Financial analysis of Diageo plc

Diageo plc is running the alcohol business. It was merger of Guinness plc and Grand Metropolitan plc. Diageo operate its business in the area such as North America, Europe, International, and Asia Pacific.

The main competitors of Diageo comprise Pernod, Bacardi group, Fortune brands, Brown-Forman, Group Campari, Remy Cointreau, United Spirits, Anheuser-Busch, SAB Miller, and Heineken.

Diageo's portfolio includes Guinness stout, Smirnoff vodka, Johnnie Walker Scotch Whisky, Captain Morgan Rum, Baileys Liqueurs, J&B Rare Scotch Whisky, Crown Royal Whisky-Canadian, Gordon's Gin, Seagram's 7 Crown Whisky-American-Other, Bell's Whisky-Scotch, Tanqueray Gin, Popov vodka, Cacique Rum, Buchanan's Scotch Whisky, Seagram's VO Whisky-Canadian, and Gordon's vodka.

Diageo's main business strategies are to focus on premium drink, increase shareholders value, and grow the business from organic sales.

Profitability & risk ratio

The gap between gross profit margin and operating profit margin are quite large. This shows that its management did not control expenses effectively i.e. marketing expenses more than 10% of sales. However, it still able to cover it expenses with high gross profit margin and earn net income from sale with low operating profit margin. The difference between return on capital employed ratio and return on owner equity indicates that gearing level is also high. The differences are due to high borrowing, interest expenses and taxation. However, its interest covered is high. So, it has more buffers and therefore would be at less risky level. Besides, it still able to pay interest and give protection to long-term debt lender although there is a slightly decrease in interest cover ratio. Gearing of Diageo is still acceptable as its interest covered is still high. However, the increase of their gearing ratio implies that the company is moving forward to more risky level and need look to debt to finance their business.

Liquidity & efficiency ratio

There is insufficient liquid asset of Diageo plc to meet its current liabilities. This is due to high stock turnover period which probably could be cause by falling demand in alcohol consumption. Besides, it will also cause the company difficult to improve their high expenses i.e. expensive storage cost and need funds to tie up their holding stock. The business will subject to high risk of bad debts and difficult to collect back their money as the debtor collection was slightly increased. Creditor payment period is slightly increased but it will not be due at once. Asset turnover ratio shows that investment in non-current asset to generate sales is still insufficient to gain additional profit.

Investors' ratio

EPS and P/E ratio is still steady although there fluctuation over this three years. This indicates that investors are confidence to company's future prospect. The fluctuation of the EPS maybe due to retained deficit continuous increase and new issue of share. Besides, they continue to expand their business and buy back their share. The dividend covered is slightly decreased but high dividend covered will still able to satisfy their investor. The company is also giving out more dividends based on company objective to maximize shareholders' wealth.

Overall, Diageo plc is still in a strong and sustainable position.

Internal Analysis

Human Resource Management (HRM)

HRM of a firm can lead a company to earn more profits and survival in particular industry. (Wheelen & Hunger, 2006)

Committed

Pension fund are operated by Diageo as an indicator for the employees. The senior managers are loyal to the company as they worked many years in Diageo Plc. Diageo also distribute share to its employees, retains talent employees, and also let them involve in development of the company's strategy and business goals.

Competent

It sales is arise over the period and it also recruits the talent staff.

Cost-effective

Diageo Plc's employees are not cost effective because the staff cost that was incurred was more than the sale generated. In addition, it has high market rate of remuneration and the workforce is not fully be used.

Work towards the goal of the company

The employees are well informed and involved in the company's goal.

Operations Analysis

Value Chain

Value chain which developed by Michael Porter is utilized to identify resources and process that add or destroy value to the company's operation. (Harrison & John, 2008)

Comments:

Diageo has the activities that add value to its operation.

  • Diageo own trademark for its brand name that was registered and protected under trademark laws.
  • The product's cost, quality, and supplier arrangement of Diageo can be added value as it has suppliers around the world.
  • Its marketing activities can increase the customers to aware with new products.
  • Human resources with operation also add value to its activities as it hired the competent staff.
  • Five different locations with production centre were undertaken by Diageo.
  • Diageo own the production facilities.
  • The technology adds value to its operation as customers can get new information of its products through website.

The activities that destroy value to Diageo's operation are as follow.

  • Inefficiency of its marketing strategy as its inventory level is still very high.
  • Diageo's inbound logistic will destroy value to its operation as it has no standard production area.

