Diageo (ADR

)
Conrad Gibbins Analyst
June 16, 2009

Recommendation:

HOLD
Pros:
• • • • • • • • • • • • Undervalued World’s Premier Spirit Company Excellent Margins Tremendous Emerging Market Growth Opportunities Recession Resistant Great Brand Equity & Market Diversity Strong Cash Position

1 DEO ADR share = 4 DGE shares on LSE 1 GBP = 1.648 USD (06/10/09)

Cons:
Negative European sales growth Currency Fluctuations Potentially inflated input costs Correlation to discretionary sector Dependence on Emerging Market Economic Expansion

Ticker Exchange Industry Sector Classification Market Cap. 52 Week Price range Recent Price Current P/E Projected 2011 P/E 2009 EPS Q1 Projected 2011 Q1 EPS Dividend Yield Debt Rating Beta

DEO/DGE NYSE/LSE Alcoholic Beverages Consumer Staples Inc & Cap Appreciation 34.89 Billion $40.93-$77.58 $56.50 12.8 15 £.627 £.80 2.8% S&P = AMoody’s = A3 .72

Porter’s Five Forces: • • • • • Threat of Competition: Moderate Threat of New Entrants: Low Threat of Substitutes: Low Power of Suppliers: Low Power of Buyers: Moderate
(3)

Brief Overview

Diageo plc is engaged in the drinks business with a collection of international brands. Diageo is a participant in the branded beverage alcohol industry and operates on an international scale. The Company produces and distributes a collection of branded premium spirits, beer and wine. It produces and distributes a range of premium brands, including Smirnoff vodka, Johnnie Walker Scotch whiskies, Captain Morgan rum, Baileys Original Irish Cream liqueur, JeB scotch whisky, Tanqueray gin and Guinness stout. In addition it also has the distribution rights for the Jose Cuervo tequila brands in the United States and other countries. Diageo's beer brands include the only global stout brand,Guinness.

PURCHASE RATIONALE (1,14)
The Educational Investment Fund decided to establish a 3% position of Diageo (Ticker: DEO) on the recommendation of Robert Wilkerson on 20 July 2006. Main supporting arguments: • Global company • Market leader • Portfolio of No. 1 and No. 2 category brands • Good growth prospects of premium spirit brands (especially in the US) The Educational Investment Fund voted to hold a 3.22% position of Diageo on April 5, 2007 based on the recommendation of Julian Braasch. Main supporting arguments: • Industry leadership position • Brand portfolio strength • Recession hedge • Strong cash returns to shareholders through dividends and share repurchases The Educational Investment Fund voted to hold a 3.54% position of Diageo on September 10, 2007 based on the recommendation of Brett Flodder. Main Supporting arguments: • World’s premier spirits company • Strong investment and positioning in emerging markets • Recession hedge • Growth in demand for premium spirits The Educational Investment Fund voted to hold the entire position of Diageo on February 28, 2008 based on the recommendation of Trey Schorgl. Main Supporting arguments: • Growth trends in the demand for premium spirits • World’s leader in premium spirits • Global priority Brand’s positions as segment leaders • Brand strength and image • Recession hedge • Diversified product segments • Strong investment and positioning in emerging markets(Intelligent Marketing) • Efficient supply chain and superior routes to market • Strong Pricing Environment • Ketel One has strong growth potential

The Educational Investment Fund voted to hold the entire position Diageo on July 09, 2008 based on Jared Shojaian’s recommendation.

Main supporting arguments: • Undervalued using valuation models • Diversified product line • Multinational company in over 180 markets • Industry & company growth potential • Industry leader
The Educational Investment Fund voted to hold the entire position of Diageo on November 13, 2008 based on the recommendation of Wes Sullivant.

Main Supporting arguments: • Undervalued using valuation models • Defensive Holding • Strong International Integration • Multinational company in over 180 markets • Industry & company growth potential • Industry leader • Premium Strategy is effective and drives margins

PORTFOLIO CONSIDERATIONS (1,2)
Diageo is now considered to be an income and capital appreciation holding because it’s dividend of $1.58 a share yields only 2.9%. As of June 11th, 2009 Diageo makes up 3.18% of our overall equity holdings. Diageo is categorized in the consumer staples group even though it does have certain consumer discretionary attributes to it. The EIF target weighting for consumer staples is 14%. We’re currently underweight our target asset allocation by 48 basis points holding only 13.52% in the staples sector. We are at a middle ground between our target weighting and the S&P 13.05% staples holdings though. Diageo currently makes up 24.5% of our consumer staples sector holdings.

Fortune Brands (known for Jim Beam and Knob Creek).5%. and consolidation to acquire new key markets.13. 5. about 85% of revenue is controlled by the top four companies. North America is Diageo’s largest market.INDUSTRY OVERVIEW (1. brandy and cognac. Diageo has the greatest spirit market share in the world as well as in the North American market where they capture 32% of the market. and various other spirits. Some of the key market players in the sub-industry besides Diageo are Pernod Ricard (known for Makers Mark and Kahlua). In spirit production and distribution. tequila. 11. Supply chain efficiency is of the utmost importance in the spirit industry. wine. and beer sub-industries. North American spirit consumption is led by whiskey with 29% market share. where there is only so much you can do to gain a competitive advantage in the form of the actual end products taste and ingredients.14) The alcoholic beverage production and distribution industry is compromised of three general categories. partnerships. The spirits sub-sector peak to trough average PE multiple is 15. the spirits. The spirit sub-industry involves fierce competition between just a few major groups dominating market share. and Constellation Brands (with a diverse set of brand names including Skol Vodka). synergetic alliances. rum with 12% and tequila with 8. Spirits (US Markets) The spirit sub-industry is aggregately mature with pockets of niche growth opportunities. vodka.2 and the sector is currently trading at a 12. Spirits is a very general and diverse category that includes all forms of well known liquors including whiskey. Brown-Forman (known for Jack Daniels and Southern Comfort). The only thing more important is brand equity which is achieved through successfully implemented marketing campaigns. gin. 7. Brand equity and awareness can make the world of difference in the spirits industry. vodka with 24%. Diageo outperformed . rum.8 multiple. The keys to success in the industry are utilization of economies of scale. 6.

