International Management

1. How attractive was Turkey as a foreign direct investment destination in 2013? In 2011? What are the attractions and risks inherent in this market for a company like Diageo?
   Turkey was the world’s 17th most populous country and 16th largest US economy with a young and dynamic population and rising middle class. It was also one of the countries that had survived the 2008 recession without needing the support of public-sector for its banking industry. With more than the average promising growth rates, single digit inflations, and reduced unemployment it had become one of the favourite destinations for FDI. The average age of the populations was 30 and the nominal GDP in 2011 was USD 775 B with a 6% increase over 2010 (Exhibit 1). In 2011 Turkey was expecting to upgrade its investment rating (Exhibit 2). Not considering the condition of Diageo company, Turkey grew stronger from 2011 to 2013. In Exhibit 1, the nominal GDP of Turkey increase by 6% since 2010 to USD 823 B with the population increasing to 76 million at an average age of 30 years. The percentage of people earning at least USD 5000 annually increased to 16469000 from 15863000 in 2011 signifying that Turkey was a perfect platform for any potential investment given the diaspora of the people. Diageo which is the world’s leading premium drinks company saw Turkey as the perfect platform in 2011 given the economic and financial condition of Turkey combined with the financial power and characteristics of the people. In 2011, Diageo purchased Mey Icki which had high operating profit margin and would increase the Diageo’s global margin. As the country’s economic and demographic indicators were improving, its tourism industry was growing and the march towards Westernization was increasing too. This led to doubling sales of alcoholic drinks rising from 614 million litres to 1.127 billion litres (Exhibit 3). Turkey’s spirit market grew by 4% every year. The once underdeveloped beverage sector of Turkey was on the grow with most alcohol being consumed in tourist resorts and large cities, where the concentration of young people was high and influence of Western culture was growing strong. The biggest inherent risk in this kind of market for a company like Diageo would be to proceed with the investment without analysing the non-financial factors or without evaluating the political and social factors. Although the platform for an investment was perfect in terms of financial benefits, but the external risks in terms of trade conditions and taxes was something that could pose threat to Diageo and which it never evaluated despite having invested in various countries since 2007 (Exhibit 2). Diageo purchased Mey Icki for almost three times the price, USD 2.1 B, for which TPG had purchased it just on the grounds of financial basis. The long-term vision of financial gains blindfolded Diageo to holistically evaluate the decision of investment and consider the various risk factors. Diageo had already faced a clash with the Turkish government over a 6-year term dispute about tax claims. This short sightedness turned the financial attractive ground into a poor investment decision when certain constraints were imposed on the sale of the beverages in Turkey.
2. What do you think about the strategy implemented and the results achieved by successive owners of Mey Icki?
   Mey Icki had changed ownership twice after it was privatized and handed over to Limak-Tutsab in 2003 for USD 292 M. It was then sold to TPG for USD 900 M and then finally sold to Diageo for USD 2.1 B in 2011 (Exhibit 4). Initially known as TEKEL, the Turkish government decided to sell its tobacco and alcohol arm separately by deciding to privatize the company in 2003, which initially was named was TEKEL. In a bid for purchasing the company, Nurol-Limak-Ozaltin-Tutsab (NLOT), won the bid and then renamed it as Mey Icki. NLOT then hired an ex Diageo and ex coca cola company executive to as a CEO to steer the helm of this new organization. They also declared that the company would maintain product quality and variety while rejuvenating its existing brands, focussing on innovation and creating new global brands. By the end of 2005, the company had introduced 13 new brands and doubled exports to 3.5 million litres. It also rejuvenated raki’s brand image (Exhibit 5) and was producing 8 different raki’s brand. Based on the strategy incorporated by NLOT, they had a vision to revive the brand of TEKEL and they were right on spot with respect to the actions they undertook to execute it. They hired one of the most influential leaders and achieved their targets within the timelines that they had decided. Finally, NLOT had grown Mey Icki enough to strike a deal with TPG to sell it for USD 900 M. The condition of TPG were different from that of NLOT as there was an increased competition from Burgaz, a fellow raki producer. However, the legality of Burgaz was questionable given their record of mismanaging a bank into bankruptcy. Hence, TPG strengthened its lobbying efforts and appointed a local politician and businessman as a senior adviser. They finally acquired Burgaz because of the family turmoil of Burgaz. Under the new leadership Mey Icki reduced their production facilities to improve operational efficiency. They removed some of the unpopular products and increased the number of its brands and production volumes. They also focussed on the packaging types for their brands, international marketing and reached an export value of USD 25 M. They invested heavily in the marketing expense and built well recognized brands in all categories to different customer segments. They did not pay out any dividends and doubled their earnings to over USD 200 M. The mindset of TPG was entirely different than that of NLOT as TPG was more focussed on expanding the operations of Mey Icki and wanted to be profitable and have a strong cash conversion. As per their strategy and their objectives, they took appropriate measures and could cash in with an operating profit margin of above 40%. They had already decided to exit the investment after four years and wanted to accelerate their financial growth as much as they could in the four years, and which they did by expanding their operations, cutting down unprofitable products. Finally, when Diageo went forward to purchase Mey Icki, their strategic objective was entirely different as compared to the previous two owners. They wanted to expand the brand of Diageo in emerging markets such as Vietnam and China, which had a rapidly growing middle class. However, their strategic objective operations could never take off as Turkey parliament passed off a law that severely constrained the way in which the sales and operation of the beverage was constrained. There were time restrictions on its selling, place restrictions, advertisement restriction and even age restrictions. This hurt the business model of Mey Icki under the new leadership. The strategy with which Diageo had acquired Mey Icki was very sound, however, the timing was very unlucky for the new clients. The parliament legislations had never been passed on the past and they just happened at the time when Diageo owned the firm. However, Diageo should always have evaluated the inherent risk by analysing the market risk since, their target firm was in an entirely different cultural setup.
3. What should Diageo management do now?  
   In terms of the strategy, Diageo should leverage the current situation to its best possible advantage. Since, the legislative laws now apply to each firm trying to enter the Turkish market, Diageo should raise the barriers to entry for other players that are trying to enter the market. Diageo should also deepen its existing roots and target all the premium segments with its new raki, vodka, and wine brands. Diageo should leverage the limited avenues of promoting any company in Turkey and its geographical reach (Exhibit 6) and ensure that it is the only market leader in terms of all the product mix catering to the Turkish beverage market. Hence, it should convert its mistake of not weighing the internal factors of legislation into an opportunity for blocking out all the potential new entrants or competitors from entering the Turkey. It should also simultaneously strengthen its brand and build loyalty with the existing customers by laying out greater emphasis on premium customers and raise their switching costs to competitors.  

Exhibit 1

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Exhibit 2

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Exhibit 3

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Exhibit 4

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Exhibit 5

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Exhibit 6

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