DIAGEO plc
Wine is a small percentage of our sales, the growth rates are very exciting, and Sterling
[Vineyards] will give us a sound platform. But wine is capital intensive and we must be confident
we can maximize capital investment and drive an appropriate return for our shareholders.
—Paul Walsh, Chief Executive Officer, Diageo PLC.
As a company, if you’re looking to invest in spirits or wine, it’s spirits every time. I hugely
admire what companies like Southcorp are doing, but let me tell you: if they had a decent
portfolio of spirits brands, they wouldn’t be bothering.
—Jack Keenan, President, United Distillers and Vintners, Diageo PLC.
Wine is a very dynamic and attractive segment to Diageo. The premium end of the business is
still growing at double-digit rates. There is a lot of demand out there for premium wine, and we
expect demand for these wines will continue to be very strong.
—Ray Chadwick, President, Diageo Chateau and Estate Wines
In April 2002, Diageo plc (Diageo) announced its intent to sell its Glen Ellen and MG
Vallejo wine subsidiaries to the Wine Group for $83 million. The sale was to include the
Glen Ellen and MG Vallejo brand names and all existing inventory but not the
vineyards/facilities of the two wineries. Glen Ellen and MG Vallejo wines typically sold
for about $5–$7 a bottle. These brands did not fit into Diageo’s increasing emphasis on
marketing premium wine brands that sold for $10–$15 a bottle and higher. Wine industry
observers viewed the sale of Glen Ellen and MG Vallejo as a move towards brand
rationalization, that is, allowing Diageo to concentrate its marketing efforts on a smaller
number of more upscale brands.
This case study was prepared by Professors Armand Gilinsky, Jr., Sonoma State University, and Richard
Castaldi, San Francisco State University, with the assistance of researchers Dan Dhruva and James
Cavanagh, MBA students at San Francisco State University, as a basis for class discussion, not to illustrate
either effective or ineffective handling of an administrative situation. The authors gratefully acknowledge a
Business and International Education (BIE) grant from the U.S. Department of Education and a matching grant from
the College of Business at San Francisco State University in support of this research.
Copyright 2004 by Armand Gilinsky, Jr. and Richard Castaldi. Dated March 23, 2004. Not for reproduction
or distribution without permission of the authors.
Diageo plc/2
Six months later, in October 2002, Ray Chadwick, President of Diageo Chateau &
Estate Wines, reviewed his company’s remaining wine portfolio. Diageo Chateau &
Estate Wines was based in Napa, California. Chadwick was pondering which, if any
further changes to the portfolio should be made:
If you were to ask me, ‘Will there be changes to the portfolio?’ We understand and pay
attention to the desires of our consumers. We’re constantly evaluating our business. We
own over 2,000 acres in the Napa Valley. We have long-term leases on over 300 acres in
Napa. That makes us the largest grape grower in the Napa Valley. We are still open to
acquiring new vineyards if we can do so at a price that makes sense. The economics have
to be right. We are currently looking at several vineyard opportunities in the Napa Valley.
I can tell you that we have no plans to sell any of our vineyards at this time. We have a
very large vineyard operation in Monterey County, Paris Valley Ranch (approximately
1500 acres). We have in addition to that probably another 700 acres or so of coastal
vineyards in the south coast [of California].
To justify his evaluation and recommendations, Chadwick needed to determine
which, if any, synergies could be achieved between his division’s premium wine holdings
in California and Diageo’s holdings of some of the most highly recognized spirits and
beer brands in the world. Diageo also owned 34% of Moët Hennessy, the wine and spirits
unit of French luxury goods maker LVMH Moët Hennessy Louis Vuitton.
Cost synergy appeared to have become the main driver of growth at Diageo. In
2001 Diageo had sold its Guinness World Records business to a media company, Gullane
Entertainment, for $63 million. In a re-branding move to emphasize the Diageo name, the
company scrapped its Guinness/UDV unit and folded those operations into a new
premium drinks division. Diageo also decided to sell its Pillsbury unit to General Mills
for $10.5 billion as part of the company’s effort to focus on its spirits, wine, and beer
businesses and to shed less profitable operations. The Pillsbury divestiture gave Diageo a
33% stake in General Mills.
Diageo’s stock price began to rise in response, reaching a 52-week high on the
New York Stock Exchange of $55.40 on May 3, 2002. Yet, securities analysts over the
summer and early fall 2002 had been progressively downgrading their recommendations
on Diageo’s stock from “strong buy” to “under-perform, medium risk.” See Exhibit 1 for
Diageo’s stock price chart, 1997-2002, and analysts’ forecasts.
Diageo subsequently announced that it has gone back to the drawing board in an
attempt to unload its Burger King business (the #2 burger chain, after McDonald’s, with
more than 11,300 locations). Diageo’s July 2002 agreement to sell Burger King for $2.26
billion unraveled after a group composed of Texas Pacific Group, Bain Capital, and
Goldman Sachs Capital Partners backed out of the deal in November 2002. New suitors
reportedly interested in Burger King included Warren Buffett’s Berkshire Hathaway,
owner of Dairy Queen, although Buffett publicly denied he had an interest in buying
Burger King.
Almost one year earlier, Diageo had finally acquired the beverage assets of the
Canada-based Joseph E. Seagram Company (Seagram’s) in a hotly contested bidding war
with rival Allied-Domecq. Following the acquisition of Seagram’s liquor and wine
portfolio, Diageo became the largest spirits and wine holding company in the world. The
Diageo plc/3
acquisition included two major California brands, Sterling Vineyards and Beaulieu
Vineyards, as well as importing rights and/or partial ownership in about 200 French
wines and champagne, including many estate-bottled French Burgundies, wines from
Barton & Guestier (Bordeaux, France), and F.E. Trimbach wines (Alsace, France).
Although senior executives at Diageo wanted the conglomerate to be viewed by
the financial markets as a growth company, its recent growth in profits had primarily
come from divestitures and cost savings. Some security analysts predicted that the
underlying growth at Diageo would remain low relative to its peer group in the beverages
industry, despite the promise of its new ready-to-drink brands based on malt liquor
beverages. Diageo’s clout in global drinks markets had been continually undermined by
the group’s poorer performing regional brands. Diageo appeared extremely reluctant to
bite the bullet and dispose of these poor quality assets. For these reasons and others,
Diageo’s stock price performance had not yet met investors’ and investment analysts’
expectations.
Diageo and Seagram Chateau & Estate Wines (the acquired Seagram wine
brands) had combined estimated wine revenues of nearly $600 million. However, its
rivals in the wine industry were ahead or in close pursuit: E&J Gallo Winery held the
number one position at an estimated $1.5 billion in sales. Other rivals included: Foster’s
Group (Beringer Blass Wine Estates) at $818 million in sales; Constellation Brands at
$713 million, Robert Mondavi, at $481 million; and Kendall-Jackson Wine Estates at
$366 million. See Exhibit 2 for a comparison of the world’s largest winemakers, ranked
by sales.
Company background
Based in London, England, Diageo was created in 1997 through the merger of two British
companies, Grand Metropolitan plc and Guinness plc. Diageo — from the Latin word for
“day” and the Greek word for “world” — competed in the food, alcoholic beverages and
fast food restaurants sectors, although it had publicly stated its intention to exit from all
sectors except the beverage industry.
Prior to their 1997 merger, Scottish-based Guinness/United Distillers (Guinness)
and London-based Grand Metropolitan (GrandMet) owned beer and hard liquor (spirits)
brands. Guinness had well-known beer (Guinness Stout, Bass Ale and Harp Lager) and
spirit brands and experience distributing products in emerging markets such as Asia and
Latin America. Guinness, through its United Distillers (UD) division, also owned whisky
(Johnnie Walker, Bell’s) and Gin (Gordon’s, Tanqueray) brands and various alcohol
brands. GrandMet, through its International Distillers and Vintners (IDV) division, was a
holding company with vodka (Smirnoff), liqueur (Bailey’s), rum (Malibu) and Tequila
(through its partnership with the José Cuervo) brands. GrandMet also owned Pillsbury
Foods and the Burger King fast-food restaurant chain, enabling it to maintain a sizable
presence in the American market.
Both holding companies had foreseen a consolidation in the spirits/beer industry
and sought acquisitions of related lines of business. In April 1997, George Bull, chairman
of GrandMet and Tony Greener, chairman of Guinness, met in London and reached a
tentative agreement to merge the two companies.
