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Diageo
Diageo is the leading premium drinks company in the world; of which categorizes most of the leading brands around the world and the market leader in many of the major growth market around the world! Their unique STP strategy had allowed them to develop globally into a renowned brand with operating profit reaching up to 2.5bn in 2010! It has also expanded from its headquarters in London into 80 worldwide offices employing around 20,000 workers. Its efficient market segmentation and diversification had allowed them to meet specific demands of its global consumer base which had contributed to the firms success. The Alcoholic industry is an oligopoly market dominated by about five large players estimated to be made of 26 PLC and about 200 LTD. In 2010 Diageo was right up there with annual revenue of 9.5 billion and return on invested capital of 14.8%. Global sales volume of alcohol reached 182.9 billion liters in 2010, growing between 1 2% from the previous five years! There are 3 separate categories in this market: beer, wine and spirits; which Beer is highest accountant of it, 76% of total sales. These statistics illustrate the huge competition firms face within the industry highlighting the importance of a well defined and aggressive marketing strategy. (Hatherly, 2010) Diageo was formed in 1997 via mergers: Guinness and Grand Metropolitan; since then it had efficiency in its operations, it sold off food brands Burger king and Pillsbury after finding a gap in the alcohol industry to fill. Diageo now manages a wide-ranging liquor cabinet with the worlds well popular spirits brands such as Smirnoff, Johnnie Walker, Guinness and many more! Alcohol industry is

Alcohol is 69% more affordable in 2007 than in 1980 The prices of alcohol have increased since 1980 by 19% which more than general retail price! Having said that, alcohol is now more affordable than it was 1

09295266 in 1980s due to the increase of the disposable income by 102%, alcohol is 69% more affordable than it was. In 2006, peoples expenditure on alcohol was 42.6bn of which is 5.24% of consumers total expenditure; Beer still accounts for the largest of the spending on alcohol (19.1bn), wine/cider/perry (14.6bn) and 7.9bn on spirits. (Hatherly, 2010)

Diageo goes to great lengths to understand what its consumers want and how best to engage with them. This continual process informs the way Diageo relates to its consumers through clarity in communication, impactful marketing activations and brilliant innovations, and, increasingly, how it better interacts with customers for mutual benefit.

Diageo continually seeks to understand what consu and shoppers want which informs customer relation and helps people celebrate with its brands everyday everywhere.

Diageo annual report 2010 In July 2010, Diageo s turnover had increase by 469m from the previous year (9.3bn) to 9.8bn. As well as spirits, it is the manufacturer of Guinness, and has a 79% share of the stout sector in Europe. (bib1) Exchange rates had increased turnover by 276m!!! Operating profit had increased by 156m in 2010 from the previous year (2.4bn) into about 2.6bn, exchange rates had contributed to this by 122m!! (Fletcher N., Wednesday 29 April 2009) visited Wednesday November 10th 2010. This clearly shows how the exchange rates has a massive impact on the companys profits, this could classified down as a competitive advantage, however, more details will need to be looked in terms of the competition and how each company has an advantage over fellow competitors further down the report.

09295266 Basic Demand Conditions Price elasticity not very elastic at -0.1; however allows inferior goods opportunity! Substitutes Demand for Diageos products is relatively resilient to recession. Although customers could switch to cheaper brands giving inferior goodat an advantage Cyclical/ Seasonal Variationbalanced seasons Durability of productcustomers buy for satisfaction, products may last up to a week or even just one day! Method of purchasesupermarkets, off license, to pubs, bars & clubs. Basic supply conditions Legal Framework Regulations for UK import duty, duty rates, EU import duty, tariffs & customs & excise duties. Importing goods price could vary from times which affects profits. Technology international supply chains. Diageo is a member of a group of food and drink manufacturers AIM-PROGRESS, which recognise the importance of ensuring that their supply chains operate to high standards of responsibility.

Market structure Number of buyers and sellers - high demand in alcohol markets keeps firms confident Product differentiation products already differ between spirits, beer, wines, etc Barriers to entry & exit very hard for a Conduct newcomer to compete in the industry, Pricing Behaviour competitive are involved in Horizontal Integration firms with competitor price, very similar different cultures and however markets worldwide, pricing strategies, markets productthe world. is very essential to overtake around quality competitors, which worldwide different markets. as Diversification- in is an advantage for Diageo their products are generally of a better quality than competitors. Product strategya wide range of different products in the same industry, however improve on their scoth whiskey! Better quality could lead to no1 in the world in about 85% of their products! R&D Performance & innovation- Diageo claim they drive innovation, while insights into shopper trends and changing ofconsumer habits inform product and Measure performance: annual report to measure sales, profits, employments & costs. Market share packaging development. Advertising/ marketing strategies companys and share price are found within the marketing annual report, reputation and corporate image are done through internet & TV, the way to differentiate sustained by public relations , competitors Diageo from Pernod Ricard (main competitor) is how actions & media coverage. advertises. 3

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Market concentration
Firm Bacardi Brown-Forman Diageo Fortune brands Pernod ricard Sazarac others Market share in % (S) 9% 6% 29 % 4% 17 % 5% 30 % Total = 100% S2 81 36 841 16 289 25 900 2188

Government Policy Barriers to entry competes in multiple price categories, which allows customers to trade down during economic downturn, by also helping fill retail distribution, they block potential competitors

Regulations, taxes and subsidies- various taxes and duty tax are placed heavily on imported products due to growth in alcohol industry.