The 2008-2009 recession has yet to have a significant influence on spirit consumption though. and is an influential factor on specific brand choices and as well as demand for overall spirit consumption. Advertising goes in hand in hand with brand recognition. but not as crucial as it is to the wine industry. Seasonality is also a factor with spirit demand. Tax laws and international trade relationships are also influential with imported spirits. Captain Morgan. Recessions can adversely affect the spirits industry as well though. Regulatory and legal issues are an important demand determinant especially in the spirits industry. Demand Determinants of the Spirit sub-industry: • • Brand recognition and the price of spirits relative to substitute alcoholic beverages.expectations with 4% growth in net sales in the North American markets in the first half 2009. and Crown Royal brands. Income is an important variable in demand of spirits. as excise taxes and tariffs can affect the purchasing price of various imported spirits. because demand routinely picks up in the fourth quarter due to holiday purchases and celebrations. • • • • • . because dry counties obviously have lower spirit consumption. and thus more negatively affected by stricter drinking and driving laws. led by its Smirnoff. Market access is also an important factor. which is more potent than beer. Spirits sales represented 73% of Diageo’s overall net sales in 2008.

but it’s been more adversely affected by the recession due to the more discretionary attributes of the sub-industry. and conform to the inevitable benefits of consolidation and economies of scale. This trend is illustrated by Fortune Brands acquisition of Allied Domecq’s wine asset unit as well as Constellation Brands acquisition of Robert Mandavi. The US wine market is only expected to grow in the next 5-10 years as a higher percentage of the population will be aging into the target wine drinking market age. The wine industry is expected to follow the spirit industries lead though.Current Spirit Sub-Industry Revenue Figures Wine (US Market) The wine sub-industry is much less concentrated than the spirits sub-industry. . The four largest companies in the US wine industry still control 57% of the overall market share though. The US wine industry is nearly double the size of the US spirits industry.

but not to the same extent as wine. Consumer confidence and the economic outlook coincides with disposable income as a crucial factor in the discretionary sub-industry. Relative prices for alcoholic beverage alternatives to wine are an influential demand factor. Clement). Constellation Brands Incorporated (known for Franciscan Estates). which has a more affluent demographic target market. Consumer preferences are a significant factor which is primarily influenced by marketing campaigns and its relative market appeal compared to substitutes. especially in the lower priced wine market. Foster’s Group Limited (known for Beringer and St. and The Wine Group (known for Corbett Canyon). Government regulations. High priced spirits are similar. The wine sub-industry has a heavier correlation to the consumer discretionary sector than the consumer staple sector as it as seen as a luxury in most cases rather than a necessity. but are to a greater degree a retail purchase at the liquor store. laws. Basically if consumers have higher disposable income they will go out to dinner more than eat in. Demand Determinants of the Wine sub-industry: • Disposable income is the most important demand determinant for the wine subindustry.The major players in the wine sub-industry include E & J Gallo Winery (known for Barelli and Stefani). Health studies and considerations affect consumer demand and wine consumption appeal as well. Wine made up 6% of Diageo’s overall net sales in 2008. High priced spirits have this same correlation. • • • • . which is the predominant market access of wine consumption. Consumers are more loyal to their grocery and retail habits and brands than they are to eating and drinking out. and societal standards in relation to drinking and driving and public intoxication are always a factor in any alcohol related industry.

and other synergetic advantages. SABMiller a subsidiary of South African Breweries formed a joint venture with Molson Coors in 2007 to combine their business’s in the US market. supply chain efficiency. with the three largest companies controlling 80% of the market share. Current Wine Sub-Industry Revenue Figures Beer (US Market) This sub-industry is even more concentrated than the spirit production. market share. As can be duly noted the beer industry has been under an immense consolidation trend like the rest of the alcohol industry. This joint venture combination was implemented to enhance economies of scale. Anheuser-Busch was acquired by Inbev in July 2008 and controls 48% of the U. .• Grape production and prices are input costs which affect the price consumers pay and therefore the demand of wine consumption as well. Miller Brewing was acquired by South African Breweries in 2002 from Phillip Morris.S.

Molson Coors is known for their Coors Light and Coors Original brands. Demand for all alcoholic beverages increases with households with larger amounts of disposable income. Beer made up 21% of Diageo’s net sales in 2008. Demand Determinants of the Beer sub-industry: • • Price and quality relative to other beer brands. Laws and regulations regarding public intoxication. and O’Doul’s brands. South African Breweries is known for their Miller-Light. • • . but the trend recently have for there to been a large proportionate amount of that growth in the demand of spirits and wine. but their CEO Paul Walsh has routinely disagreed with these analysts defending his move by reminding them of Guinness’s sales growth of 6% last year and 14% growth outside of Ireland. and Foster’s brands. The trend in the alcoholic beverage industry has been shifting more and more towards spirits and wine. Diageo’s beer brands that have US presence include Guinness. Some analysts discourage Diageo’s increased involvement and capital spending on their beer brands. and Red Stripe. Harp Lager. Excise taxes can have a strong affect on the end user price. Bud-Light. Age demographics are a key factor. and age are a factor with beer demand as well. because the demand of beer in the age group of 21 to 35 is higher. drinking and driving. Milwaukee’s Best. The revenue growth of the beer industry has been relatively stagnant.Anheuser-Busch Inbev is widely known for their Budweiser. Miller Genuine Draft. Michelob.

Diageo has also disposed of several non-core assets since their incorporating merger date in 1997. Diageo also owns a minority interest in ShuiJingFang which is a spirits company in China. Diageo has a very strong international presence in over 180 markets around the globe. Jose Cuervo. J&B. Baileys.14) Diageo was formed in 1997 subsequent to their merger of Grand Metropolitan Public (GrandMet) and Guinness and is headquartered in London. Diageo currently employs nearly 25. Tanqueray. beer. Beaulieu Vineyard and Sterling Vineyards wines. Guinness. . and Bushmills Irish whiskey. and wine including Smirnoff.11. Johnnie Walker.000 people.13.Current Beer Sub-Industry Revenue Figures COMPANY OVERVIEW (1. Diageo is primarily known for their production and distribution of high end spirits. In 2008 Diageo also acquired the exclusive rights to market and distribute Ketel One Vodka products further diversifying their spirit brands giving them a premium plus vodka brand to distribute along with their premium brand vodka Smirnoff. The company is publicly traded on both the New York Stock Exchange under the ticker symbol DEO and the London Stock Exchange under the ticker symbol DGE. 7 Crown. Captain Morgan. Crown. Royal. Diageo owns a significant interest of 34% in Moet Hennessy which is a subsidiary of LVMH Moet Hennessy that produces and distributes various champagne’s and cognacs.