Diageo plc/4
Publicly, both companies gave a number of reasons for the merger. The merger
would create one of the largest providers of branded food and beverages in the world.
The major reason for the merger, though, was the specific benefits or “synergies” to be
realized from combining the premium spirits brands of Guinness and GrandMet. Both
companies had extensive experience selling and distributing internationally and the
combined portfolio of brands covered the entire spirits spectrum. At the time it was
consummated, the merger was expected to save £175 million (roughly $263 million at an
exchange rate of £1 = $1.50), although this synergy cost savings was later estimated to be
£290 (about $435 million). One of the first consequences of the merger was that the
spirits divisions were combined to form a new division called United Distillers and
Vintners (UDV). Under the new Diageo holding company corporate structure, Guinness
Brewing became one division, UDV another, and Pillsbury and Burger King were
combined into a separate food division.
From 1997 to the year 2000, the merger was not received as favorably by the
investment community as Diageo had originally hoped. During this period, Diageo’s
stock price lagged behind the London Stock Index by 20 percent. By 2000, its food
division, which had been facing intense price competition, contributed about 35 percent
of total company operating profits. The Guinness and UDV divisions contributed the
remaining 65 percent of group operating profits. Exhibits 3-5 present recent financial
statements. Exhibit 6 presents company segment information by line of business and by
geographical region.
Hired two years after the merger, Paul Walsh, Diageo’s CEO, stated his intention
to focus on the ‘drinks’ business. See Exhibit 7 for a list of Diageo’s portfolio of
beverages brands. In 2000, Walsh merged Guinness Brewing with United Distillers and
Vintners to create a more focused core of beverages businesses (now named Guinness
UDV) upon which to build future earnings growth.
In 2000, Seagram Corporation was in the process of being acquired by Vivendi
Corporation. Vivendi was interested in Seagram’s entertainment-related assets and made
public its plan to sell off Seagram’s numerous liquor brands. At this juncture, Diageo
already owned twelve of the top one hundred spirits brands in the world. In seeking
Seagram’s liquor brands, CEO Walsh was moving Diageo further along the spiritsoriented strategy.
Meanwhile, Allied Domecq, another British alcoholic beverages conglomerate,
joined the chase for ownership of Seagram’s valuable drinks brands. Allied Domecq, the
number two distiller of alcohol in the world behind Diageo, had already entered into
negotiations with Seagram to purchase the Captain Morgan’s rum brand. Allied Domecq
was consolidating alcohol brands under one corporate umbrella and had already begun to
shed some of its core non-drinks businesses, including a donut chain in Spain and its pub
operations in the United Kingdom.
Diageo prevailed in the battle for Seagram’s, and in December 2000, Diageo and
the French company Pernod Ricard agreed to jointly purchase Seagram’s alcohol assets
and divide them between the two companies. Diageo paid $5 billion, while Pernod
Richard contributed $3.15 billion to the deal. Diageo stood to gain the Seagram whisky
(Seven Crown brand) and Seagram wine assets. These wine assets included Sterling
Vineyards (Napa Valley), Monterey Vineyard, and Mumm Cuvée Napa. It also included
Diageo plc/5
numerous wine brands with which Seagram had import agreements, such as Barton &
Guestier (France) and San Telmo (Argentina). Industry analysts predicted that many of
Seagram’s remaining smaller brands would then be divested.
A large stumbling block to completing the deal was the United States Federal
Trade Commission (FTC). Even though European and Canadian (Seagram’s home
country) regulators had approved the deal, the FTC was concerned that Diageo would
have a monopoly over the United States rum market if the deal went through. On October
23, 2001, the members of the FTC voted to seek a preliminary injunction to block the
sale. Joe Simmons, the director of the FTC’s bureau of competition, said at the time,
“This will create a dangerous likelihood of reduced competition and higher prices for
consumers of rum.” The FTC’s reasoning was that Diageo would own the second largest
rum producer in the United States (Seagram’s Captain Morgan brand) and the third
largest (Diageo’s Malibu brand). The FTC indicated that Diageo would probably have to
sell one of its rum brands in order to finalize the Seagram purchase.
In a press release following the FTC announcement, Paul Walsh stated, “We are
encouraged by the FTC’s willingness to have further discussions.”
In late October 2001, Diageo completed the sale of its Pillsbury unit to General
Mills, and plans were already underway to spin off its Burger King unit by summer 2002.
Diageo received a 33% minority stake in the newly merged General Mills and Pillsbury
as well as $4.5 billion in cash. Despite intense focus on what it now called its “global
priority” brands, Diageo had not yet succeeded in mitigating its high (relative to the
industry) financial and operating leverage, vestiges of the 1997 merger. However, some
industry analysts remained skeptical that Diageo wasn’t yet completely drinks/alcohol
focused. After the Pillsbury deal was announced, Morgan Stanley Dean Witter beverage
analyst Alexandra Oldroyd remarked, “People are disappointed that they [Diageo] didn’t
get out of the food [sector] altogether.” Walsh rebutted Oldroyd’s criticism by pointing
out that the General Mills cash-and-stock deal was the only one available since “not
many companies have $10.5 billion in cash.”
On December 21, 2001, the FTC gave its final approval to Diageo to complete the
Seagram deal, based upon Diageo’s promise to sell its Malibu Rum brand. Commenting
on the FTC’s decision, Paul Walsh said, “Last summer we announced Diageo’s strategic
realignment behind premium drinks. Our strategy is to focus on our priority brands in
their most important markets.” In February of 2002 Diageo sold Malibu rum to its rival,
Allied Domecq, for $795 million. Diageo also sold one of Seagram’s wine brands,
Mumm Cuvée Napa, to Allied Domecq for $39 million. By the end of the wheeling and
dealing, Diageo had strengthened its position in the rum market and had also procured
significant wine assets in terms of wineries, brands and export rights.
Overview of the wine industry
Wine, the German poet Goethe once wrote, “rejoices the heart of men, and joy is the
mother of virtue.” Wine has been a part of civilization for thousands of years. One legend
that is believed to have arisen in 3500 B.C. described how a tasting of accidentally
fermented grape juices turned King Jamshid of Sumer and thus the entire kingdom into
wine lovers. Regardless of the validity of legends concerning the origins of wine, grape
growing and winemaking were essentially the same in 2002 as they had become by the
Diageo plc/6
time of the Roman Empire (220 A.D.). Selected vines were planted and cared for, grapes
harvested and crushed, and grape juice transformed into wine through the process of
fermentation and then blending, bottling, and labeling. Over the centuries, grape growers
and winemakers developed small refinements and improvements in the procedure so as to
help the natural process along.
Wine is a complex beverage. It contains so many natural substances that scientists
are still discovering new facts about it (including the purported health benefits of red
wine on preventing heart disease, known as “the French paradox”). Its complexity has
accounted for the vast number of producers in the United States and around the world,
and the great variety of wines found in the marketplace. According to the Adams Wine
Handbook, there are more producers of wine than any other beverage product.
Unlike the production of beer or spirits beverages (e.g. whisky, vodka, rum and
gin), wine production is primarily an agricultural pursuit. A winemaker could really only
further improve the quality of the wine by using better quality grapes. A bad grape crop
(e.g., due to weather or pest infestation) could result in a shortage of supply and
inconsistent quality in the year-to-year vintages. On the other hand, a glut of grapes due
to a bountiful harvest would alleviate supply shortages but not always guarantee
consistency of quality.
Spirits and beer production were mostly process-related. A better technical
process in the efficiency of distilling, for example, could lead to larger quantities being
produced as well as improved taste and perceived quality of the final product. Raw
materials and ingredients supply and demand imbalances had little effect on quality and
quantity of production, due to the longer shelf lives of both raw materials inputs (e.g.
grains, yeast and water) and production outputs (e.g. beer, whisky, gin).
The nature and circumstances of wine, spirits, and beer consumption could be
varied as well. Wine consumption was historically part of daily life in Mediterranean
countries. Wine was consumed with the cuisine of the area, and the two complemented
each other. In other countries, however, wine was seldom a part of mainstream culture.
