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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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Diageo plc is a multinational alcoholic beverage company, it owns an array of well known brands such as Baileys, Guinness and Smirnoff vodka. It also has shares in Moet Hennessey which owns Moet & Chandon and Hennessey whiskey. Diageo was formed when Guinness and Grand Metropolitan merged together in 1997. The first Shares in Diageo plc began trading on the London Stock Exchange on the 17th of December 1997. Since then Diageo has done a lot of business with large, very well-known brands such as Burger King and Bushmills Irish whiskey.

How Diageo started out:

Diageo owned Pillsbury grain company who is the main supplier to Kellogg's cereal until 2000 when it was sold to General Mills. In 2002, Diageo sold the Burger King fast food restaurant chain to a consortium led by US firm Texas Pacific for $1.5 billion they did this, so they could solely focus on alcohol products. In February 2011, Diageo agreed to receive the shares in a Turkish liquor company named Mey Icki for $2.1 billion. Diageo then agreed to acquire Ypioca, the largest-selling brand of premium cachaça in Brazil in May 2012 for £300 million. In November 2012, Diageo agreed to acquire a primary shareholder stake of 53.4% in an Indian spirits company called United Spirits for £1.28 billion. Diageo then agreed to sell Bushmills Irish whiskey in exchange for $408 million and full ownership of tequila brand Don Julio in November 2014. In October 2015, Diageo announced the sale of most of its wine business to Treasury Wine Estates. Other brands that Diageo wanted to keep such as Navarro Correas and Chalone Vineyard, were sold separately. In March 2016, the company sold Grand Marnier, a cognac and bitter orange-based liqueur, to a well-known Italian alcohol company, Campari Group. This show that Diageo has gone from strength to strength since there launch in 1997.

How Diageo's brands started out:

It all started in 1627 when there first record off the Haig family distributing scotch whiskey was, they are regarded as the oldest family of scotch whiskey distillers. Then in 1749 a master distiller from Italy, Giacomo Justerini founds a wine and spirits company with George Johnson, nephew of Samuel Johnson. In 1759 Arthur Guinness signed a 9000-year lease on a disused property at St. James's Gate, Dublin, and starts to brew ale. This ale became very popular with the Irish public and the brand began to grow. Then in 1820 John Walker opened a grocery business in Kilmarnock, Scotland, and starts blending whiskies, his whiskeys started to sell very well around his home town, so he decided to start distributing it to bars and stores around his country, this lead to great success. Ten years later Charles Tanqueray opened for business he began distilling gin products to the upper class in the Bloomsbury district of London. In 1864 Pyotr Smirnoff opens a distillery in Russia and begins making vodka using a revolutionary charcoal filtering process, Smirnoff then began to take off and is now the world's leading brand in vodka. In 1939 Crown Royal whiskey is created to celebrate the historic visit of King George VI and Queen Elizabeth to Canada and people liked it so much it became a popular product. Then in 1943 Captain Morgan launched there first ever whiskey named after the legendary Governor of Jamaica, Captain Henry Morgan. This is another product that is up there with the top brands of its respective alcohol category. Baileys Original Irish Cream Liqueur launches in 1974, this is widely regarded as the industry's most successful new product launch ever. Diageo has acquired all these huge and well-respected brand names. This insured that Diageo PLC is the top firm in the alcohol industry.

Investment

Diageo is a worldwide company and its products are sold through out  more than 180 countries. It boasts over 200 brands worldwide,to name a few Guinness,Smirnoff and Captain Morgan and it has 143 production sites worldwide.Diageo launched its shares at the end of 1997 by trading on the London Stock Exchange.

Diageo is amongst leading brand owners, including Nike and PepsiCo, that have produced accelerator schemes and are edging into start-ups.In turn it invests in numerous startups and franchises. It owned the well known brand Pillsbury and in 2000 General Mills bought it over. Diageo sold Burger King to Texas Pacific for an outstanding amount of $1.5 billion in 2002.This created huge amount of capital for Diageo to invest in other companies.In February 2011, Diageo brought  the  liquor company Mey Icki for $2.1 billion.

Ypioca, in Brazil, which sells the largest brand of cachaca,a distilled spirit was bought by Diageo for 300 million sterling,in 2012.

That same year Diageo invested 1 billion sterling in the production of Scotch whisky. Its aim  over the next 5 years was to expand existing facilities and increase by 30 to 40 the overall production capacity.Also in its plans was to have on if not more new distillery constructed. Unfortunately keeping the Johnnie Walker plant in Kilmarnock was not part of its plans as it had closed its doors earlier that same year.

Diageo was now known to be one of the lead brand companies worldwide having also acquired over 50% stake in United Spirits,the Indian Spirits company for 1.28 billion sterling.In 2013, the company took a leading role to reduce the harmful effects of drinking by joining other leading alcohol producers to stamp out harmful drinking worldwide.

