diageo 2014 annual report

8/10/2019 Diageo 2014 Annual Report

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AnnualReport 2014


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About our reporting

Over the past year, Diageo has undertakena review of its corporate reporting format andstructure. This has resulted in the separation ofDiageos UK and US disclosure requirementsand enables Diageo to progress its alignmentagainst the International Integrated ReportingCouncils Framework. This Annual Report2014 is based on UK reporting requirementsand Diageo separately files an Annual Reporton Form 20-F with the US Securities andExchange Commission. In addition, Diageohas prepared a Sustainability & ResponsibilityPerformance Addendum, which is available

online at www.diageo.com and outlinesfurther economic, social and environmentaldisclosures in line with the Global ReportingInitiative Sustainability G4 Guidelines and theUnited Nations Global Compact advancedreporting criteria. The Sustainability &Responsibility Performance Addendum2014, as well as the companys websiteand any other website referred to in thisreport, are not incorporated by referenceand do not form part of either this AnnualReport 2014 or the Annual Report onForm 20-F.

Within this Annual Report 2014, we demonstratethe connections between our competitiveenvironment, group strategy, business model,and integrated risk management within astringent corporate governance system.

Reflecting our commitment to transparencyand best practice reporting, our approachwill continue to develop over the comingyears to ensure we meet the expectationsof our investors and other stakeholders, andprovide visibility into how Diageo createssustainable value.

2014 Performancehighlights 1

Volume

EU156.1m2013: 164.2 millions of equivalent unitsOperating prot*

3,134m2013: 3,479mNet sales

10,258m2013: 11,303m

Earnings per share*

95.5p2013: 103.1p

Marketing spend

1,620m2013: 1,769m

Total dividend per share**

51.7p2013: 47.4p

2014 Sustainability &Responsibility highlights

Alcohol in societyResponsible drinking programmes

373 programmes2013: 315

Water efficiency***

6.9L/L2013: 7.0L/L

Employee super-engagement

38%2013: 41%

1 Where appropriate, comparatives have been restated following the ad option of new accounting standards. * Before exceptional items. **Includes recommended nal dividend of 32.0p. *** In a ccordance with Diageos environmental reporting methodolo gies data for 30 June 2013 has been restated and total water used excludes irri gation water for agricultural purposes on land under the

operational control of the company. Within KPMGs limited assurance scope. Please see page 140 for further details.

This is the Annual Report of Diageo plc for the year ended 30 June 2014 and it is dated30 July 2014. The Annual Report is made available to all shareholders on Diageoswebsite ( www.diageo.com ).

This report includes names of Diageos products, which constitute trademarks or tradenames which Diageo owns or which others own and license to Diageo for use. In thisreport, the term company refers to Diageo plc and the terms group and Diageo refer tothe company and its consolidated subsidiaries, except as the context otherwise requires.

Diageos consolidated financial statements have been prepared in accordance withInternational Financial Reporting Standards (IFRS) as adopted for use in the EuropeanUnion (EU) and IFRS as issued by the International Accounting Standards Board (IASB).References to IFRS hereafter should be construed as references to both IFRS, as adoptedby the EU, and IFRS, as issued by the IASB. Unless otherwise indicated, all financialinformation contained in this document has been prepared in accordance with IFRS.

Unless otherwise stated in this document, percentage movements refer to organicmovements. For a definition of organic movement see page 50. Share, unless otherwisestated, refers to value share. The market data contained in this document is taken fromindependent industry sources in the markets in which Diageo operates. Unless otherwisestated in this document, the percentage figures presented are reflective of a year-on-yearcomparison, namely 20132014, only.

The brand ranking information presented in this report, when comparing volumeinformation with competitors, has been sourced from data published by IWSR, ImpactDatabank, Nielsen, Beverage Information Group or Plato Logic. Market data informationand competitive set classifications are taken from independent industry sources in themarkets in which Diageo operates.