The activities that add value to Diageo's operation can minimize its costs. The support activities are also important as it lead to add value to Diageo's product.

Marketing Analysis

4P (product, price, promotion, place) can be varied to meet the customers' needs and also more effective to increase the sales and profit for the company. Besides, they are interdependent with each other in reality which one of the '4P' decision will affect each other. (Solomon & Marshall, 2009)

Product

The existing products of Diageo Plc such as Guinness Stout, Smirnoff Vodka, and Johnnie Walker Whisky have long time historical background. It brand is widely recognized and it brand image is strong. It registered its well known trademark such as black dog head logo, black colour of Guinness Beer under law so that its products are protects against other competitors who try to imitate and copy right it.

The Boston Consulting Group (BCG) Matrix

BCG matrix is useful in forcing decision in product's portfolio (Have, S.T. et al, 2003, p.16). Overall, Diageo plc's performance is in strong position. For its star products, only sales volume of Baileys Liqueurs is slightly decreased compare to previous year but is experience increase from year 2004 until 2007. Therefore, Diageo can invest more in this product to build its share as it can ensure its future money generation which generates a stable income to finance and support the other products and cover the other expenses. The cash cow products, Gordon Gin is continuous decreasing from year 2004 until 2008. So, Diageo should only average invests in this product to hold its share. For problem child product, Diageo need to decide for which of the problem child should be turned into stars product and divest the remainder product. For dog product, Diageo can be liquidated unprofitable product by dispose it.

Price

The cost-based pricing is used by Diageo. It can be view that its product is available in anywhere and product i.e. Guinness Beer is cheap.

Diageo utilize prestige pricing strategy by focus on its premium drink. It stronger its premium alcohol brand image by investing in premium brand of manufacturer.

Place

The intensive strategies which are adopted by Diageo to sell its alcoholic drinks i.e. beer through the distribution channel such as supermarket, off licences and specialist store, pubs, bars, and clubs. It can be view that the strategic place that was chosen by Diageo is surrounded with huge channel member. Diageo no longer owns any pub now.

There is also a selective strategy that is utilized by Diageo to sell it alcoholic drinks such as Whisky and Wine at pub, bars, and clubs. The number of pubs and bars in European countries was declined as it was tightly controlled by the government legislation and licence also required for selling the alcoholic drinks.

Promotion

Diageo had effective advertisement and promotion as it spends a lot of money on it. Therefore, the increase of sales volume is due to increase in marketing expenses. Besides, themes and slogan also used to increase the awareness of the customers to a product that is new launched.

PEST Analysis

External factors can affect a company's decision. (Pearce II & Robinson, Jr., 2009)

Political environment

Government provision

  • imposed smoking ban in pubs

Legislation/regulation

  • Legislation or regulation can affect Diageo's alcohol sales. Government strictly controlled and regulated the production and sales of alcoholic drinks. The distribution channels in most of the country are strictly controlled by the government legislation. There is also had Anti-drink driving legislation.
  • Diageo had trademark protection for its brand names under trademark law.
  • Advertising of alcoholic drinks is prohibited (i.e. France). It will create barrier for Diageo to increase its sales as advertising is one of Diageo's main marketing strategy.
  • Increase in excise duty by government. The excise duty for Diageo is 24% of total sales.

Economic environment

Economic growth rate (recession)

  • Global economic downturn can affect the share price. Diageo's share price dropped slightly. However, it still cannot affect the shareholders' confident as the performance of Diageo is in good position compare to the other company. Diageo also planned to buy back the share.

Unemployment and income per capita

  • Recession will increase unemployment rate and affect customer per capita income. In other word, it will reduce the demand of the customers to luxury goods. For example, people will reduce or stop to buy the expensive goods. They may start to seek for substitute product which will cheaper than Diageo's product. (assumption)

Interest rate

  • Diageo increase its borrowing as the interest rate will be low and interest expenses will also be cheaper.

Social environment

Social attitudes to alcohol

  • Increase in health conscious of people also lead the global wine sales are higher than the spirit market. It will cause demand of Diageo's spirit product in the future (assumption).

Different taste of the customer

  • Propensity of the customer to Diageo alcoholic drink will be low as the customer from different place will have different taste. For example, Soju (in Korea), Shochu (in Japan), and Baijiu (in China).

Prohibit consumption of alcoholic drinks in some cultures and regions.

  • Limitation for Diageo to have distribution channel and advertise its products in some country.

