Alcohol Industry, External Environments

Diageo is a company that produces and distributes alcoholic beverages. Its products include all three branches of this industry – spirits, wine and beer. The brands that the company produces include well-known names like Smirnoff, Johny Walker scotch whiskey, Baileys, Captain Morgan rum, Tanqueray gin, Guiness beer, Don Perignon champagne, and many others. One can find the products produced by this company in nearly 180 countries all around the world. The company’s offices are located in 80 countries and employ 20,000 people.

Manufacturing facilities are spread out all around the world, including Great Britain, Italy, Australia, Latin America, Canada, Ireland, United States, Caribbean and India (Diageo, 2011).

Every company experiences the influences of seven key environments. One of them is internal environment that defines the corporate culture. The other six environments are external. They are: economic, technological, cultural, natural, governmental and legal environments. Every environment consists of forces that influence every business and their relationship with government and society (Steiner & Steiner).

Diageo is a UK based company, but the United States of America is responsible for 40% of its revenue.

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The company has numerous offices, breweries and distilleries based in the USA, and they exist within influential frames of external environments of the country (Diageo, 2011 ). Regulatory Environment The United States of America has very strict laws and regulations that concern Alcoholic Beverage Industry. Alcoholic beverage consumption, as well as its distribution, is regulated by the government. Every state has different liquor consumption rules and regulations.

However, the minimum drinking age of 21 years old is the same in every state.

A place and time when alcoholic beverages may be consumed are regulated as well. The retail sales of liquor products are usually provided by the specialized stores. Some of the states, like Ohio, prefer to own the stores and have control over prices and sales. Some other states have privatized liquor stores (Kwon, 2010). According to the Alcohol and Tobacco Tax and Trade Bureau, any retail dealer has to operate with the compliance with the principal Federal liquor laws and regulations.

For every manufacturing location Diageo ad to obtain manufacturing liquor license from the State Liquor Authority. Alcohol and Tobacco Tax and Trade Bureau regulates labeling process of wine, malt beverages and distilled spirits. It also determines the health warning statement that manufacturers have to put on the label (Alcohol and Tobacco Tax and Trade Bureau, n. d. ). Macroeconomic Environment The macroeconomic environment has a great influence on the functioning of the company. There are certain trends that characterize the present economic environment. The recession made more people stay at home than go out; it led to the development of the off-premise consumption.

During the recession consumers were trading down by purchasing less expensive brands (Kwon, 2010). For the manufacturing business of Diageo it meant the slower growth of revenues through the years. The range of products had to change as well, as the less expensive brands and products took the lead. After the decrease of investments into the industry in general and Diageo in particular during the recession, investors’ interest in the company is rising. At the present moment, the on-premise consumption is recovering after the recession.

Increase in disposable personal income in 2011 is leading to the growth of company’s sales and consumption of more expensive premium brands. Consumers are starting to trade up (Kwon, 2010). The rise of the Producer Price Indexes put pressure on the profit margins of the company. Decreased interest rates mean an opportunity for active acquisitions and introduction of new products (Kwon, 2010). Cultural Environment The present cultural environment dictates Diageo produce more low-calorie products, as the population of the United States of America is going towards the healthier life style and is fighting obesity (Kwon, 2010).

The growing number of Hispanic population increases demand for the liquor that is typical for that area, like tequila. It is very important to always target different age groups while conducting a marketing campaign or advertising. Different age groups have different product preferences and different spending habits. The wine producing segment of Diageo, especially the premium wines, is going to benefit from the increasing numbers of consumers in the over-55 age group. Increasing number of young legal-age drinkers will contribute to the increase in beer consumption (Kwon, 2010).

In general, mature consumers drink moderately, and are very conscious about alcohol abuse and drunk driving. Governmental environment The United States government controls sales and marketing of alcoholic beverage products, collects taxes, and works on reducing underage drinking. Alcohol and Tobacco Tax and Trade Bureau is the main federal agency involved in the alcohol policy. It regulates labeling, packaging, advertising and is responsible for product approval (Alcohol and Tobacco Tax and Trade Bureau, n. d. ).

All alcoholic beverage businesses have to get the authorization to produce and sell from Alcohol and Tobacco Tax and Trade Bureau under the Federal Alcohol Administration Act. Some of them also have to be authorized under the Internal Revenue Code. Before starting manufacturing, distilled spirits plant, brewery or winery have to apply for a permit of operation from The Alcohol and Tobacco Tax and Trade Bureau. Soon it is going to be possible to apply for these permits online (Alcohol and Tobacco Tax and Trade Bureau, n. d. ). Manufacturing and sale of the Alcoholic Beverages is taxed. A tax is imposed upon the privilege of engaging in business as a manufacturer or as an importing distributor of alcoholic liquor” (USLegal, 2011). For example, in the year of 2008, the Alcohol and Tobacco Tax and Trade Bureau collected around $17,4 billion dollars in taxes. It made this bureau, the third largest tax gathering organization in the federal administration (Kwon, 2010). There are several reasons why the excise taxes are imposed on the liquor products. First of all, it slightly increases the price of the products.

According to the National Institute on Alcohol Abuse and Alcoholism, lower prices on the alcohol beverages lead to the increased consumption of the alcohol mainly among the underage drinkers. This usually leads to the traffic crash fatalities, increase of the level of crimes and alcohol associated health complications. The second reason for the taxation is the revenue that may be used for public health, safety programs, prevention of underage drinking, enforcement of liquor laws, and prevention and treatment of alcoholism (Center for Science in the Public Interest, n. . ). Government enforces the three-tier alcohol industry products distribution system. Manufacturers and importers sell their products to the wholesalers, then the wholesalers sell them to the retailers. Technological Environment For the maximum efficiency of the alcoholic beverage production industry, manufacturing company has to stay up-to-date with all the technological innovations. Combination of Rothes Distilleries is a joint venture in the United Kingdom, which was created in 1904 to process whiskey waste.