The markets of Japan, East Asia, and India consumed little wine, and future consumption
in those areas was confounded by the fact that traditional wine varieties were not known
to be well suited to the diverse cuisines of those regions. Hard liquor (whiskies) and beer
dominated alcohol consumption in the United States. In the United States in particular, a
strong lobby of anti-alcohol groups, along with other publicity regarding the effects of
alcohol on health and public safety, were considered by some industry observers to have
had a lasting negative impact on wine, beer and spirits sales and consumption. Antialcohol groups advocated stringent labeling and distribution requirements for all
alcoholic beverages.
The United States wine industry
The United States wine industry was composed of approximately 1,500 wineries in all 50
states; however, it was highly concentrated, with the top 10 wineries accounting for 70
percent (by volume) of United States production, according to the 1999 Adams Wine
Handbook. California dominated the United States wine industry with over 800 wineries,
which accounted for more than 90 percent of the wine produced in and exported by the
Diageo plc/7
United States. Washington, Oregon, and Idaho, had attracted approximately 200 wineries
and were developing an export presence and a reputation for quality wines.
During the 1990s several major trends emerged in the United States wine
industry. These trends included: 1) consolidation of the industry’s “three-tier”
distribution network (winery-wholesaler/distributor-retailer); 2) market segmentation due
to consumers’ “trading up” from inexpensive jug wines to premium-priced “varietal”
wines, such as Chardonnay, Merlot, and Cabernet Sauvignon;1 and 3) the emergence of
global markets for wines, notably the increasing share of foreign imports in the United
States wine market.
Distribution channels. Wine was sold through a three-tier distribution system.
Wineries (the first tier) or importers sold wine to wholesalers (the second tier), who
provided legal fulfillment of wine products to local retail businesses (the third tier) within
a certain state. Wine was a controlled substance, and laws in each state differed regarding
how wine could be sold. Typically, wine passed through the second tier via wholesalers
and distributors, making direct shipping to retailers or selling wine through the Internet
and wine-buying clubs difficult or impossible in all but 13 states. Thus, access to
wholesale distribution channels was considered by wineries to be critical. Meanwhile,
second-tier distribution channels were consolidating due to the advantages of scale and
scope afforded to larger distributors, and due to the fact that there was similar
consolidation underway in the third tier, primarily on the retail (off-premises) side.
The third tier of the distribution system consisted of retail and non-retail outlets.
According to Adams Wine Handbook, supermarkets, convenience stores, club stores, mail
order and Internet retailers, specialty stores, and wine clubs accounted for 78 percent of
total sales volume. Supermarkets alone accounted for 41 percent of retail wine sales and
were very influential in wine distribution. They were dominant in food and drink retailing
and made one-stop shopping an appealing concept for consumers. Furthermore,
supermarkets had considerable bargaining leverage with wholesalers. The role of
specialty stores in wine distribution diminished due to the increasing power of
supermarkets. Specialty stores’ share of retail wine sales was about 23 percent in 1998.
Nevertheless, specialty stores were not likely to disappear soon because they provided
superior customer service. Moreover, their sales staff had extensive knowledge of wines.
Specialty stores also carried specialty brands and limited production labels, attracting
wine connoisseurs and enthusiasts. On-premises sales via non-retail outlets such as
restaurants, hotels, and airlines accounted for the remaining 22 percent of wine volume in
the United States, according to Adams Wine Handbook. See Exhibit 8 for an estimated
breakdown of percentage sales for each distribution channel by country.
Market segmentation. “Table” wines were those with 7–14 percent alcohol content
by volume and were traditionally consumed with food. This was in contrast to other wine
products such as sparkling wines (champagnes), wine coolers and fortified wines, which
1
In 1983, laws in the United States had taken effect controlling what wineries could put on their labels. A
varietal wine meant one variety of grape—the name of a single grape could be used if not less than 75
percent of the wine was derived from grapes of that variety, the entire 75 percent of which was grown in
the labeled appellation of origin.
Diageo plc/8
were typically consumed as stand-alone beverages. Table wines that retailed at less than
$3.00 per 750 ml. bottle were generally considered to be generic or “jug” wines, while
those selling for more than $3.00 per bottle were considered “premium” wines.
Premium wines generally had a vintage date on their labels. This meant that the
product was made with at least 95 percent of grapes harvested, crushed, and fermented in
the calendar year shown on the label and used grapes from an appellation of origin (for
example, Napa Valley, Sonoma Valley, Central Coast, etc.).2 Within the premium table
wine category, a number of market segments emerged, based on retail price points.
“Popular premium” wines generally fell into the $3.00 - $7.00 per bottle range, while
“premium wines” retailed for $7.00 - $10.00 and “super premium wines” retailed for
$10.00 - $15.00. The “ultra premium” category sold for $15.00 - $30.00 per bottle. Any
retail price above $30.00 per bottle was considered “luxury premium.” See Exhibit 9 for
wine market segmentation by price point.
The Wine Institute estimated that 1999 United States wine market retail sales had
reached $18 billion, growing from $11.7 billion in 1990. The United States wine market
ranked third in the world behind France and Italy. However, the United States ranked
thirtieth in the world in per capita consumption of wine in 1999. The greatest
concentration of table wine consumers was in the 35 to 55-age bracket. About the same
proportion of men and women consumed wine. While all income levels consumed wine,
higher income was associated with greater wine consumption. In 1998, adults in families
earning over $75,000 annually represented 18.7 percent of the population and 31.4
percent of the domestic table wine consumption. Still, according to the Adams Wine
Handbook, barely more than 10 percent of the adults in the United States consumed 86
percent of all wine sold. See Exhibit 10 for wine consumption patterns in the United
States by year, 1981-2000, and Exhibit 11 for a table comparing wine consumption in the
top ten wine consuming nations in 2000.
Global markets. By 2000, the United States had become the second largest market
for exported wine and the fourth leading producer of wine in the world. In 2000, United
States wine exports to 164 countries totaled $560 million, of which more than 90% came
from California. Wine was produced commercially in over 60 countries with 23 percent
(by volume) of the wine produced in the world being exported to international markets
according to Wines & Vines. Leading wine producers included the “Old World” wineries
in France, Italy, and Spain, which were also the leading exporters. So-called “New
World” producers, such as the United States, Australia, Chile, Argentina, and South
Africa had been making both production and export inroads globally over the past few
decades. For example, France, Italy, and Spain all exported more than 25 percent of the
wine they produced, Australia exported over 40 percent, and Chile over 80 percent of its
2
Appelation of origin meant a general term for the label designations that indicated geographic origins of
bottled wines that met specific legal requirements. Any wine, at least 75 percent which was made of grapes
grown in the area designated on its label and that conformed to the laws and regulations relevant there, was
entitled to a country, state, or county appellation. § Title 27 Part 4 of the Code of Federal Regulations.
Washington, DC: Bureau of Alcohol, Tobacco and Firearms, Regulatory Agency, United States
Department of the Treasury.
Diageo plc/9
production. Many observers attributed Australia and Chile’s high rates of growth in
exports to the comparatively smaller size of their home markets. See Exhibits 12, 13, and
14 for year 2000 comparisons among wine producing nations, ranked by grapes
produced, volume of wine produced, and volume of wine exported.
Until the mid-1990s, the United States wine market remained largely a domestic
industry, with some imports from France, Italy, and Spain competing with United States
wineries. By 1999, however, imports had risen to 20 percent of the United States’ market,
seven percentage points above 1995, according to Wine Business Monthly. Australian and
Chilean wines began making rapid inroads into the United States market. For example,
from 1995 to 1999, Australia increased the value of its exports to the United States by
243 percent and Chile by 152 percent. Since 1995, the unfavorable balance of trade for
wine in the United States had increased by 78 percent. Tariffs and trade barriers played a
pivotal role in obstructing United States wineries’ access to various country markets.
Wine exports from the United States nevertheless grew consistently, from a base of
$137 million in 1990 to $548 million in 1999, according to the U.S. Department of
Commerce. Also, the United States wine industry enjoyed the highest rate of increased
wine exports (19.3 percent) in 1998, among the major wine producing countries listed in
the 2000 World Vineyard, Grape, and Wine Report. At the same time, United States
wineries also faced increasing threats to their domestic market share due to globalization
in the wine industry. Wines & Vines reported in 1999 that the United States had only 4.2
percent (by volume) of the world export wine market, while producing eight percent (by
volume) of the wine produced in the world. The United States wine industry exported
only 13 percent of the wine it produced, while other countries had more intensely
developed their export markets. Ten United States wineries accounted for more than 89
percent of exports. Nearly 50 percent of United States wineries exported their products.