Diageo plc 2014.

DIAGEO ANNUAL REPORT 2014DIAGEO IN 2014


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OURBUSINESS

Diageo is a global leader in beverage alcohol with iconicbrands in spirits, beer and wine. We invest behind our brandsto drive growth, providing consumers with choice and qualityacross categories and price points.

Our business is built on foundations laid by the giants of our industry.Arthur Guinness, Alexander Walker and all those that followed intheir footsteps, cared deeply about the people and businesses theyfostered. They were driven to create products that would last forgenerations, the best conditions for their people, and the best financialperformance. Today, we act like those entrepreneurs, passionate about

our brands, our customers and consumers, our communities, andsociety as a whole. Our purpose is to help our consumers celebratelife, every day, everywhere, and to do so responsibly.

We give our people the freedom to do the best work of their careers.We take great pride in what we do, and in how we do it. Above all wevalue each others commitment to delivering the best.

WE PRODUCE WE MARKET WE INNOVATE WE SELL

Every year we produce more than6.5 billion litres of our brands, frommore than 100 sites in 30 countries.

Our supply functions are responsiblefor the distilling, brewing, bottling,packaging and distribution of ourbrands. We are committed to efficient,sustainable production to the highestquality standards, and are proud thatour supply facilities are recognised asleaders in environmental sustainability.

Our 21 markets are designated as

import markets, import and third-partyproduction markets or import and localproduction markets. Our export-ledInternational Supply Centre (ISC),based in Europe produces many ofour heritage brands, including ourScotch whisky products. It employsover 4,000 people across more than55 sites in Scotland, England, Ireland,Italy and the Netherlands.

We are committed to ensuring that ourbrands are at the front of consumersminds whenever a purchase decisionarises. The strength of our portfoliomeans that we have relevant brands atalmost every price tier of every category.

We work tirelessly to engage and delightexisting and new consumers, constantlyinnovating with our products and howwe market. For decades our brands havebeen at the forefront of marketinginnovation and the same remains truetoday. We take seriously our obligations

to market our brands responsibly, andto help our consumers make informeddecisions about drinking, or not drinking.We are committed to the developmentand implementation of programmesto educate consumers aboutresponsible drinking.

Innovation is critical to our continuedgrowth. We are committed to ndingbreakthrough innovations and ideas toserve our customers and consumers.We identify new consumer trends, andinnovate at scale boldly. Innovation isa permanent engine of growth forour business and we are restless inour search for new products. We areopen-minded to where these ideaswill come from, combining ourworld-leading technical and researchcapability with investments in smallerstart-ups. In each of the last ve years

our innovation pipeline has delivereddouble-digit growth for Diageo.

Everyone at Diageo is encouraged tosell or to help to sell. This is just oneexpression of the world-class customerfocus that is at the heart of our business.Our founders and all those who followed,were obsessed with providing the bestquality products to their customers inmarkets at home and abroad. Todaywe are no different. In each of our21 markets, we are passionate aboutensuring our products are available toconsumers in every appropriate shopor bar. We are continually working todeliver amazing consumer experiences

and to extend our sales reach.

02 DIAGEO ANNUAL REPORT 2014OUR BUSINESS


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OURSTRUCTURE

Diageos strength is in its geographic reach. We operateas 21 geographically based markets around the world andhave a presence in over 180 countries. We employ 28,000talented people across our global business. 39% of Diageosbusiness is in the emerging markets in Latin America, Asia,Africa, Eastern Europe and Turkey. This presence is balancedthrough our strong businesses in the worlds most protablebeverage alcohol market, the United States, and an integratedWestern European business.

