Description

 

Diageo Plc is a
British multinational company and a global leader in the production and distribution of alcoholic
beverages.  They possess a large
portfolio with a broad range of iconic brands that vary from premium products
such as Smirnoff, Captain Morgan, and Guinness to reserve products which
include Johnnie Walker Blue Label, Cîroc Vodka, Singleton Malt Scotch and Don
Julio Tequila.   

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Diageo headquarters is based
in London, England and is the leading luxury spirit player in every region of
the world.  Diageo produce and distribute their brands from more than 200 sites
across the globe. (Diageo.com, 2016).  Diageo is listed on
both the London Stock Exchange (DGE) and the New York Stock Exchange (DEO).

 

Diageo is still a relatively young company and has only
been in its’ current form since 1997, however, their brands and business have a
long and rich heritage.  In 1759 Arthur Guinness signed the lease on the now world famous St
James’s Gate Brewery in Dublin, going on to create the globally iconic Guinness
brand.  Many
of Diageo distilleries that are in operation today got underway
throughout the late eighteenth century and on into the nineteenth and twentieth
centuries.

 

Over the years Diageo’s range of brands and businesses have
continued to expand and innovate and in 1997 Diageo was created through the
merger of Grand Metropolitan Plc and Guinness Plc, creating a food and drinks
conglomerate which included an extensive collection of premium alcoholic
beverages.

 

Between 2000 and 2002 Diageo made the strategic
decision to sell Burger King the fast food chain and Pillsbury, the baked goods
company (which were acquired during their merger with Metropolitan), to focus
exclusively on premium alcoholic beverages.

 

In 2001, Diageo acquired additional spirits
and wine brands from Seagram
Company Ltd., headquartered in Montreal Canada, known for its’ Bourbon, American Whiskey and Gin Whiskey (Wall
Street Journal, 2016)

 

Diageo employ
32,000 people worldwide and  have been ranked #11 out of the top 25 most
diverse and inclusive companies globally by the new Thomson Reuters Diversity &
Inclusion (D&I) Index. (Diageo.com,
2016).

 

Diageo were recently shortlisted for the 2016 Diversity Team of the Year
Award category for European Diversity Awards, one of the most prestigious and widely respected diversity awards
ceremony in Europe. (Europeandiversityawards.com, 2016)

 

Diageo
invest in world class marketing to build on their premium and reserve brands
with a focus on connecting with new and existing consumers. They identify
emerging trends in the drinks market and endeavour to meet the diverse needs of
their consumers.

 

  

The
Market Structure of the Alcoholic Beverage Industry

 

The word “Oligopoly” is derived from the Greek words
for “few sellers”.  Oligopoly describes a
market that consists of a relatively small number of big players when viewed
from a global vantage point.  The
products they produce are not exactly the same but similar enough that it
creates competition within the market place. 
There are several examples of markets that possess the characteristics
of oligopolies, these include the fast food industry where a few major players compete
for market share such as Mc Donald’s, Burger King and KFC or the music industry
which is dominated by Sony, Universal
and Warner.

 

Within the
alcoholic beverage industry Diaego’s main competitors on a global scale include
Pernod Ricard, Barcardi, Brown Foreman,
Constellation Brands and Fortune Brands. 
That is not to say they are the
only players within their respective industries, on contrary there are
countless smaller independent firms in operation like Blackwater Distillery,
Waterford that produces their own bespoke gin but they are unlikely to be a
major threat to the position of the larger firms. 

 

Another defining
feature of an oligopoly is that the success of the firm is often largely
dependent on the actions of its’ major competitors, i.e. Diageo shareholders
are unlikely to be impressed if the CEO of Diageo was unaware that Barcardi Ltd
had just introduced a novel Christmas inspired alcopop and were offering
promotional discounts. (Byun, n.d.)

 

 

Threat of New Entrants

 

Although
one of the primary functions of Government is to preserve competition within
the market place so as to ensure economic health, they can also either directly
or indirectly create barriers to entry into industry through strict
legislation, regulation, policies and procedures.   Such barriers can prove to be a deterrent for
any new entrants wishing to enter the market.

 

For example in Ireland national
laws establish the legislative framework surrounding the production,
importation and exportation of alcoholic products, i.e. Revenue imposes severe excise
duty on the price of alcohol.  According to the
pre-budget submission by Alcohol Action Ireland 2016, the National Charity for
Alcohol related issues in Ireland;

 

“In general, an increase in excise duty rates leads to reduced alcohol sales,
higher excise receipts and lower consumption” (Österberg,
Lindeman and Karlsson, 2014).

