Diageo Case Report

Diageo Case Report

Scott Johnsson

BMGT495

March 11, 2008

Strategic Issues

In 2001, the conglomeration known as Diageo PLC became the world’s largest spirits and wine holding company in the world. This was the outcome of an intense acquisition of Seagram Company’s beverage assets for $8.15 billion. The resulting conglomerate faced complicated strategic issues concerning how it wished to move forward in its beer, wine, and spirits divisions. The subject of their inquiries focused mostly on marketing and acquisition decisions.

The addition of Seagram’s upscale wine and spirits brands into Diageo’s portfolio caused the corporate-level management to rethink their global marketing strategy. The newly created Diageo Chateau & Estate Wines division was especially under examination for opportunities to create synergies with the other two beverage lines. Also because of the fundamental differences between the processes to produce wine and the processes to produce beer and spirits, Diageo faced questions on how to market the wines alongside the beer and spirits.

Ray Chadwick, the newly appointed President of Diageo Chateau and Estate Wines, was fully aware that his division’s industry was undergoing dramatic changes that caused a great deal of uncertainty. It was evident that global consolidation within the wine-making industry by competing conglomerates was creating a follow or lead scenario. The main question that Chadwick had to answer was if it was appropriate for Diageo to diversify its holdings and become a first-mover in the uncertain global environment, or to focus on its existing brands as a safe alternative. Such issues would be largely dependent on Diageo’s marketing skills, innovations, and timely realization of global trends.

External Analysis

[Exhibit 1] The turn of the millennium and the years that followed were an extremely dynamic period in the global environment. The economies of the world were suffering a downward trend following the dot-com bubble. During late 2002, the downturn was beginning to end and globalization stormed into the public spotlight. Despite the general bear market, the global sale of wine, beer, and spirits increased by 3.5%, indicating a strong ability for industry growth buoyed by international trade.

The increased trade between nations was directly a result of international free trade agreements. These agreements, such as the formation of the European Union, caused trade barriers to fall across the globe. As wine-producers increasingly exported their products to other nations, a global wine market began to emerge. This was especially true of foreign imports within the United States. However, the defeat of France’s wine producers by California brands during a 1976 French wine-tasting competition also opened the possibility for other nations’ wines to compete with the “Old World”.

Although the international trade barriers were becoming less restrictive, alcoholic beverage producers still faced a bevy of legal preconditions when engaging in geographically different markets. Conglomerates like Diageo were continuously under the scrutiny of anti-trust legislation to prevent the concentration of market power whenever they agreed to acquisitions or mergers. Anti-trust cases against conglomerates could involve several nations with varying legal frameworks. The political views toward wine, beer, and spirit producers could also present problems within certain cultures. For example, U.S. anti-alcohol lobbies have placed considerable standards on labeling and distribution requirements. In addition to this, the marketing of these products often were forced to conform to local laws pertaining to individual areas. Many states have vastly different laws that require contrasting sets of selling requirements.

This virtual spider web of legal and political obstacles has led to improved distribution systems. The alcoholic beverage industry has consolidated into a three-tier distribution channel, where independent wholesalers navigate the specific laws that certain retailers operate. Also, increased technological innovation in agricultural and system processes has streamlined the operations of these producers. Other innovations within psychology have discovered that the higher price of wine has a distinctly positive effect on a consumer’s enjoyment of that product.

The understanding of cultural changes is essentially transforming the general environment. The demand for wine has been consistently in favor of premium wines, while “jug” wines have been lagging. Drinkers of wine are finding it much more affordable than in the past, but are also increasingly affluent themselves. Also, foreign wines are becoming more popular in native countries than ever before. The consumption of wine has moved to вЂ?off-premises’ locales as a result of 9/11 and its effect on the restaurant business.

[Exhibit 2] Within the wine-producing industry, competition can be stifling. The competitors create an intense industry rivalry for profits. There are more producers of wine than any other beverage product so profit margins are generally less than beer or spirits.

Many factors contribute to the intense competition between wine-producers. The end consumers of wine have many product options available to them along and a vast array of available substitutes, including beers and spirits. The product differentiation between producers cannot be easily interpreted by most purchasers, which leads to premium wines having lower revenues.

New firms entering the industry have considerable costs involving the capital cost of land and equipment. Also, economies of scale allow larger firms to create inequalities that can make small firms difficult to operate. This can include a larger influence over quality grape suppliers. However, industry suppliers are rather plentiful and concentrated in specific geographical areas. These vineyards possess the ability to forward integrate with the same ease as producers can backward integrate. In the end, suppliers are not a considerable industry threat.

[Exhibit 3] The main industry competitors of Diageo include other conglomerates and stand-alone wineries. The largest threats specific to Diageo are Allied Domecq, E&J Gallo, Constellation, and others. These firms generally competed for Diageo’s