% SHARE OF NET SALES BY OUR 21 MARKETS***

EACH OF OUR 21 MARKETSIS ACCOUNTABLE FOR ITS OWNPERFORMANCE AND FORDRIVING GROWTH

North America Western Europe Africa, EasternEurope and Turkey

Latin Americaand Caribbean

Asia Pacic

>20% US Spirits & Wines Western Europe

3-6% Diageo-GuinnessUSA (DGUSA) NigeriaEast Africa TurkeyAfrica RegionalMarkets

WestLAC

Paraguay,

Uruguay & Brazil

Global Travel Asia& Middle East

2-3% Canada Russia &Eastern EuropeSouth Africa

South East AsiaAustraliaNorth AsiaGreater China


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Organic equals reported movement for volume. See page 50 for denition of organic movement.*IWSR; **Impact Databank; ***Nielsen; ****Beverage Information Group; *****Plato Logic.

BRANDPERFORMANCE

These brands deliver approximately two-thirdsof our net sales. They have broad consumerappeal across geographies, and while eachof them has a rich heritage, they all continueto innovate and expand to meet new andemerging consumer trends.

Johnnie Walker Crown Royal JB Buchanans Windsor Bushmills

Category Scotch whisky

No.1SCOTCH WHISKY

IN THE WORLD*

Canadian whisky

No.1CANADIAN WHISKY

IN THE WORLD**

Scotch whisky

No.5SCOTCH WHISKY

IN THE WORLD*

Scotch whisky

No.3PREMIUM SCOTCH

WHISKY IN LATINAMERICA ANDCARIBBEAN*

Scotch whisky

No.2SUPER PREMIUM

SCOTCH WHISKYIN ASIA PACIFIC*

Irish whiskey

No.3IRISH WHISKEY

IN THE WORLD*

Key markets United StatesGlobal Travel& Middle EastBrazilMexicoChina ThailandSouth Africa Taiwan

United StatesCanada

SpainFranceSouth AfricaUnited States TurkeyBelgiumPortugal

United StatesMexicoVenezuelaColombia

KoreaChina

United StatesRussiaIrelandFranceGreat Britain

Volume movement (6)% (4)% (7)% (13)% (5)% 8%

Organic net sales movement (4)% 1% (8)% 6% 1% 7%

Reported net sales movement (9)% (3)% (11)% (24)% 1% 4%

Read more on pages 40-41.

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Captain Morgan Smirnoff Croc Ketel One Baileys Don Julio Tanqueray Guinness

Rum

No.2BRAND IN THE RUM

CATEGORY IN THEWORLD**

Vodka

No.1PREMIUM VODKA

IN THE WORLD**

Vodka

No.2ULTRA PREMIUM

VODKA IN THEUNITED STATES***

Vodka

No.2SUPER PREMIUM

VODKA IN THEUNITED STATES***

Liqueur

No.1LIQUEUR IN

THE WORLD**

Tequila

No.1ULTRA PREMIUM

TEQUILA IN THE WORLD*

Gin

No.1IMPORTED GIN

IN THE UNITEDSTATES****

Beer

No.1STOUT IN THE

WORLD*****

United StatesCanadaGreat BritainGermanyRussiaSouth Africa

United StatesGreat BritainCanadaBrazilSouth AfricaAustralia

United StatesBrazilGreat Britain

United StatesCanadaAustraliaBrazil

United StatesGreat BritainCanadaGermanySpain

United StatesColombiaAustraliaCanada

United StatesSpainCanadaGreat BritainAustraliaItaly

Great BritainIrelandNigeriaUnited StatesIndonesiaCameroon

6% (1)% 2% 3% (2)% 27% 4% (5)%

6% (2)% 2% 6% 1% 27% 6% (1)%

1% (7)% (2)% 2% (3)% 22% 3% (5)%

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OUTSTANDINGBREADTH ANDDEPTH ACROSSPRICE POINTS

We have brands at almost every price tier ofevery category. The range of our price pointsmeans we are able to capture consumptionshifts across the price spectrum. The breadthand depth of our business provides resilience,and enables us to sustain our performanceover time.

