International Expansion

The group has adopted a transnational approach to its internationalization strategy. “A transnational strategy is an international strategy through which the firm seeks to achieve both global efficiency and local responsiveness”, (Hitt, Ireland, & Hoskisson, 2011, p.229). This entails flexibility in local responsiveness while maintaining adequate global coordination.

However, it is increasingly adopting a multi-domestic approach in the fast growing emerging markets. This approach entails the decentralization of strategic business units according to operating regions to allow for customization of products towards the domestic markets (Hitt, Ireland, & Hoskisson, 2011).

Essentially, Diageo combines the two international corporate-level strategies to engage in growth and market consolidation. It has divided its market into regions and currently has five operating regions. They were initially more but some regions were integrated in particular, Africa with Turkey and Eastern Europe.

Diageo has adopted the two strategies in its internationalization strategy; acquisition and joint-ventures. The company has been on acquisition drive especially in Africa with concentrated efforts in East Africa. It initially acquires a substantial stake in an international firm with a sales purchase agreement (SPA) that allows it to acquire additional interest in the firm.

The company used this approach to acquire a 50% equity stake in Rum Creations Products (RCP) for $224 million in 2011. Industrias Licoreras de Guatemala (ILG), the parent company of RCP has a put option to dispose the remaining 50% in 2015 based on calculation of profit multiples. Diageo holds the preemptive rights to acquire this stake.

In another instance, Diageo acquired Turkish brewer, Mey İçki Sanayi VE Ticaret A.S for $2.1 billion in 2011. This is allowed it to gain access to a fast expanding market at the crossroads between Europe and Asia. The company realized $492 million in net sales from the acquisition and positioned it competitively to serve a burgeoning upper-middle nation.

Internationalization through the establishment of strategic stakes or outright acquisitions has been an industry trend. A similar strategic approach was adopted by rival, Anheuser-Busch Inbev when it completed the acquisition of a remaining 50% in Grupo Modello for $20.1 billion in 2012. This allowed it to establish a stronger presence in the Mexico and the Caribbean.

Host Country Overview: Kenya

Kenya is the 11^th largest African economy by nominal GDP valued at $37.2 billion with per Capita income averaging $900 (World Bank, 2013). It is East Africa’s largest economy and has a vibrant beer market which is ranked 3^rd in the continent at 17% behind Nigeria and South Africa with market shares of 36% and 18% respectively (Irungu, 2012).

The country has an estimated population of 44 million people with five ethnic communities dominating the demographics. Kikuyu, Luhya, Luo, Kalenjin, and Kamba have combined population concentration of 72% (CIA, 2014a). Kenya has population growth rate of 2.27% with an urbanization level of 24% growing annually at a rate of 4.36% (CIA, 2014a).

Literacy levels have been improving to a current level of 87.4% with the major driver being the provision of free primary education across the country in public schools. It has gained significant political stability in the aftermath of a post-election crisis in 2007/08. Economic growth rate is robust rising 4.6% in 2012 (CIA, 2014a).

It is projected to average to average similar levels in 2013 and is expected to accelerate past 5% in 2014. Unemployment rate is high at 40% for the general population but a much higher 70% youth unemployment. Poverty level are generally high at just under 50% but is expected to decline as urban incomes continue to rise.

Overhead inflation has declined to 9.4% with underlying inflation just under 5% while the Central Bank Discount rate remains stable at 8.25% (CIA, 2014a). This has meant that commercial bank lending rates have stabilized at about 20%. The capital markets are vibrant with equity having a market capitalization of $23 billion.