The leading United States exporter by volume was Ernest and Julio (E&J) Gallo,
accounting for about half of United States exports and more than four times the volume
of its nearest export competitor. E&J Gallo exported approximately 13 percent of its total
production. United States wineries typically exported only a small percentage of their
production. Wente Vineyards was a notable exception. Wente had made exports a
cornerstone of its long-term strategy, as 60 percent of its annual case sales were in 147
different country markets.
By 2001, the super-premium and ultra-premium market segments had become
highly fragmented, composed of hundreds of individual, small to large wine-producing
operations, all competing to produce the most acclaimed wines each year. Although the
largest among these producers held advantages in scale and capital, the smallest wineries
were able to compete by consistently producing high quality wines in limited quantities
(known in the industry as “on-allocation”). On-allocation wines often gained critical
acclaim from wine enthusiasts, in part because of their scarcity. Smaller wine producers,
however, remained at a disadvantage when trying to compete for grape sources against
larger better-financed competitors, such as Foster Group’s Beringer Blass Wine Estates,
Robert Mondavi Corporation, Kendall-Jackson, Sebastiani Vineyards, E & J Gallo, and
Constellation Brands’ Canandaigua division. Many of these rival firms owned portfolios
of brands, invested in wine-making facilities and vineyards across California and abroad,
and produced wines across the price spectrum of the premium, super-premium, and ultra-
Diageo plc/10
premium market segments. The ability of a winery to produce brands in multiple
segments appealed to distributors and retailers, who were in turn hoping to sell broad
product lines to consumers.
Due to the globalization of markets and the creation of the European Union, trade
barriers were falling worldwide. The worldwide consolidation trend accelerated among
wineries and distributors. For example, Allied Domecq (United Kingdom), BRL Hardy
(Australia), Brown Forman Corporation (United States), Constellation Brands (United
States), Fosters Group (Australia) and Southcorp (Australia) had all courted larger
premium wineries in Northern California, such as Buena Vista and Kendall-Jackson, for
acquisitions. Wine industry analysts anticipated further consolidation in the wine industry
as large wine and alcoholic beverage conglomerates continued to acquire smaller winery
operations across national borders, in order to gain access to premium and ultra-premium
brands, as well as access to the growing markets for those brands.
Competition
Diageo Chateau & Estates Wines competed with two major types of businesses: standalone wineries and conglomerates. Diageo’s primary stand-alone winery competitors in
the United States included publicly-traded Robert Mondavi, and the privately held
Kendall-Jackson, E&J Gallo, and a host of small- to medium-size wineries primarily
based in Northern California. Large conglomerate competitors included Allied Domecq,
Brown-Forman’s Wine Estates division, Constellation Brands’ Canandigua division,
Fortune Brands, Foster’s Group’s Beringer Blass Wine Estates division, Louis Vuitton
Möet Hennesey (LVMH), Southcorp, and UST (formerly known as U.S. Tobacco).
Comparative historical financial data for many of Diageo’s publicly traded competitors in
the alcoholic beverages industry are shown in Exhibits 15 and 16.
Since the end of Prohibition in 1933, the jug wine segment had been almost
completely dominated both in the United States and global markets by E&J Gallo, a
family-owned wine business. However, during the 1980s, large alcoholic beverage
companies, such as Canandaigua and The Wine Group, entered and competed with E&J
Gallo in the jug wine market segment. Although Modesto, California-based E&J Gallo
was still the single largest wine producer in the world, comprising approximately 45
percent of California wine sales, it had failed to capitalize on changes in consumer
demand toward a preference for premium wines. In recent years, E&J Gallo, like many
other jug wine producers, sought to enter the premium wine market, choosing to develop
and launch new E&J Gallo brands from 2,300 acres of prime vineyards in Sonoma
County, acreage acquired to supply the development of new premium and ultra-premium
brands.
Besides the wine companies, several large food and beverage conglomerates, such
as Nestlé, Pillsbury, Suntory, PepsiCo, and Coca Cola, entered the premium market by
acquiring premium to ultra-premium wineries in the 1970s. However, during the 1980s,
each of these food and beverage companies divested their wine holdings, choosing
instead to focus on their core businesses. The beneficiaries of these divestitures were the
wine and alcoholic beverage companies that continued to build their portfolios of wine
brands. For example, while Diageo and Allied Domecq owned a host of other diversified
businesses, Constellation/Canandigua focused primarily on alcoholic beverages and
Diageo plc/11
related products such as bottled water. All three firms, however, were firmly rooted in
distilled spirits, and continued to expand their wine businesses.
Diageo’s Chateau & Estates division faced intense global competition in the
premium and ultra-premium wine segments. Rival beverage conglomerates such as
Brown-Forman, Foster’s Group, and Constellation/Canandigua continued to build their
wine portfolios through acquisitions and partnership arrangements. Diageo’s
conglomerate competitors had historically expanded their wine portfolios through
acquisitions of independent wineries as well as purchases of and majority interests in the
beverage divisions of other conglomerates. In 2000 and 2001, conglomerates began
divesting those satellite businesses that diverted resources from their core beverage
businesses, notably Allied Domecq’s sale of the majority of its food operations. Exhibit
17 presents a comparison of portfolios and recent strategic moves by several major
competitors in the wine industry.
At the wine industry’s annual trade conference in Sacramento, California in
January 2002, several industry experts predicted that the wine industry would continue to
grow despite the challenges of economic uncertainty, consolidation, and oversupply of
grapes. The experts opined that the accelerating trend of worldwide consolidation in the
producer and trade segments would be more than offset by several factors. These
included the continuing increase in the number of small wineries, a fundamental increase
in consumer demand, the increasing affluence of the wine-buying public, and the results
of decade-long efforts directed toward improving quality in production, sales, and
service. Vic Motto, of Motto Kryla, Fisher, a wine industry consultant, remarked:
Globalization has created a world market with a trend towards worldwide normalization
of taste and stylistic standards. Global communication networks have also created the
potential for small brands to access the same consumers as large ones. However, no one
has succeeded in building a global brand—yet.
Future uncertainties
At the time of Ray Chadwick’s promotion in December 2001 to President of the Chateau
& Estates wine division, another Diageo executive had said publicly:
With Ray Chadwick’s rich and long history in the wine business, he will bring a thorough
understanding of what it takes to be successful in a competitive industry. Additionally,
Ray has a command of the intricate financial issues, as well as the strategic vision critical
to leading a portfolio that will contain some of the finest wines in the world. Key to being
successful in the wine industry is how well you build and maintain relationships.
As Chadwick considered changes in the portfolio for his Chateau & Estates wine
division, many observers still questioned Diageo’s wisdom of entering the wine industry
at all, with its comparatively (to spirits and beer) lower profit margins and the industry’s
increased reliance on an uncertain grape supply and consumer demand. Exhibit 18
presents Chadwick’s biography.
In a January 2002 interview with a reporter at Wine Business Insider, Chadwick
spoke of Diageo’s philosophy behind entering the wine business:
Diageo plc/12
Wines are a very attractive consumer segment with a strong growth potential. Wine is
definitely a complement to Diageo’s strategy to be a total beverage alcohol company.
Diageo is very focused on the consumer and we think about “consumer need” states and
what types of beverage alcohol consumers tend to drink in these various need states.
There’s one need state which is the dinner table: wine tends to be the choice when people
choose to consume beverage alcohol. When people sit at the table and they eat, they tend
to use wine.
Still, some observers argued that the wine market required a completely different set of
skills from Diageo’s other beverages brand businesses, and that wine was more about
vintage than brand, so there would be little transfer of skills in the Seagram acquisition.
An anonymous critic, quoted in Marketing Week, said:
I would question the long-term growth potential of a company that moves from being a
conglomerate with lots of diverse interests to being a business focused purely on highvalue drinks. The alcoholic drinks market is not a high growth industry — the only way
to grow is to take market share from someone else.
However, other observers believed that global trends favored Diageo. As beverages
analyst Alan Gray of ING Barings Charterhouse Securities pointed out in the same
Marketing Week article, “There are growth and cost benefits to come — Diageo can sell
the acquired brands through its own distribution network.”