Scotch whisky Other whisk(e)y Vodka Rum

Ultra premium*

Super premium

Premium

Standard

Value

*Ultra premium includes prestige.

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Liqueur Tequila Gin Local spirits Beer

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OURPERFORMANCEAMBITION

Diageos Performance Ambition is to createone of the best performing, most trusted andrespected consumer products companies inthe world.

Prioritised investment in:

We measure progress against our Performance Ambitionusing the following nancial and non-nancial indicators:

Efficient growth

Organic net sales

Operating margin Earnings per share

Free cash flow

Consistentvalue creation

Return on averageinvested capital

Total shareholder return

Strong reputation

Alcohol in society

Water efficiency

Fully engaged employees

Employee super-engagement

Targeted investment in:

DIAGEOS STRATEGY AIMS TO DELIVEROUR PERFORMANCE AMBITION THROUGH:

Premium core spirits* Reserve Other spirits* Beer Wine

Read more on page 14. Read more on page 14.

* Spirits include ready to drink (RTDs)

See our Key Performance Indicators (KPIs) on pages 20-21.

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CHAIRMANS STATEMENT: IN BUILDING REPUTATION,DIAGEO STARTS FROM APOSITION OF STRENGTH.

Ivan and the Executive Committee haveset out the clear and stretching ambitionto create one of the best performing, mosttrusted and respected consumer products

companies in the world. To deliver thisambition, and with the support of yourBoard, Ivan has put in place a strategicframework to guide commercial executionand the allocation of our resources.

Performance and dividend This financial year has seen a number ofmacroeconomic and one off challengesimpact our performance. Cyclical weaknessand volatility have slowed the growth of theemerging markets, and, while growth in thedeveloped markets is improving, the paceof economic recovery remains uneven.We were quick to adapt to changing marketand competitive dynamics, managing ourcost base and shifting our organisation,culture and behaviours. The business is nowwell placed to step up our performance todrive efficient growth and consistent returnsfor shareholders.

This confidence in Diageos future prospectshas enabled the Board to recommend a finaldividend of 32 pence per share, to be paid toshareholders on 2 October 2014. This bringsthe total dividend for the year to 51.7 pence pershare, an increase of 9% over the prior year.

Strategic progressDiageo has an enviable history ofentrepreneurialism that has built theleadership of our brands and business overmany generations. Critical to our futuresuccess as a global consumer goodscompany operating in over 180 countries,is our ability to maintain that entrepreneurialspirit. We continue to build our agilityat a market level, empowering our localbusinesses to act with speed and authority. This journey was started in 2011 andculminated in the removal of our regional

hub structures in Africa, Latin Americaand Asia this year, thus allowing for fasterand more efficient decision making.

The reorganisation programmeannounced in January will improveoperational efficiencies and will also driveout cost. It has identified annual savingsof 200 million by the end of fiscal 2017.

Diageo continued to expand its globalpresence this year, and I am particularlypleased with the progress made in achievinga majority stake in United Spirits Limited(USL), through the acquisition of anadditional 26% shareholding on 2 July 2014. This acquisition takes Diageos holding in USLto 54.78%.

Trust and respect Trust and respect have never been moreimportant for a global business. In buildingreputation Diageo starts from a position ofstrength. We believe that alcohol can playa positive role in society and in order toachieve this we need to continue partneringwith others to help reduce the harmful useof alcohol. As part of the United Nations (UN)

Dr Franz B Humer, Chairman

Diageo has an enviable history of entrepreneurialismthat has built the leadership of our brands and businessover many generations. Critical to our future successas a global consumer goods company operatingin over 180 countries, is our ability to maintain thatentrepreneurial spirit.

Interim dividend per share

19.7p ( 9%)31 December 2012: 18.1p

Final recommended dividend per share

32.0p ( 9%)30 June 2013: 29.3p

Total dividend per share*

51.7p ( 9%)Full year 2013: 47.4p

* Includes recommended nal dividend.

