Harvard Case - Diageo and Mey Icki: Turkish Delight or Turkish Hangover?
"Diageo and Mey Icki: Turkish Delight or Turkish Hangover?" Harvard business case study is written by Dante Roscini, Gamze Yucaoglu. It deals with the challenges in the field of Business & Government Relations. The case study is 34 page(s) long and it was first published on : Aug 3, 2016
At Fern Fort University, we recommend Diageo proceed cautiously with its acquisition of Mey Icki, recognizing the significant challenges and opportunities presented by the Turkish market. A thorough due diligence process is crucial, focusing on the political and economic landscape, regulatory environment, and Mey Icki's internal operations. Diageo should develop a comprehensive strategy that balances growth ambitions with risk mitigation, incorporating local partnerships, robust corporate social responsibility initiatives, and a strong commitment to ethical business practices.
2. Background
This case study examines Diageo's potential acquisition of Mey Icki, the leading Turkish alcoholic beverage company. Diageo, a global leader in the alcoholic beverage industry, seeks to expand its presence in emerging markets like Turkey, which boasts a rapidly growing middle class and a burgeoning demand for premium spirits. However, Turkey presents a complex environment with a volatile political landscape, economic uncertainties, and a unique cultural context.
The key protagonists are:
- Diageo: A multinational alcoholic beverage company seeking to expand its global footprint and capitalize on the growth potential of emerging markets.
- Mey Icki: A leading Turkish alcoholic beverage company with a strong brand portfolio and established distribution network.
- Turkish Government: Plays a significant role in shaping the economic and regulatory environment for foreign investment and the alcoholic beverage industry.
3. Analysis of the Case Study
Strategic Analysis:
- Porter's Five Forces: The Turkish alcoholic beverage market exhibits moderate competitive rivalry, with several local players competing with international brands. The threat of new entrants is low due to high barriers to entry, including capital requirements and brand building. The threat of substitutes is moderate, with non-alcoholic beverages and other forms of entertainment offering alternatives. The bargaining power of buyers is moderate, with consumers having a range of options but also showing a preference for well-established brands. The bargaining power of suppliers is low, as Diageo has access to a global supply chain and can leverage its scale to negotiate favorable terms.
- Competitive Advantage: Diageo holds a significant competitive advantage in global brand recognition, marketing expertise, and operational efficiency. However, Mey Icki's strong local brand presence and established distribution network offer a valuable asset.
- Growth Strategy: Diageo seeks to leverage its existing brand portfolio and expertise to expand into new markets, particularly those with high growth potential like Turkey. Acquiring Mey Icki would provide immediate market access and a strong platform for further expansion.
Financial Analysis:
- Valuation: Diageo must carefully assess Mey Icki's financial performance, considering factors such as revenue growth, profitability, and debt levels. A thorough due diligence process is crucial to determine the fair market value and potential synergies.
- Investment Justification: Diageo needs to justify the investment in terms of return on investment (ROI), payback period, and potential for long-term growth.
- Financial Risks: Turkey's economic and political instability, fluctuating exchange rates, and potential regulatory changes pose significant financial risks.
Marketing Analysis:
- Brand Positioning: Diageo must understand the cultural context and consumer preferences in Turkey, adapting its marketing strategies to resonate with local consumers.
- Distribution Channels: Leveraging Mey Icki's established distribution network is crucial for reaching target consumers. Diageo may need to invest in expanding distribution channels to reach new market segments.
- Marketing Communications: Diageo must develop effective marketing communication strategies that resonate with Turkish consumers, considering cultural sensitivities and local advertising regulations.
Operational Analysis:
- Integration: Diageo needs to develop a seamless integration plan for merging Mey Icki's operations with its own, considering cultural differences, language barriers, and potential operational challenges.
- Supply Chain Management: Diageo must ensure a reliable and efficient supply chain, considering the complexities of navigating the Turkish regulatory environment and potential disruptions.
- Human Resources: Diageo must address potential cultural differences and ensure a smooth transition for Mey Icki's employees, fostering a positive working environment and retaining key talent.
4. Recommendations
Due Diligence: Diageo must conduct a comprehensive due diligence process, focusing on:
- Political and Economic Landscape: Analyzing the political and economic stability of Turkey, including potential risks and opportunities for foreign investment.
- Regulatory Environment: Understanding the legal and regulatory framework governing the alcoholic beverage industry in Turkey, including tax policies, advertising regulations, and licensing requirements.
- Mey Icki's Internal Operations: Assessing the company's financial performance, brand portfolio, distribution network, and operational efficiency.
Strategic Partnerships: Diageo should seek to establish strategic partnerships with local companies and organizations to navigate the Turkish market effectively. This could include:
- Joint Ventures: Partnering with local companies to establish joint ventures that leverage their expertise and local market knowledge.
- Distribution Agreements: Securing distribution agreements with local companies to expand reach and access new market segments.
- Government Relations: Building strong relationships with government officials to understand and navigate the regulatory landscape.
Corporate Social Responsibility: Diageo should prioritize corporate social responsibility (CSR) initiatives in Turkey, demonstrating its commitment to sustainable business practices and engaging with local communities. This could include:
- Environmental Sustainability: Implementing environmentally friendly practices throughout its operations and supply chain.
