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Diageo is a major participant in the branded beverage alcohol industry and it the world's leading premium drinks business with an outstanding collection of international brands across spirits, wine and beer. Diageo is engaged in a broad range of activities within the beverage alcohol industry. Its operq1ations include producing, distilling, brewing, bottling, packaging, distribution, developing and marketing a range of brands around the world. The existing business strategy is to deliver sustainable organic growth through well run of the range of premium drink brands. This is supported by strong marketing team and financial discipline and appropriate acquisitions.
Products of Diageo
Spirits: Scotch whisky, Vodka, Ready to drink, Liqueurs, Whiskey, Rum, Gin, Tequila, Other
Identifies 8 "Global priority" brands (Smirnoff vodka, Johnnie Walker whisky, Captain Morgan Run, Bailey's Liqueur, J&B whisky, Jose Cuervo tequila, Tanqueray gin, Guinness stout)
Bees: Guinness stout, Red stripe lager, Harp lager
Wine: Beaulieu Vineyard (USA), Blossom Hill (Californian), Piat d'Or (French), Chalone wine (USA), Rosenblum Cellars (USA)
Diageo operates in 180 markets across the globe and managed under four business areas, North America and Europe are the main sales location, 31.2% and 32.5% percentage of total sales in 2008. Premium spirits is the main income driver of Diageo according to sales figure. One of the main sources of income is disposals and acquisitions.
The following business report is based on an identified SBU of premium spirits.
Financial Analysis (Appendix 1)
Analysis of Diageo's financial statement as following:
Liquidity Ratio: Diageo can keep a low level of current ratio, more of firm's assets are working to grow its business. Diageo keep a high level of stock due to inventories of Whisky. As Whisky depends on the age of year, so it's normally has a high level of inventories.
Profitability Ratio: Gross profit margin is same in these few years. Decline of percentage of Return on Assets and increasing figure of Return of Equity, this indicate that Diageo do not have a significant acquired growth in his business. And Diageo is not effectively the firm's assets are being used to generate profits but the profits earned for each dollar invested in the firm's stock is increasing.
Asset Turnover Ratio: it indicates of how efficiently the firm utilizes its assets. Both inventory period, collection period and payment period become longer. It is due to the economic downturn. High level of inventories dues to Whisky need to keep a longer period for sales. Diageo can put aggressive in its sales to generate more cash and fully utilized to be assets.
Dividend Policy Ratio: A high dividend payout ratio may indicate Diageo has strong cash financing and no financing needs. The times interest earned ratio indicates how well the firm's earnings can cover the interest payments on its debt and now the figure declines.
Interest charge is increasing and the net borrowing is nearly double compared with 2008 and 2005. Due to the economic recession, the interest rate is now keeping in a low level. But when the economic recover, interest rate will be increased very fast. The financial risks will increase on high interest payment.
Diageo has exposure to certain foreign currency risk and risk control of raw material price fluctuation. So Diageo has a number of contracts for the forward purchasing of its raw material requirements in order to minimize the effect of raw material price fluctuations. And Diageo has supply agreement with certain suppliers, it can stable the supply of raw materials.
Diageo's brands are one of the competencies of the group. The 8 global priorities always have a world ranking. Diageo's brand names are all registered trademarks and protected under trademark laws. Whisky and Vodka are the top premium drinks and their majority market share is in Europe and North America. Due to Whisky has to be keep much longer for the tasting period, so the inventories level is higher.
The tools available to a business to gain the reaction it is seeking from its target market in relation to its marketing objectives.
Noble is the target customer of Diageo's premium drinks. The target customers are willing to pay high priced for those premium drinks. It is status symbol of their lifestyle.
Advertising and promotion is a major part of Diageo's cost structure.
Smirnoff and Johnnie Walker are the world's leading vodka and whisky. Diageo is to focus on premium drinks to grow its business through organic sales and operating profit growth and the acquisition of premium drinks brands that add value for shareholders.
Europe and North America are the two business areas have good performance. Diageo have to keep it. Effective distribution channel to China, Diageo owns 34% of Moet Hennessy (subsidiary of LVMH as China is the top of consuming countries. Different market has different distribution channel (annex 17).
High remunerations to senior managements but cut up to 900 jobs, Diageo may hire high talented and high experience people. People, culture and values are a source of sustainable competitive advantage. Diageo strives to keep employees well informed and engaged on the company's strategy and business goals as a high priority.
