Rapport Diageo - Case Study on wine and spirits. PDF

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Case Study on wine and spirits....

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“Celebrating life everyday, everywhere”

Andy Crichton – Clara Anica – Laurène Mathieu – Lucas Maugin – Jubin Pareek

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I. I.

Table des matières

Leader in spirits ......................................................................................................... 3 ab-

II.

A fast growth since 1997.................................................................................................. 3 And today ?...................................................................................................................... 3

How they get this position? ....................................................................................... 4 ab-

A portfolio composed by famous brand ............................................................................ 4 What’s the brand equity? ................................................................................................. 4

III.

Financial Statistics of Diageo .................................................................................. 5

IV.

Strategy Expectations Innovation ........................................................................... 8

abc-

Expectations: ................................................................................................................... 8 Objectives ........................................................................................................................ 9 Innovation ....................................................................................................................... 9

V.

What’s work the best for DIAGEO? .......................................................................... 10

VI.

DIAGEO would like to create a positive role for alcohol in society. ........................ 10

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I.

Leader in spirits

Diageo is a British multinational alcoholic beverages company with its headquarters based in London, England. The company is a global leader in beverage alcohol with an exceptional collection of brands across spirits and beers.

a- A fast growth since 1997 The Diageo company was created 20 years ago (1997) from the merger of the Guinness Company and Grand Metropolitan. The merger of these two companies grouped historical brands of alcoholic beverages including Smirnoff, Baileys, J&B, Johnny Walkers, and Guinness. Although Diageo was created recently, it is a very old established company. It was in deed created on the principles and foundations laid years before from giants of the industry such as Arthur Guinness, John Walker and many more. It is why Diageo is still very much inspired by the ideas and audacity of these giants, and develops its activities in the same entrepreneurial spirit and determination. From the merger, not only did Diageo possess alcoholic beverage brands, but also other big company names (e.g. Pillsbury and Burger King) that were dominant in different sectors. Pillsbury and Burger King were sold in 2000 and 2002 respectively, for Diageo to concentrate exclusively on alcoholic beverages. Since the merger, Diageo has grown by acquisitions. These acquisitions are strategic as they mostly involve companies that are in strong positions in the developing world. In 2011, Diageo agreed to acquire a Turkish liquor company (Mey Icki). In 2012, Diageo acquired the best-selling Brazilian Cachaça brand (Ypioca) as well as 53% of the shares of an Indian beer company (UB Group), the world’s second largest lager producer. Most recently in April of 2017, Diageo agreed to acquire Georges Clooney’s high-end Tequila brand (Casamigos).

b- And today? Today, Diageo produce more than 200 alcoholic beverage brands that are enjoyed in over 180 countries. Led by Ivan Menezes (CEO), Diageo employs approximately 33,000 people and the company has 143 productions sites in over 80 countries. Last year, Diageo’s Turnover was around 14 billion €. With an astonishing Market Capitalisation of around 69 billion €, the ratio of Market Capitalisation to Turnover reached approximately 4.9. This significantly high ratio highlights the confidence awarded by investors in regard to the future potential of the company. Diageo recorded a 30% Net Profit (4.1 billion €) last year. The growing amount of alcohol consumers (in emerging countries especially) and the huge amount of profit in the alcoholic beverage industry is one of the reasons this sector is so attractive for investors. Due to their scale, the geographical diversity of their businesses, and their desire to continuously improve their performances, Diageo seem to be in a good position to fulfil their ambitions: to be one of the best performing, most trusted and respected consumer products company in the world. 3

II.

How they get this position?

Diageo has a huge portfolio. In order to clarify and classify all brands, 3 three categories have been made. The first one is « Global Giant », which represent 41% of the net sales realised by six brands and is illustrated above. Into this section, Diageo owns two of the top five largest spirits brands in the world which are Johnnie Walker and Smirnoff. Then, we have “Local star” (illustrated on the right). This part gathers brands developed locally. Diageo wants to be present all over the world and for that, they must adapt their products to the consumer preference of each country. To answer to specific needs, and is targeting new markets. In lines with their philosophy, Diageo is developing new brands in the hope of conquering the alcoholic beverage industry in promising countries. This last section (Reserve) was recently created to capture the global luxury opportunity. Although Diageo brands are already present in a lot of emerging country, these do not generate much profit. Therefore, their strategy is to keep premiumising some of their products into these countries. Diageo brands are currently leaders in different alcoholic beverage markets. It is also capturing new opportunities in emerging countries and hopes to continue in the upcoming years. Furthermore, an estimated 730 million new alcohol consumers over the next decade is promising considering Diageo’s strong position.

a- A portfolio composed by famous brand A lot of brand are famous in Diageo’s portfolio. As mentioned previously, Diageo owns two of the top five largest spirits brands in the world. Moreover, 20 brands on the world’s top 100 belong to Diageo.

b- What’s the brand equity? As well as its ambition is to be one of the best performing consumer products company worldwide, Diageo also works to be seen as the most trusted and respected company in the world. Quality and information on bottles are common features we can find in each brand. Diageo has understood that these are some of the criterions consumers are looking for.