Technological environment

Production facilities

  • The purchase of PPE (property, plant and equipment) by Diageo is increase from year 2006 to 2008. Diageo can decrease its cost per production due to the better machine.

Construction and operation of high capacity distillery

  • Distillery of malt and grain whisky is expanded by Diageo.
  • Diageo also invest in new malt distillery.

Porters Five Forces Analysis

Competitive forces can influence a company attractiveness go beyond rivalry. (Gamble & Thompson, Jr., 2009)

Bargaining power of suppliers

Concentration of suppliers is low

  • Diageo had large number of suppliers around the world. For example, it sourced raw material for production of spirits and beer from suppliers around the world.

Bargaining power of supplier is low

  • Dependency of the suppliers to Diageo will more higher as it is one of the largest alcoholic drinks producers in the world.
  • Diageo is important to supplier's business. Diageo purchase its raw material in bulk. For example, Diageo purchase bulk tequila for making Jose Cuervo line of tequilas and tequila. The supplier will not want to lose a big customer like Diageo. Therefore, it can reduce supplier's bargaining power.
  • Diageo in place long-term contracts to its suppliers to reduce consequences of the price fluctuation in raw material. So, the supplier cannot simply increase the raw material price beyond certain condition in the contract.
  • Some of the raw materials price is fixed and controlled by the government. Therefore, there is a limitation for supplier to increase the price of raw material that supply to Diageo. (assumption)

Switching cost is low

  • Diageo can easily switch to another supplier. So, it had more influences over supplier. It also had more alternative to choose the sources from suppliers. Therefore, it can easy switch to other suppliers who offers material more cheaper.

Bargaining power of buyers

Concentration of buyer is high

  • Emerge of plenty substitutes product. Diageo's notable competitors, United Spirits locally produced their products. Other, supermarket sell their own brand of alcoholic i.e. beer and spirits.

Product differentiated

  • The differentiation of Diageo's product is high. It can increase the dependency of buyer to its product and reduce the buyer's from switching to competitor's product.
  • Diageo had strong brand image which can differentiate its products from competitor's product.

Switching cost

  • Switching cost for buyer is high. The competitors mostly are oligopoly such as Bacardi Group and Pernod Ricard which also had produced Scotch whisky and vodka. But the buyers are hard to switch to competitors product as there are no close substitute products that can replace Diageo's products. From table 6, it shows that the net sales of Diageo's main products such as Smirnoff vodka, Johnnie Walker whisky, Captain Morgan Rum, and Guinness stout still increase compare to previous year. This shows that the demand of the buyers to Diageo's product is still high.

Threat of substitutes

High switching cost

  • Diageo's alcohol spirit products such as Smirnoff vodka and Johnnie Walker whisky is on top international brands of sales. From table 7, Diageo's major competitors have not significant influence to its alcohol spirits product.
  • Besides, Diageo had many other brands of alcohol spirit product. For example, Liqueurs, Ready to drink, Whiskey, Rum, Gin, Tequila, and other.

Buyer propensity to substitute

  • The demand for local brand of spirit is arise. There is a lot of local and domestic brand of spirits come out. For example, Soju (in Korea), Shochu (in Japan), and Baijiu (in China) are the spirits that was locally produced. The sign of the competition from substitute products is also strong. Most of the spirit of China and India is locally produced. China is the largest market for alcohol spirits. Whilst, India is the largest market for whisky in the world. Almost 75% sale growth of India is in spirits and 99% of the consumption is locally produced brand.
  • 52.5% tariff on imported Scotch whisky is imposes by the India Government. As a result, Diageo will need to spend a lot of money for tax. Therefore, the sales of Diageo cannot be maximized.
  • It can be view that buyers propensity to substitute is higher as good substitute product are readily available.

Indirect substitute (Whisky and Wine)

  • Threat of generic substitution. Whisky and Wine is at the same group but different kind of ingredient of material. For example, wine produced by the fermentation of grapes was tasted sweeter than whisky which was produced by the fermentation of cereals will taste bitterer. The value of wine sale is higher than the value of spirits market. Beside, the wine sales have increase in many markets and continue to grow in the future.
  • The wine is healthier than Whisky. Indirect substitute would be a threat for Diageo because people begin more health conscious. It is easy for customer switch to wine product as wine offer better benefit compare to the Whisky. Diageo would need to incur a lot of cost to its alcohol spirits product when demand of wine is increase in the future.