Noble is the packing of Diageo's brand, due to global downturn, sales will not have a significant grow. But when economic recover, organic growth will increase again.
Diageo's success is dependent on effective HRM and its development. Diageo has been ranked within the top 10 in published results in a number of best company surveys around the world. Employees are proud of the responsible manner in which the brands are marketed and the role that moderate consumption of these brands plays in the lives of many people.
Benefit to staff - Share purchase plan/ pension fund
Training - E-training provided
Working environment - provided ideal working environment
Periodically Review - survey to understand staff
Leadership - leadership performance bonus generates 900 posts
Human Resource Management can be an important strategic tool of the company. It can help to establish an organization's sustainable competitive advantage. The reputation of Diageo will be will be affect due to Diageo announced cut up to 900 jobs in Scotland even the job losses would be offset by the creation of about 400 new posts in Fife. Competitive salary is the advantage compare with competitor. Training & development investment benefits the business as employees drive the firm to future success.
Diageo maintains a stable margin by using following strategy:
1) Forward contracts
2) Long-term contracts
3) Supply agreement
Glass is purchased from supplier located around the world, so it can be purchased near the production plant to save the transportation cost and time.
Marketing and Sales:
Distribution Channel - warehouse to distributors
Distribution Rights for premium brands/ Distribution agreement with agency.
After sales service to distributors as no direct sales to customers
There is an uncertainty about the supplier contract as it will expire in 2011 and it can be terminated at anytime before 18 months of the end of the contracts. And the supply agreement of Tequila will also expire in June 2013. Due to production of alcoholic drinks is not a high technology. So Diageo will not out source part of the production process.
Strengths and Weaknesses
Prioritized internal strengths & weaknesses for Diageo:
Acquisitions to increase market share and brands/ reduce risks
Outstanding brands - Smirnoff vodka and Johnnie Walker is the world's leading vodka and Scotch whisky.
Effective marketing/management - concentrated on alcoholic drinks industry and disposal of food business.
Strong marketing power - huge amount of advertising ad promotion
Financial - Use free cash flow to measure ability of cash generation
Cost control - implementation of restructuring programmed
Ranked within top 10 in published results in a number of best company
Under utilize the manufacturing capabilities
High remuneration of management but cut posts in Scotland due to reduce cost
Financial risk increase due to high borrowing and interest increase
Weak distribution channel - no direct sales and controlled by government legislation.
High advertising and promotion cost
High capital investment cost - â‚¤650 million in the construction of new brewery
- Increasing government excise duties and taxes on alcohol sales
- Strong pressures from health authorities and governments
Global economic rebound, increasing spending power
Fluctuation of Exchange rate
Increased interest rate
some cultures and religions prohibit alcoholic drink use
Change in attitudes (taste image and brand appeal and alcoholic strength
High cost in glass recycling
New technological for production process
Waste handling of raw material and water
Reduce greenhouse gas emissions
Government legislation and requires license to sell alcoholic drinks
Advertising of alcoholic drinks is prohibited in some countries
External environment will affect the organization decisions and strategy just like government legislation and global economic. Customer attitude changed will also influence the organization's performance. They would like the organization more social responsible, so the organization's technology development has to minimize the damage of environment.
Porters 5 forces Analysis
Supply agreement to stable the supply of raw material
Forward contract to stable the price of raw material
High switch cost to supplier due to the control of agreements and contracts
Indirect purchased of raw material via agency
Wide range of advertising/ promotion channels
Few buyers, licenses are necessary to sell alcoholic drinks
Backward integration (cash flow, skills and knowledge)
Increasing Duty free operation (few agents)
Threat of new entrant
- Barriers to entry alcoholic drinks industry (capital investment, license)
- Wine and beer are substitution but it should be take a long time to have positive challenge
- Industry growth implied to new consumers
- Different competitor has different strong brands
Supplier bargaining power is strong as there are few suppliers to supply raw material. Diageo have to use agreement and contract to stable the price fluctuation and supply. For the supplier of marketing, the bargaining power is weak as Diageo can through different channel to promote its brands. Buyers bargaining power is strong as there is no new entrant of competitive due to the high barriers of entrant requirement.
Attractiveness of industry and the strongest force:
A wide range of alcoholic drinks can satisfy customers need. Premium drinks has a high profitability and low production technology skills. Consumption of alcohol in China is increasing, high potential in this country.