This is in large part due to the greater retail price North American consumers are willing to pay because of higher GDP per capita figures.9 billion sale of General Mills shares and £. Diageo’s international revenues refer to emerging market economies for the most part that aren’t a part of North America. Their sales are led by the North American and European markets with each taking 32% of their overall sales. Diageo’s emerging market revenue growth has been decelerating recently though. as well as more developed infrastructure and marketing outlets in the North American markets. Diageo’s Net Sales (2008) & Operating Profit (2008) by Geography: Diageo’s sales are diverse and have exposure to just about every major economy in the world.Some of these have resulted in large increases in capital which have strengthened their balance sheet enormously. and that this is the reason behind negative sales growth for Diageo in the European markets. Diageo’s most profitable market has been the North American market. Africa and especially South Africa has seen enormous revenue growth. a £1. and realigned their company’s core assets to strictly the business of producing and distributing premium grade alcoholic beverages. Some of these divestures include a £4. or Asia. Diageo has an extremely diversified market and product portfolio line which is illustrated in the graphs below and on the next page. Spain was an especially painful market for Diageo in . It’s the only market where their operating profit has been significantly higher than their revenue. and beverage offerings. Many analysts believe the European markets are in a state of constant pricing wars.3 billion valued sale of Pillsbury. and retains the title as the undisputed heavyweight in the spirit industry. Diageo’s business model is very unique because there’s really no other premium brand spirit company who also has any significant revenues in both the wine and beer markets as well.7 billion sale of their interest in Burger King. Europe. In all other markets the operating profit figure is either even or less proportionate to the corresponding geographies net sales figures. Diageo operates in over 180 different countries. Not only are they diverse in market presence but they are diverse in their brand categories as well.

Jose Cuervo. but they still purchase their same brand of Scotch. Johnnie Walker’s target market customers are men who make between $100. but my argument highlights that they are at least recession resistant. beer makes up 21%. Scotch is still Diageo’s leading revenue generator. Diageo Net Sales (2008) by Beverage Type: .the aggregate European sales category. Captain Morgan. Yes there is a discretionary element to premium grade spirit and wine producers and distributors. These areas will be increasingly important to Diageo’s geographic market portfolio as the North American and European markets continue to saturate. Cumulatively spirits make up 73% of their net sales.5 bottles of Johnnie Walker a year. and wine follows up with 6% of their net sales. The J&B and Johnnie Walker scotch brands have enormous customer loyalty and elevated intangible asset valuations.000 a year in salary and drink on average 2. But their scotch brands have continued to hold up better than expected due to their strong brand equity and loyal consumers. and Crown Royal are more closely aligned to the consumer staple category than their higher end scotch brands and Ketel One vodka. India. East Europe. Russia. The old myth that alcoholic beverage companies are recession proof isn’t completely true. Baileys. These Diageo brands have held up especially well because of the trend that the target market might have scaled back on a taking another vacation this last year or buying a new car. Diageo has fairly limited exposure to the premium plus brand names that are more discretionary. Smirnoff. Diageo’s global market exposure lets them maintain perpetual growth and lends them a competitive advantage in these pricing wars because they can offset their losses by other markets revenue generation. Diageo has an ever increasing presence in the BRIC countries (Brazil. and China) whose economies are expected to continue to expand even throughout the global recession. Diageo’s growth strategy hinges on the continual economic expansion in the BRIC countries as well as various other emerging market plays such as Latin America. but for the most part the demand for many of Diageo’s brands has been fairly inelastic. accounting for 28% of all their sales. and a few isolated markets in the Middle East. Africa.000-$150.

thus eliminating the threat of new entrants to a great extent. so the threat of substitutes should be categorized as low. Diageo has exemplified this and has positioned itself well by marketing and developing its diverse set of brands in many markets to capitalize on fluctuations in consumers preferences’. Therefore.14) Threat of Competition – Moderate Diageo is the world leader in spirits sales and market share. The industry is also highly regulated and highly taxed due to the risk profile of the product. The alcoholic beverage industry is highly concentrated with only a few well-positioned companies dominating market share (there are numerous companies in the industry. could be substitutes. since they are primarily premium spirits producers. though the current market trend and preference would prove this to be an unlikely scenario. consequently there are many companies offering very comparable products. this is a competitive industry in which companies are always fiercely competing for brand recognition and awareness. but they are better-positioned to acquire smaller players and avoid takeovers themselves. Diageo could still participate but at a significant revenue reduction. The best way to gain a competitive advantage is through brand awareness and appeal. All of these factors contribute to what has to be categorized as a low threat of new entrants industry. but the majority of market share is controlled by only a few). However. Brand equity and market presence require very capital intensive oriented marketing campaigns to achieve.11. Furthermore. but not overbearing or interfering with Diageo’s growth strategies. millions must be spent on frequent marketing-related projects. companies with broad reach and economies of scale not only deter new entrants. thereby mitigating currency risk and regional financial downturns. consumers will most likely not . Threat of competition therefore is present. In particular. only about 21% of Diageo’s revenues come from beer sales. via marketing. Similarly. However. Diageo is well-positioned in the face of competition. Threat of Substitutes – Low The alcohol industry as a whole has almost no substitutes. Their brand equity is high in the 180 markets in which they operate. Therefore. especially ones lower on the pricing scale. To maintain financial stability. the fact that 73% of Diageo’s revenue comes from spirits suggests that other alcoholic beverages. lower end spirits could outgain the premium category in sales volume.PORTER’S FIVE FORCES (1. an industry player would do well to diversify by broadening their geographical and categorical scope. If consumers’ tastes and preferences shift more in favor of beer. Threat of New Entrants – Low The spirits industry is dominated by those companies which posses brands with high brand equity and market presence. Although the industry has moderate operating capital requirements. There are only so many ways to modify the end user product.

The power of buyers to set prices is low and producers such as Diageo certainly have pricing power. where consumers opt for cheaper brands. and buy less when agricultural prices are high. grain. Additionally. This time lapse delays any immediate financial stress and allows for smoothing across financial statements. Ultimately. many spirits have to be fermented as much as a decade in advance of end user consumption. and their premium brand pricing strategy borders midstream. prices. spirits). However. Premium-plus brands suffer most from decreased consumption at restaurants and bars. grapes. As a hedge. the power of suppliers is low. aggregate alcoholic beverage demand is mostly a staple product and fairly inelastic relative to its price. Farm suppliers are geographically-diverse with nearly infinite competition. their prices dictated by supply and demand. Power of Buyers – Moderate Similar to the threat of substitutes. . there is only moderate concern in the current economic downturn. etc. Diageo may have to rely on promotional discounts and favorable payment terms in order to maintain steady revenues. but the recent relaxation in such prices have eased such concerns. Additionally. it would not be unusual to see consumers shift their preference to a less expensive alcoholic beverage category.). companies can buy more when agricultural prices are low. since Diageo’s immediate customers are primarily wholesalers. the frequency with which they purchase spirits could decline. Finally. Due to such opportunities and the limited influence of agricultural producers. if prices rise in one beverage category (beer. Diageo products have among the highest brand equity. so the industry should not expect consumers to begin favoring non-alcoholic beverages. Thus. or average. and the power of buyers remains as such. Therefore.substitute premium and midstream spirits for lower-end brands due to the importance of brand recognition. Still. the alcoholic beverage industry is generally characterized as selling a primarily inelastic product in economic downturns such as this one. or they frequent such venues less and less. Rising commodity prices certainly hurt spirits producers’ margins. suppliers have hardly any pricing power. I want to keep this threat at a low level. While many consumers’ preference will not change. Power of Suppliers – Low Input costs to alcohol-producing companies come from agricultural products (wheat. wine.

