Tuesday 20 May 2014

Diageo's Chinese takeover

pic: telegraph.co.uk
Domestic brands are closely guarded in China and hence takeovers of Chinese companies are not that common. Consequently, the acquisition of a Chinese baijiu manufacturer by FTSE top 100 company Diageo in 2013 is an interesting example (baijiu is China’s national alcoholic drink). This is an example of horizontal integration as it was one drinks manufacturer taking over another (removing potential competition from the market and enabling Diageo to attain increased market share and economies of scale in its Chinese operations). The move is part of Diageo’s corporate objective of growth which it aims to deliver by increasing its presence in emerging markets. By widening its product portfolio in the Chinese market Diageo would no doubt hope that it could grow revenues for its other key brands in that key growth market. Having said that, the early months post-merger have been very difficult ones in that specific market as the takeover has coincided with a crackdown on corruption and gift-giving for government officials by the new Chinese President (restrictions on gift-giving has hit alcoholic drinks companies hard).  Likewise rival baijiu manufacturers have been discounting heavily which has hit profit margins and revenue for Diageo’s brand.

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