Government policies restrict the growth of alcoholic drinks industry.
Critical success factors in the industry
Diversification - variety of alcoholic drinks
Acquisition - increase market share and global brands
Global brands - reputation and noble
Focused differentiation - e.g. gender (indicate female has potential to consume alcoholic and try new products)
Market sizes - increasing in India and China
Worldwide reputation - old age brand name
Distribution channel - Trade in internet
Technology development - Stock level controls
Opportunities and threats
Global economic rebound
Barriers to entry alcoholic drinks industry, no new competitors
Acquisition to increase market share and new brands
Have a number of joint distribution arrangements in Asia Pacific region, develop China market due to China is a top 1 consuming country of alcohol
Global economic downturn
Raw material price fluctuations
Foreign exchange fluctuation s
Increasing government excise duties and taxes on alcohol sales
Low reputation due to cut posts in Scotland
The threat of Diageo due to global economic uncertainly, people do not want to spend money for premium alcoholic drinks. And Asia Pacific region is a most potential to develop as the economic growth rapid and they are willing to spend on luxury goods.
Diageo is the leading premium spirits business in the world by volume, by net sales and by operation profit. Enable Diageo to attract and retain talented individuals with the capabilities to contribute to the delivery of Diageo's strategy, which is to focus on premium drinks to grow its business through organic sales and operation profit growth and the acquisition of premium drinks brands.
Global economic downturn decreases the sales volume of spirit. But compared of the International sales (Duty free), it increases 18%. And after economic recover, sales of volume of spirit will be resumed again. Diageo mainly focus on the 8 global brands, it give customer a noble feeling and develop to growth of economic to China.
Uncertainty of supply of raw material, as their supply agreement will be expired. Growth in organic sale by Joint venture or acquisition, share the distribution channel to reduce the import or transportation cost.
Fulfill stakeholder expectation to add value to shareholders. Social responsibility to environment, solve the pollution problem and reduce the waste of water and raw materials.
New future strategies
Potential future strategies will be based on the following SBU's:
Acquire to increase no. of brand
Packaging - change the size/design of the alcoholic drinks or cross over with other kind of products (e.g. Ferrari) Ferrari also gives customers a famous and precise feeling. It matches with Diageo's brands.
Launch E-Commerce - buy everywhere. It can solve the problem of heavy bottles. Females can not carry the heavy bottles of alcoholic drinks. And buy easy and delivery point to point is the main salesing point.
Site visit - let people to recognize the production process of alcoholic drinks and teach them the health consciousness (do not over drunk) and also let people to try different kind of products
Acquisition - increase number of brands, market share and also the distribution channel
Selection of future strategy
- Change of design could give a more fashion feeling
- cross over, expand different kind of consumer
- Need marketing/ design skills
- Financial resources available
- Expansion of distribution channel
- Import duties increased
- Financial resources available
- introduce different kind of products (promotion)
- create more job opportunities
- promote Diageo and alcoholic drinks
- Easy to set up and inexpensive
- minimize/ share risk with other brands
- government regulation imposed to different geographic
- High investment cost
Distribution cost saving
The table shows that strategies 1 and 3 are accepted by suitability, acceptability and feasibility.
Customer styles will change from time to time
High import duties and increased transportation cost due to delivery point to point
Safety problem when site visit
High competition and high investment cost of acquisition
Diageo's winning strategy should be utilized the internal capacities. Site visit can promote Diageo's brand and give the chance to consumer taste their products including new taste of alcohol drink. After tasting the products, customer can buy at the site directly. Understanding of the production processes can increase the interest of alcohol drinks. Also through the site visit, Diageo can introduce of the health consciousness is quite important as nowadays social attitudes of customers almost concern on over drinks and health. Tough anti-drink driving legislation and enforcement is an example. And the investment cost of this strategy is not too high. So the expected return will be much more than invest including the brand appeal.
Changed of design of Diageo's product will give a new image to customer and fashionable feeling. As most of Diageo's brand is a long age of year. It can't attract the young consumer. But at the modern period, young consumer also has a high spending power. Celebration and gathering is the suitable atmosphere for young people to buy alcoholic drinks. Cost control is the main problem of the design. If the size of the products decreased, the selling price can be lower. The result is more customers can afford then sale volume will be increase. And the risk of this strategy is low and low investment cost.