- Community Engagement: Supporting local charities and community initiatives to foster positive relationships.
- Employee Development: Investing in employee training and development programs to create a skilled and engaged workforce.
Ethical Business Practices: Diageo must adhere to the highest ethical standards in all its operations in Turkey, including:
- Anti-Corruption: Implementing robust anti-corruption measures to ensure compliance with local laws and regulations.
- Transparency: Maintaining transparency in its business dealings and financial reporting.
- Fair Labor Practices: Adhering to fair labor practices and respecting the rights of all employees.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Diageo's core competencies in brand management, marketing, and operational efficiency align with the acquisition of Mey Icki. The acquisition is consistent with Diageo's mission to expand its global footprint and capitalize on growth opportunities in emerging markets.
- External Customers and Internal Clients: Diageo must understand the needs and preferences of Turkish consumers while ensuring a smooth transition for Mey Icki's employees.
- Competitors: Diageo needs to consider the competitive landscape in Turkey, including local and international players, and develop strategies to maintain a competitive advantage.
- Attractiveness: The acquisition of Mey Icki presents a potentially attractive investment opportunity, offering access to a growing market and a strong platform for further expansion. However, Diageo must carefully assess the financial risks and potential challenges before making a final decision.
6. Conclusion
The acquisition of Mey Icki presents both opportunities and challenges for Diageo. While the Turkish market offers significant growth potential, navigating the complex political, economic, and regulatory environment requires careful planning and execution. By conducting thorough due diligence, establishing strategic partnerships, prioritizing corporate social responsibility, and adhering to ethical business practices, Diageo can increase its chances of success in Turkey and achieve its long-term growth objectives.
7. Discussion
Alternatives:
- Organic Growth: Diageo could pursue organic growth in Turkey by establishing its own operations and building brand presence from scratch. However, this would require significant investment and time to achieve market penetration.
- Strategic Alliance: Diageo could form a strategic alliance with a local company without acquiring full ownership. This would provide access to the Turkish market without the risks and challenges of a full acquisition.
Risks:
- Political Instability: Turkey's political landscape is volatile, with potential for policy changes and economic disruptions.
- Economic Uncertainty: Turkey's economy faces challenges, including high inflation and currency fluctuations, which could impact consumer spending and business operations.
- Regulatory Challenges: The Turkish government imposes various regulations on the alcoholic beverage industry, which could create challenges for Diageo's operations.
- Cultural Differences: Navigating cultural differences and adapting marketing strategies to resonate with Turkish consumers can be challenging.
Key Assumptions:
- Political and Economic Stability: This recommendation assumes that Turkey will maintain a degree of political and economic stability in the coming years.
- Regulatory Environment: This recommendation assumes that the regulatory environment for foreign investment and the alcoholic beverage industry will remain relatively stable.
- Mey Icki's Performance: This recommendation assumes that Mey Icki's financial performance and operational efficiency will continue to meet Diageo's expectations.
8. Next Steps
- Due Diligence: Conduct a comprehensive due diligence process, focusing on the political, economic, and regulatory environment in Turkey, as well as Mey Icki's internal operations.
- Strategic Planning: Develop a comprehensive strategic plan for entering the Turkish market, including market entry strategies, brand positioning, distribution channels, and marketing communications.
- Partnership Development: Identify and engage with potential partners in Turkey, including local companies, government officials, and non-governmental organizations.
- CSR Initiatives: Develop and implement a robust CSR program that addresses environmental sustainability, community engagement, and employee development.
- Ethical Business Practices: Establish and enforce strict ethical guidelines for all operations in Turkey, including anti-corruption measures, transparency, and fair labor practices.
This timeline should be adjusted based on the specific circumstances and priorities of Diageo. By taking a measured and strategic approach, Diageo can navigate the challenges and capitalize on the opportunities presented by the Turkish market, potentially turning this venture into a Turkish delight rather than a Turkish hangover.
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Case Description
In September 2013, two years after its $2.1 billion acquisition of Mey Icki Sanayi ve Ticaret AS (Mey Icki), the principal spirits company in Turkey specializing in the local beverage raki, Diageo, the world's leading premium drinks company, was concerned about new legislation approved by the Turkish parliament prohibiting marketing and restricting the places and times at which alcoholic beverages could be sold. Diageo's Mey Icki investment in 2011 was the company's biggest acquisition in more than a decade. Having been caught off guard by the 2013 legislative changes, the Diageo management found itself needing to justify its $2.1 billion valuation, given that Diageo had acquired Mey Icki in 2011 from TPG for three times TPG's purchase price in 2006. Investors as well as analysts were questioning the over seven times value increase in Mey Icki since its privatization in 2003. Menezes, The new CEO, found himself increasingly overwhelmed by these issues. Had Diageo underestimated the uncertainties in the Turkish market? Would Diageo, with its broad range of brands, geographical spread, and significant financial resources be able to adapt to the changing environment and recoup its vast investment in Turkey? The case describes the forces that affect investment circumstances in emerging markets, raising the issue of how to best manage and prepare for risks. The case provides the context for the students to identify the potential elements that companies could face when investing in emerging markets where rules, legislation, and taxation can change and thus affect investment outcomes. The case challenges the students to ponder how companies should think about when investing in volatile markets and what it takes for them to succeed under uncertain and shifting circumstances.
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