The company faces a considerable threat with their marketing campaigns which have been censored in a minor way up till this point. Diageo is based in England and therefore is most adversely affected by Great Britain Pound currency fluctuations. Regulation. International Government Legal. Excise taxes are always a very direct threat. promoting and marketing tactics. The Pound has appreciated against the US Dollar recently. and South African Rand would be beneficiary to Diageo. and Excise Tax Considerations: Governments all over the world have stringent rules and regulations regarding the purchase age of alcohol. Therefore when the pound appreciates relative to various other markets’ currencies that Diageo operates in. . Brazilian Real. happiness. A reversal of this trend would have a lot of potential upside to Diageo’s profitability in the region as that is where they generate their largest portion of operating profits. Diageo’s most important market the United States has come under intense pressure and regulation regarding liquor sales. and sexual appeal without the warning about many of the possible damaging effects of alcohol consumption and dependence. China’s Yuan. Mexican Peso. there are adverse consequences to their bottom line profitability for the company in their primary currency. The only benefit of weaker foreign currencies relative to the GBP is that it reduces the costs of marketing and expansion in that market.14) Currency Fluctuations and Exchange Rates: Since Diageo operates in over 180 markets worldwide. A depreciating pound against various other currencies including the US Dollar.11. etc. Needless to say Diageo hedges a large amount of their currency transactions in the foreign exchange futures markets. There are many powerful lobbying groups and agencies that have been gearing up for a crack down on television advertising campaigns which are usually directed at younger age market segments and display images of fun. and the safe use of alcohol. This is a risk none the less that can have an immense affect on the company’s overall profitability. India’s Rupee.tw CRITICAL ISSUES (1. which can strip away Diageo’s critically important operating margin spreads in their largest market as they’ve done in the tobacco industry. Basically a weaker domestic currency (GBP) stimulates export activity and would favor a export dominated company such as Diageo. Only 32% of Diageo’s sales are from European markets and an even smaller 30% portion of their operating profit is extracted from the European markets though. Japanese Yen. which has been a hindrance to Diageo’s further potential profitability in their primary market. drinking and driving laws.3.13. drinking and driving laws. fluctuating currencies can have a dramatic affect on their real (currency adjusted) input and sales prices. Russians Ruble. This could be a potentially a huge issue considering brand equity and awareness is fostered through these campaigns and could be adversely affected by any new regulation.

The seasonal and cyclical peaks and troughs of the corresponding commodity prices are highly influenced by incremental changes in supply and demand.6 billion has many analysts speculating about Diageo’s possible acquisition targets. Potentially Higher Input Costs: The commodity markets are historically more volatile than the equity markets. This has led many of Diageo’s input costs to rise recently. Spain in particular has over a 9% unemployment rate and Diageo’s growth has gone negative in that market where net sales decreased a stunning 18% in the first half of 2009. and the Latin American countries have been their strongest growth prospects. This has caused sugar input prices to raise from their Dec 2008 lows of 11 cents per pound to nearly 16 per pound. Diageo’s current cash position of £3 billion. Most of their sales growth has been in the BRIC and emerging market countries. The only other real potential growth prospects would be from acquisitions. barley prices from $120 per metric ton to nearly $150 per metric . The worsening economy resulted in a large drop in consumer demand and reduced ability by their Spanish wholesalers to maintain their previous stock levels of Diageo’s products. The stagnant European growth has become more and more of a liability that various emerging market economies such as Latin America and Africa have had to offset which leads into Diageo’s next critical issue discussed. with their highest margins. consolidations. The critical issue is the fact that these markets growth rates have been decelerating recently. This critical issue and growth obstacle could be overcome though with a strategic acquisition which many analysts believe may be in the cards in the near future for Diageo. Africa and specifically South Africa. and synergetic alliances and partnerships. China) and emerging market countries. India. Russia. wheat prices from $225 per metric ton to nearly $275 per metric ton. The lower federal funds target rates and cheap money flying around recently has spurred investors to hold non-monetized assets that will benefit from stimulus packages as a hedge to weaker currencies. The commodity markets have been on a bullish tear recently has investors have flocked to non-monetized assets to avoid the inflationary consequences of the massive fiscal stimulus packages that have been implemented by multiple countries federal reserve’s and administrations. and that they’ve been depended on too greatly recently to offset stagnant European and Asian growth. The North American market has been Diageo’s profit cash cow. Many of the economies in the Europe have socialist and communist leaning governments which aren’t as friendly to trade agreements and free market economic expansion. but more so recently. This has always been a concern and critical issue to Diageo. Dependence on Emerging Market Demand Growth: Diageo’s growth opportunities are really limited in scope to the BRIC (Brazil. but their sales growth there has been fairly conservative.Stagnant European Economic Growth: European growth has become an exceedingly large obstacle for Diageo. This has probably been the largest impediment to European sales growth. which is six times their 2008 fiscal year cash position of £0.

They have great market presence in 180 separate countries. Paul Walsh and company over at Diageo have managed to increase their cash position nearly 3 times over from their June 2008 amount of £0.ton. Aggregate Commodity Food & Cereal Price Index (Includes Cereals – such as Barley.74 billion to now over £2.11.13. They have a great product line that isn’t too highly concentrated in any one price or beverage category. Diageo has this option because of the roughly 10 year fermentation period for most of their spirits.42 billion.14) Diageo is an extremely well positioned and diverse alcoholic beverage company. but their beer.12. Maize. This is a substantial amount of cash which leads me to speculate Paul Walsh is contemplating another acquisition or round . Diageo is the industry leader in spirits production and distribution and has a great niche market carved out in the beer and wine sub industries.088 billion roughly equal to $3. Diageo has been extremely well managed thanks to the brilliance of their CEO Paul Walsh. Wheat & Food such as Grapes and Sugar) CONCLUSION (1. Regardless Diageo has the advantage of buying more of their commodity inputs at times when prices are lower and less when prices are higher. and wine production is of more concern when discussing higher input prices. More importantly at a time when most industry competitors are cash strapped with higher debt obligations year over year.

