Diageo Plc. Harvard Case Solution & Analysis

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 othera

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 othera

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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