Diageo Plc. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Diageo Plc. Case Solution

1. What does Exhibit 3 suggest is the reason Diageo is selling Pillsbury and spinning off Burger King? What is the beta of Diageo’s stock? Given its beta, how should Diageo’s stock have traded relative to the FTSE index?

What reasons can you think of that would explain Diageo’s stock performance?

Sales of non-core business units

From the exhibit that provides the financial information regarding the turnover and operating profit, the percentage is calculated that is as a base of total turnover or operating profit. It can be seen that Pillsbury is engaged in manufacturing of packaged foods contributes 32% in total turnover and about 25% in the operating profit. Burger king, on the other hand, working as fast food restaurant is contributing only 8% in the total turnover whereas, 10% in operating profit. Form this it is seen that both have lowest contribution than the other divisions. The company has been on the plan to focus on its core businesses and gains competitive advantage in those units. About 60% turnover is from the core business that includes spirit wines, and beer. The company has decided to make innovation and take other strategies to develop its core business and sell off the non-core less contributing business so that all efforts can be made on the core businesses.

Turnover	CY 96 PF	FY 97 PF	FY 98	FY 99	FY 00	As a percentage of total
Class of business
Spirits and Wine	5,830	5,692	5,327	4,929	4,971	42%
Beer	2,262	2,259	2,176	2,234	2,146	18%
Packaged Food	3,784	3,755	3,654	3,757	3,812	32%
Restaurants	877	879	869	875	941	8%
Associates and other^a	687	400	3	0	0	0%
Total	13,440	12,985	12,029	11,795	11,870	100%

Operating Profit	CY 96 PF	FY 97 PF	FY 98	FY 99	FY 00
Class of business
Spirits and Wine	1,138	1,135	1,070	967	1,002	51%
Beer	254	264	247	273	284	14%
Packaged Food	412	423	447	478	492	25%
Restaurants	161	160	179	185	202	10%
Associates and other^a	36	21	(1)	0	0	0%
Total	2,001	2,003	1,942	1,903	1,980	100%

Exhibit 3 shows that the company’s stock prices has been declining and is much lower than the standard market indices. The prices are below FTSE index. Thus, the company’s group chief executive, Paul Walsh, has decided to focus on the beverages and alcohol drinks and sell off other non-core business and make strategic innovations to gain sustained growth and steady profits.

Stock beta

The stock beta of the company shows 0.55. This is lower than 1, which can be interpreted in a way that the stocks are less volatile as compared to market indices. The higher beta that is higher than 1 means that highly volatility of the stock and lower beta that is lower than 1 means less volatility. This also implies that the stock of the company is less risky with beta of less than 1. The fluctuation in the stock prices of the company as per data given in exhibit 3 is not in line with what should be as per beta value. The stock process should perform in line with market trend however; it fluctuates more maybe due to some other reasons.............

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