 

A major
hurdle to overcome for new any new comers to the alcoholic beverage industry is
the existence
of tried and trusted brands that have a strong heritage and history with a
loyal following.  Existing firms within the
market such as Diageo who produce Guinness and Johnnie Walker possess a
trademark and have well established brand reputation. Jernigan, D. H. (2009),

 

To become major player in the alcoholic beverage
industry, substantial amounts of capital is required to purchase large specialised
assets such as premises and distillation systems in an effort to achieve
economies of scale.  New entrants are
unlikely to commit to purchasing assets that cannot be sold or converted into
other uses if the venture fails. 

Global distribution channels are well
established through years of partnership with distributors, independent
wholesalers and retailers.

 

With all things considered, it
would be relatively difficult for any new entrant into the alcoholic beverage industry
to try and compete with existing players on a global scale.

Buyer Power

 

There are several components that account
for the “buyers” within the alcoholic beverage industry, they consist of
distributors/wholesales, bars/restaurants/ and consumers.  Although buying power collectively is enormous
it is also fragmented in that there is no one component of the “buyers” i.e. an
independent off licenses or bars that would be in a position to dictate to the
producers on price or quality of their brand. 
In contrast Dunne’s Store might be in a position to dictate to their
milk suppliers on price because they have many suppliers to choose from and switching
costs are low. 

 

The threat of forward integration is
high in that Diageo are in position to buy up an off license chain to sell
their products as opposed to the contrary.

 

 

Supplier Power

 

The agricultural industry, namely famers, who grow ingredients such as barley, corn, cereal, wheat, apples, yeast,
grapes and sugar processors are the primary suppliers for Diageo and all alcohol producers
alike.   Additionally, marketing and merchandising houses, wood
pallet suppliers, cardboard box/container manufactures, and glass product
manufacturers are all links in the supply chain
for Diageo.  There is no shortage of
suppliers and as a result, supplier bargaining power could be considered
to be generally low with respect to the industry as a whole.  Backward integration is a credible threat as
Diageo’s purchasing power far outweighs supplier power within the industry i.e.
no one independent bottling facility or farmer who would have
the capability to demand a higher price for their supply of raw materials.

 

 

Substitutes

 

Although product loyalty
is high generally speaking, differentiation of the substitute is low, many
different types of all alcoholic beverage exist to cater to consumer tastes,
preferences and budgets. Absolut Vodka produced by Pernod Ricard retails in the
region of €35 – €40 while Smirnoff retails in the region of €15 – €20. The real
difference in taste is up for debate while there is a stark contrast in price. The
functions and the attributes of both products are essentially the same, they
are both alcoholic beverages.  Switching
costs are low in that there is nothing preventing consumers switching from
Smirnoff Vodka produced by Diageo to Absolut Vodka produced by Pernod Ricard.  The higher the price of the substitute the
higher the quality of the product and vice versa making switching effortless
with all budgets and tastes preference catered for.    

 

 

Conclusion

 

The profitability of an industry is largely dependent on the competitive
forces that surround it, as a consequence the forces will have a major impact
on strategy formulation for an organisation. Taking into account the analysis of the above
competitive forces, a company like Diageo with a strong position within the global
alcoholic beverage industry, unthreatened by potential entrants, buyer power
and supplier power could still see low returns if it faces a superior or a
lower-cost substitute product.  In such a
situation, coping with a substitute product becomes a strategic priority. (Harvard
Business Review, 2016)

 

 

 

Diageo – Strategy

 

“We aim to grow our participation in international premium spirits, driven by growth in
both populations and incomes, and the increasing penetration of spirits in emerging
markets”. Our intent is to build breadth and depth across drinking occasions by
shaping consumer demand for our international premium spirits brands”. (Diageo.com, 2016)

 

Choosing the right
competitive strategy is vital in order to mitigate the threat of consumers
switching to substitute products. Organisations
that adopt a differentiation strategy seek
to be unique in their industry with the ability to deliver superior products and/or
services that outperform their competitors’.

 

They can offer products/services that possess
superior features such as brand, quality, innovation, products/services at a
low price that cannot be beaten by their competitors or superior product/service
at a premium price making them more attractive to consumers. (Thompson,
Strickland and Gamble, 2008)

 

An organisation seeks to achieve competitive advantage when it selects
one or more of the above attributes and incorporates them into their offerings
to encourage buyer preference for their brand over their brand rivals, as a
consequence, consumers become strongly attached to the attributes of the
differentiators’ offering.

 

Alcohol is a product
that has proven to stand the test of time. It has always been in high demand regardless
of the state of the global economy. Diageo is a company that specialises in the
promotion of luxury brands with prioritised investment in premium core spirits i.e.
Buchanan’s Scotch Whiskey and Captain Morgan Private Stock and reserve spirits
i.e. Haig Club (Single Grain Scotch) and Johnnie Walker Blue Label.