Competitive rivalry within the industry

Many equally size competitors are arise

  • The competitors of Diageo are roughly same size. They are oligopoly. For example, Diageo's major international spirits competitors such as Pernod Ricard group, Bacardi group, and Fortune Brand are roughly same size and competitive capability. They compete like Diageo for the same buyers i.e. vodka and whisky.

Quick industry growth rate

  • Some of the competitors are marries to entry. Therefore, the buyers will become more powerful as more substitute product available.
  • Market share is the important key for Diageo to survive. It share is still high which is 28% but it sales decrease in certain country i.e. India. It can be view that arises of local and domestic competitors is strong. The market share is mostly captured by Diageo's competitors such as Pernod Ricard group with 16% share and Bacardi group with 11% share.

High Fixed cost

  • Diageo faced intense competition within alcoholic industry i.e. Asia Pacific (China). China is the highest alcoholic consumption due to its high population. The total annual of its consumption is 4468.7 million litres. But the sales volume of Diageo is low at China.

High advertising expenses

  • Due to increase in marketing expenses.
  • Can affect Diageo's overall profitability.

Threat of new entrants

Product differentiation

  • Customers are high level of brand loyalty. Diageo had strong branding, brand image and quality for its products.

Capital requirement

  • High set-up capital. For example, Diageo need to spend a lot of cost in advertising expenses, technology, R&D, plant, distribution, inventories, warehouse, and marketing expenses.

Access to distribution channels

  • Distribution channel is strictly controlled by government and licence is required.

Government policy

  • Excise duty and tax are high.
  • High tariff (52.5%) imposes by India government on imported Scotch whisky.
  • The United Kingdom tries to tackle "binge drinking".
  • Prohibited advertising of alcohol drink in France.

Economic of scales

  • Diageo international brand of spirits and sales by volumes is ranked 1 out of 30. Therefore, it I a cost disadvantages for new entrants as they need to incur large scale.

Overall, the threat of new entrant is low as the entry barrier for Diageo is high. Diageo plc is a long-established company. So, new entrants have to spend longer time to become established in alcohol industry. The entry is also restricted by government policy. Diageo's brand that was recognized by customers and intense competition will create the barriers to entry and drive down the new entrant.

SWOT Analysis

The main problem from business environment and strategy capability which summarized by SWOT are possible to affect on company's strategy development. (Johnson, Scholes, & Whittington, 2008, p.119)

Prioritized strengths

Brand and high reputation

Diageo had strong branding for its products. The customers' loyalty and satisfaction level is high. It can be view from its high reputation. Diageo claim the highest percentage of the share, which is 28% for its international spirits among its competitors. Diageo also ranked 18 out of 100 in FTSE with over £23 billion market capitalization.

Product range

There is a high differentiation in Diageo's product. Therefore, there is also difference for the product price which is from low price to high price. In this situation, it can fulfill different level of demand from the customers.

Strategic alliance

Long term contract is in placed by Diageo to its supplier for forward purchase the important sources. It can reduce effect of price fluctuation on the raw material. For example, when there is a shortage of the material, the price of raw material will be increased. Besides, the increasing of the currency value due to arise in global and country economic will also increase the raw material price.

Production facilities

Diageo manufacture the alcoholic products by themselves. It also expands its own facilities such as distillery and warehouse. As a result, Diageo can control the quality of its production. Besides, Diageo also can produce the products in bulk or cut down the production to solve the inventory problem.

Prioritized weaknesses

Distribution

The dependency of Diageo on the distribution channel is high i.e. supermarket. It is a weakness for Diageo as the distribution channel in most of the country is controlled by the government legislation. Besides, Diageo did not own any pub now.

Market

Diageo had ignored the Asia Pacific market. The marketing expenses in Asia Pacific market is low and had decreased 6%.

Acquisition and liquidity problem

Diageo did not fully utilize its production capacity. For example, there are too much idle employees. It leads the extra cost to Diageo. There is also increasing in debtor which will cause more bad debts to Diageo. Whilst, high inventory in hand is also lead to low liquidity which cause the quick ratio become low.

Operation

Diageo had many brewing facilities which were due to the acquisition. It is a weakness for Diageo when the product that was supply more than demand. In addition, Diageo might be cannot fully control the quality of Guinness as some Guinness are brewed by third parties. The quality of some product such as Smirnoff vodka, Popov Vodka, and Gordon Vodka which was produced in others country might slightly differ.

