Environmental Analysis of Diageo

Environmental Analysis

MM/590 Contemporary Issues in Leadership and Management

University of Phoenix Online, September 19, 2006

Introduction

“Diageo PLC is a British multinational alcohol company, selling alcohol in 180 countries, with a substantial presence in 30 countries. The company was created in 1997 by the merger of Guinness PLC with Grand Metropolitan PLC (GrandMet)” (diageo. com). At that stage, it was a large multinational with interests in food as well as drink. Today, the company has shed most of its food interests to concentrate on alcohol, acquiring new spirit brands. Diageo engages in the manufacture and distribution of spirits, wines, and beer worldwide. With a collection of outstanding brands, Diageo is the world's leading premium drinks business. The company manufactures its products under names of Smirnoff vodka, Johnnie Walker Scotch whiskeys, Guinness stout, Baileys Original Irish Cream liqueur, J&B Scotch whiskey, Captain Morgan rum, and Tanqueray gin. “Diageo PLC operates in more than 180 markets across the world with over 20,000 employees, a market capitalization of 1.5 billion and turnover of 8 billion” (diageo. com).

Diageo projects an image of itself as a clean, friendly and ethically oriented company with a commitment to corporate social responsibility. This includes both a professed concern with the harm alcohol can cause, and statements about what a great service the company is providing by producing such well-loved brands.

We have selected Diageo to conduct an environmental scan of the industry and remote environments to identify potential opportunities and threats that may arise in the near term. We will describe and evaluate our findings and provide recommendations for responding to the issues and opportunities that we have found in the environmental scan. Our assessment includes the following:

Availability of substitute products and threats of new entrants and competition

Diageo has long been the front-runner in the premium drinks business. Its brands include Guinness, Smirnoff, Bailey’s, Johnnie Walker, and Cuervo complimented by broad range of local and specialty brands from around the world. In 2002, Diageo held a 15% (United States-Spirits, 2002) market share and was by far the leading manufacturer of spirits in the United States followed by Pernod, and Fortune Brands, Inc. The market is expected to have 9.8% (Huddleston, 2005) growth in the next three to four years, so new entrants may find the going hard unless they have capital to sustain themselves.

The ready to drink (RTD) market is an industry sector that has good growth potential and room for competition because it has not been saturated with products. Players in this market come and go as consumer trends switch between the flavored RTDs and traditional drinks (“The Fab Trade Continues its Growth Phase,” 2006).

New entrants must have capital to sustain themselves until their product is viable. This is because the market will be squeezed once, the goliaths of the industry enter. Small companies will have a hard time competing with revenues that the large organizations put into their advertising and marketing campaigns. To compete beer

brewers are developing flavored brands, low carbohydrates varieties, and creative packaging appearances. A new beer brand has a chance if it can become trendy, gain market recognition and brand identification. This appears to be a viable substitute to the

Diageo brands.

Wine is also a substitute for spirits consumption. Wine has limitations because it is not packaged for individual consumption. Where wine cannot be packaged for individual consumption beer comes in a variety of sizes for the consumer. Breweries are producing flavored beers marketed for contemporary people (Huddleston, 2005). The merger of Molson Canada and Coors Brewing will create a strong substitute for consumers. However, Diageo should do well against this competition because it owns the Guinness brand and several wine varieties.

One threat of substitute is from juice and water distributors. Since consumers are aware of their diet and health, this could be an area for alcoholic beverage distilleries to exploit. This exploitation could take place in the form of organic beverages. Currently, the product field in this area is non-existent nationally, but organic products are marketable and trendy.

The acceptable growth rate will allow some new entrants into the market, but they must be competitive. The obstacle that new entrants will face is that the United States spirits market is an oligopoly dominated by Diageo and Pernod. On the horizon, threats from new entrants