Diageo is the world's foremost alcoholic drinks business, controlling several of the world's best known spirits including Smirnoff, Johnnie Walker, Captain Morgan Rum and Baileys liqueur, as well as Guinness stout and a small collection of wines. The group was formed in 1997 by the merger of Grand Metropolitan and Guinness. It has streamlined its operations considerably since then, selling off food brands Pillsbury and Burger King, while also adding the choicest brands from the former Seagram portfolio. The group is especially strong in North America and Asia; weaker in Europe where it is outgunned by arch-rival Pernod-Ricard. There are also significant gaps in its non-spirits portfolio. Guinness is its only sizeable beer, and its presence in the global wine sector was modest at best. In 2015, Diageo agreed to divest virtually all of its wine business, mostly to Treasury Wines Estates. The group has an important strategic partnership with LVMH's Moet Hennessy division, in which it controls a large minority shareholding.
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|Captain Morgan's Rum||J&B Scotch Whisky|
|Bailey's Irish Cream||Crown Royal|
|Windsor Royal||Blossom Hill|
|Tessera Vineyards||Seagram's 7 Crown|
|Sterling Vineyards||Seagram's VO|
|Baron Philippe||Red Stripe|
Adbrands Weekly Update 15th Oct 2015: Diageo sealed a deal to transfer the bulk of its wine operations to Treasury Wines Estates of Australia in a deal worth around $600m in cash and assumed debt. The sale includes US wineries Sterling Vineyards, Rosenblum Cellars, Beaulieu and Blossom Hill, among others, and the UK-based Percy Fox distribution division. The only significant exclusions from the sale are the US-based Chalone brand and Acacia winery, Navarro Correas in Argentina, and the group's various regional wine merchant businesses, such as Justerini & Brooks in the UK. TWE is best-known for its Penfolds and Lindemans brands. CEO Michael Clarke said the deal will significantly increase the group's premium wine portfolio, but he also suggested it might ultimately divest lower-priced brands.
Adbrands Weekly Update 8th Oct 2015: Diageo and Heineken agreed to swap a selection of beer assets in emerging markets. Heineken will take control of Jamaican brewer Desnoe & Geddoes, makers of Red Stripe lager, as well as full ownership of the Guinness licensee in Malaysia and Singapore that was previously a joint venture between the two companies. In return, it will surrender its minority stake in Guinness Ghana Breweries - allowing Diageo to increase control of its Guinness operations across Africa - and also make a cash payment of $780m to the British group. Separately, there were reports that Diageo has been sounding out buyers for part or all of its wine portfolio. Treasury Wine Estates has been highlighted as the most likely potential buyer.
Adbrands Weekly Update 30th Jul 2015: Drinks giant Diageo reported lacklustre figures for its latest year, also ending June. Full consolidation of United Spirits of India caused volumes to soar by 58% to over 246m cases, while revenues were up 5% to £10.8bn. Net profits grew 6% to almost £2.4bn, helped by a lower tax rate and lower exceptional items. However, organic volumes were flat, and operating profit before exceptionals slipped 2%. One notable development was a further reduction of non-core operations, with the sale of the Gleneagles hotel and golf course, and the dissolution of a joint venture in Africa with Heineken to focus on spirits in South Africa and reduce the contribution from beer. Analysts have been anticipating the disposal of Diageo's trophy beer asset Guinness for several years, and the African development could be a further step in that direction.
Adbrands Weekly Update 16th Jul 2015: Diageo North America's new regional CEO Deidre Mahlen is bringing with her a new regional chief marketing officer. Current North America CMO Peter McDonough is leaving the company and is being succeeded by James Thompson, previously managing director of the group's global high end Reserve brands unit.
Adbrands Weekly Update 11th Jun 2015: Diageo's share price surged following a report in Brazilian news magazine Veja that 3G Capital, the private equity owners of AB InBev, Burger King, Heinz and most recently Kraft, are considering the British drinks company as a potential target. No further details were disclosed. Most analysts were sceptical that 3G could pull off such a deal or even that it would want to. However the buzz might actually be a smokescreen for an approach by 3G to acquire Diageo's Guinness business and other brewing operations in Africa. That sort of deal would make a lot of sense both for 3G's AB InBev and for Diageo, for whom beer has been something of a distraction from its core spirits operations.