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Wine drinkers Beer drinkers

Spirit drinkers

Diageo's consumers

Middle and upper class consumers

Figure 1 : Consumers categories Diageo has no special consumer target because through all brands, the group is targeting different consumers who enjoy having a drink. Due to its large brand portfolio, Diageo can target a wide variety of consumers in terms of age (legal adults), sex, origin, etc. As most of Diageo’s brands are well-known, it brings consumers to be attached to certain brands depending on its image or the quality of alcohol. For men, it is important and rewarding to drink and share with people famous alcohol brand. To accentuate this feeling, Diageo tries to be dynamic in terms of communication. Even if the target is different between brands, Diageo tries to share funny messages and a young spirit. For example, the following Guinness publicity. They are also involved in some humanitarian project such as create access to drinkable water in Africa. Moreover, they want to improve their environmental quality procedure in order to reduce ecological imprint.

III.

Financial Statistics of Diageo

In the last 5 years Diageo has shown a sustained growth, as a multinational company. Today Diageo stands first in the global market when we talk about size and revenue of the company. The fact that Diageo is spread in more than 180 countries and has acquired some of the biggest names in the alcohol beverage industry has helped the company to grow tremendously in last 20 years. If you look at the last 5-year net turn over and net sales in the figure 2.1 below, we could observe a steady improvement in the numbers given the scenario where the market has been really volatile in Europe and north America in the recent years. The net turn over has increased by nearly 15% in last 5 years leading to a surge in the net sales by 18.62 % from 2013 to 2017 (Source: Financial Times; Internet database). Diageo, the company behind the names like Johnnie Walker and Smirnoff vodka, has had a 3.5 % rise in their whole year of operating profit. According to MarketLine, the global spirits market grew by 4.4% in 2015 to reach a volume of 29,975.6 million litres. Specialty spirits was 5

the largest segment of the global spirits market, accounting for 44.2% of the market's total value. The global spirits market is expected to grow at a compound annual growth rate (CAGR) of 8% during 2015–20. The market's volume is expected to rise to 40,179.6 million litres by the end of 2020, representing a CAGR of 6% from 2015 to 2020.

FIGURE 2: Gobal view of the last 5 years- source: Ivan Menezes (CEO), Delivering Sustained Growth (2017)

The major growth is expected in the global duty-free market as commutation has become a really vital part of general individual’s life. As per the industry estimates, the global duty-free retailing market is expected to grow at a CAGR of more than 8% during 2017–21. The market share for wines and spirits was about 14% in 2016, and the category is expected to grow at a CAGR of nearly 3% during 2017–21. The growth in the global duty-free market is mainly driven by the increasing number of international travellers, which indicates that the major consumer base for duty-free products belongs to the airport visitors' category. Further, travel retail is the business undertaken in all the shops located in duty free areas or any areas dedicated to travellers.

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Figure3: Diageo’s sale share of premium spirits - Source Statistica If we look at other spirit producing competitors, then Diageo is way ahead in the global market share from its closest Market rivals. The company sits on a 25% share of global market where as Pernod-Ricard which are their closest competitors are far off with a global share of 16% and then Bacardi with 9%. This shows how dominant Diageo stands when compared in their business sector. The reason behind the success and global share in the market is the focus of the company in emerging acquisitions and investments in growing economies.

Figure 4: Diageo net sales by alcohol category - Source Statistica 7

IV.

Strategy Expectations Innovation

a- Expectations: The motto of the company is: TO BE ONE OF THE MOST PERFORMING, MOST TRUSTED AND RESPECTED CONSUMER PRODUCTS COMPANIES IN THE WORLD. It shows their ambition to convince all the consumers of the world thanks to their omnipresence on all the world markets. It also shows how they want to do it, they need a brand image that inspire confidence and they want to be respected for their performance. Confidence and performance, two keys to be preferred in competition. Like all companies, in all sectors, the ultimate goal is to keep actual consumers, and to convince the others. Most of the actual consumers are in America and in Europe and they are already convinced (to believe the market share). What about the future consumers? The main expectation is to be present in the future promising markets. In the spirits sector it’s in Asia and in Africa. 500 million new legal drinking age consumers will arrive over the next decade. India and Africa will account for half of it. This expectation is clearly visible on the following graph. Diageo have realized a long-term investment on emergent markets. They want to be one of the most important companies of the emerging markets when the number of consumers will increase.