In an interview with Wine Business Insider in January 2002, Chadwick commented
on Diageo’s future relationships with its distributors:
Let me address this very directly. [We want] to develop a more efficient and effective
way of bringing [our] total portfolio of products — including wines — to market. We
want to create a new way of working with our distributors and brokers. Over the coming
months we will begin a process with our distributors and brokers to develop this new
kind of relationship. And we can foresee the possibility of adjustments to our distributor
network in the next year or eighteen months, but that process is just beginning. In broad
strokes, the new relationship will be more collaborative, more fact-based, more longterm, and more focused on delivering greater value to consumers and customers:
understanding the consumer better, understanding customers and consumers better, for
example, working with our distributors to really fine tune our channel strategy. I can
honestly say to you that no decisions have been made yet.
Despite all the economic, social and political turmoil that marked 2001, global
retail dollars from the sale of wine, beer and diversified spirits increased approximately
3.5% to $127.3 billion (from $122.8 billion in 2000), according to Beverage Dynamics.
Spirits retail sales increased 2.9%, from approximately $37.3 billion to more than $38.4
billion. Wine retail sales grew about 4.4%, from $18.1 billion to just under $19.0 billion.
Beer dollar volume sales also rose, up 3.7% from $67.4 billion in 2000 to almost $70
billion in 2001. Although the percentage gains over the previous year were smaller in
2001 than in 2000, consumption trends favored higher-end products.
Diageo plc/13
A few months before the 2002 sale of the Glen Ellen brand to The Wine Group,
Chadwick explained the segmentation of Diageo’s wine brands to Wine Business Insider:
Super-premium wines are growing really well. The $12-$15 category continues to be a
really attractive category for us. The economy and the events of September 11 have
caused some business to shift from on-premise to off-premise. People are staying home
but they’re still drinking wine at home with friends at the table. The off-premise sector
has been strong. On-premise was relatively weak for a while and has begun to come back
in many areas. There’s no doubt that the low end of the business has been soft, but again,
that $12-$15 category — where we’ve got some really good brands — continues to be
very strong. BV [Beaulieu Vineyards] and Sterling are two of the great Napa Valley
brands. We’ve got a stable of other California brands: Glen Ellen, the Monterey
Vineyard, Blossom Hill, Mumm Cuvée Napa. On the European side, we have a worldrenowned collection of great labels from Bordeaux and Burgundy, and we also have
B&G French wines. And our other French relationships — most notably Trimbach from
Alsace — we expect will continue to grow.
Question marks still remained regarding Diageo’s future in a global market where
economic uncertainties increased the difficulty of forecasting and planning future growth.
Much of the Chateau & Estates division’s success would depend on the basic skills of
marketing: well timed innovation, informed analysis of social and demographic trends,
and leveraging strong distribution, particularly in the United States. Chadwick wondered
how to manage the wine brands more profitably, leveraging Diageo’s formidable
resources and history of successfully marketing other beverages. In the January 2002
Wine Business Insider interview, Chadwick discussed the future of his portfolio of wine
brands:
BV will remain BV and Sterling will remain Sterling. Each will operate independently
and each will retain their unique character. Within our portfolio, they complement each
other. BV was founded 100 years ago, it is high end in certain appellations, notably
Carneros and Rutherford. Georges de Latour (the late founder) is an icon in the industry.
Sterling was the first Napa Valley Winery to bottle a vintage-dated varietal — Merlot —
again, it has a unique set of vineyards. Our plan is to have a focused wine division with
dedicated sales and marketing teams. We’re also going to have dedicated finance, human
resources and operations departments within the wine division. Any overlap is minimal.
As you may be aware, Guinness UDV markets wines together with spirits. And those
individuals that focused on wines are being considered for opportunities within Chateau
& Estates. We’re still putting the company together, but we intend to have a very, very
strong and large organization. We are very alert to opportunities to expand our current
business, but the economics have to be right. We have to provide returns to our
shareholders.
Still, Chadwick wondered, should Diageo lead or follow other conglomerates into
further diversification outside of its current French and U.S. wine holdings?
Diageo plc/14
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Adams (1999). Adams Wine Handbook, Adams Business Media, New York.
Anon. (2001). “2000 California wine sales up - for seventh consecutive year.”
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Anon. (2001). “US clears $8 billion Seagram deal.” http://news.bbc.co.uk, December 19.
Anon. (2000). “Diageo Confirms Pillsbury Sale.” http://news.bbc.co.uk, July 17.
Anon. (2001). “Regional spotlight: Australia,” http://www.winepros.com/, accessed 2/15/02.
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Business Insider, January.
Brandes, R. (2002). “Growth brands,” Beverage Dynamics, 114(2), (March), 14-23.
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North Bay Economic Outlook conference, Rohnert Park. CA, February 2002.
Echikson, W. et. al. (2001). “Wine war.” Business Week, September 3, 54-60.
Fish, T., & Gaffney, J. (2001). “Sale of Seagram’s Wines & Spirits blocked by U.S. regulators.”
http://www.winespectator.com, October 24.
Foster’s Group Inc. Annual Reports 2000 and 2001.
Gaffney, J. (2002). “Diageo sells Glen Ellen for $83 million.” http://www.winespectator.com,
March 18.
Gomberg-Fredrikson. (1999). 1999 Annual Wine Industry Review, Gomberg, Fredrikson &
Associates, 703 Market Street, Suite 1602, San Francisco, CA 94103.
Lamb, R. & Mittleberger, E. (1984). In Celebration of Wine and Life. New York: Drake
Publishers.
Lucas, G. (2002). “Small wine merchants uncork anger.” San Francisco Chronicle, April 16,
A13.
Mansson, P-H. (2001). “Who really controls the vineyards of France.” Wine Spectator, November
30, 89-92.
Manuel, D. (2001). “What’s a premium wine?” http://www.supermarketguru.com, November 19.
Motto Kryla Fisher. (2002). “High-end California wine sales increase 10% in 2001,” Unified
Grape Symposium, Sacramento, CA, January 2002.
Quackenbush, J. (2002) “Diageo plans Napa HQ.” North Bay Business Journal, January 7, 1.
Rachman, G. (1999).”The globe in a glass.” The Economist. December 18, pp. 91-105.
Radio National. (2001). “The business report: Fosters’ wine on the march,” January.
Robert Mondavi, Inc. (2001), press release, July 25.
Simon, A. (1957). The Noble Grapes and The Great Wines of France. NY: McGraw-Hill.
Standard & Poor’s. (2001). Industry Surveys: Alcoholic Beverages & Tobacco. March 1.
Diageo plc/15
Exhibit 1—Diageo plc—Stock Price Movements, 1997-2002
Diageo
2000
2001
2002E
2003E
19.9x
2.8%
19.3%
8.5%
17.3x
3.0%
20.1%
15.1%
17.0x
3.2%
18.4%
1.6%
14.3x
3.4%
20.7%
14.5%
(NYSE:DEO)
P/E ratio
Dividend yield
ROI
Core EPS growth
Sources: www.StockCharts.com, accessed October 28, 2002; Diageo company reports, and
Salomon Smith Barney estimates as of October 25, 2002.
Diageo plc/16
Exhibit 2—World’s Biggest Wine Makers, ranked by sales ($ millions)
Rank
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Company1
Country
Wine Sales
in CY 2000
E&J Gallo Winery2
Foster’s Group3
Seagram4
Constellation Brands5
Southcorp
Castel Frères
Diageo6
Henkell & Sonlein
Robert Mondavi
Kendall-Jackson
U.S.
Australia
Canada
U.S.
Australia
France
Britain
Germany
U.S.
U.S.
$1,500
818
800
712
662
625
590
528
481
366
NOTES
1
List excludes France’s LVMH, which earned more than 75% of its $1.6 billion wine sales in
champagne.
2
Includes Gallo of Sonoma (Healdsburg, CA) with estimated sales of $190 million.
3
Includes Beringer Blass Wine Estates (Napa, CA) with estimated sales of $440 million.
4
Includes Seagram Chateau & Estates (Napa, CA) with estimated sales of $273 million.
5
Includes Franciscan Estates (Rutherford, CA) with estimated sales of $200 million.
6
Includes Guinness (Rutherford, CA) with estimated sales of $303 million.
Sources: Business Week, September 3, 2001, p. 57; North Bay Business Journal estimates (June
11, 2001).
Diageo plc/17
Exhibit 3 — Diageo plc, Summary Statements of Income and Expenses, 1998-2002
FY June 30
All quantities converted from £ sterling to dollar amounts in millions except per share amounts.