 

The success of an alcoholic beverage is
dependent on the success of the company that promotes it. Diageo has a presence
in 180 countries worldwide, where Diageo is based and who they market to can be
an advantage as trends differ in various parts of the world and Diageo views
these trends as opportunities to form new and loyal customers with different
tastes and preferences.

 

Africa is Diageo’s biggest emerging market region, rich in potential due
in part to its sheer size and geographic spread, it
competes with Latin America to be the fastest-growing market, with economic
growth accelerating in much of the continent and with its population of 1bn set
to double by 2050. (Reuters UK, 2016)

“We are seeing more people
with more money to spend, and with these drivers of growth in place we expect
overall growth to accelerate,” said Nick Blazquez (President, Diageo
Africa) (Irishexaminer.com,
2016)

To take advantage of this emerging market Diageo created Snapp a premium, apple flavoured drink developed and
marketed exclusively to African women, providing a more stylish and
sophisticated alternative to beer. In its first year, Snapp delivered £10
million of net sales making it Diageo’s most successful launch of a new brand,
ever. (Diageo.com, 2016)

 

Spirits growth in Africa has outpaced that of beer, helped by the
introduction of smaller bottles of spirits (just under one third of the average
sized bottle) aimed at cash-constrained consumers which has enabled Diageo to
harness 40% share of the international spirits market in Africa. This approach
is a way for consumers to share one of Diageo’s premium brands instead of
choosing a local brand or beer. They appeal to aspirational drinkers who want
to try something new and more sophisticated.
(AFKInsider,
2016)

 

“In developed markets our strategy is to drive premiumisation
through spirits price tiers up to our reserve
portfolio”. (Diageo.com, 2016)

 

Typically, Diageo’s
developed markets, which include USA and Western Europe are ageing and growing
more slowly than those in the emerging markets. Overall, levels of disposable
income are higher, and consumers are often prepared to pay a premium price for
high quality brands with heritage and background (Diageo Annual Report, 2016
pg.14).

 

In developed markets
consumers want experiences as opposed to possessions, bespoke as opposed to
mass produced and quality rather than quantity.

 

Diageo aims to market their reserve brands that are built
on strong heritage, craftsmanship and authenticity,
synonymous with as a perceived high-class
lifestyle.  This
exclusive portfolio includes Johnnie Walker Super Deluxe, Cîroc Vodka, Don
Julio and Tanqueray No. TEN as well as a fine collection of single Malts.

 

On 24th October 2016 during a live webcast addressing Diageo
investors and analysts, Rudy Paoli (Director of Diageo Reserve) stated.

 

“Diageo Reserve has
generated strong double-digit growth in both developing and developed markets
as well as strong growth across all categories. Having increased share from 10%
to 15% in the last three years, Diageo Reserve is now the Super Deluxe spirits
category leader”.

 

“We have more than doubled our business in 4 years
increasing our business to over £1 billion today”. (Diageo
Reserve Brands Webcast, 2016)

 

Diageo achieved this by focusing
and engaging the organisation behind a 3 pillar model that includes a specialised
sales force, luxury marketing excellence and super deluxe innovation, all 3
vessels are utilised to promote Diageo’s international reserve products and
encourage consumers to trade up from premium to reserve products within their
portfolio.

 

A specialised sales force who understand the luxury consumer and have
the ability to attain key accounts that influence trends and are trend setters
such as Mahiki in London and Selfridges Department Store are just two examples
of great vehicles for reaching high net worth individuals.

 

Luxury
marketing excellence
consists of 4 main drivers such as;

 

gifting
limited edition reserve brands

 

physical
spaces such as Johnnie Walker House, an exclusive
embassy for luxury

scotch whisky, designed to
immerse consumers in history, origin and pioneering spirit of the Johnnie
Walker brand. Membership as a patron of the Johnnie Walker House is by invitation only. (Walker and
House, 2016)

 

spectacular events such as the John Walker
& Sons Voyager 1920s-style yacht,

which hosts exclusive events such as the
Cannes Film Festival and Monaco Grand Prix – world stages for luxury brands (Theluxurychannel.com,
2016)

      

World Class Bartender of the Year
Competition which brings together the best bartending talent from around to
globe and delves into the future of cocktails and reveal the trends set to
revolutionise drinking experiences. (Theworldclassclub.com, 2016)

 

Super Deluxe Innovation

With a focus on renovation
to keep their brands contemporary and relevant. Diamond Jubilee by John Walker
& Sons was created to celebrate the 60th Anniversary of the Queen’s Diamond
Jubilee. A 60-year-old blend of rare scotch whiskies which were distilled and
have been maturing since 1952. Only 60 bottles were released at £100,000 each (Diageo Reserve Brands Webcast, 2012)

 

 

The macros environment consist of the
external factors that can influence the selection of a corporate strategy for
an organisation. A PEST analysis
identifies changes in the market caused by political, economic, social, and
technological (PEST) forces.  Successful navigation of the macro environment can
contribute to the success of an organisation and its’ brand reputation and therefore
should be considered in-depth before the selection process of a competitive strategy.
(Oxford College of Marketing Blog, 2017)

 

 

Political/Social and Economic

 

Where the
Alcoholic Beverage Industry is concerned it appears that the PEST forces are
somewhat interlinked and have a knock on effect on one another.  Alcohol misuse and related harm is a complex social issue, different cultures and
societies require different approaches when addressing alcohol-related harm and
although presented as a social issue it is also a political/legislative and
economic one too.