The US age market demographics in particular have been increasingly falling into Diageo’s specialty. has adequate fundamentals. heavily diversified. has ample growth opportunities. Diageo’s product portfolio mix is strategically aligned with current market trends and preferences which have been increasingly moving towards Diageo’s product offerings. while their PE multiple has traditionally averaged 15 times earnings. INVESTMENT RECOMMENDATION Based on the aforementioned reasons. Brand equity and awareness is a major contributor to revenue growth in the alcoholic beverage industry and their brands have continued to be extremely well marketed. and this is a gamble Diageo can take given their market position. I think Diageo is relatively undervalued right now trading at a 12. The company has good fundamentals. and Diageo plans to capitalize on their rivals Brown-Forman and Pernod Ricard by increasing their brand image and thereby market share during this economic downturn. but I have doubts about any seriously influential regulation coming to fruition in the near future in any of Diageo’s largest markets. Diageo is also making the right moves by shifting more of their marketing budget towards the BRIC and emerging market countries which have the largest growth potential and the United States where their margins are the highest. Diageo maintains a relatively strong balance sheet and good cash flow position in the industry. I have come to the conclusion and recommend that the EIF HOLD our equity position in Diageo (NYSE:DEO). Brand equity and image is everything in the alcoholic beverage industry. and very well positioned to outperform the alcoholic beverage and consumer staples sector.of expansion into a new market. and will more than likely come out of the global recession much stronger than when the recession began.8 PE multiple. . Premium grade spirits and beer has been where consumer’s preferences have been turning towards. It’s definitely undervalued (32% or $18 a share by my valuation model). potential for market share gain. Paul Walsh was recently quoted as saying marketing expenditures will expand more than revenue growth in the years to come as they penetrate further into emerging markets. has a strong cash position. acquisition opportunities. Regulation is a critical issue and fear of Diageo. and a diversified product portfolio.

The mean recommendation is a 2.10) The MSN poll ranged from a strong buy to a strong sell. 2009 to a market weight rating. with the plurality of analysts recommending a hold.07 a share which would be just under a 29% return from the current market price. My opinion falls somewhere between the Yahoo! Finance and MSN analyst ratings being a strong hold to moderate buy. The mean recommendation on Yahoo! Finance was a 1. This recommendation seems to be a bit pessimistic.PROS TO RECOMMENDATION • • • • • • • Undervalued World’s Premier Spirit Company Excellent Margins Tremendous Emerging Market Growth Opportunities Recession Resistant Great Brand Equity & Market Diversity Strong Cash Position CONS TO RECOMMENDATION • • • • • • Negative European sales growth Currency Fluctuations Potentially inflated input costs Correlation to discretionary sector Dependence on Emerging Market Economic Expansion Relatively Debt levered compared to primary competitors ANALYST RECOMMENDATIONS (4.5 on a (1 being strong buy – 5 strong sell) 1-5 scale. The mean price target on Yahoo! Finance is $72.63 coming down from a 2.86 rating a month ago. . JP Morgan also just upgraded Diageo on May 22nd.

and Kalua and Wild Turkey and Seagram’s extra dry gin. 2008 was the first year Brown-Forman’s sales exceeded the $3 billion mark and they are quickly gaining a part of the international spirits market.COMPETITION (1. Knob’s Creek. Brown-Forman’s 2008 sales figures illustrated this by the fact that over 50% of their sales being made up from international markets. Southern Comfort. Brown-Forman is Diageo’s largest competitor in the US spirits production and distribution industry with a commanding 30. Pernod Ricard is based out of Paris. Pernod Ricard had a key acquisition of Allied Domecq in 2005 which helped elevate their market share.5% in 2008 to $617 million. so they could focus more on their core business model of sprits and lessen their debt obligations.4% in the US in 2008 with their ready to drink beverages paving the way with 9% sales growth. Pernod Ricard had $2. and Canadian Mist brands.5. France and also acquired Vin&Spirit in 2008 to better position themselves to compete with Diageo’s premium Smirnoff brand vodka in the United States. Malibu. Fortune Brands Inc. Pernod Ricard isn’t nearly as strong of a competitor as Brown-Forman but they do still have 13% of the US spirits market share.4 billion in sales in the US in 2008 and increased their operating profit by 7. Brown-Forman’s sales grew 4. is known for their Jim Beam. In 2007 Fortune Brands had $2. but they are only the fourth largest within the United States. Pernod Ricard SA: Pernod Ricard is known for their trademark brand names such as Maker’s Mark. Internationally Fortune Brands is the second largest of the big four.14) Brown-Forman Corporation (NYSE:BF-A): Brown-Forman Corporation is known for their Jack Daniel’s. (NYSE:FO): Fortune Brands Inc. Calvert.6 billion in revenue and $766 million in operating profit. and Kessler brands. Fortune Brands sold their wine business during 2007 to Constellation Brands. is based out of Illinois and is very well diversified internationally. Fortune Brands Inc. Brown-Forman has yet to venture into the other two sub-industry categories of wine and beer.5% market share in 2009 compared to Diageo’s 32%. . Fortune Brands is the smallest of the 4 largest international spirits producers and distributors claiming a 10% market share in the US. Unlike Diageo.

3 6. Diageo has clearly utilized economics of scale and supply chain efficiencies to cut costs and retain best in industry margins.21 5.14) Profitability Ratios: Profit margins show the amount of income generated from sales. Profitability Ratios 2005 2006 2007 2008 Industry FO BF.2% 37.64 2.3% 14.0% 7.8.92 5. BrownForman is the most closely related company to Diageo.A GP Margin Net Margin ROA ROE 45.1% 42.3.A is showing higher valuations than Diageo.0% 45.2 15.0% 9.62 2.14 2006 9.60 16.5% 15.99 0.68 13.59 17.7% 20.7% 4.3% 21.78 5.8% 5.% 50.12 FO 0. Valuation Ratios Price Price : Book Price: Sales Price : Earnings Price : CF 2005 8.0% 10.14 5. and free cash flow to equity.1% 15.79 18.36 0.14 5. and BF.9% 41.7% 22.7% 11. From this class of ratios.75 14.03 Industry 2.13 16. I also believe these ratios do not illustrate the full valuation of Diageo.28 2007 10.7 9.0% 11.41 15.0% 12. From the above valuations. However. while ROA and ROE show the efficiency in which assets and equity are used to generate net income. Diageo is slightly higher than its peers.72 18.0% 30.0% 38. A 4.6% 10.6% 13.2% 44.RATIO ANALYSIS (1.66 .55 2.2% 15.0% 4. Diageo is outperforming it’s the industry averages and their primary competitors in almost every category in nearly every year. Diageo is undervalued based on its dividend discount model.3% 45.06 2.23 BF.03 2008 9.16 14.27 2.9% Valuation Ratios: Valuation ratios show the value of a stock relative to some financial/earnings criteria. forecasted alpha.05 7.