Diageo is a proud member of this group and is taking part in one of their latest technological achievement. Waste from the whiskey distilleries is going to be used to create electric power for up to 9,000 homes. The power plant has won funding from the Royal Banking Group and the Royal Bank of Scotland. The engineering work is already in process, and the construction is about to start within twelve weeks. The plant is going to be built by the existing animal feed factory owned by the Rothes Distilleries.

Solid residue from the distilleries will be taken to the plant and burned with the wood to provide electricity which is going to be used to power local homes and run the animal feed production process (Ranscombe, 2011). Diageo is using enzymes as a part of the brewing process. Beer is usually made of barley, which contains starch that has to be broken down to fermentable sugars before the yeast can make alcohol. Therefore, there is a process named malting, where enzymes are needed for the degradation of starch into fermentable sugars (Molecular-Plant-Biotechnology, n. d. ).

New technology of using anaerobic bacteria, to reduce the degree of pollution in the waters created by the processes of brewing and distilling, is used by Diageo (Dnce, Ayman-Oz, Turker, Celikkol, Dnce, n. d. ). New technologies allow the production of new types of packages like draft beer boxes and vortex bottles (Kwon, 2010). New software options were recently developed by the On-Trak company based in Cincinnati and Belgian company, Copa-Data. The new software allows manufacturers and distributors of food and beverage products track every item from the factory to the retail sector (Copa-Data, 2010).

Natural Environment Processes of manufacturing of the alcoholic beverages cause damage to the natural environment. They generate large amounts of acidic, recalcitrant and colored wastewaters with high organic content (Steiner & Steiner, 2009). In 1970s, the Congress of the United States of America passed the number of new laws concerning the environmental protection. When the Environmental Protection Agency was created, this started the “environmental decade. ” The agency has consistently worked on protection of human health and preservation of the natural environment (Steiner & Steiner, 2009).

There are numerous possibilities to reduce the bad influence of the industry on the environment, and Diageo takes the path of sustainability as well as many other manufacturing companies. Diageo has reached ‘Gold Class’ rating in the admired SAM Sustainability Yearbook 2011. The yearbook measures more than 2,500 of the world’s largest companies in terms of their impact on economic, social and environmental performance (Diageo, 2011). All breweries and distilleries have numerous options on how to reuse their wastes, like growing mushrooms on the fermentation wastes or sending spent grains to farms for animals feed.

It is also possible to recover the heat from the hot water using the heat exchanger saving energy (Cleaner Production International LLC, n. d. ). Trend interaction The six external environments do not exist apart from each other. They are connected and interact with one another. An important trend from one environment may be as important for another environment as well. For example, the regulations and policies provided by the Alcohol and Tobacco Tax and Trade Bureau are connected to each other and can be related to both the Regulatory and Governmental environments.

The same thing can be said about all the technological innovations. Most part of the new technologies were created with the sustainability in mind. The new technology of anaerobic treatment of waste waters helps to reduce pollution. With the help of new recyclable materials Diageo can create more sustainable packaging for its products. Trends of macroeconomic and cultural environments are usually connected. Consumers’ buying behavior is more or less easy to predict knowing the current economic situation and having data on the personal disposable income.

The most important trends Having all this in mind, it is easy to detect the most crucial trends for Diageo’s future. To be aware of the range of products that are going to be needed in future, the company has to predict the economic situation in the country. If there is a recession to come, and personal disposable income is going to drop, consumers will trade down, and more cheap brands will be consumed. In the opposite situation, trading-up will be going on, and Diageo will have to produce more premium products.

Types of the products that will be consumed will also depend on the popularity of the on-premise or off-premise consumptions. Management of every company has to know company’s customer base and be well aware of the demographical changes to come. Aging population of the USA is dictating the increase in the popularity of the premium brands, especially in wine and spirits sectors. Growing Hispanic population will increase the consumption of the import South American brands, some of which create a strong competition for Diageo (Kwon, 2010).

Another crucial trend for Diageo is constant development of new technologies that allow the company to increase its level of sustainability and reduce its negative impact on the natural environment, as well as increase company’s efficiency and profits. Over the next five years, positive influence of the economic environment will take place. Recovery after the recession will allow people to get more freedom in their spending habits. Consumers will be trading up, and the on-premise consumption will thrive.

The number of consumers in over-55 age group will be increasing, and demand for the premium brands will rise. It is important for Diageo to concentrate its attention on the innovation sector and introduce new brands and products that will match the growing demand for more expensive and sophisticated drinks. Old-fashion classic cocktail mixes manufacturing is another path that can be taken by the company. Diageo successfully applies most innovations that modern technology has to offer. I am sure, that in the course of the next five years, sustainability rating of the company will increase even more.

Summary Exploring the present environment of business gives us a good idea on how the company operates in frames of the external conditions that influence the company. In its turn, every business impacts the environments, society and influences the course of history (Steiner & Steiner, 2009). It is easy to predict changes of many factors and trends. Knowing the way these changes will affect the company, we can create the optimal scenario for its development. However, there are some aspects that will remain uncertain, and some that will be changed with the influence of the company.