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Free for all users | see full profile for current activities: The two companies which came together to form Diageo in 1997 each had a rich and colourful history. Although best-known for its dark, creamy-headed stout, Guinness had a finger in many different pies by the mid-1990s and was looking for a way to make a quantum leap forward [See Guinness Brand Profile for more]. By chance, Grand Metropolitan was looking for exactly the same opportunity. That company had been the brainchild of Maxwell Joseph, a self-taught property developer who started out buying and selling buildings in and around London in the 1930s. By the end of World War II, there was no shortage of damaged buildings to buy up, and Joseph began to acquire bombed-out sites, renovating and reopening them as hotels for a huge profit. In 1961, Grand Metropolitan went public, using some of the funds it raised to take over Grand Hotels of Mayfair.
The group underwent massive diversification during the following decade. It acquired restaurant chain Berni Inns, Express Dairies, Mecca betting shops, and the breweries Truman Hanburg and Watney Mann in 1971 and 1972. The latter purchase introduced the company to distilled spirits for the first time. Watney Mann already owned International Distillers & Vintners (IDV), makers of Baileys, Bombay Gin, and J&B. IDV was itself the product of a series of mergers, dating back to the mid-18th century. Giacomo Justerini first began distilling whisky in 1749, and his business was acquired 80 years later by Alfred Brooks, who renamed it Justerini & Brooks. J&B itself merged with Twiss Brownings & Hallowes, UK agents for Hennessy cognac, to form United Wine Traders in 1851. Around the same time Walter and Alfred Gilbey set up business in London to distil gin. IDV was formed more than 100 years later when W&A Gilbey and United Wine, each having added a number of additional brands to their portfolios, joined forces in 1962.
By the mid-1970s, Grand Met's size meant that there was little in the UK it could acquire without falling foul of anti-monopoly regulations, so Joseph turned his attentions to the US. Cigarette maker Liggett Group was acquired in 1979, followed by the InterContinental Hotel chain in 1981 (from Pan Am). Joseph died a year later, and his successor, Allen Shepherd, began to refocus on food and drink, selling off Liggett (in 1986), InterContinental (in 1988 to Japanese group Saison) and William Hill/Mecca betting shops (in 1989). The purchase in 1987 of Heublein (Smirnoff, Lancers, and Cuervo) from Nabisco turned IDV into the world's largest wine and spirits company. Two years later Shepherd mounted a hostile takeover of food company Pillsbury, bringing Burger King (acquired by Pillsbury in 1967), Green Giant (acquired 1978), and Haagen-Dazs (acquired 1983) into the fold. In 1991, the company's Watney Mann beer interests were sold to Foster's in the latter's (short-lived) bid to be a world-class brewer. Alpo Pet Foods went to Nestle in 1994 for $510m. Loss-making US optician chain Pearle Vision (bought 1986) was sold to Cole National for $200m in 1996. Purchases included Pet Inc, maker of Old El Paso Mexican foods, for $2.6bn in 1995.
In 1997, Grand Metropolitan and Guinness announced their merger to create a food and drink supergroup, second only to Nestle by revenues. But there was a spanner in the works, in the shape of Bernard Arnault of LVMH. Guinness and LVMH already owned significant stakes in each other, and Arnault also held an 11% shareholding in Grand Met and was involved in a series of joint venture drinks distribution deals. Initially he threatened to block the Guinness-Grand Met merger unless LVMH was included as third partner. After some hard negotiating he relinquished that threat in return for a £270m goodwill payment, a seat on the merged board and rights to distribute the full portfolio of the group's drinks through a separate distribution joint venture. (Arnault subsequently resigned from the board and sold most of his shares to fund an attempted takeover of Gucci).
The combined group announced its new name to almost universal criticism from shareholders. A working title of GMG Brands was dropped for being "too unimaginative", and was replaced with Diageo. (The name combined the Latin for "day" and the Greek for "world", although no one at the group has ever suggested what connection that had to its business portfolio. It was to set a brief trend for mock-Latin corporate names in the UK). Meanwhile the group pushed ahead with consolidation of its various operating divisions. Grand Met's IDV division was merged with Guinness's United Distillers to form UDV. Then the group began to streamline its brand portfolio to remove non-core or insufficiently international assets. These included Dewar's scotch and Bombay Gin (sold to Bacardi for $1.9bn), and a half-share in Cantrell & Cochrane (sold to Allied Domecq for around £275m), both to comply with international competition regulators' requirements. The company also put a for sale sign on its Gleneagles hotel in Scotland. The sell-off accelerated in 1999: Accent, B&M, Joan of Arc, Las Palmas, and Underwood food brands (to B&G Foods for $192m); the North American Black Velvet, Golden Wedding, Rebel Yell, Old Charter, MacNaughton's, McMaster's and OFC whiskies and bourbons; Spanish brewer Cruzcampo to Heineken for £426m; best-selling German brandy Asbach and Greece's best-selling spirit Metaxa to Dutch spirits business Bols for $200m; and Cinzano, Ouzo 12 and several Brazilian spirits to Campari for an undisclosed amount.