The above table shows the market share and market concentration for each of the firms in the industry measured using the Herfindahl- Hirschmann Index. this indicates the amount of competition among firms and it is also a measure of the firms size in relation to the industry The data clearly illustrate a major difference between the market leader, Diageo (841) and Sazarac (25) is 816.

Employment incentivesincrease in national minimum wage.

Macroeconomics policies- keeping inflation low and predictable & reasonable rate of interest.

09295266 Year ending 2007 2008 sales m Marke t share % 27% 15% 9% 6% 5% 3% 35% 100% 2009 sale s m Market share % Growth 2007-2009

Firm

Ran k

sale s m

Marke t

Diageo Pernod Ricard Bacardi BrownForman Sazarac Fortune brands others

1 2 3 4 5 6 /

share % 7,84 25% 1 4,189 2,693 1,496 1,197 898 11,97 0 29,9 24 14% 9% 5% 4% 3% 40% 100%

8,090 4,494 2,697 1,798 1,498 899 10,487 29,96 3

9,31 1 5,458 2,890 1,927 1,605 1,284 9,632 32,1 07

Sal Shar es e% 29 % 18. 4 7 30.3 7.3 3 0 1 1 1 -10 /

17 % 9%

6 % 28.8 5 % 34.1 4 % 43.0 30 % 100% 19.5 7.3

(Annual reports for: Diageo, Pernod Ricard, Bacardi, Brown-Forman, Sazarac and Fortune brands) 2009 figures had been used as 2010 figures not available for every firm.

The data clearly demonstrates that sales for Diageo and competitors had been increasing and growth had been achieved from 2007 to 2009, however, competitors such as Pernod Ricard had been achieving stronger growth than Diageo which could be a concern to Diageo; having said that, Diageo still hold the highest market share with 29% while their nearest rivals (Pernod Ricard) lie at 17%.

Market share in the alcohol industry

Driving forces in the industry

Diageo annual report 2010

09295266 Diageo is of course the market leader and in a very stable position, could argue that it is in the maturity stage which also suggests that has cash cow products; as the product, market and competitors change over time, the product life cycle forces Diageos positioning and differentiation strategy to change. Diageos and competitors product have a long product life cycle, vodka and liqueur drinks is bought by consumers for pleasure; Smirnoff and other high quality brands are in the maturity stage of the product life cycle. The recent recession that had come across the UK had not affected the alcohol industry majorly, certainly not affected Diageo, the intense competition between Diageo and Pernod Ricard with the introduction of some inferior alcohol goods had been affecting pricing strategies, however, Paul Walsh, the chief executive had managed to keep Diageo in a very stable position during the economic downturn, having said that, recession doesnt affect everyone but certainly would have made some customers to switch to Tesco Value vodka which cost 3.99 rather than the Smirnoff bottle which cost over 10. Social communities have been accusing the alcohol industry for the drunken disorder that plagues Britains town centers; Paul Walsh had come out to defend the industry claiming that revelers must take personal responsibility for the amount they drink on a night out, claiming that Diageo behaves responsibly in the way it sells its brands; these factors could affect the alcohol industry, making less people buying alcohol worryingly on their health, but it is usually the under 25 year olds that drink heavily which is an advantage, however not very ethical from a neutral point of view. (Walsh Tuesday 16th November 2010) A constant and continuous threat to Diageo and competitors are the supermarkets; inferior goods such as Tesco Value and Asda Smart Price could affect the sales of Smirnoff or other brands due to the price! In this case only, it could be argued that alcohol is price elastic, a tesco value 1L vodka costs about 7.99 whereas a Smirnoff 1L bottle costs about 16.00, this is about double the price, young customers such as students of which are known to be heavy drinkers at this stage of their life for example, always look for the cheaper option for minimum living costs; therefore, Smirnoff and co may be left out, having said that, there are customers who look for quality of which is when the high brands contributes to the reason of which Diageo is so successful.

09295266 Due to the intense market and competition in the industry, firms have to turn to their quality and make a priority in order to separate themselves in the market! Tesco and Asda are companies that aim to make customers spend less but spend it more on their product, for example, inferior products, this increase their companies sales, therefore share, their alcoholic range of products is not majorly popular, however could be argued that at some stage with the strong secure power of the two firms, they could possibly break into this market and achieve growth repeatedly.

