Introduction, Company Profile and Current Strategy
Diageo is one of the world’s largest alcoholic drinks companies, leading the global market in flavoured alcoholic beverages (such as Smirnoff Ice), and spirits. In this regard it is still very similar to several of its major rival companies, including Allied Domecq, Pernod Ricard or CCU, all of who have varied alcoholic drinks portfolios. Where Diageo has differed from its rivals in recent years, however, is the way in which its wine business has been somewhat overlooked in comparison to the development of its global priority brands, which have mainly been centred on spirits, as well as its flavoured alcoholic beverages. The strategic review undertaken in the case study has the potential to alter this state of affairs, and the company may wish to look at possibly extending its presence in the premium New World wine segment, taking on its rivals head on.
Diageo’s decision will likely depend upon several factors, with the key factor, likely to support growth in wine, being the growth potential of premium wine, particularly in the light of recent health claims made about the benefits of drinking red wine and dangers of spirits consumption. In addition, the company has endured a decline in its flavoured alcoholic beverage business, again like its competitors which have seen this particular sector begin to lose its fashionable appeal. However, through extending its wine offering, Diageo will intensify the competition between itself and companies such as Pernod Ricard or Allied Domecq, as well as more wine-centred companies including Kendall-Jackson or Constellation Brands. All four of these companies have portfolios which are similarly prioritised around Californian premium wines.
A merger, or acquisition, may be the best way to achieve a strong presence in the wine sector, as consolidation continues to be strong amongst wine firms. The global wine industry has yet to settle down from the period of intense merger and acquisition activity witnessed over the last few years. The acquisition of BRL Hardy by Constellation Brands in 2003 was the first major salvo, creating an environment of consolidation which remained in early 2005, with E&J Gallo acquiring Barefoot Cellars and the integration of Robert Mondavi into Constellation Brands’s fine wine division, not to mention Diageo’s own acquisition of Chalone. (Diageo Plc, 2005)
External Environment Opportunities and Challenges
An analysis of the external environmental opportunities and challenges facing Diageo’s wine business, in some of its major markets, is based primarily on the fact that the company’s portfolio is firmly rooted in the still light grape wine sector. It does have a few rosé and sparkling wines, notably extensions to the UK-focused Blossom Hill, but these are unlikely to have a significant impact on the company’s sales going forward despite the predicted growth of around 27% in the UK still rosé sector and 6% in UK sparkling wine. Within its other key markets, Spain and Ireland, Diageo’s wine portfolio is likely to see mixed results. Whilst in Ireland, which has come late to wine-drinking, the potential of an immature market is apparent. Increased interest in wine as consumers develop more sophisticated tastes is expected to lead to growth of around 92% in red wine and 80% in white wine, offering Diageo great potential once its distribution channels have been widened.
In contrast, the Spanish wine market is much slower, suffering from maturity and the same change in family habits that has had such a negative impact on the French wine industry. As a result, static growth rates are expected, although it is likely that with Spanish consumers exchanging quantity for quality, the potential for Diageo’s premium wine portfolio remains. In the US, where wine drinking is still a relatively new activity, the growth potential for the company’s wide premium wine portfolio is good. Red wine growth of around 26% is anticipated over the five years to 2009, as US consumers grow increasingly interested in wine and sophisticated in their tastes. This growth will be significantly faster than the developed UK market, which is expected to grow only by a further 3% in total as it matures.
Diageo CEO has earmarked four markets which he wishes to expand, Brazil, India, Russia and China. In Brazil, where the company is already active, the red wine market is anticipated to grow by around 14% in volume, suggesting positive forward growth as domestic production continues to grow, encouraging more widespread wine-drinking, particularly for reasons of health. Here, white wine growth of just 4% will be significantly slower, but nonetheless offers organic growth potential. India, Russia and China are all significant immature markets, expected to enjoy dynamic wine growth in the 2004-2009 period, as all three countries see an increasingly westernised lifestyle. Although Diageo’s New World-focused portfolio may be slower to enjoy the benefits of growth, with these markets particularly enjoying wines from the Old World producing countries such as France, there is certainly medium-term potential, particularly with the benefit of the work being done to widen distribution channels. In Russia, the development of a market for domestic wine may also dampen Diageo’s growth rate. Only in China is red wine growth expected to outpace that of white. In Russia, both white and red wine are expected to grow at very similar rates of between 28% and 29%, whilst in India white wine is likely to grow more rapidly, at around 81% compared to 74% for red, due to its lower base. (Global Market Information Database, Mar 2005)
The wine industry environment, as a whole, is particularly susceptible to fluctuations in supply arising from weather-related factors that influence the volume and quality of the annual grape crush harvest. In 2004, a shortage of wine in Western Europe resulted in increased prices, leading to slower volume growth and consumers switching to cheaper alcoholic alternatives such as beer. In the previous year, however, oversupply had caused the opposite effect, with a glut of wine volume driving down prices and value in the industry. As a result, the wine industry needs more effective coordination between producers in order to ensure a steadier level of global supply.
