London (CommentWire) – Diageo can breathe a sigh of relief after offloading Burger King. But what should it do with the money? Investing in the core spirits offering seems like the best plan. In the absence of major Seagram-style acquisition opportunities, it may snap up some smaller brands – but much of the spending should go on strengthening its marketing and distribution capabilities.
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UK drinks group Diageo has sold fast food chain Burger King to Texas Pacific, Bain Capital and Goldman Sachs for US$2.26bn.
The path ahead for Burger King is clear. Performance has already begun to improve under new CEO John Dabsburg. The new owners would be wise to leave him in place, monitor the turnaround, and float when stock markets pick up. But how will Diageo will spend the money?
It says it will invest some in premium drinks and return some to shareholders. While there are opportunities in the wine market, the ‘premium drinks’ part of this is most likely to be the spirits business. This has been the focus of previous acquisitions; indeed, Diageo allowed Pernod Ricard to take the lion’s share of Seagram’s wine business.
At present, there do not seem to be any big spirits acquisition opportunities. This could change – the same seemed to be true in 2000 before Seagram came on the market. But such an opportunity is unlikely.
Another option is to acquire some larger independent brands – Drambuie is one example, but there are plenty of others. Diageo’s global distribution and marketing support would benefit such brands significantly, and it could use the brand-stretching expertise that created Smirnoff Ice in fresh products.
But the best use of the cash may be to strengthen what Diageo already has. It’s one of the world’s biggest marketing spenders already, but in the style-driven spirits industry, more investment may be better. The decision in May to create its own network of US TV stations after the major networks refused to screen liquor ads, is just one example of how Diageo is prepared to spend.
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By GlobalDataDistribution is also important. Diageo has one of the world’s largest spirits distribution networks; once again, more investment is unlikely to do any harm.
Related research: Datamonitor, “Best Practices in Drinks 2002” (DMCM0078)
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