Case Interview Questions #00010: You are consulting for Diageo plc (LSE: DGE, NYSE: DEO), a global alcoholic beverages company headquartered in London, United Kingdom. It is the world’s largest producer of spirits and a major producer of beer and wine. Its brands include Smirnoff (claimed the world’s best-selling vodka), Johnnie Walker (claimed the world’s best-selling scotch whisky), José Cuervo (claimed the world’s best-selling tequila), Baileys (claimed the world’s best-selling liqueur) and Guinness (claimed the world’s best-selling stout).
Diageo North America is a major producer and marketer of distilled spirits headquartered in Norwalk, Connecticut, United States. Their primary products are a line of mid-priced vodkas and two brands of mid-range rum. Over the past few years, however, the business has become less and less profitable. The management of Diageo North America has hired you as a consultant. They want you to find out what could be causing their declining profitability. How would you go about the case?
Additional Information: (to be given to you only if asked)
1. Products: The split of product sold has consistently been 60% vodka / 40% rum over the past few years. The selling prices of the two lines are essentially the same. Overall sales are growing at about 3% to 5% per year, the same as the industry average for these product lines.
2. Costs: An analysis of the costs reveals the following:
- Production Costs have remained constant.
- Advertising Costs have remained constant on average.
- Distribution Costs have increased significantly.
3. Distribution: The products are sold throughout the United States. In 27 so-called “open” states, where alcohol is sold in privately managed supermarkets and liquor stores, shelf space is extremely expensive and trade promotions are critical. Such stores are also becoming less and less willing to hold inventory, which is increasing distribution costs by requiring more frequent deliveries. In the other 23 states, liquor is only sold through state regulated liquor stores. Distribution costs in these states is much lower, as there are far fewer outlets to service and central warehouses for the state-run stores. Advertising of alcohol is much more tightly regulated, and therefore, advertising spending is lower.