Prioritized opportunities

Recession

It is an opportunity for Diageo to expand its business in recession. Diageo can take over its competitors. It also can be view that there is increase of the purchase of business in Diageo's cash flow statement.

Health

Diageo had its own vineyards. Diageo can produce more grape wine to expend its market for targeting the customers who is more health conscious.

Market entry

It is an opportunity for Diageo forecast to increase its market size in China in year 2013. As China is most population country. It is also the highest consumption of alcoholic drinks among the other countries.

Technology

Diageo can attract more customers by develop more "ready to drink" drinks. Diageo can do more research and development to increase its production.

Prioritized threats

Government policy

It is a threat to Diageo when the government imposed high tax and excise duty. This is because it can affect Diageo sales. Consequences, Diageo's sales cannot be maximized.

Advertising

There are certain countries i.e. France banned the advertisement for alcoholic drinks. It is a threat for Diageo as advertising is its major strategy to increase its sales.

Consumers' behavior

The consumers' behavior can lead difficulty for Diageo to target the market. For example, some of the consumers may prefer the product of the alcoholic drink that is more health. Therefore, it can reduce the consumption of consumer in the alcoholic spirits.

Economic condition

In the economic recession, the income per capita is low. Therefore, the customers will seek for the alcoholic drink which is cheaper and can affordable by them.

Competitors

It is a threat to Diageo when there is price War between Diageo and its competitors. In addition, the supermarkets also begin develop their own alcoholic brand product. This will increase the threat to Diageo's product as most of Diageo's product is depended on distribution channel. Besides, the supermarket or hypermarket is the most effective distribution channel for Diageo to sell its alcoholic drinks.

Strategic position

Diageo is performance well in its strategic alliance. The price for its products i.e. price of differentiation product will not be fluctuated for next few years as Diageo in place long-term contract to its supplier for purchase its important raw material. Therefore, Diageo can retrench the future fluctuation cost. With strategic alliance, there is a high profitability of getting lower price to produce its products. But, Diageo cannot change to other supplier since it had in placed the long-term to its suppliers. Consequences, Diageo is hard to switch to other suppliers that might be offer cheaper material price.

Diageo is in bad positions for the health consciousness issues. The increases of the wine products might lead to less consumption to Diageo's alcoholic spirits products. Indirectly, it will also lower sales. But, there is an opportunity for Diageo to increase in its wine product. As, the people start to seek for healthier lifestyle.

Diageo had strong branding for its product. It holds highest share for its international spirits products. Therefore, there is an opportunity for Diageo to develop more "ready to drink" drinks by doing research and development in market preference drink.

Recommendation

Recommended Strategy

Diageo plc's winning strategy should be the consolidation strategy. Consolidation of the company's current position would make the company more sustainable in the alcohol industry.

Diageo can buy over its competitors, Brown-Forman which with 5% share in premium spirits in the world. Then, it can continue to buy over the other competitors, Fortune brands which with 6% share for the next few years. As a result, it can maintain its share in growing market and become much more powerful than its competitors. They will hard to beat down Diageo when its business continuous growing. The competitor would need to have substantial capital to buy over Diageo and other competitors.

Next, Diageo can buy over it supplier to control its product's quality. This is because if Diageo just rely on the long-term contract with the supplier, Diageo could not switch to other suppliers who offer material more cheaper. By buying over the supplier, Diageo can control it product's quality and also indirectly control its raw material price.

Diageo can produce less products or stop the production for its unprofitable products to clear out its old inventory in warehouse. This will help to solve its liquidity problem. In addition, Diageo can transfer labour to other production or chop down its labour forces to reduces its cost and save money in warehouse, rental, and insurance cost.

There is a risk for Diageo to utilize the consolidation strategy. Diageo need a lot of capital to adopt this strategy. First, Diageo can issue more share to its existing shareholders. Second, Diageo can sell the fixed asset and leased it back. Third, Diageo can move and open it factory in somewhere else as its current location for production is expensive. Fourth, Diageo can divest its unprofitable product by disposal off production facility in child and dog product. Fifth, Diageo can get long-term loan as long-term loan's interest expenses will definitely be less expensive than short-term loans.

Finally, it is the better way to use this strategy now as the economic is still in recession.

Please be aware that the free essay that you were just reading was not written by us. This essay, and all of the others available to view on the website, were provided to us by students in exchange for services that we offer. This relationship helps our students to get an even better deal while also contributing to the biggest free essay resource in the UK!