2002
2001
2000
1999
Turnover - continuing operations
Turnover - acquisitions
Turnover - discontinued operations
Total turnover
Operating costs
Operating profit
Share of profits of associates
Trading profit
Disposal of fixed assets
Sale of businesses – cont. operations
Merger expenses
Sale of businesses – discont.
operations
Utilization of provision
Total
Interest payable (net)
Profit on ordinary activities before tax
Taxation on profit on ordinary activities
1998
$13,881
860
2,183
16,924
(14,444)
2,480
424
$12,933
—
6,299
19,232
(16,422)
2,810
305
$18,010
—
—
18,010
(15,307)
2,704
296
$18,716
—
—
18,716
(16,309)
2,407
286
$29,229
—
176
29,405
(25,803)
3,602
452
2,903
(33)
749
3,115
29
42
3,000
8
(255)
2,693
(16)
(165)
4,054
(3)
(869)
141
483
(77)
—
—
452
415
688
(807)
3,934
(1,510)
(599)
3,504
(949)
(525)
2,584
(653)
(551)
2,202
(608)
149
(514)
2,328
(698)
Profit on ordinary activities after tax
$2,555
$1,930
$1,593
$1,630
$2,424
Minority interests - equity
Minority interests - non-equity
Profit for the year
Dividends
Transferred to reserves
(74)
(57)
2,426
(1,151)
1,275
(65)
(55)
1,810
(1,126)
684
(56)
(56)
1,481
(1,082)
399
(78)
(57)
1,495
(111)
(90)
2,223
$0.73
$0.73
$0.54
$0.54
$0.44
$0.44
$0.42
$0.42
$0.57
$0.57
Earnings per share - basic
Earnings per share - diluted
NOTE: Entries for Fiscal Years 2001 and 2002 have been restated to account for Goodwill from
the acquisition of Seagram’s drinks businesses.
Source: Diageo Annual Reports
Diageo plc/18
Exhibit 4— Diageo plc, Consolidated Balance Sheets, 1998-2002
FYE June 30
All quantities converted from £ sterling to dollar amounts in millions.
2002
2001
Fixed Assets
Intangible assets
Tangible assets, net
Investments
Total fixed assets
Current Assets
Inventory stocks
Debtors due within one year
Debtors due after one year
Debtors subject to fin. arrangements
Investments
Cash at bank & in hand
Total current assets
Creditors due within one year
Borrowings
Other creditors
Creditors due after one year
Borrowings
Other creditors
Provision for liabilities & charges
Capital and reserves
Called up share capital
Share premium account
Revaluation reserve
Capital redemption reserve
Profit & loss account
Reserves attributable to equity
shareholders
Shareholders’ funds before minority
interest
Minority interest - equity
Minority interest - non-equity
Total minority interests
Total capital & reserves
Source: Diageo Annual Reports
2000
1999
1998
$8,151
3,818
4,775
16,744
$8,028
4,764
2,210
15,002
$8,025
4,670
2,270
14,965
$8,232
5,043
2,149
15,424
$7,854
4,994
2,067
14,915
3,474
3,314
1,815
3,348
2,948
1,926
3,246
2,799
1,801
59
3,494
3,064
2,047
60
2,394
10,997
2,763
10,985
1,613
9,518
1,741
10,406
3,715
3,384
1,660
30
804
4,159
13,752
(5,577)
(5,468)
(11,045)
(5,990)
(5,243)
(10,646)
(4,652)
(4,969)
9,621)
(6,196)
(5,605)
(11,801)
(7,849)
(5,855)
(13,704)
(5,567)
(74)
(5,990)
(144)
(5,638)
(152)
(5,387)
(159)
(4,808)
(404)
(5,640)
(1,221)
9,834
(6,134)
(1,094)
8,594
(5,790)
(1,053)
8,019
(5,546)
7,288
(5,212)
(1,171)
8,580
1,395
1,986
194
4,518
1,481
1,971
206
4,431
(404)
1,502
1,950
209
4,475
(988)
1,574
2,012
275
4,659
(2,131)
1,892
1,863
316
4,772
(1,151)
7,607
6,204
5,646
4,814
5,799
9,002
276
557
833
9,834
7,685
311
599
909
8,594
7,148
256
615
871
8,019
6,388
284
616
900
7,288
7,691
281
608
889
8,580
Diageo plc/19
Exhibit 5—Diageo plc, Consolidated Cash Flows, 2001 and 2002
All quantities converted from £ sterling to dollar amounts in millions.
FYE Jun 30
2002
Net Operating Cash Flow
Net Investing Cash Flow
Net Financing Cash Flow
Net Change in Cash
Depreciation and Amortization
Capital Expenditures
Cash Dividends Paid
2001
$ 2,361.0
(785.0)
(1,435.0)
2000
$ 2,108.0
(59.0)
(2,256.0)
$ Million
Net cash inflow from operating activites
Dividends received from associates
Returns on investments and servicing of finance
Interest paid (net)
Dividends paid to equity minority interest
Taxation
Capital expenditures and financial investment
Purchase of tangible fixed assets
Purchase/sale of own shares
Sale of fixed assets
Free cash flow
Acquistions and disposals
Purchase of Seagrams spirits and wine businesses
Purchase of other subsidiaries
Sale of the Pillsbury Company
Sale of other subsidaries and businesses
Sale of associates
Equity dividends paid
Cash flow before management of liquid resources
and financing
Management of liquid resources
Financing
Issue of share capital
Own shares purchased for cancellation
Redemption of guaranteed preferred securities
(Decrease)/increase in loans
(Decrease)/increase in cash in the year
Movement in net borrowings
(Decrease)/increase in cash in the year
Cash flow from change in loans
Change in liquid resources
Change in net borrowing from cash flows
1999
$ 589.0
191.0
(552.0)
Year Ended
June 30, 2002
$ Million
3,012
131
(540)
(60)
1998
$ 3,201.7
1,498.4
(4,071.7)
Year Ended
June 30, 2001
$ Million
$ Million
3,414
152
(669)
(47)
(600)
(467)
(878)
(96)
57
(716)
(345)
(659)
(81)
65
(917)
1,159
(5,300)
(89)
6,269
1,382
-
(675)
1,830
(204)
18
29
2,262
(1,137)
(158)
(1,088)
2,285
138
585
(858)
17
(2,487)
(206)
47
(162)
(59)
597
(2,676)
(253)
423
150
(225)
206
(138)
(157)
150
(597)
858
411
Diageo plc/20
Exchange adjustments
Non-cash items
(Increase)/decrease in net borrowings
Net borrowings at beginning of the year
Net borrowings at end of the years
Source: Diageo Annual Reports and 10-K.
401
(269)
(25)
(8,219)
(8,244)
(344)
32
99
(8,318)
(8,219)
Diageo plc/21
Exhibit 6 — Diageo plc, Selected Financial Ratios, 1998-2002
2002
Profitability
Return On Total Equity (%)
Return On Assets (%)
Return On Invested Capital (%)
Cash Earnings Return On Equity (%)
Cost of Goods Sold To Sales (%)
Gross Profit Margin (%)
Operating Profit Margin (%)
Pretax Margin (%)
Net Margin (%)
Activity
Assets Per Employee ($)
Assets Turnover (x)
Inventory Turnover (x)
Net Sales To Gross Fixed Assets (x)
Capital Expend Pct Sales (%)
Leverage
Total Debt Pct Common Equity (%)
LT Debt Pct Common Equity (%)
LT Debt Pct Total Capital (%)
Equity Pct Total Capital (%)
Total Debt Pct Total Assets (%)
Total Capital Pct Total Assets (%)
Liquidity
Quick Ratio (x)
Current Ratio (x)
Cash Ratio (x)
Receivables Pct Current Assets (%)
Inventories Pct Current Assets (%)
Inventories Days Held (days)
Source: Diageo Annual Reports
2001
2000
1999
1998
25.61
25.11
20.55
13.22
9.13
8.03
7.02
6.64
12.15
10.92
9.45
8.90
36.66
38.05
21.36
21.66
75.05
70.67
66.24
59.72
20.29
26.12
30.34
36.53
19.64
16.20
18.49
18.50
13.88
10.61
12.88
14.05
11.18
8.22
9.49
9.03
$344,496
0.64
3.72
2.18
4.00
$333,540
0.78
3.97
2.61
4.61
$350,909
0.64
3.00
2.07
5.38
$381,522
0.57
2.56
2.12
6.42
152.17
149.29
187.77
169.56
80.29
82.10
87.74
64.76
41.74
42.17
43.38
36.19
51.98
51.37
49.44
55.89
43.83
42.82
45.65
44.41
55.41
55.83
49.17
46.86
0.50
0.43
0.39
0.56
0.85
0.80
0.71
0.88
30.54
20.90
20.82
41.04
28.85
32.17
33.81
22.00
37.01
42.06
41.80
30.72
96.71
90.78
120.16
140.58
Diageo plc/22
Exhibit 6 — Diageo plc, Segment Analysis, 2002, 2001, and 2000 (millions, British £ sterling)
FY 2002
Revenue
Oper.