Becoming the world's biggest spirits business also brought with it some friction with the smaller brandowners whose drinks Diageo licensed or distributed. An underlying trend within the spirits industry is that many of the world's biggest brands actually belong to small local manufacturers who license global distribution rights to the multinationals. Mexican tequila maker Jose Cuervo, for example, had originally signed a deal with Grand Met, and insisted on renegotiating the deal when Diageo was formed. The dispute was finally resolved in 2002 after Diageo agreed to return its 45% stake in that business in return for a new distribution agreement extended to 2013. Meanwhile Pernod-Ricard allowed Diageo's US and Japanese distribution rights for its Wild Turkey brand to lapse because the British company now had competing brands. Nor did Diageo's size solve what was then an inherent weakness in the spirits market. By the late 1990s, sales in the spirits market as a whole were static, while sales within the whisky segment were in steep decline. During the 30 years from 1966 to 1996, for example, American consumption of Scotch fell from 103m to just 3.4m litres. In fact, by 1996, the French drank more whisky than the Americans - 131m bottles compared to 120 million in 1996. Meanwhile in Britain, Scotch sales had fallen by a third in a decade.
Despite CEO Tony Greener's 1998 claim that Diageo wanted "to be in the top five of the world's consumer goods companies", it became increasingly apparent that the company's best bet would be to focus its attentions on alcohol, and leave foods to other companies, also consolidating rapidly. The first step came in 1999 when Diageo's Haagen-Dazs ice cream business in the US was transferred into a joint venture with Nestle. The biggest spur to consolidation came a year later when Seagram announced the sell-off of its large drinks portfolio as part of its takeover by Vivendi. All the world's big drinks companies began preparing for an auction battle. In order not to find itself outmanoeuvred, Diageo accelerated its own divestment of non-drinks businesses, putting Burger King up for sale and confirming plans to merge Pillsbury with its US rival General Mills.
Following Seagram's announcement that it would only sell its brands to consortia not single companies, Diageo formed a partnership with French company Pernod-Ricard to divide up the spoils between them. However the Seagram sell-off quickly turned into a shambles, when the individual licensors of Seagram's two key brands, Absolut and Captain Morgan, both announced they would block any deal of which they didn't approve. Eventually the auction turned into a contest between two rival consortia: Diageo and Pernod-Ricard against Bacardi and Brown-Forman. Diageo and Pernod-Ricard swung the deal at the end of 2000, agreeing to pay around $8.2bn between them for the portfolio. Diageo contributed around $5bn for control of Captain Morgan, Crown Royal Canadian whisky and Seagram's wine business. Pernod supplied the remaining $3.2m for Seagram's scotch whiskies such as the Glenlivet and Chivas Regal, as well as selected North American brands. Unwanted or competing brands were disposed of in a further round of deals in 2001 and 2002.
Now the biggest cloud hanging over Diageo was the consolidation of its rum portfolio. Destileria Serralles of Puerto Rico, the actual owner of the Captain Morgan trademark, claimed to have right of approval over the new licensee of their brand, and had already agreed a side deal with Allied Domecqm and the case was submitted to the Puerto Rican courts. The issue was further complicated when US regulators ruled that Diageo, which already owned the #3 rum brand Malibu, could not own Captain Morgan as well. Diageo faced an uncomfortable dilemma. If it sold Malibu to appease regulators, it faced the danger that a Puerto Rican court would rule in favour of Allied Domecq's claim to Captain Morgan, leaving Diageo with nothing. After some months of negotiation, Diageo killed two birds with one stone, agreeing to sell Malibu to Allied for £560m if the latter dropped its claim to Captain Morgan. Rounding off this long series of disposals, The Guinness Book of Records was finally sold to Gullane Entertainment, owners of Thomas The Tank Engine and Sooty, in 2001 for £45.5m. The Glen Ellen and MG Vallejo Californian wine brands were sold in 2002 to Franzia Winery of the US. See full profile for current activities
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