Company Background
Diageo (a coined name combining the Latin for “day” and “earth”, respectively) is the undisputed global leader in what is styled the “premium spirits business” (Murray, 2009) in point of gallonage, net sales in pounds, and operating profit. Having originated with J & B blended Scotch in the mid-eighteenth century and grown chiefly through acquisitions of or alliances with, other distilleries since then, Diageo boasts eight of the world’s 20 most popular spirits brands (Ibid.). Johnnie Walker Scotch, José Cuervo tequila, Tanqueray gin, and Smirnoff vodka have pride of place in the company stable of spirits.
Consolidations and mergers in the last century endowed the company with a broad product spectrum that came to include beer and wine as well. It is also one of the few international beverage companies that span the entire alcoholic drinks sector, offering beer, wine, and spirits. In beer and wine, the better-known of these brands are world-beater Guinness Stout, Harp Lager, and chateau or estate wines like Sterling Vineyard and Blossom Hill. Having both the spirits inventory and beer brewing technology also enabled the company to create a new segment, popularly known as ‘alco-pops: single-serve, carbonated beverages rather more potent than beer such as ‘Smirnoff Mule’ or ‘Smirnoff Ice’.
The important blending, brewing and bottling operations of Diageo are the original ones in the domestic market (the U.K. and Ireland), as well as in Italy, Canada, and the US. The firm also has wineries in France, Argentina, and the US. In smaller markets, the company ships out concentrate that is then blended with water and alcohol before being packaged and distributed.
Diageo has no qualms about reaching outside its core business to acquire, for instance, a 34% holding in Moët Hennessy (the spirits and wine subsidiary of LVMH), a stake in the Smirnoff distribution company in Russia, and a 43% interest in Quanxing to take advantage of the massive market in mainland China for baijiu, a rice or sorghum “wine”.
Industry Position: The Global Beer and Spirits Industry
Competing as the firm does in three market segments, Diageo must reckon with such redoubtable competitors as Beam Global Spirits & Wine, Pernod Ricard, SABMiller (American, European and Asian beer entries), Angostura, Anheuser-Busch, Asahi Breweries of Japan, Asia Pacific Breweries (Malaysia and Singapore), Bacardi, Bavaria S.A., Blavod Extreme Spirits (black vodka), and Cabo Wabo (an American tequila maker).
The league-leading position of Diageo owes as much to strong brands that have earned drinker loyalty for decades and even centuries in the case of Guinness, Johnnie Walker and J & B as to mergers and consolidations. The Diageo of today is the more robust descendant of a 1997 merger between Guinness and GrandMet as both companies sought to combat stagnant liquor sales and ruthless competition. The J & B brand (along with Bailey’s and Bombay gin) came from a GrandMet acquisition of International Distillers & Vintners in the 1970s.
Environmental Scanning
For the leaders in the alcoholic beverages industry, the competitive arena extends to all industrialised nations and emergent economies as well. Despite the proliferation of homebrews and local favourites among the native populations, branded spirits, beer and wine already account for some 38% of alcohol consumption worldwide (Jernigan, 2008).
That said, the number of truly international brands is not significantly large, bespeaking the numerous consolidations of prior decades into what is now a few large multi-national corporations. In such a context, the three main success factors are distribution, new product development and marketing.
Jernigan (2000) asserts that like many other fast-moving consumer goods – particularly of the impulse-purchase and lifestyle-enhancing type – the character of international beer and spirits is very much the ‘marketing-driven commodity chain.’ Particularly in respect of penetrating and carving out share in new markets, it does seem that international players exact ‘monopoly rents’ for equity that consists largely of proprietary drinks recipes and investments in marketing and promotions. Multinational drinks companies have little interest in licensing and marketing local beverages, after all, China being one notable exception for Diageo.
That being so, high-profile advertising and promotions are the norms to foster acceptance of international brands, permeate consumer lifestyles and day-to-day, as well as celebratory, drinking. The alcoholic beverage marketing toolbox is well-known: major-media advertising, creative materials attuned towards camaraderie and festive occasions, sports and entertainment sponsorships, aggressive product placement in both ‘on-premise (pubs, hotels and restaurants) and ‘off-premises (e.g. wine cellars, duty-free stores) retail outlets, and price strategy to address all socio-economic strata.
In 2006, Advertising Age ranked Diageo 82nd among the Global Top 100, with an outlay of US$ 359 million in measured media (TV, radio, press, out-of-home media, Internet) advertising, down slightly from US$ 370 million the prior year (Wentz, 2007). Diageo allocated more effort to the U.S. market, up the A & P investment there by 10% (for a half share of the company budget for the year) while pouring almost all the balance to Europe (US$ 130 million) and a minimal US$25 million to all Asian markets combined.
That same year, the six beer, wine and liquor companies in the Global 100 spent some US$ 2.05 billion in measured media. Collectively, advertising and promotional effort in the category shrank at a faster rate (9.4%) than did Diageo’s (down 3% for the year). The other five aggressive advertisers were Anheuser-Busch (US$ 517 million for 2006), LVMH Moet Hennessy Louis Vuitton (US$ 456 million), Heineken ($338 million), SABMiller ($ 321 million), Canada’s Molson Coors ($267 million), and chief rival but occasional ally Pernod Ricard ($247 million).
The chief environmental pressures on the beer, wine and spirits industry are political and social. Governments lend an ear to recriminations about adolescent drinking, drunk driving and other violent outcomes of excessive drinking but they are generally loathed to ban alcoholic beverages outright because these are lucrative, evergreen sources of specific, ‘ad valorem’ and GST revenue.
As to the social repercussions of drinking, countries like the UK, Russia, Australia and the U.S. at least recognise the existence of ‘problem drinking’ (along with ‘problem gambling and drug addiction) amongst their citizens. Whether or not alcoholic beverage advertising should be banned remains subject to debate, not least due to the efforts of the industry’s PR agents. As well, however, there are empirically-minded authors like Fisher(1993) who drew on experience investigating a wide range of issues around alcoholism in the 1970s and early 1980s, as well as conducting commercial tests for large advertisers since 1996, to deny that the extent of alcohol advertising has anything to do with the incidence of abusive consumption. The author’s investigation covered a review of the literature on sexual imagery in alcoholic beverage advertising, social-learning theory, econometric studies (see Figure 1 below, by way of example), warning labels, and the effect of advertising on brand shares. Ultimately, the not-unreasonable conclusion is that advertising does help attain better market share but is seemingly impotent when it comes to encouraging minors to begin drinking or motivating adults to drink to excess (Chafetz, 1994).
Bibliography
Chafetz, M. E. (1994) Contributions to the study of mass media and communications: No. 41. New England Journal of Medicine, 330: pp. 724-725.
Diageo (2009) Ordinary share price. [Internet], Diageo and EuroInvestor. Web.
Fisher, J. C. (1993) Advertising, alcohol consumption, and abuse: A worldwide survey. Westport, Conn., Greenwood Press.
Hanson, D. J., Ph.D. (2007) Alcohol advertising. Web.
Jernigan, D. H., Ph.D. (2000) Cultural vessels: Alcohol and the evolution of the marketing-driven commodity chain. Ph. D. thesis, University of California, Berkeley.
Jernigan, D. H. (2008) The global alcohol industry: an overview. Addiction, 104 (s1), pp. 6 – 12.
Murray, B. (2009) Diageo plc. Dun & Bradstreet/Hoover Company Records. 55181.
Wentz, L. (2007) 21st annual global marketers: Part 1, global ad spending by marketer. Ad Age, 2007.