Introduction

History

1759: Arthur Guinness signs lease for brewery

1986: Guinness acquires the Distillers Company ltd

(DCL)

1987: DCL and Arthur Bell & Sons combine to

form United Distillers

1934: MRMA ltd becomes a public company

1961-1962: Name changed to Grand Metropolitan Hotels ltd and shares listed on

stock exchange

1997: Diageo created from merge of Guinness and Grand Metropolitan

2001: Diageo acquires the Seagrams Spirits and Wine business

2000: Diageo sells Burger King and

Pillsbury

1971-1973: Name changed to Grand Metropolitan ltd and enters

brewing industry.

Brands

Situation Analysis

External Analysis

Global

• Diageo North America

• Diageo Europe• Diageo Asia Pacific

• Diageo International

North America• Most prominent market segment

• 13 premium brands

• Ranked among the top 4

• Known for consistency

Europe

• Consists of 1/3 of the market

• Experiencing economic challenges

• Decline in sales

Asia Pacific• Largest amount of growth potential– Spirits

• Increase in Sales

• Advertising and marketing of premium brands

International

• Trends towards premium brands

• Joint venture with Heineken N.V.

Socio-Cultural• Protecting Against Harmful Drinking

• Healthier Drinking Options

Protecting Against Harmful Drinking

• No “one-size-fits-all” approach

• Provide “drink responsibly” campaigns– Help protect image

• DRINKiQ.com

Healthier Drinking Options• Trend towards healthier options

• Low-calorie malt beverage• Market leader

Demographics• Trending towards minorities

• Expecting 80% of sales from this demographic

• Reality television show

Situation Analysis

Industry/TaskEnvironment

Beer

• 50.5% market share

• Saturated market• Decline stage since 2005

• Low-Calorie beers

Wine

• 24.7% market share

• Mature stage – Lack of technology

• Room for growth– Weather

• 22.1% market share

• Growth stage– Ready-to-drink– Low-Calorie beverages

• Increasing since 2005

Spirits

Competitors

• 200 Brands of beer

• 125 Breweries in more than 70 countries

• Total Cost Management

• Cross functional team

Heineken N.V.

Competitors• Operates worldwide• Focus on the wine and spirits industry

• 26 brands• Strong brands• Not a large presence in Asian markets

• Dedicated to building brands

Brown-Forman

Competitors

• Operates using subsidiaries

• Operates in beer, wine and spirits

• 4 main geographic segments: France, Europe, the Americas and Asia/rest of the world

Pernod Ricard

Competitors

• Operates solely in beer

• 60 countries worldwide

• Focus on the art of brewing

• Strategic partnerships

SABMiller

• 3 subsidiaries: Molson Canada, Coors Breweries and Coors Brewing company

• 40 brands• Project Eve• Solely in the beer industry but is one of the largest in the world

CompetitorsMolson Coors

Industry Attractiveness

Rivalry

New Entrants

Substitutes

BuyersSuppliers

Supplier Power• Moderate• Few substitutes for resources

• Many buyers to choose from

• Niche suppliers• Chance to integrate forward

Rivalry

New Entrants

Substitutes

Suppliers BuyersSuppliers

Buyer Power• Moderate• Many supplier options

• No substitutes• Can integrate backwards

Rivalry

Substitutes

BuyersSuppliers

New Entrants

Buyers

New Entrants• Easier on a smaller scale

• Market legitimacy

• Specialty drinks

New Entrants

Substitutes

Suppliers BuyersRivalry

New Entrants

Rivalry• Dominated by key players with deep pockets

• Difficult to differentiate Rivalry

New Entrants

Suppliers Buyers

Substitutes

Rivalry

Substitutes• No real substitute

• Other drink options

• Can depend on the company Rivalry

New Entrants

Substitutes

Suppliers Buyers

Substitutes

Situation Analysis

Internal Analysis

Resources

• Company size– Large product portfolio

• Distribution• Focus on innovation of growth

SWOT Analysis

Strengths

Weaknesses

Opportunities

Threats

Culture and Management Style

• Passionate about customers/consumers

• Entrepreneurial spirits• Pride in company• Strive for the best• Value each other

Values

Culture and Management Style

“At Diageo, our business strategy is to deliver sustainable organic growth through the stewardship of our outstanding range of premium drink brands. This is supported by strong financial discipline and cash management, and where appropriate will be supplemented by selective acquisitions.”