 

For example here in Ireland the AAI (Alcohol Action Ireland)
and independent organisation funded by the Health Service Executive, had a
strong influence on the implementation of the Public Health (Alcohol) Bill. The
measures to be included in the Bill were first announced
by Government in October 2013, this piece of legislation is aimed at tackling
Irelands’ harmful relationship with alcohol and now treats alcohol as a public
health concern and not just another ordinary product found at your local
supermarket.

 

The purpose of the Bill is
to try and regulate alcohol misuse, reduce alcohol harm and to improve public
health, safety and wellbeing.  The Bill provisions
include minimum unit pricing, labelling which includes health warnings, stringent
advertising, sponsorship, and marketing regulations as well as structural
separation of alcoholic products in mixed trading outlets such as supermarkets.
(Alcohol Ireland, 2016)

 

 

Diageos’ support
of, and compliance with, the measures outlined in the Bill can make a
difference surrounding alcohol related harm by raising awareness, shifting
attitudes and changing behaviour and therefore creating and maintaining a
positive reputation for Diageo by not only contributing to economic health but
to public health also within the global market place.   (Oxlearn.com, 2017)

 

From an economic
standpoint according to the Alcohol Beverage Federation Ireland (ABFI) and the
latest CSO data the alcohol industry in Ireland alone contributes to the Irish
economy by paying €217 million annually in wages and
salaries, providing €311 million in total labour costs, buying €901 million
worth of materials for processing annually and buying €33 million of industrial
services. (ABFI, 2017)

 

Not
to mention the alcohol industry is a huge contributor to the Irish Tourism
Industry which is an essential pillar of the Irish economy, by
supplying alcoholic beverages to of 8,305 public houses, hotel bars and other
bars and 1,752 wine and 411 full licence restaurants across the country. The
industry also provides financial and other supports for festivals, cultural tourism
and sporting events. 

 

It also directly provides major tourism attractions such as the Guinness
Storehouse (the most popular fee paying tourist attraction in the country with
1,087,209 visitors in 2015) and the Old Jameson Distillery (246,617 visitors)
and other smaller visitor attractions throughout the country. The pub is the
most widely used facility for meals by foreign tourists. The pub is cited as
the number one attraction for tourists according to the international travel
guide publication.

 

With such a sizeable
contribution to the Irish economy it is also in the interest of Government,
legislative authorities, lobbyist groups and society as a whole to work
together to find a happy medium where responsible drinking is promoted and
encouraged and alcohol misuse is minimised while still maintaining economic and
social health. (ABFI, 2017)

 

 

Technological

 

Information technology has dramatically changed the
commercial landscape of today, with the aid of technologies
such as computers, smart phones, mobile electronic devices such as tablets and
iPads, businesses operations can perform the same duties more effectively and
efficiently. Technological advances in social media such as Webpages, Twitter
and Facebook have broken down barriers to markets such as geographical location
and physical presence.

 

I.T. significantly affects strategic options by creating
opportunities for growth and providing new innovative problem solving
techniques that are a necessity for decision makers when addressing many
aspects of business production and processes.

 

For example, Diageo no longer see their glass bottle as
a receptacle for liquids,
they are now working on a new innovative technology that will allow their glass
bottles to serve as “smart bottles”. 
In an interview with
CNBC on 25th February 2015,Venky Balakrishnan Iyer (Global VP, Digital
Innovation at Diageo), explained that by placing an electronic sticker manufactured by Thinfilm onto
their glass bottles, Diageo will be able to communicate directly with the
drinkers’ smartphones.

 

Consumers can use their smartphone
to scan the sticker and receive targeted
marketing ads and promotions straight to their mobile devises. The sticker can also recognise
when the bottle has been opened so that Diageo can send through cocktail
recipes for drinkers.

Diageo also says it will help the
company track the bottle along the supply chain to ensure the authenticity of
the product and, in time, the bottle may be able to judge when
supplies are running low and notify the consumer via their mobile device that
it is time to re-stock. (Kharpal,
2017)

 

With such new innovative technologies like the “smart bottle” in the
pipeline it is likely to be a welcomed addition to any competitive strategy
formulation for Diageo and the Alcoholic Beverage Industry as a whole.

 

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