Figure 5: Diageo’s spirit volumes in emerging markets- Source Statistica

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b- Diageo’s objectives

Keep premium core vibrant

Their premium core brands account for roughly two thirds of Diageo’s net sales. Ensuring they have a vibrant premium core is therefore critical to their overall performance. Increase participation in mainstream spirits

Mainstream spirits are a sizeable and growing opportunity. They have rapidly invested in mainstream spirits and now have a strong foundation from which to drive growth. Continue to win in reserve

They build their reserve brands by ensuring they are available in the most influential accounts and build their reputation with the bartenders and consumers who set trends. Drive innovation at scale

They build on their existing brands, fulfil new consumer occasions and create the brands of tomorrow with a focus on scale and speed. Build an advantaged route to consumer

Consumers are at the heart of their business; using insights they ensure they understand where they invest our resources and that their brands show up consistently. Embed productivity to drive out costs and invest in growth

They are focused on everyday efficiency, effectiveness and agility to reduce costs and create fuel for their growth. As you can see, they have defined 6 important points for strategy. To simplify, we can say that they want to conserve their strength (giants and luxury brands). They also need to be ready for convince the future consumers and to keep an eye on the market, that’s why they place innovation, marketing and participation in their main objectives. The customers, and the brand image, are one more time at the heart of the policy.

c- Innovation The place for innovation is very important for Diageo. But the return on investment is more important. They are responsible for just above a third of all spirits innovations in the world, but these have delivered 60% of world spirits sales on

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innovations. It can be said that, because of the costs associated with innovation, they prefer quality than quantity, and from now it works very good. For spirits, innovation can have different forms, like for example spirits already famous mixed with fruits like Bailey almond. Limited edition like Christmas Ballantine’s. To finish, the most interesting innovation on spirits is Seedlip. It was launched by Diageo in 2016. The innovation lies in the fact that it’s a non-alcoholic spirits. You can drink it pure or with sparkling water. For moment it’s only available in some very prestigious restaurants and on Seedlip website.

V.

What’s work the best for DIAGEO?

The real strength of DIAGEO, which undeniably distinguishes it from its competitors is Scotch. Globally, Scotch is inspiring and more and more people are drinking it in emerging countries. Therefore, it represents for DIAGEO a real opportunity. Firstly, the company owns a brand of Scotch whiskey in the top 3 of all the regions where it operates. For example, Crown Royal is the largest brand of Scotch whiskey in the United States and Johnnie Walker is the world’s largest selling Scotch whiskey in the world. Secondly, its development policy is concentrated especially on new emerging countries like Brazil or India and the Diageo’s biggest scotch brands are in pole position in these countries. DIAGEO has captured more than half of the world market in this category of alcohol which keeps growing. The company has been able to market an alcohol of better quality and better taste compared to its competitors. For this reason, Diageo’s scotch brands are growing even faster than the market.

VI.

DIAGEO would like to have positive role for alcohol in society.

Diageo wants to have an impact on society and its environment. The company is developing a lot of advertising campaigns to prevent the dangers of drinking and driving and to solicit good decisions by its consumers. The "Join Johnnie Walker Pact" campaign encourages people to choose between either drinking and driving. This illustrates Diageo’s will to create a positive role for alcohol in society today. Besides, the company would like to contribute to the reduction of carbon emissions in the atmosphere. They are members of the We Mean Business Coalition, so they are

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committed to carbon emissions reduction targets, eliminating commodity-driven deforestation, and providing cli mate change information in corporate filings. They are also committed to procuring 100% of our electricity from renewable sources by 2030, and reducing emissions from short-lived climate pollutants. From now on, the company is using solar power in India especially and organic materials. The company has also created a development program that helps farmers in disadvantaged countries (Ethiopia for instance) by giving them reliable and sustainable ingredients to build a local supply of barley. The program support more than 45.000 farmers in Africa by training and encoring sustainable practices that protect natural resources thanks to this, the barley obtained is of better quality and its production is in accordance with the environment. Barley is then used for alcohol production. Furthermore, water is a continuing strategic focus for DIAGEO. Water is an essential resource to their business, and its careful management is a commercial priority as well as a responsibility to the communities and habitats. Good water stewardship is a vital part of their strategy for mitigating and adapting to climate change, since climate change and water scarcity are inextricably linked. Their strategic aim is to reduce the overall impact, especially in water-stressed regions in Africa, India and Brazil, which requires a deep commitment to collaboration with multiple stakeholders. Their sites are located in water-stressed areas and account for approximately a third of their total production by volume. As a responsible business, they comply with legal and regulatory requirements, including those related to human rights and working conditions. It is essential for the company to guarantee a good work ethic. In Cameroon, for example, the company wants to impose good working conditions. To do so, they continuously make sure people are not overexploited. They aim to go further. They want their supply chain to be a resilient foundation for their business success, while enabling them to contribute to reducing poverty and inequality, addressing environmental challenges, increasing wellbeing, and improving livelihoods. In conclusion, the strategy is built on three cores principles:

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Contributing to economic and wider growth Respecting human rights, building capacity and creating shared value with farming communities

Using resources efficiently, minimising environmental impact and safeguarding future crops and ecosystems.

To conclude the whole report, we can say that Diageo has been a very successful company in all the important aspects. Today with a top global position in the spirits industry Diageo insures that the brand value and the brand names are associated with the local community, which leads to their increasing profit margins and market capitalisation globally. Unlike most of the other companies their work towards the environment and investments in the growing economy has proved their efficiency all over the world, which at the same time improves their profit and brand popularity in the upcoming markets like Asia and Africa. Innovation has again made a h...