84 Industry 0.01 2006 1.57 2.45 0.88 BF.70 1.61 Industry 2.35 2008 1. but using sales instead of net income. Diageo is utilizing debt financing more than its competitors based on these figures. Inventory turnover also shows the efficiency in which inventory generates sales.72 FO 1. Diageo is fairly comparable. Once again.22 2007 0.57 2.02 2.45 FO 0.12 2006 0.30 . There is not much disparity. This is similar to ROA.30 BF. Liquidity Ratios Current Ratio Quick Ratio 2005 1. Diageo is spending more on marketing.65 2008 1.79 FO 0.77 Asset Utilization Ratios: Asset utilization ratios show the efficiency in which assets generate sales.73 2007 1. but a little bit better than its peers.22 2008 0.13 3.18 Industry 0. They are relatively highly leveraged compared to their biggest competitors and have taken on a sizable amount of long term debt obligations.31 1. Debt Utilization Ratios Debt: Equity Financial Leverage 2005 0.48 0.24 0.54 0.98 3.71 1.98 2007 1.2 0.57 1.53 3.A 1.66 1.A 0. Asset Utilization Asset Turnover Inventory Turnover 2005 0. This is probably the most fundamentally worrisome fundamentals about Diageo.31 0. buy backs and related activities and is using debt to finance their expenditures.98 2.65 BF.64 1.46 0.80 Liquidity Ratios: Liquidity ratios show the company’s short-term solvency and financial flexibility.A 0.85 2.Debt Utilization Ratios: Debt utilization ratios show the proportion of debt used in financing activities.66 2006 1. Diageo is fairly comparable with its peers in this category.

I may have had fairly high revenue growth rates with the exception of 2009 compared to analysts.7% 0.98 42.80 22.0% 2007 15.45 9. but as of recently commodities and other non monetary assets have come back into favor as inflation hedges.54 2.A 13.5% BF.11.71 3.3% Industry 5.0% 0.4.64 3. but I more than offset this with being more conservative and estimating larger marketing expenses.14) Revenue For 2009 and 2010 I used a growth rate of 7% and for 2011 I used a growth rate of 11%.9% PROFORMA ASSUMPTIONS (1. This could be a variable to watch out with in the future as I’ve mentioned in my critical issues section.6% 0.9% FO 7.Du Pont Analysis: Du Pont Analysis shows the factors that affect return on equity.84 38. COGS I used traditional industry average rates of 31% and 30% of sales. My revenue growth rates were moderate with some variations from analyst averages.70 2.01 30.57 2. Historically excise taxes have been in the 24-30% range for companies in the industry. Since Diageo has stellar profitability ratios and high margins.5% excise tax rate.66 3. as I don’t believe any new excise taxes will come to fruition in the current environment.0% 0. Commodities had a steep sell off when the recession began. their Du Pont Analysis looks much more attractive than the major competitors. DuPont Analysis Net Profit Margin Asset Turnover Financial Leverage ROE 2005 15.3% 2008 15.88 11. and I used a 24.7% 0. Most analysts had their 2009 revenue growth at a higher level and their 2010 revenue growth rate at a lower level.0% 0.35 37. and 2011 growth rates of most analysts were at a slightly lower level.2% 0. Excise taxes I stuck with the same excise tax rates that were used in the last Diageo report by Wes Sullivant.2% 2006 20. .98 1.

Shares outstanding Diageo’s share buyback program has been put on hold but I included a very minimal buyback option in case management changes their guidance. Income Taxes I kept the income tax level even at 25% of EBT with past analyst reports and recommendations. Dividends I also retained previous dividend growth rate estimations of 5% in my calculations.5%. VALUATION ASSUMPTIONS Risk Free Rate (1. but I believe this is very likely to happen with the way management has been speaking. This has been their traditional dividend growth rate and it seems like a conservative estimate of future rates. which is in line the average 30 year Treasury yield. This is something that could obviously change if corporate tax rates are raised and various deductibles are removed under the Obama Administration. Operating profit stayed mostly in line with historic averages at roughly 20% of sales even though marketing expenses went up.4. Market Risk Premium I used the EIF market risk premium of 5. I included less than a . I used 14-15% of sales figure to estimate upcoming marketing expenses.7%.Operating Expenses & Operating Profit I used a more conservative marketing expense figure as I believe Diageo’s CEO Paul Walsh will continue to be aggressive in trying to steal market share from competitors via marketing campaigns in emerging market economies as well as the US.5% share buyback program per year. This led to a higher operating expense figure than most analysts calculations. .14) For the risk free rate I used 4.

The beta has definitely gone up since the last EIF analysts report. with a return to their historical average P/E multiple of 15 in 2011. and that can be duly noted as a result of the volatility of Diageo’s stock. Diageo is slightly less volatile of an equity than it’s peers more than likely because of their international and diverse market exposure as well as multitude of product offerings ranging across all three primary alcoholic beverage categories. Diageo’s P/E multiple during the peak of 2007 soared to 29 times earnings. I have chosen slightly lower EPS estimates than other analysts.72 which was in line with most analysts’ estimates. I don’t think this is a realistic multiple for them to achieve in the near future. These estimates are more conservative than past analysts reports. which isn’t as volatile as numerous other sectors. My report and valuation models are all in pounds so they must be converted back to US dollars using the Friday. Closing Price & FX Assumptions I used the closing price from Friday. but in general the alcoholic beverage industry is a fairly recession resistant industry.64 equals £1.Beta I used a beta of . The aggregate spirit sector beta is modestly higher than this. P/E Multiples I project an average P/E multiple of 13 for 2009. Diageo has continued to implement their focus on high margin markets such as the US and aggressive growth strategies in emerging market economies. Diageo also has promising prospects especially with their wine and premium plus brand spirits which have more discretionary attributes to them if the recession recedes and economic expansion resumes.8 times earnings for much longer if economic activity picks back up. but I do think it shows the capability of analyst’s to heavily over value Diageo during times of great expansion which could be just around the corner. My 2009 EPS estimate is slightly below most analysts expectations and my 2010 is slightly above most analysts expectations. and my 2011 is right in line. 1 Diageo New York Stock . In 2009 I have EPS growing at a modest 2% rate which is below most analysts’ expectations. 14 for 2010. but I have chosen these because I am trying to follow conservatism valuation principles. June 12th in my report. In 2010 I have EPS growing at near 12% with plenty of further potential upside in the future if there’s an acquisition. I think that these facts along with the growth prospects of Diageo make it safe to assume they won’t continue to trade at 12. EPS As is the case with my P/E multiples I choose to error on the side of conservatism. June 12th reported exchange rate of $1. They still have a plethora of growth opportunities available to them which could easily increase the PE multiple if their prospects start heating up. Diageo isn’t a completely saturated company either. In 2011 I have EPS growing at a rate of 7%.