A long-term challenge facing the global wine industry is the underlying trend away from wine consumption in major traditional markets such as Italy, France and Spain. Changes in the pattern of life in these countries, with consumers increasingly rarely drinking wine at lunch, have led to falling consumption per capita of wine, with younger consumers often preferring alternatives such as FABs, soft drinks or water. Specific marketing towards younger consumers in these markets, and continued expansion of wine distribution in developing markets are two key strategies in confronting this challenge.
Manufacturers also face increasing competition from outside the wine industry, with the growing popularity and heavy marketing of beer, FABs and soft drinks. In response, manufacturers are seeking to make wine accessible to an increasingly wide consumer, whilst retaining the product’s social cachet.
Celebrity endorsement, product placement in films and the broad-based promotion of a culture of wine connoiseurship are central strategies in wine marketing. As consumers grow increasingly health conscious in both developed and developing markets, demand for beverages with a high alcohol content continues to diminish. This presents wine manufacturers with an opportunity to emphasise the potential health benefits of wine, particularly when compared to the health risks of high alcohol-content spirits that are the customary drink in certain regions such as Eastern Europe. Increasing consolidation in the highly fragmented global wine industry has arisen due to the significant growth opportunities in developing regions, and the success of global brands of New World wines such as the US’s E & J Gallo and Australia’s Jacob’s Creek.
As such, the key challenges and strategies for the next few years fall into a few distinct categories:
Destabilising fluctuations in supply: There is a need to coordinate between producers to maintain steady level of supply, and the use of available technology to prevent the damaging effects of over, or under, supply.
Declining consumption in traditional markets: This must be countered by the promotion of premium wines in developed markets, and increased distribution and education in emerging markets.
Increased competition from non-wine drinks: This is already being tackled by cultivating a sophisticated, yet accessible product image for wine.
Health trends away from alcohol: This has long been dealt with by the promotion of the apparent health benefits of wine, and the development of organic and low-alcohol variants.
Increased consolidation in global industry: This is causing geographical and sector expansion via acquisition, global branding, and an increasing focus on the key growth sector of premium wines. (Global Market Information Database, Sep 2005)
Recommendations for the CEO
Diageo’s broad geographical coverage acts as a cushion against economic uncertainty in any one particular region.
The company is becoming increasingly recognised for providing a positive working environment, and being a good place to work. High levels of employee loyalty will help the company through difficult periods.
Diageo recognises the importance of building international brands, which enhances its sales potential.
A broad wine portfolio means that the company is reasonably insulated from undesirable fluctuations in consumer confidence, through its affordable labels, but can also offer the aspirational consumer, higher-priced reserve wines.
The acquisition of the Chalone Wine Group, which was completed in February 2005, adds several premium Californian wines to Diageo’s portfolio, which significantly increases the company’s profile in the wine industry.
Focused marketing of Blossom Hill in the UK has paid off, with significant volume increases during fiscal 2004.
Taking control of its North American distribution through dissoliving its joint venture with Moët Hennessy gives Diageo greater control over its marketing in this region as well.
Insufficient marketing resources are being put towards the company’s wine brands in comparison to its spirits business.
The lack of any major wine strategy reflects a lack of commitment to Diageo’s wine portfolio.
The company has not established itself fully in the UK premium wine market, with both Blossom Hill and Piat D’Or more mid-priced wines.
The lack of a major global brand is a distinct disadvantage in an industry which is becoming increasingly focused on branding.
Diageo’s portfolio remains incomplete without ownership of an Australian brand, and also suffers from lack of participation in the Chilean or Argentinian wine industries, which are increasingly popular in key markets such as the UK.
The UK wine market is proving to be more resiliant against private label wines than may be suggested by the growth of private labels elsewhere in the retail sector.
Strong growth in both still red and white wines is forecast in the US market over the 2004-2009 periods. This will help to boost sales in the company’s most significant overseas market.