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HOW WE WILLDELIVER OURAMBITION: PERFORMANCEDRIVERS

Diageos performancedrivers are key to achievingour Performance Ambitionand each market focuseson the priorities whichare relevant to drivinggrowth in that market.

STRENGTHEN ANDACCELERATE GROWTH OFOUR PREMIUM CORE BRANDSOur premium core brands are broadlydistributed and enjoyed by consumers in thedeveloped world and have wide appeal to theincreasing number of middle class consumersin emerging markets. They include iconicbrands such as Johnnie Walker, Smirnoff,Captain Morgan and Baileys.

WIN IN RESERVE

IN EVERY MARKET The growth of luxury consumption is aglobal phenomenon. There are forecast to be400 million new consumers in this category by2020. Winning in reserve, our luxury portfolio,is a priority for Diageo and during the last veyears we have transformed our luxury brandbuilding capabilities. We have doubled thenet sales of our reserve business, which nowaccounts for 13% of our total net sales and weare now the leaders in the super and ultrapremium segments. This year Diageo hasextended this leadership across key categories.

SMIRNOFF: EXCLUSIVELY FOR EVERYBODYSmirnoff is the No.1 spirit brand in the world by volume and the leadingvodka brand in the United States (IRI data 2013). This year we launcheda new global advertising campaign, Exclusively for Everybody, toreposition the brand and reinforce Smirnoffs credentials as a greatquality vodka that is accessible to everyone. While remaining rootedin promoting responsible drinking, the new campaign celebrates thebrands belief that exclusivity for few is less fun than good times for all.

JOHNNIE WALKER BLUE LABEL LIMITED EDITION COLLECTION

In the spirit of craftsmanship, heritage and modernity, this year Johnnie Walker teamed upwith luxury goods designer, Alfred Dunhill, to create the Johnnie Walker Blue Label LimitedEdition Collection. The gift pack, designed by Alfred Dunhill, features a limited editionbottle with its interior evoking the contours of a map.The bottles exterior marries the Johnnie WalkerBlue Label signature blue colour packagingwith Dunhills signature Chassis design andgunmetal nish. The innovation brings thetwo iconic brands shared journey to life.We also launched a Travel Retail Exclusivegift pack that includes a uniqueone-litre bottle.

No.1spirit brand in theworld by volume(Impact Databank2013).

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INNOVATE AT SCALE TO MEET NEW CONSUMER NEEDSWe believe our ability to innovate gives Diageocompetitive advantage. Its a proven driver of

growth and is critical to performance in eachof our markets. For each of the last ve yearsinnovation has accounted for at least half ofDiageos net sales growth, and has growndouble-digit. As a result of dening ourPerformance Ambition we have put renewedfocus on bigger, more scalable ideas,identifying and delivering results throughimpactful innovations.

DELIVERING GROWTH: BULLEIT RYEBulleit Rye was launched in 2011 to criticalacclaim and has exceeded expectations;its 95% rye mash is exactly what keymixologists seek for making authenticclassic whiskey cocktails. Its success isdened by the growth it continues todeliver in a measured and sustained wayas it builds its credentials and presencein the North American whiskey market.

DRIVE OUT COSTSTO INVEST IN GROWTHBy reducing costs we can invest more inthe areas that we believe will drive futuregrowth. We are committed to a long term,cost conscious culture which results inongoing, year-on-year improvementsin our cost base and margins.

ENSURE WE HAVE THE TALENT TODELIVER OUR PERFORMANCE AMBITIONOur Performance Ambition can only be achieved by having the rightpeople with the right capabilities in place across our business whocan deliver our plans. Ensuring that we have the best talent nowand in the future is one of our biggest challenges and one of ourgreatest opportunities.

