Diageo: A Toast to Success in the Beverage Industry

In the global beverage industry, few companies command as much recognition and respect as Diageo. The company was founded in 1997 in London following the merger of Guinness, the renowned stout beer producer, and Grand Metropolitan, a diversified leisure, manufacturing, and property conglomerate. Today, Diageo has grown to become a global leader in alcoholic beverages, boasting a vast portfolio that includes some of the world's most recognizable brands of spirits, beer, and wine.

The formation of Diageo dates back to the year 1997, but the company's roots are steeped in a much deeper history, spanning over centuries and tying together the destinies of two beverage giants: Guinness and Grand Metropolitan.

Diageo was founded as a merger between Guinness and Grand Metropolitan

Diageo was founded as a merger between Guinness and Grand Metropolitan

Guinness, founded in 1759 by Arthur Guinness, is renowned globally for its stout. A brand synonymous with Ireland and its rich cultural history, Guinness started its journey in a small brewery at St. James's Gate in Dublin. Arthur's unwavering commitment to quality established Guinness as a brand admired for its distinctive taste and character. Through the years, the company expanded its reach beyond Ireland, earning international acclaim.

On the other hand, Grand Metropolitan was a diverse corporation with a portfolio that included food, accommodations, and retail businesses. The company entered the liquor industry in the 1960s, growing quickly through the acquisition of several notable brands such as Smirnoff, Baileys, and eventually, in the 1980s, the Pillsbury Company.

The merger of Guinness and Grand Metropolitan in 1997 marked the creation of Diageo, a new beverage powerhouse, combining the assets of both companies. The name "Diageo" was derived from the Latin word for day ("dies") and the Greek word for world ("geo"), signifying the company's stated purpose to celebrate life, every day, everywhere.

This merger brought together an impressive collection of internationally recognized brands under one umbrella, setting the stage for Diageo's rise as a leading global player in the beverage industry. The combined strengths of both companies enabled Diageo to expand its operations worldwide, reach more consumers, and build upon the strong heritage of its brands.

Thus, the tale of Diageo's founding is not just a story of a successful business merger It’s also a testament to the power of heritage, vision, and strategic expansion in shaping a global leader in the beverage industry.

One simply can’t talk about Guinness without doubling down on Arthur Guinness, fondly regarded as the ‘fifth ingredient’ in the famous stout. His legacy has lasted for over 260 years, and he’s remembered for the influence he had on Dublin, the people who worked for him, and the Guinness business.

Born in 1725 in Celbridge, County Kildare, Ireland, Arthur Guinness was the third son in a family of ten children. Coming from modest beginnings, his life took a sharp turn when he inherited £100 from his godfather, Archbishop Arthur Price. Instead of spending the money, he wisely invested it and started building on what would become his legendary brewing career.

Arthur signed a famous 9000-year lease in 1759 on a small and abandoned property at St. James’s Gate, and started to brew ale. The rent was £45 per annum, a significant sum at that time. Arthur however believed in his brewing abilities, and what began as a small operation would eventually grow into a global brand synonymous with Ireland.

He was relentlessly determined to quality and consistency, something that became a cornerstone of his brewing philosophy. The brewing practices of that time often involved using subpar ingredients to cut costs, but Arthur insisted on only using the highest quality ingredients. This determination extended beyond only brewing, and in an era of widespread poverty and disease, he used his wealth to improve the lives of not only his workers, but also the overall community. Among other things, he established a welfare system for his employees, and even funded the construction of the St. Patrick’s Cathedral in Dublin.

Arthur passed away in 1803, but his legacy lives on in every poured pint of Guinness, reminding us that with vision, dedication, and a commitment to quality, it’s possible to leave a lasting impact on the world.

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The other half of the Diageo story comes from Grand Metropolitan, or “GrandMet” as it was commonly known; a British conglomerate with interests in hotels, catering, and brewing.

GrandMet was founded by Maxwell Joseph, who initially got into the business world through the property sector in the 1930s. Joseph had a knack for spotting profitable ventures, and in the 1950s, he shifted his attention to the hospitality industry. There, he spent his time acquiring struggling hotels, turning them around, and selling them for profit – laying the foundation of Grand Metropolitan.

The company grew and became more diversified, and by the late 1960s and early 1970s, GrandMet had entered the catering industry with the acquisitions of Express Dairies, the Berni Inn chain, and the Mecca Bingo halls. GrandMet then entered the brewing industry by acquiring Truman, Hanbury, Buxton & Co., one of the oldest breweries in Britain. They didn’t stop there however, and continued to make a series of acquisitions in the beverage industry, including the purchase of the famous vodka brand, Smirnoff, in 1972.

GrandMet was also known for its aggressive advertising, which often helped its brands resonate with consumers. They were pioneers for their time, and were always keen on staying ahead of the curve.

Vintage Smirnoff and J&B advertisements

Vintage Smirnoff and J&B advertisements

The conglomerate continued to grow and consolidate its position in the drinks business by acquiring well-known brands like J&B, and eventually the Pillsbury Company, bringing the Burger King brand with it.

GrandMet is, like Guinness, a key ingredient in the forming of Diageo – a strategic merger, combining Guinness’s strength in the beer and spirits market with GrandMet’s diverse brand portfolio and marketing abilities.

Diageo's successful expansion has been largely due to its strategic acquisition and management of numerous high-profile brands, ranging from globally popular ones to regional favorites.

