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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 is the
leader in many of the major growth market around
world!

market
the

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

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 in

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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 consumers
and shoppers want
which informs
customer
relationships
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.

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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

Basic
Demand Basic supply conditions
Conditions
Legal
Price elasticity
Framework
not very elastic at
Regulations for UK
-0.1;
however
import duty, duty
allows
inferior
rates, EU import
goods opportunity!
duty,
tariffs
&
Substitutes
customs & excise
Demand
for
duties.
Importing
Diageos products
Regulations,
goods price could
is relatively resilient
taxes
and
vary from times
subsidies- various
which
affects
to
recession.
taxes and duty tax
profits.
Although customers

Technology

are placed heavily

switch
to
Conductcould
international
supply
on
imported
cheaperBehaviour
brands competitive
Pricing
with competitor
chains.
giving very inferior
price,
similar pricing strategies, however products due to

Diageo
is
a
goodat quality an
product
is very essential to overtake growth in alcohol
member of a group
advantage which is an advantage
competitors,
for Diageo as industry.
of food and drink
their
Cyclical/
Seasonal
products
are generally of a better quality
manufacturers
Employment
Variationthan
competitors.
AIM-PROGRESS,
balanced strategyseasons
Product
a wide
range of different incentiveswhich recognise the
products
Durability
of industry,
in
in the same
however improve on increase
importance
of
national
producttheir
scoth whiskey! Better quality could lead to no1
ensuring that their
minimum wage.
buy
for 85% of their
incustomers
the world in
about
products!
supply
chains
satisfaction,
R&D
& innovation- Diageo
claim they
drive
operate
to
high
products
may
last
innovation, while insights into shopper trends and
up to a consumer
week or habits standards
changing
inform product ofand
responsibility.
even just one
day!
packaging
development.

Method
of
Advertising/ marketing strategies marketing
purchasedone
through internet & TV, the way to differentiate
supermarkets,
from Pernod Ricardoff
(main competitor) is how Diageo
license,
to
pubs,
advertises.
bars & clubs.
Market structure

Market
concentration

Number
of buyers and

sellers - high demand in

alcohol markets keeps firms confident
Firm
Market share in
S2
Product differentiation products already differ
% (S)
between spirits, beer, wines, etc
Bacardi
9%
81
Barriers to entry & exit very hard for a
Brown-Forman
6%
36
newcomer
to
compete
in
the
industry,
Diageo
29 %
841

Horizontal Integration firms are involved in

Fortune brands
4%
16
and markets
Pernodmarkets
ricard worldwide, different cultures
17 %
289
around the world.
Sazarac
5%
25

markets.
others Diversification- in worldwide different
30 %
900
Performance
Total = 100%
2188
Measure of performance: annual report to measure
sales, profits, employments & costs. Market share
and share price are found within the companys
annual report, reputation and corporate image are
sustained by public relations , competitors actions
& media coverage.

3
Macroeconomics
policies- keeping

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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.
Year ending
2007

Firm

Diageo
Pernod
Ricard
Bacardi
BrownForman
Sazarac
Fortune
brands
others

2008

2009

Ran
k

sales Marke
m
t
share
%
1 7,84
25%
1
2 4,189
14%

sales
m

Marke
t
share
%
8,090
27%

sale
s m

4,494

9,31
1
15% 5,458

Market
share
%

Growth
2007-2009
Sal Shar
es
e%
29 % 18.
4
7
17 % 30.3
3

3
4

2,693
1,496

9%
5%

2,697
1,798

9% 2,890
6% 1,927

9%
7.3
6 % 28.8

0
1

5
6

1,197
898

4%
3%

1,498
899

5% 1,605
3% 1,284

5 % 34.1
4 % 43.0

1
1

11,97
40% 10,487
35% 9,632
30 %
0
19.5
29,9 100% 29,96 100% 32,1
100%
7.3
24
3
07
(Annual reports for: Diageo, Pernod Ricard, Bacardi, Brown-Forman, Sazarac and
Fortune brands)

-10
/

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%.
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Market share in the alcohol industry

Market Share%

bacardi; 9%
others; 30% brownforman; 6%

Sazarac; 5%

diageo; 29%

Pernod ricard; 17% fortune brands; 4%

Diageo annual report 2010

Driving forces in the industry

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
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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.
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

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Diageo's Sales Turnover 2006-2010

12,000
10,000
8,000
(million)

turnover

6,000

Linear (turnover)

4,000
2,000
0

2006

2007

2008

2009

2010

Year

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%!

Diageo's financial analysis 2005-2010

(Milion)

3,000
2,500
2,000
1,500
1,000
500
0
Year
Operating profit

Profit before tax

Taxation

Profit after tax

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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
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

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% of sales by business sector 2010

Gin ; 3%

Tequilla; 3% Other; 3%

Liqueur; 5%

Scotch ; 27%

Wine; 6%
Rum; 6%
Whiskey; 6%
Ready to drink; 8%

Beer; 22%

Vodka; 11%

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
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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.

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

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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)
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
11

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Appendix 1 Diageo Profit or loss account for past 5 years

Appendix 2 Diageos sales per sector

Appendix 3 Industry Market concentration

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Appendix 4 Excise duties rates in UK

Excise duties
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

rates

VAT %
RATE

17.5

5.5

1.25

1.65

0.38

Appendix 5 Formula for the Herfindahl- Hirschmann

Index.

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