to our shareholders. This gives us the opportunity to look into acquiring new businesses that will enhance Diageo’s strategic brand portfolio.

Across the world there is a rising demand for luxury products especially in India and China, as they are seeing an 18% rise in luxury good sales from 2010-2014. This trend is not unique to only India and China and we are seeing similar increases worldwide. This demand for luxury goods opens up a bright future for Diageo’s ever growing luxury brands. This gives us an opportunity to acquire additional brands that follow this global trend.

One thing that we do need to keep our eyes out for in all of our products is the rise of raw materials (grains, water, corn, potatoes). A slight rise in price can have a tremendous effect on our bottom line and can lead to experiencing losses if we are not prepared for such events. This is a continuous threat to our company as well as our competition with similar companies such as Pernod Ricard, Brown-Forman and Anheuser-Busch. One way we can combat this threat is by looking into acquiring businesses that are outside the alcoholic beverage industry. We want to look into businesses that do not rely as heavily on raw materials and that our competition has not thought of yet.

Some other macro-environmental trends that could affect Diageo are listed in appendix III. From these trends we have drawn conclusions into what markets we should be targeting with our strategic brands and some areas we want to avoid.  We have found that Diageo should attempt to expand into industries that are outside the alcohol industry. The strict advertising laws and high competition show that a wise move for the company would be to acquire a business in an industry that our competition is not currently in, and that adheres to our current luxury-seeking clientele.

We have also found that it is essential that we begin marketing to the increasing younger generation (15-34 years old) in order to expand our customer base and to hopefully transition them into our more mature brands in an attempt to maintain them as lifelong customers. Diageo has already begun to do this by encouraging our vodka brands to develop products that appeal to our younger customers. If you look at appendix IV, the vodka industry is one of the most attractive industries that we are in. Our vodka brands have already began producing products that appeal to these younger consumers.

Although vodka is our most attractive industry, our other industries are just as attractive according to our Porter’s 5 Forces in appendix IV. In these industries, although we have high competition, we also have high power over our suppliers and a relatively low threat of losing our customers to substitute products. This shows that we should stay in our current industries when we begin entering a new industry.

When considering which new industries we should enter, we used the Porter’s 5 Forces to determine the attractiveness of the same three proposed industries we overviewed in our value chain analysis. If you take a look at our appendix IV we ruled out entering the clothing industry because of the unattractive competition, rivalry, and power of customers. We want to enter an industry where we feel that we would have an advantageous entering position and clothing lines did not meet that standard. While cruise lines are an attractive industry, there is a high bargaining power from customers. Our most attractive current industry, vodka, has a low bargaining power from suppliers and we want our new industry to also meet this characteristic. This is because having this power over suppliers has proven to be a factor that ensures success in that industry. The ski resort appealed to our company the most because of its high overall attractiveness, low threat of competition and low bargaining power of customers. We want to enter an industry where we feel we can differentiate ourselves relatively soon after entering it. If we differentiate ourselves early on, it will ensure success despite the high amount of competition.

Vision and Recommended Strategy

Diageo has created an image of luxury and high class that we plan to continue on with in any industry we may enter. After much research into our current industries, our strengths and weaknesses, and where we stand with our competitors, we have come to the conclusion that we already have a very impressive portfolio of alcoholic brands. With steady growth in our current alcoholic beverage industries, we have determined that we have the funds to make a calculated risk in the new direction for Diageo. It would be advantageous for Diageo to acquire a luxury business outside of the alcohol industry and use our knowledge of promoting and marketing to enter an alternative luxurious industry that would not only appeal to our current target market, but make the Diageo name known to a new market segment.

After much debate over our proposed new industries the two alternatives we chose to look into can be seen in appendix VII. We decided that acquiring either a luxury clothing line or a world renowned ski resort would be the most value-adding alternatives.  We also determined that our most important criterion for choosing an alternative was the durability of any synergies between our current business and proposed businesses. In this criteria, as well as many of the others, acquiring an existing ski resort proved to be the dominant alternative.

Durability of synergies was the most important to us because we looked at our current products and saw one thing that many of our strategic brands had in common was their strong, long lasting generation-to-generation name brands. We wanted to find an industry that no other alcoholic beverage company would think of or could easily copy. That is when we found that the ski resort industry would follow our vision. There is going to be a lot of work and a huge investment in order to make this vision become a reality but we think we can carry a lot of our current strengths into this new industry as well as strengthen some of our weak areas in our current businesses such as after sales service.

Some of the strengths that we think would carry into an existing ski resort are: marketing of our products with celebrity endorsements as well as carrying over our bio-energy facility technology to create fuel/energy efficient ski lifts and gondolas. An average size lift cost anywhere from $2,000-$9000 a day in electricity costs and using our current knowledge in bio-energy will really help us to create a system that lowers this cost. A ski resort will also help with Diageo’s current weaknesses of battling a maturing market with their products. Extreme snow sports cater to people from ages 3-80 years old but tend to draw in a younger, more active crowd. It is also a less strictly regulated industry compared to our current industries.

We have chosen to acquire an already existing ski resort for a few reasons, the biggest being that according to the law you cannot build a new ski resort in the U.S. The other reason for acquiring an existing resort is that there is such a high amount of customer loyalty to the large existing resorts (i.e. Vail, Breckenridge, Big Sky, Jackson Hole). In keeping consistent with the luxury reputation Diageo has earned, we need to look specifically at ski resorts whose image matches to our own. A perfect example of this type of resort would be Whistler-Blackcomb for its unparalleled terrain, high end village life off the slopes, and rumors of a pending foreclosure in the air. The current owners have had financial problems with the business, but we believe with Diageo’s financial situation, strong marketing skills, and luxury brand name we could make Whistler-Blackcomb the number one ski destination in the world.

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