The Diageo brand portfolio features a wide range of spirits

The Diageo brand portfolio features a wide range of spirits

As the name suggests, Scotch is only made in Scotland. It has been distilled by Scots for over 500 years, and involves a complicated process of mixing and maturing in oak casks for a minimum of three years before it can be called Scotch whisky. As of H1 FY2023, Scotch stands for around 27% of Diageo’s net sales. Its most recognized whisky brands are:

• Johnnie Walker

• Buchanan’s

• J&B

• Grand Old Parr

• Talisker

• The Singleton

Vodka, like Scotch, has a distinct identity and production process. Originating in Eastern Europe, vodka has been produced for centuries, with early references dating back to the 9th century in Russia and the 8th century in Poland. It is traditionally made from fermented grains such as wheat, rye, or potatoes. About 9% of Diageo’s net sales is Vodka and renowned Diageo vodka brands include:

• Smirnoff

• Cîroc

• Ketel One

Tequila originates from Mexico and is made exclusively from the blue agave plant. A key characteristic of tequila is its categorization based on aging. There are primarily five types of it: Blanco (unaged), Joven (young), Reposado (rested, aged between two months and a year in oak barrels), Añejo (aged, between one and three years in oak barrels), and Extra Añejo (extra aged, over three years). Tequila constitutes around 11% of Diageo’s net sales and some known brands are:

• Don Julio

• Casamigos

• Astral Tequila

• DeLeon

• 21 Seeds

Gin became popular in Britain, particularly London, in the late 17th and 18th centuries. Its primary ingredient is juniper berries. However, a wide range of botanicals, such as coriander, citrus peel, cinnamon, almond, and licorice, can be added to create different flavor profiles. Gin is around 5% of Diageo’s net sales, primarily under these brands:

• Tanqueray

• Gordon’s

Rum, a spirit made from sugarcane byproducts like molasses or juice, is aged in barrels and comes in varieties like light, gold, dark, spiced, and aged, each offering unique flavors. Liqueurs, on the other hand, are sweet spirits infused with flavors from fruits, herbs, spices, or cream, and are enhanced with sugar. They’re often used in cocktails or enjoyed on their own. Rum and liqueurs constitute of around 10% of Diageo’s net sales and notable brands are:

• Captain Morgan

• Baileys

Wine doesn’t need any further introduction and is integral to many cultures. It’s often paired with food to enhance the dining experience. Popular wine regions include Bordeaux in France, Napa Valley in the USA, Tuscany in Italy, and Rioja in Spain. Diageo’s wine brands include:

• Fine Wine & Spirits Merchants

• Justerini & Brooks

No and low-alcohol beverages have increasingly become a popular choice among people enjoying the social aspects of drinking without the effects of alcohol. These beverages are designed to mimic the taste and experience of traditional alcoholic drinks, and Diageo’s brands in this category include:

• Tanqueray 0.0%

• Gordon’s 0.0%

• Seedlip

Moreover, Diageo’s portfolio isn’t limited to only spirits. As mentioned, the company also owns Guinness, a globally renowned beer brand recognized and loved for its rich, creamy stout.

The beverage sector is a complex web of brand partnerships, joint ventures, and cross-ownership arrangements. An illustrative case is the relationship between Diageo and Heineken, two global powerhouses of the industry. While many may assume that Diageo owns Heineken due to their significant business dealings, this is not the case. The companies have engaged in strategic business interactions over the years, but neither holds ownership over the other.

The most notable instance of cooperation between Diageo and Heineken occurred in 2015, when the two companies executed a high-profile asset swap. This was not merely an exchange of assets; it was a strategic move designed to consolidate each company's presence in crucial markets and streamline their respective operations.

The transaction involved Diageo trading its stake in Desnoes & Geddes, a Jamaican brewer known primarily for its Red Stripe lager, to Heineken. In exchange, Heineken relinquished its shares in Brandhouse, a South African drinks distributor. As a result of this deal, Heineken assumed majority control of Desnoes & Geddes, allowing it to strengthen its position in the Caribbean region.

Simultaneously, Diageo took full control of Brandhouse, thereby enhancing its footprint in the South African market. This strategic move allowed Diageo to capitalize on the growing demand for premium spirits in the region and fortify its African market strategy.

This alliance illustrates how Diageo and Heineken, like many players in the beverage sector, engage in calculated partnerships to achieve their long-term business goals.

Diageo's primary focus lies in the production and distribution of premium alcoholic beverages. The company owns over 200 brands, operates in more than 180 countries, and has 140 manufacturing sites worldwide. These include distilleries, breweries, packaging plants, maturation warehouses, and cooperages.

Diageo’s size provides for scale efficiencies in production, selling, and marketing among others. And it seems like they’ll be able to continue growing. 600 million consumers are expected to reach the required age by 2032, and as the ‘middle class and above’ income bracket continue growing, chances are the market will expand with another 600 million.

Premiumization is a long-established trend and something Diageo speaks about a lot. The highest price tiers for example, are growing at more than double the rate of the international spirits category between 2016 and 2021. Good for Diageo, as they boast the largest premium-plus portfolio within international spirits, accounting for over half of net sales as of 2023.

Sales growth of Diageo's premium portfolio

Sales growth of Diageo's premium portfolio

To sum up, the strength of Diageo’s broad and deep product portfolio across categories and price points, and their balance between developed and emerging markets, give them large headroom for continued growth while providing resilience to global volatility. As always when talking about companies in industries like this one, a strong emphasis on ESG is required, as it should be. Diageo has a nice way of putting this, and believes in celebrating life every day, everywhere – but doing so responsibly.