BUILD AND THEN CONSTANTLY EXTENDOUR ADVANTAGE IN ROUTE TO CONSUMEROur route to consumer performance driver is about enabling andempowering our markets to drive broader distribution and higher ratesof sale for our brands in an efficient way. The global programme, that wasrolled out this year, looks at how we can protably extend where ourbrands appear and improve the quality of how our brands appear atevery appropriate drinking or buying occasion. Each market is responsiblefor its own Route to Consumer programme, and for building an efficientlocal platform that creates competitively advantaged consumer andshopper experiences.

TATA CONSULTANCY SERVICESThis year we selected Tata ConsultancyServices to manage our global ITinfrastructure, simultaneously improvingefficiency and delivering cost savings.This decision was an important milestonein a programme to transform the waywe provide IT services to our 28,000employees. Tatas solution providesa greater level of exibility anddifferentiation of services to meetmarket needs, and gives each marketthe freedom and agility to drive growth.

CHAMPIONING DIVERSITYAt Diageo we champion diversity in the workplace and we believethat gender diversity gives us competitive advantage. We areproud that over 40% of our Executive Committee membersare women and that almost 30% of senior leadership roles atDiageo are held by women. Diageo offers career developmentprogrammes to all employees across all levels and we arecommitted to growing and developing our future leaders.

GUINNESS NIGERIA DISTRIBUTION CENTRESPerformance in Nigeria has been challenging this year, but the Routeto Consumer programme has enabled us to take a new approach toexpanding our distribution footprint. Until recently, we had directcoverage of outlets though our distributors, who used vans todeliver primarily in urban areas. Unfortunately this meant that therewere pockets of consumers we didnt reach in semi-urban and ruralareas because small deliveries made van distribution unprotable.By positioning 40-foot shipping containers in key areas outside thecities, we created economical Guinness Distribution Centres fromwhich motorised tricycles can deliver beer more widely. This gives usthe exibility to reach the next tier of potential consumers. 40% Over 40% of our ExecutiveCommittee members are women.

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Materiality matrix (a comparative analysis of S&R interests)

HOW WE WILLDELIVER OURAMBITION: SUSTAINABILITY& RESPONSIBILITY

Strong communities supported by localeconomic growth and a stable supply ofnatural resources are critical to Diageosnancial performance. This makes doingbusiness in a sustainable and responsibleway, including creating a positive role foralcohol in society, critical to achievingour Performance Ambition.

Through Diageos Sustainability & Responsibility(S&R) Strategy, we manage the companys mostmaterial social and environmental impactswith a goal of creating shared value for bothour business and our diverse stakeholdersaround the world.

At the core of our approach is a commitmentto create a positive role for alcohol in society,which is fundamental to Diageos purpose ofcelebrating life, every day, everywhere, anda critical expectation of our business.

Meeting stakeholder expectations alsoinvolves creating a positive role for our businessand the industry as a whole. This includesprotecting the watersheds on which ouroperations and communities rely, andinvesting in community programmes thatempower stakeholders throughout our valuechain. It also includes managing impacts thatare fundamental for any consumer products

company, such as governance and ethics,people and labour, and other environmentalissues such as greenhouse gas emissions,waste and packaging.

Diageos S&R Strategy supports ourambition to be one of the best performing,most trusted and respected consumerproducts companies in the world. It bringscommercial benefits, including securingresources and raw materials, recruiting andretaining a talented and diverse workforce,creating operational efficiencies and ultimatelymaintaining our licence to operate aroundthe world. S&R projects also save costs.

For example, a water recovery project atour Tusker brewery, which operates in awater-stressed part of Kenya, started payingreturns in just six months and now generatessavings of 500,000 per year.