At the end of 2014,Diageo decided to sell Bushmills Irish Whisky for a staggering 408 million dollars and to be the sole owner of the tequila brand Don Julio.In  2015, Treasury Wine Estates brought a large amount of Diageo's wine business. Its other wine brands like Charlone Vineyard and Navarro Correas were each sold separately.

The Italian Campari Group purchased their liqueur Grand Marnier in Spring 2016.It was exciting times for Diageo in 2017 when it announced publicly to open a Guinness brewery in Baltimore County,Maryland in turn generating a huge tourist attraction. Also in its plans was to create numerous jobs at the brewery.The summer of 2017 saw the purchase of George Clooney's top end tequila,Casamigos purchased by Diageo for nearly 1 billion dollars.

An excellent marketing ploy announced by Diageo in February 2018, was to sell limited edition of its 12-year-old Black Label Whisky.These limited edition bottles were named Jane Walker with the label showing a striding woman instead of Johnnie walker with the known brand label showing the top-hatted man.

Today we can see the international drinks group,Diageo has merged with an innovation expert in an effort to invest in numerous spirit brands around Europe and to entice consumers to purchase premium drinks.

Distill Ventures which is operated by Diageo has 15 million sterling available for a Seed Program which enables entrepreneurs to develop their products and business skills.It also has a growth program which this money will help support new spirit brands and give some applicants help with its worldwide experience and knowledge in the spirit industry.

Syl Saller, chief marketing officer at Diageo has said “We are seeing some brilliant new brands being born and built that are achieving commercial success,” Also she has seen “a remarkable entrepreneurial spirit” in the drinks area of business.

Distill Ventures came into fruition, when on behalf of Diageo, it made its first investment in a non-alcoholic drinks company by acquiring a stake in the British company Seedlip, to aid the funding of innovations within the spirits world.

Syl believes new brands will prosper and grow if they have an injection of cash and knowledgeable guidance whilst still giving them the control of running their business.

In the end Diageo is hopeful that this new initiative will expand its western european consumers willing to trade up to premium spirits.Diageo has seen this in North America with its vodka brand Ciroc. Diageo, as it is known worldwide holds the number one position in the distillery area. It has made over half of its business deals in premium tequila area purchasing DeLeon, Peligroso, and Don Julio.

   

Diageo Ltd - Finance

How diageo finance all these projects and their brands is a good question, however here are some of the financial results for the year ended 31/12/2017.

Net sales: 6.5 billion

Operating profit: 2.2 billion.

All regions contributed to broad basic organic net sales growth, up 4.2% , organic volume grew 1.8% and organic operating profit grew 6.7%.

Cash flow continued to be strong and in line with last year, with net cash from operating activities at 1.2 billion and free cash flow at 1 billion. This tells us that Diageo is a rapidly growing business and is also extremely profitable , so it will most likely have more than enough to finance all their brand ambassadors and team up with other companies to have a significant influence on society.

When one looks at how to finance their operations, one would look at equity , debt and retained earnings and how they use this to finance their brands. Equity refers to the value of the company divided into many equal parts owned by the shareholders or one of the equal parts into which the value of the company is divided. In simpler terms, equity is the shares of the company and any of the shares could have been used to finance projects and brand ambassadors for diageo as it is an extremely accessible source of finance that is easily paid back.

Furthermore, in relation to finance debt is the amount of money borrowed from one party to another, debt is used by many corporations and individuals as a method of making large purchases they could not afford under normal circumstances. A debt arrangement gives the gives the borrowing party permission to borrow money under the condition it is to be paid back at a later date, usually with interest. When starting up the business many years ago this method was extremely popular as it gave any aspiring business a chance to be successful and pay back their debt over time. In regard of financing their brands at this current moment, Diageo would certainly not have to use this method as they are hugely successful with immense turnover as previously stated and the leading player in their market.

Lastly, retained earnings is the profit shareholders make a year and use this profit to the benefit of the business by investing it back into the company. The amount is then adjusted wherever there is an entry to the accounting records that impacts a revenue or expense account. This is also another popular source of finance that business regularly use as most of the time, when shareholders use their money to invest in the business , it will usually make its way back to them over time as it is making the business a stronger player in the market.

Diageo's brand ambassadors are extremely successful and are a social commentary of the times that we live in. These brands are financed by the huge profit that diageo generates a year and their focus on cost delivered savings and drove margin expansion, prioritising cash resulted in a marked cash flow improvement. With a free cash flow of 2 billion as you can see on the diageo financial performance overview for 2017, it is clear to see how they finance their brands ambassadors and projects with various companies. There is no clear disadvantage to using their cash flow as they have so much of it , however it could be used to enhance the performance of their drinks even more by buying machines or investing in automated devices. The benefit of having such a significant amount of cash flow is that they don't need any retained earnings or need to borrow money and have to pay back in the future with interest.

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