Profit
FY 2001
Total
Assets
Line of Business
Premium Drinks
Quick Service Rest.
Packaged Food
TOTAL
Geographical Area
Europe
North America
Asia Pacific
Latin America
Rest of World
TOTAL
NOTE: Percentages may not add up to 100% due to rounding.
Source: Diageo Annual Reports
Revenue
FY 2000
Oper.
Profit
£ 7,580 59%
Revenue
£ 1,432 67%
£ 5,123 48%
Oper.
Profit
Total
Assets
£ 7,117 60%
£ 1,286 65%
£ 4,972 49%
1,356 13%
8%
1,432 13%
8%
202 10%
4,199 33%
518 24%
4,077 38%
3,812 32%
492 25%
3,734 37%
£ 12,821 100%
£ 2,127 100%
£ 10,632 100%
£ 11,870 100%
£ 1,980 100%
£ 10,062 100%
£ 4,073 32%
£ 614 29%
£ 3,763 35%
£ 4,181 35%
£ 585 30%
£ 3,804 38%
6,401
50%
47%
6,193
58%
5,639
48%
956
48%
5,696 57%
990
8%
206 10%
246
2%
886
7%
170
9%
183
2%
776
6%
188
9%
216
2%
697
6%
165
8%
252
3%
581
5%
118
6%
214
2%
467
4%
104
5%
127
1%
1,042
8%
Total
Assets
£ 12,821 100%
177
1,001
£ 2,127 100%
£ 10,632 100%
941
£ 11,870 100%
£ 1,980 100%
£ 10,062 100%
Diageo UDV/23
Exhibit 7 — Diageo’s Portfolio of Drinks Businesses and Priority Brands
Global Priority Brands in 2002
Brand
Recent news
Johnnie Walker
Baileys
J&B
Tanqueray
Smirnoff Red
Smirnoff flavours
Cuervo
Guinness
Captain Morgan
net sales up 4%
volume up 10%
volume up 5% in Spain
re-launched with marketing spend up 11%
volume up 7%.
now 1 million cases; Ice up 98%
US market share up 1.1%
creating a platform for future growth
growing volume and market share in US
Local priority brands in 2002 and 2003
Brand
Market
Archers
Beaulieu Wines
Bells
Bells
Buchanan’s
Buchanan’s
Budweiser
Bundaberg rum
Cardhu
Carlsberg
Dimple/Pinch
Goldschlager
Gordons gin
Gordons gin
Harp
Old Parr
Red Stripe
Romana Sambuca
Rumple Minze
Smithwicks
Great Britain
United States
Great Britain
South Africa
United States
Venezuela
Ireland
Australia
Spain
Ireland
Korea
United States
Great Britain
United States
Ireland
Japan
Jamaica
United States
United States
Ireland
Brand
Added for 2003
Market
Cacique*
Crown Royal*
Malta
Myers’s Rum*
Pilsner
Seagram’s 7*
Seagram’s VO*
Sterling Vineyards*
Tusker
Windsor Premier*
Spain
United States
Africa
United States
Kenya
United States
United States
United States
Kenya
Korea
Source: Diageo’s presentation to Securities’ Analysts and Investors, London, September 5, 2002.
Diageo UDV/24
Exhibit 8 — Wine Distribution Channels by Country, Year 2000
HORECA* (%)
Supermarkets
Specialists
Other**
Western Europe
Austria
Belgium
France
Greece
Germany
Italy
Netherlands
Portugal
Spain
UK
26
44
28
30
20
14
12
10
57
20
41
39
38
36
43
34
62
81
33
59
4
7
19
20
7
8
21
5
7
18
30
10
14
14
30
44
5
6
4
2
Americas
Argentina
Canada
Chile
US
15
24
45
22
10
5
26
41
2
65
14
23
75
6
14
14
Other
South Africa
Australia
Japan
34
57
61
28
15
7
34
19
17
3
9
15
*HORECA = Hotels, Restaurants, and Cafes
**Other includes direct sales, mail orders, corner and food shops
Source: Euromonitor
Exhibit 9—United States Consumers’ Wine Purchases in Food Stores, Year 2000
AC Nielsen/Adams
Category
Total Wine
Up to $3
$3 to $7
$7 up to $10
$10 up to $14
$14 and over
Volume
Share
Case
Removals
Change
(000)
Volume %
Change
Revenue %
Change
100%
39%
41%
13%
5%
2%
1,266
-920
539
1,298
468
146
3%
-4%
3%
22%
23%
18%
10%
-4%
3%
24%
25%
24%
Sources: Gomberg-Fredrikson & Associates’ data, compiled from AC Nielsen/Adams.
Diageo UDV/25
Exhibit 10 — U.S. Per Capita Wine Consumption, 1981-2000
Year
Total Wine
per Resident,
Gallons
Total
Wine,
Gallons
Total
Table Wine,
Gallons
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
2.01
2.02
1.95
1.94
1.89
1.77
1.77
1.74
1.87
1.85
2.05
2.11
2.24
2.39
2.43
2.43
2.34
2.25
2.22
2.20
565
551
526
520
500
464
459
449
476
466
509
524
551
581
587
580
555
528
514
506
505
482
466
461
439
404
395
381
405
394
423
432
457
481
487
378
401
402
397
387
Source: The Wine Institute.org. Key Facts.
Exhibit 11 — Top 10 Wine Consuming Nations, 2000
Country
France
Italy
USA
Germany
Spain
Argentina
United Kingdom
China (inc. Taiwan)
Russia
Romania
Wine
Consumption
(million liters)
Share of World
Consumption %
3,290
3,080
2,140
1,956
1,450
1,276
915
553
550
521
15.0
14.0
9.8
8.9
6.6
5.8
4.2
2.5
2.5
2.5
Source: G. Dutruc-Rosset, extracted from the Report on World Vitiviniculture. Presented at the
World Congress of the OIV in Adelaide, 12 October 2001.
Diageo UDV/26
Exhibit 12 — Top 10 Grape Producing Nations, ranked by grape production, 2000
Country
Grape production
(million tons)
% Share of world
production
8,871
7,627
6,792
6,641
3,400
3,013
2,300
2,191
1,900
1,408
14.2
12.2
10.9
10.6
5.4
4.8
3.8
3.5
3.0
2.5
Rest of world
18,266
29.1
World
62,409
100.0
Italy
France
USA
Spain
Turkey
China (inc. Taiwan)
Iran
Argentina
Chile
Germany
Note: percentages may not add up to 100% due to rounding.
Source: G. Dutruc-Rosset, extracted from the Report on World Vitiviniculture. Presented at the
World Congress of the OIV in Adelaide, 12 October 2001.
Exhibit 13 — World’s Top 10 Wine Producing Nations, ranked by volume, 2000
Wine production
(million liters)
% Share of world
production
France
Italy
Spain
USA
Argentina
Germany
Australia
South Africa
Portugal
Chile
5,754
5,162
4,113
2,210
1,254
985
859
695
669
667
20.9
18.8
15.0
8.0
4.6
3.6
3.1
2.4
2.4
2.4
Rest of world
5,123
18.8
27,491
100.0
Country
World
Note: percentages may not add up to 100% due to rounding.
Source: G. Dutruc-Rosset, extracted from the Report on World Vitiviniculture. Presented at the
World Congress of the OIV in Adelaide, 12 October 2001.
Diageo UDV/27
Exhibit 14 — Top 10 Exporters of Wine in the World, 2000
Country
Italy
France
Spain
USA
Australia
Chile
Germany
Portugal
Moldavia
South Africa
Rest of world
World
Wine exports
(million liters)
% Share of
world exports
1,780
1,508
865
297
285
270
254
210
152
139
27.5
23.3
13.4
4.6
4.4
4.2
3.9
3.2
2.3
2.1
714
11.0
6,474
100.0%
Note: percentages may not add up to 100% due to rounding.