The company’s domestic market, the UK, is a “showcase market”, where consumers are happy to experiment with wines, providing a wide market for Diageo’s products.
Red wine sales are likely to continue to benefit from medical and scientific research findings indicating that it offers health benefits to regular, moderate drinkers. Recent studies have suggested red wine may help improve coughs, lower blood pressure and, reduce the risk of lung cancer.
There is considerable growth potential in Norway and Ireland. Although sales in these countries are growing, they are not yet at the same level as other Western
European countries. As Diageo is currently well represented in Europe, it is in a strong position to further exploit these markets.
The trend towards premium wines offers growth potential to several of Diageo’s brands including Sterling Vineyards, Beaulieu Vineyard and Barton & Guestier.
Continued fears about the social impact of alcohol abuse may lead to the reduction of Diageo’s market as consumers are encouraged to turn away from alcohol.
Any changes in excise levels in any of its markets could have a negative impact on the company’s margins.
As a British company, with significant overseas sales, the company is at the mercy of fluctuating exchange rates, when a strengthening pound, particularly against the US dollar may impact negatively on revenues.
Falling sales of spirits brands could lead to an international price war, which could drive down both the company’s revenues and margins.
There is increasing competition from small, artisan wineries throughout California, which could impact Diageo’s Californian wines.
Greater emphasis is being placed on anti-drink/driving campaigns in some traditional wine-drinking countries, such as Spain, which is a key market for Diageo.
Further global expansion is definitely possible for the Diageo CEO, who has pinpointed several geographic markets into which he wishes to increase sales, including the growth areas of Brazil, India, Russia and China. All of these markets offer potential for its wine business as well as spirits, and the company should be able to gain economies of scale were it to share distribution channels with its extended spirits business. Further expansion of the company’s wine portfolio could be considered in New World wine producing areas such as Chile or Argentina, which are also growth areas and popular sources of wine in key markets such as the UK. The company already has Latin American operations in the form of its Monte Xanic wine, acquired through the purchase of Chalone Wine Group in 2004. The wine business of Chilean brewer CCU may well make a good fit within an expanded Diageo Chateau & Estate Wines.
Diageo could also look to Australia for further expansion, as it still lacks wine from this region. It is unlikely that Diageo would stretch itself as far as attempting to acquire Southcorp alone, as Foster’s has been attempting since early 2005. Nonetheless, Diageo could be in the running either to participate in a joint venture to bid to part-own Southcorp, or to pick up any of Foster’s wine business that it would need to divest following a successful takeover of its rival.
As the world’s leading producer of spirits, Diageo is an attractive company, most notably for its eight global priority brands which include J&B whisky, Smirnoff vodka and Tanqueray gin. The company is at risk, however, from losing its premier position in the global spirits market once South Korean spirits maker Jinro, currently ranked second in the market, is sold at the end of March. Should the buyer be Diageo’s key rival Allied Domecq, this would have serious implications for Diageo’s global position. Should this happen, an alliance or merger activity between Diageo and Pernod Ricard should not be ruled out. The latter is rumoured to have been investigating the possibility of a takeover of Allied Domecq since early 2005, and here again Diageo’s dominance of the market is at risk. A merged Jinro/Allied Domecq would also well prove too large a proposition for Pernod Ricard, leaving it to look elsewhere for consolidation and Diageo would be a good fit, although there would be some clash within the joint Californian wine portfolio.
Diageo is unlikely to be approached with regard to its wine business alone, because of its lack of a major global brand, which is an essential element of any major wine company. Although Diageo has one ace up its sleeve, current UK still light grape wine market leader Blossom Hill, its history of underinvestment in its wine business and falling volumes in its established Californian portfolio, combined with its lack of a true global brand makes Diageo an unattractive proposition from this point of view. As such, Diageo needs to rapidly and dramatically increase its marketing and branding expenditure in its wine business, if it wishes to gain the necessary regard to be able to enter into joint ventures and alliances with major companies. One way of doing this would be to look towards acquiring a smaller company, with one or two recognised brands, and leveraging Diageo’s main strength: its brand development skills and expertise, to developing these brands, and thus the whole company’s global wine image and potential. Alternatively, the firm could try to make Blossom Hill a truly global brand, however this would require a large investment of time and expenditure, and may be beyond even Diageo’s branding skills.
Diageo Plc. (2005) www.diageo.com. Accessed 26th December 2005.
Global Market Information Database (Mar 2005) Diageo Plc. Euromonitor International.
Global Market Information Database (Sep 2005) The World Market for Wine. Euromonitor International.
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