growth is stable. which lasted from 1919 to 1933. Fortunately. technically. trading up has been a welcome tail wind for alcoholic beverages companies. despite the effects of trading down. most alcohol companies are still highly profitable--evidence of the moats within the industry. B-to-the-E?) or marketing could change that trend. especially at bars and restaurants. producing and selling alcoholic beverages is a beautiful business: brand loyalty is high. the answer is false. and profits are robust in good times and bad. like Sam Adams. 2009. click here.) Even in 2008. We would argue that alcoholic beverages companies are recession-resilient rather than recessionproof as they still experience cyclical demand. mainstream beers like Budweiser (made by Anheuser-Busch InBev) and Coors Light (made by Molson Coors ) have been losing share to premium-positioned beers such as imports and crafts.15) True or False­­Alcohol Stocks Are Recession­Proof?  Ann Gilpin -. craft beer grew 5%-6% while the total beer category grew just 1%-2%. . What Goes up Must Come Down For the better part of the last decade. a brand made by Boston Beer . To find out more about Morningstar Institutional Equity Research. alcohol has comprised a very steady percentage of the United States consumer's total food budget for over 130 years. 4:00 pm EDT True or false: alcoholic beverages companies are recession-proof? Contrary to popular belief. We do have a few favorites.Morningstar On Friday June 12. which we'll detail later in the article. After baking the impacts of a stronger dollar and a weaker consumer environment into our valuations. 2009. (We recently added coverage of Anheuser-Busch/InBev. First we'd like to take a closer look at some issues facing the alcoholic beverages industry. save for Prohibition. However. the market appears to be overly discounting the attractive attributes of our alcohol beverage company coverage list.88 as of June 8. It seemed that no amount of innovation (anyone remember AB's caffeine-infused beer. trading at an average price/fair value estimate of 0. while consumers are trading down to lower-priced brands and curbing their consumption. the industry looks undervalued. RECENT NEWS (9. In fact. Given the right brands and adequate scale. In the domestic beer market.Exchange ADR share quoted as DEO equals 4 Diageo shares on the London Stock Exchange quoted as DGE.

This price differential has been especially exacerbated as craft brewers. are forced to take higher percentage price increases compared to their larger competitors to offset input cost pressures. which we consider weaker competitors. In certain categories. Constellation Brands and Fortune Brands . please click here: http://news. all companies in the spirits industry have seen their underlying sales growth slip. sales have gone nowhere but up over the past decade.In spirits and wine. and fetching high prices through advertising and bottle design even though the quality differential between super-premium and value products was quite minimal. In addition. Meanwhile. like super-premium vodka.99. The recession has also led to trading down to lower-priced brands in spirits and wine. Keystone Light is growing faster than Blue Moon. it's not surprising that value brands are one of the fastest-growing categories in beer today. which have medium to lower-end priced brands. This has only widened the price gap between. With the economy enduring a deep recession. reported a 13% decline in core shipments last quarter. due to their lack of scale. have seen their margins pressured. founder and chairman of the company.morningstar. where the premiumization trend was more pronounced. Imports and crafts have been the losers for the most part across the beer space. a company used to posting quarter after quarter of double-digit volume growth. With price discrepancies like that. we have been very impressed with the robust cash flow and operating margins being reported by the better-run operators like Diageo and BrownForman (bf. these trends have hit the brakes. To see the images associated with this article. more expensive craft beer doesn't seem worth the higher price. like Constellation Brands' Effen vodka. A-B is finally growing volumes again. and for Molson Coors. consumers have become more selective with their purchases in virtually every category. As consumers spend more of their alcohol dollars off-premise. Would You Rather Sell Keystone Light or Sam Adams? What's the result of the weak consumer environment? A-B/InBev and Molson Coors. .b. say. and most have lowered their forecasts for the year as consumers pull back on premium products. noted that he was in a convenience store recently where a 6-pack of Sam Adams sold for $8. For example.B) despite weakening top-line growth. growth in spirits consumption has slowed as consumers shift their consumption from on-premise (like bars and restaurants) to offpremise (grocery stores) channels. companies were making up new brands. While there are winners and losers in beer. For example.com/articlenet/article. during Boston Beer's latest conference call. Consumers have been trading up to more sophisticated and premium-priced brands and in some cases forgoing beer consumption altogether in favor of spirits and wine. Jim Koch. Boston Beer. increasing 6.99 and a 30-pack of mass domestic beer sold for $7. However. however. Suddenly.0% annually on average since 2000. are reporting great performance in the U.aspx?id=295022 Not surprisingly. Sam Adams and Bud Light. they are more likely to purchase beer over spirits due to its lower price point and lack of the need to buy mixers.S.

