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...