Diageo PLC financial analysis for 2006-2010

Average percentage increase in sales over the past 5 years is roughly 34% from 2006 up to 2010; however, the percentage increase from 2006 to 2007 in only about 3% which is approximately 4% less than the average percentage increase per year, having said that, it had picked up majorly between 2008 and 2009 to about 15%!

The graph shows Diageo PLC financial position over the previous 5 years. Operating profit growth has increased at an average of 25% from 2006-2010, with the majority of the increase between 2008 and 2009 of about 9.3%. Having said that, macroeconomic factors such as tax had affected Diageo since 2007 and it decreases up to about 38% in 2009; effectively, this could be due to the economical downturn in the industry, however it did increase from 2009 to 2010 by 3.4%. Despite the success that Diageo had achieved, and regardless of being the market leader in a very popular market, Diageo does obtain a relatively risky competitive position if the government decides to raise excise tax; the companys profit margin would effectively drop, having said that, there is less

09295266 pressure to raise excise taxes for health reasons because a light consumption of alcohol does not provide much health risks. The global and regional economic downturns are factors which Diageo are not limited to; other macroeconomic factors include: changes in consumer tastes and preferences, this is a very key element to a market such as the alcohol industry because consumer are always looking for the best option which suits them best, therefore innovation and possibly diversification could prove vital to Diageos competitive advantage. Diageo operates in worldwide markets; therefore a change in levels of consumer spending in specific markets could influence the companys performance in those markets, another affect is the failure of financial counterparties alongside customer and suppliers.

Turnover by sector

Diageos organic growth strategy has a very key element of which remains innovation; this approach simply remains: to innovate on core brands such as the scotch, beer and smiroff which between them hold up to about 60% of Diageos Sales, to look deeply into consumer and shopper insight and to deliver rooted ideas which would satisfy consumers and give could Diageo a competitive advantage. Flavour innovation across our vodka brands, such as Croc Red Berry and Croc Coconut, has helped to drive innovation performance in North America. Paul Walsh, Chief Executive

Diageo has continuously been investing in attempt to enhance the capabilities of its consumer marketing function of which at the moment consists in over 30 countries involving about 500 people covering more than 80% of Diageos net sales. The company had made it simpler for customers to shop for products in the spirits category. This formed a partnership with customers that had helped them to offer the convenient range of products, the appropriate amount of self space and provides navigation through signage. 8

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Evaluations and conclusions With the recent economic downturn that had struck the economy, the financial figures show that the alcohol industry had not been affected by the downturn; Diageo and its competitors had achieved regular growth since 2007, proving that consumers are still likely to spend money on alcohol proving that macroeconomic factors such as deflation and recession does not affect all consumers. In comparison to their competitors, Diageo had kept their strategy of innovating high quality brands in order to maintain the strong competitive advantage that had them at the front foot of the industry for the past years. Tesco Value and Asda Smart Price can be a threat to high class names in the alcohol industry by offering a Brilliantly low price that would suit a shopper weekly shopping budget, this could be a wakeup call for the strong brands of Diageo and Pernod Ricard to release cheaper drinks into the market that would be competing with those inferior goods.

Word Count: 2195

Refrences

1. 16 Diageo Careers, www.diageo-careers.com/WhoWeAredidYouKnow.asp+distiller+diageo&hl=en 2. Bacardi annual reports ( 2007, 2008 and 2009) 3. Brown-Frowman annual reports (2007, 2008 an 2009) 9

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4. Diageo PLC annual reports (2006, 2007, 2008, 2009 and 2010) 5. Fortune Brands annual report 2009 6. Fletcher. N., Wednesday 29th April 2010 http://www.guardian.co.uk/business/marketforceslive/2009/apr/29/blackfla g-diageo 7. Hatherly Z. 2010 independent sustainability consultant http://ccreport2010.diageoreports.com/top/about-this-report.aspx 8. Pernord Ricard annual reports (2007, 2008 and 2009) 9. Sazarac annual report 2008 10.http://www.stock-analysis-on.net/NYSE/Company/Diageo-PLC/FinancialStatement/Assets 11.Walsh. P. Tuesday 16th November 2010. Paul Walsh Chief Executive Of Diageo Defends Drinks Industry http://news.sky.com/skynews/Home/Sky-NewsArchive/Article/20080641302818

Appendix
Appendix 1 Diageo Profit or loss account for past 5 years

10

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Appendix 2 Diageos sales per sector

Appendix 3 Industry Market concentration

Appendix 4 Excise duties rates in UK 11

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Excise duties rates in UK Spirits. per 70cl bottle 40% ABV Still wine per 75 cl bottle 11.5% ABV Sparkling wine per 75 cl bottle Beer. per pint 5% ABV or 12 Plato

5.5

1.25

1.65 Appendix 5 Formula for the Herfindahl- Hirschmann Index. 0.38

VAT % RATE

17.5

12