We think Brown-Forman will continue to take the cash provided by its very profitable U. such as Japan and South Africa.. more stable names. we think the market has placed several of them at attractive prices.S. In its recently announced first-quarter results. in the U. Constellation Brands. Brown-Forman Uncertainty Rating: Medium | Price/Fair Value Estimate Ratio: 0. we like Molson Coors as it benefits from the trade-down phenomenon and should continue to generate cost savings through the MillerCoors joint venture. powerful brands. Generally. At just 12.77 | 4 Stars The benefits from the MillerCoors JV have already stood out in Molson Coors' results. the alcoholic beverages companies are not immune from the weak consumer environment in this recession. but 17% in Europe and 54% in all other countries. Brown-Forman and Diageo. we think this highly profitable wide-moat industry leader. but is not so strapped for cash that he or she is forgoing the affordable luxury of premium Scotch whisky. we think Brown-Forman's mix shift could approach something similar to that of rival Diageo . It is also trading at attractive prices. However.S.S.Overall.85 | 3 Stars In our opinion. In general.000$120. and in fiscal 2008. Diageo Uncertainty Rating: Medium | Price/Fair Value Estimate Ratio: 0. Brown-Forman's biggest opportunity is in international markets. makes a great long-term holding. Molson Coors Uncertainty Rating: Medium | Price/Fair Value Estimate Ratio: 0. For Brown-Forman it seems that the enduring brand equity of Jack Daniel's and its "aspirational" qualities in emerging markets have helped to distinguish it from other brands and thus preserve its robust cash generation in good times and bad. we would steer investors away from stocks with high financial leverage. the premium spirits companies we like. We would gladly pound the table on this one if it dipped back into 5-star territory.S. the typical consumer of Johnnie Walker Black Label (made by Diageo) has an income of $100. For example. that turns every dollar that comes through the door into 15 cents of free cash flow. Finally. Bottoms up to These Picks Overall.5 bottles per year. Molson Coors' reported operating income grew 50%. The shares rallied and are currently rated 4-stars.68 | 5 Stars Diageo is hands-down the best spirits company on the planet. more than half of fiscal 2008 sales came from markets outside the U.0 times earnings and a 4. For the first time in the company's history. and A-B/InBev and toward the highest quality.2% dividend yield. (up from 20% in 1994). The firm has been especially savvy in tailoring its marketing message for Jack Daniel's in emerging markets. Over time. as savings from the MillerCoors JV more than offset tough head winds from a 20% depreciation in the Canadian dollar and a 28% depreciation in the British pound versus the U. business and invest it behind expanding its presence internationally. and the best emerging-markets presence. are trading at attractive valuations in spite of the low sales growth we foresee for them in the near term. we are not surprised to see the companies with the best brand equity and the portfolios with the widest moats in the spirits business fare well.S. such as Fortune Brands. dollar. the company's sales increased 4% in the U. It has scale.000 and consumes 2. It appears that this consumer is forgoing a vacation or a new car this year.

there were plenty of soft drinks. among other things.In March 2008. much of the socializing. pitches the beverage as an alcohol alternative for sophisticates. Below. Eight months later. Coca-Cola responded by launching its own malt drink. And many nondrinkers frequent bars to be with their friends. Soft-Drink War Rages in Kenya -. A quirky.(split evenly between North America. It's too soon to tell which brand will come out on top in what has become Kenya's version of the cola wars fought between Coke and PepsiCo. backed by a major media blitz. East African Breweries. introduced Alvaro. including Coke and its sister brands. revolves around the pub scene. as it has elsewhere. They became Alvaro's target market. but none of these beverages was aimed specifically at adults. Backed by Marketing Firepower By S AR AH CHILDRESS – Wall Street Journal NAIROBI. That left a niche that East African Breweries sought to fill. Kenya -. a non-alcoholic. according to the United Nations. above. An ad for Novida. Before Alvaro and Novida entered the market. But Africa's population is growing faster than any other major region's. But in this cosmopolitan city of three million people. and all other countries). Coke Launches Its Own Version.but Not Over Cola After Brewer's Non-Alcoholic Beverage Becomes a Hit. a unit of London-based spirits maker Diageo. light-malt drink. According to the brewer's research. particularly among young professionals. Novida. light-malt drink. touts it as a refreshing treat. . Europe. And nearly a decade of economic growth has helped foster a middle class that still has money to spend. Coke's non-alcoholic. about 70% of Kenya's predominantly Christian population doesn't drink alcohol. The global recession is expected to damp consumer demand across the continent. But the battle. although we doubt the firm can gain as much scale due to its smaller portfolio of offerings. which hit the market first. an ad for East African Breweries' Alvaro. underscores the growing importance of a once-neglected consumer market: sub-Saharan Africa. bare-bones ad campaign helped make the beverage a sensation.

Its pitch: Novida gives you a lift. so it's difficult to measure either brand's success. Novida. doesn't think there's room in Kenya for two drinks in the same niche at the same price: about 30 cents for 10 ounces. normally strongholds for East African Breweries. It also offered chilled samples of the drink at big sporting events. As a gimmick for the product's launch. which own all of Kenya's major beer brands. In its first six months on the market. Coke. At the time. radio and print ads for Novida. Coke moved up the launch of its drink. "But it's still too early. which is packaged in a distinctive green-glass bottle. Coke spent about $1. Since the market was already primed for malt beverages. Though its ad spending was limited. which sometimes made it hard to find. That only added to its cachet. In the three months following its introduction. The drink wasn't distributed very widely." . the company focused more on what the drink could do. the company spent only about $600. says Roger Gauntlett. Coke's marketing director for East and Central Africa. Maina. managing director for Kenya of market-research firm Consumer Insight Africa. it hired limos to drive around the city towing skateboarders." East African Breweries markets Alvaro as an alcohol alternative for sophisticates. Novida arrived in November. local radio and in print. which was amplified by word of mouth." he said. Coke declined to provide sales figures. by around 12 to 18 months. whose cola is the dominant non-alcoholic beverage brand in Kenya. "The non-alcoholic business was owned by Coca-Cola. hard day at work. in a curvy green bottle. the brewer began buying TV ads for Alvaro in December. who handed out the green bottles. the market researcher. was also developing a non-alcoholic malt drink. and homing in on neighborhoods with bars and restaurants. though Coke has continued to outspend it. The company kept up its "lift" theme. "Who will win the battle can't be said at this stage.000 to promote the drink. The brewer bought ads on billboards. Mr. according to marketing-research firm Synovate. It's the drink that will refresh you after a long. decorating taxi cabs with its ads. Alvaro had the advantage. When Alvaro hit the market. In response.5 million on TV. says Ndirangu Maina. it was enough to create a buzz around Alvaro.As the pioneer in its category. It's amazing that an alcoholic company would think of that before Coke.

IBIS World Industry Report: Wine Production in the U. Google Finance 4. 7. Morgan Stanley Diageo Analyst Report 12. 6. IBIS World Industry Report: Liqueur & Spirits Production in the U.S. JP Morgan Diageo Analyst Report 14. 8. Yahoo! Finance 5. Morningstar Article 10.S. Jared Shojaian.SOURCES 1.S. Credit Suisse Diageo Analyst Report 13. 2009 3. Diageo Annual Report 9. DEO EIF Report Summer 2008 15. Wall Street Journal Article . Trey Schorgl. MSN Money 11. EIF Portfolio May 12. IBIS World Industry Report: Beer Production in the U. DEO EIF Report Spring 2008 2.

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