Strategy

Culture and Management Style

• North America– Distribution depends on state– Closed/Open System

• Europe– Direct distribution

• International– Third part vendors

Structure

Culture and Management Style

• CEO – Paul Walsh

• Took over Diageo in 2000

• Dropped food division

• Focus on premium beverages

Top Management

Culture and Management Style

• Chairman – Dr. Franz Humer

• CFO - Deirdre Mahlan

Top Management

Profitability• Return on Assets is consistently higher than industry average

• Even with unorthodox capital structure, Return on Capital remains high

Asset Turnover• Total asset turnover is high

• Fixed asset turnover raises total turnover

• A/R and Inventory turnovers lower total asset turnover

Short Term Liquidity• Current and Quick ratios show ability to pay current liabilities

• Cash conversion cycle is far longer than industry average

Profitability Margins• Higher than industry

• Convergence over past

Cash Flow Margins• Diverged below industry average– Industry increase in market share

– High debt hurts levered FCF

Capital Structure• Favor debt in capital structure, especially LT– Cheaper financing

– Known payments– No call options

Interest Burden

• High debt yields high interest burden– Debt coming due gives refinancing opportunities

Problem Statement

Staying Ahead• Recognition of Trends– Ready-made drinks

– Health conscious drinks

• Expanding their Market– Purchase of Shui Jing Fang

• High interest rates on debt– Limits cash on hand

• Jose Cuervo – Decreasing Sales– Distribution Contract

Problems

Strategy

Refinancing LT Debt• $9 billion in long-term debt outstanding with an effective interest rate of 4.8%.

• Use interest rate swaps to swap their fixed rate to a floating rate.– Two attractive possibilities:

•$818 million 6.625% 2014 Euro Bonds•$540 million 7.375% 2014 USD Bonds

Refinancing LT Debt• Swaps:

– Two year contract where Diageo pays the rate on:•30-year US Treasury Bond + 1.0% for the Euro Bonds

•30-year US Treasury Bond + 1.5% for the USD Bonds

• In the future, Diageo should structure their longer-term debt issuances to have built in call options.

Tequila BrandsJose Cuervo

• Been around since the late 1700’s

• Number one selling tequila on the market

• 2009 sales down 4%; 2010 volume movement down 13%

• Approximate purchase price: $2 billion

Sauza• First distilled in

1873; one of first “Tequila” from Mexico

• Number two selling tequila on the market

• #26 on the world’s top 100 premium spirits list

• 2009 sales rose 11%

Bourbon WhiskeyJim Beam

• Been around since 1795 and is one of the best-selling premium bourbons in the world

• #14 on the world’s top 100 spirit list

• International Distribution

Maker’s Mark• Super-premium bourbon

whiskey• Made in batches of

around 19 barrels at a time

• Distillery named “2011 American Whiskey Visitor Attraction of the Year” by Whiskey Magazine

Suggestions:• Use interest rate swaps to hedge their interest payments and lower the effective interest rate on outstanding debt.

• Purchase Sauza, Jim Beam, and Maker’s Mark from Beam Global instead of renewing distribution rights or purchasing Jose Cuervo

What if?

• Interest rate swaps may backfire– Base interest rates rising is bad

– Forces use of more cash

• Solution– Another interest rate swap

– Include a cancellation fee in contract

Refinancing

• Assumption that Sauza, Jim Beam, and Makers Mark would be for sale

• Distribution rights for Jose Cuervo end in 2013– Situation may change

Acquisition

• Option 1: Purchase Jose Cuervo– If sales increase– Re-develop the brand

• Option 2: Extend Distribution Contract– Maintain the current relationship

• Option 3: Acquire another tequila brand– Analyze trends – Develop a new brand

Acquisitions Cont’d..