Diageo has announced the sale of its Croft and Delacorte port and sherry brands.  The wine industry may believe that if you make it, people will drink it. But the world's biggest spirits company does not agree, indirectly admitting that wine cannot efficiently compete with beer and spirits in the drinks market. The sale, part of Diageo's strategy of focusing entirely on premium but high-volume brands, looks like the best move for the company.

In a strategic move to drive organic growth, the UK's Diageo is selling the port and sherry business to a consortium of Gonzalez Byass and Taylor Fonseca, for $75.3 million. Gonzalez Byass will acquire the Croft sherry business and the company's assets in Spain, while Taylor Fonseca will buy the port assets in Portugal, the Delaforce port brand and worldwide rights to the Croft brand for marketing port. Diageo, which also plans to sell the market leader in port, Sandeman, will retain the right to market Croft brandy.

The world's largest spirits company, formed in 1997 by the merger of Guinness and GrandMet, Diageo has in the past year been realigning itself behind its premium drinks business, Guinness UDV, whose brands include Smirnoff, Johnnie Walker, Tanqueray, Guinness, J&B, Baileys, Malibu and Cuervo. Diageo already planned to exit the food sector, selling packaged food producer Pillsbury and demerging fast food chain Burger King. It has now clearly realized that Croft and Delaforce do not fit with the new direction either.

In December 2000, Diageo joined with Pernod Ricard to purchase Seagram's wines and spirits business, which should face few obstacles in the way of regulatory issues. However, to ensure the sale meets approval from the US FTC, Diageo may be willing to divest one of its relatively minor rum brands, such as Seagram's Myers Rum. It is expected that final closure of the sale will not come until well into Q4 this year.

Diageo faces increasing competition as its rivals in brewing and spirits consolidate, and needs to restructure through divestment of non-core businesses and concentration and investments in its core businesses. The port and sherry sale is a solid move by the company, which will realign its assets into a more profitable stance moving into 2002. Despite the long history behind Diageo's port and sherry houses, it was time to move on and acknowledge growth is not based on tradition.

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