Source: G. Dutruc-Rosset, extracted from the Report on World Vitiviniculture. Presented at the
World Congress of the OIV in Adelaide, 12 October 2001.
Diageo UDV/28
Exhibit 15—Selected Financial & Operating Highlights of Global Alcohol & Beverage Conglomerates, 1999 and 2000
Sales ($ millions)
2000
ROE (%)
2001
2000
ROA (%)
2001
2000
HQ Location
2001
Allied-Domecq1
Bristol, England
$ 4,318
$ 6,154
$ 3,948
$ 516
$476
$114
117.7
N/A
12.7
N/A
Brown-Forman
Louisville, KY
2,180
2,009
2,134
233
202
218
19.6
20.8
19.3
19.3
Fairport, NY
3,154
2,340
1,497
136
97.3
77.4
14.4
15.8
3.9
3.3
Fortune Brands
Lincolnshire, IL
5,678
5,579
5,844
385
(891)
(138)
18.9
-6.2
7.5
-2.3
Foster’s Group2
Australia
2,244
1,874
1,656
256
236
203
12.2
18.5
9.0
12.8
Louis Vuitton
Moet Hennessy
(LVMH) 3
Paris, France
1,168
8,589
10,909
10
696
680
0.2
10.3
2.0
8.4
Australia
1,375
1,441
1,554
118
168
11
15.2
N/A
N/A
N/A
1,670
1,548
1,512
492
442
469
84.6
163.3
24.4
26.8
Constellation
Brands, Inc.
Southcorp2
UST
Greenwich, CT
1999
Net Income ($ millions)
2001
2000
1999
Company
N/A = Not Available.
1
Converted from British £ sterling to U.S. dollars at a rate of £1 = $1.50 U.S.
Converted from Australian dollars to U.S. dollars at a rate of $1 Australian = $0.55 U.S.
3 Converted from Euros to U.S. dollars at a rate of 1 ¤= $0.95 U.S.
2
Sources: Company reports, Value Line, and WSRN.com, accessed October 25, 2002.
Diageo UDV/29
Exhibit 16 — Selected Stock Price and Financial Data for Publicly-Traded U.S. Alcohol Beverage Companies, 2002
Stock
Ticker
Symbol
Recent
stock
price
P/E
Ratio
(x)
12 mo.
Trail
EPS
30 day
price
change
(%)
1 year
price
change
(%)
Brown-Forman Corp.
Chalone Wine Group
Constellation Brands
Diageo plc (ADS)
Robert Mondavi Corp.
BF.B
CHLN
STZ
DEO
MOND
$75.00
8.65
25.50
46.14
31.86
23
62
14
15
14
$3.29
0.14
1.82
2.98
2.21
13%
8%
0%
-8%
6%
23%
-10%
19%
15%
-1%
Div. Stk. Mkt.
Yield Capitaliz.
Beta (%) ($ million)
0.44
0.25
0.30
0.39
0.82
1.9
Nil
Nil
3.1
Nil
2,963
104
1,994
39,346
305
Return
on
equity
(%)
Pre-tax
margin
(%)
LTD to
Capital
(%)
18.3
2.8
17.5
24.8
6.1
17.8
6.5
8.2
13.4
9.3
2.8
38.6
53.6
40.5
41.0
Source: Compiled by casewriters in October 2002 from statistics prepared by Richard Joy, Standard & Poor’s Rankings.
Diageo UDV/30
Exhibit 17—Profiles of Diageo’s Major Wine Industry Competitors: Brand Portfolios and Recent Strategic Moves
Company
Portfolio Brands—Wine
Other Portfolio Brands
Annual Wine Production
Recent Strategic Moves
Allied Domecq
Clos du Bois, Callaway Coastal,
Atlas Peak, William Hill, Bodegas
Balbi, Graffigna & Ste Sylvie,
Montana, Marques de Arienzo,
Harveys, Cockburn’s, La Ina, Mumm
and Perrier-Jouet.
Spirits: Ballantine’s, Beefeater,
Kahlua, Sauza, Stolichnaya, Tia
Maria, Maker’s Mark, Courvoisier
Canadian Club
Fast-food: Dunkin’ Donuts, BaskinRobbins and Togo’s
Atlas Peak: 40,000 cases; 500 acres
owned
Callaway: 340,000 cases; 40 acres
owned, 605 leased or controlled
Clos du Bois: 1.4 million cases; 640
acres owned, 160 leased or controlled
Unsuccessfully bid to acquire
Seagram’s drinks businesses assets in
2001.
Constellation (Canandigua)
Almaden, Arbor Mist, Franciscan
Oakville Estate, Simi, Estancia,
Talus, Taylor, Vendange
Spirits and Beer: Paul Masson
brandy, Corona Extra, Modelo
Especial, St. Pauli Girl, Alice White,
Black Velvet, Fleischmann’s,
Schenley, Ten High, Stowells of
Chelsea
30 million cases; 765 acres owned,
2,600 leased or controlled.
Acquired Ravenswood Estates
(Sonoma, CA) for $148 million in
cash and assumed debt in July 2001.
E & J Gallo
E & J Gallo (Modesto, CA): Gallo,
Thunderbird, Carol Rossi, Bartles &
Jaymes
None
E & J Gallo (Modesto, CA): 90
million cases (est.)
Is world’s largest wine producer and
leading U.S. wine exporter, selling in
85 countries; wines also account for
over 25% of all U.S. wine sales;
exports one million bottles annually
to the French market; plans to create
first-mover advantage in the Indian
wine market.
Gallo of Sonoma (Healdsburg, CA):
E&J Gallo Estate, Gallo of Sonoma,
Anapamu, Marcelina, Rancho
Zabacho, Indigo Hills
Gallo of Sonoma (Healdsburg, CA):
1 million cases (est.); 3,000 acres
Kendall-Jackson
Kendall-Jackson, Pepi, La Crema,
Edmeades Estate, Camelot, Tapiz,
Villa Arceno, Calina
None
4 million cases; 12, 000 acres
Launched new Australian line,
Yangarra Park in 2001; in May 2001,
rejected several takeover bids,
including one by BFC; also lost fiveyear battle with Gallo over alleged
theft of trade secrets.
Robert Mondavi
Robert Mondavi Winery, Robert
Mondavi Coastal, Woodbridge, La
Famiglia de Robert Mondavi, Byron,
Arrowood, Vichon Mediterranean,
Opus One, Caliterra, Luce
None
Unknown; 7,730 acres
Formed joint ventures with producers
in France, Chile, and Italy; created a
$10 million wine country attraction
in 2001 at Disney’s California
Adventure theme park; began shift
from vineyard development to
production — internal grape supply
expected to rise from 7% to 20% by
2004.
Sources: Dow Jones Interactive On-line, accessed October 25, 2002, and Wines and Vines’ 2001 Annual Buyers’ Guide.
Diageo UDV/31
Exhibit 18 — Ray Chadwick’s biography
Ray Chadwick
President, Diageo Chateau & Estates
Chadwick was appointed president of Diageo’s wine operations in December 2001. At that time
he assumed responsibility for the integrated wine operations of Guinness North America and
Seagram Chateau & Estate Wines. Previously, Chadwick served as Executive Vice President and
Chief Financial Officer of the Seagram Chateau & Estate Wines Company, where his
responsibilities included the overall direction of the finance function, long range and strategic
planning, international sales, business development, information services, and environmental
affairs. Chadwick served concurrently as Managing Director of Barton & Guestier, S.A., and had
functional responsibility for the finance function at the Seagram Beverage Company. Chadwick
first joined Seagram in 1974 and has worked in a variety of roles, including market research, sales
and finance. He also spent time in London in an international marketing role for Brown-Forman.
Chadwick served as integration leader when The Seagram Classics Wine Company and Seagram
Chateau and Estate Wines Company were merged in 1996. He served as co-integration leader
during the merger of Diageo and Seagram wine operations in 2001, which led to the formation of
Diageo Chateau & Estate Wines. Chadwick holds Bachelor of Arts and Master of Arts degrees
from the University of Virginia, as well as an M.B.A. from the University of Chicago. He also
studied in France for several years, including a year in Bordeaux under the auspices of the
Fulbright program. He currently serves on the Board of Directors of the Wine Institute.
Source: www.aboutwines.com