Key stakeholders and their expectationsWe define our stakeholders as all those whoaffect or are affected by Diageos business. Theyinclude internal and external stakeholders,ranging from employees, investors, customersand suppliers, to governments and regulators,not-for-profit organisations, consumers and

local communities. In 2013, we invitedmore than 40 stakeholders to share theirexpectations of Diageo in terms of our socialand environmental impact. Communicatingabout the risks of alcohol consumption andtackling alcohol misuse were among themost frequently cited. A common piece offeedback was that all leaders in the alcoholindustry should work together to have a

greater collective impact on reducingalcohol misuse.Empowering stakeholders in our value chain

through skills and education particularly forsmallholder farmers and women was alsofrequently cited as an important contributionto socio-economic development, while athird key expectation concerned watersecurity, particularly in water-stressed areas.Stakeholders noted the need to continue towork on the issue within our operations butalso to collaborate with local communitiesand raw material suppliers.

Defining our material issues To identify and prioritise our materialimpacts, we coupled feedback from externalstakeholders, our Board and managementteam, with commercial analysis. The resultsare shown in the materiality matrix above,with external stakeholder interests illustratedon the y axis and business interests on thex axis. Business interests represent the impact

each issue might have on factors includingequity, market share, price, operating profit,our reputation and employee engagement.

We recognise that this matrix is not fullycomprehensive but it is illustrative of thevariety of concerns stakeholders may havein the more than 180 countries in which wesell our products. We will continue to updateit as we engage individuals and organisationsaround the world. We are currently in theprocess of developing targets for the mostmaterial issues, and we aim to announcethem in December 2014.

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ALCOHOL IN SOCIETYDiageos iconic brands are enjoyed bymillions every day and it has long beenour priority to ensure that they are enjoyedresponsibly. While drinking alcohol canplay a positive role in social occasions andcelebrations for those who choose to drink,Diageo recognises that the misuse ofalcohol can cause serious problems forindividuals, communities and society.Following a United Nations (UN) politicaldeclaration on the prevention and controlof non-communicable diseases, the WorldHealth Organization (WHO) has set a targetof reducing alcohol-related harm by 10%across the world by 2025. Diageo sharesthis goal: every one of our responsibledrinking programmes, partnerships andcampaigns are in service of this.

In 2012, 13 leading alcohol beverage

WATER ANDTHE ENVIRONMENTDiageo uses a wide range of resources inits business. Some, like fossil fuel, are finite;others, like cereals, are vulnerable to theeffects of climate change. Water, the mainingredient in all of our products, is becomingincreasingly scarce in many parts ofthe world.

While our S&R Strategy includes targetsand policies aimed at reducing the emissionsof greenhouse gases, reducing the amountof waste sent to landfill, and improving thesustainability of our packaging, we andour stakeholders recognise that waterstewardship is the most material aspectof our environmental strategy.

industry standards for responsible marketing;continuing to support effective programmesand partnerships to tackle drink drivingand excessive drinking; and advocatingeffective, evidence-based policy.

The Diageo Marketing Code and DigitalCode are our mandatory minimum standardfor responsible marketing, and we reviewthem every 12-18 months to ensure theyrepresent best practice. In addition to abidingby these codes, all brands operate under theDiageo Alcohol Beverage Information Policywhich mandates what information Diageoprovides on labels, including, among otherprovisions, a link to our responsible drinkingwebsite, www.DRINKiQ.com.

companies, including Diageo, announcedthe Global Beer, Wine and Spirits ProducersCommitments to Reduce Harmful Drinking.Built on long-standing industry efforts, thesecommitments represent the largest everindustry-wide initiative to implement effectiveways to address harmful drinking. The initiativeidentified five broad areas in which to progressover five years from January 2013: (1) reducingunderage drinking; (2) strengthening andexpanding marketing codes of practice; (3)providing consumer information and responsibleproduct innovation; (4) reducing drink driving;and (5) enlisting the support of retailers.Diageo and the other signatory companieshave pledged to ensure that progress inimplementing the commitments is transparentand independently assured.

Beyond these commitments, our approachto creating a positive role for alcohol in societyfocuses on promoting rigorous company and

This year, 23 of our sites, producing aboutone third of Diageos packaged volume, weredesignated as being located in areas whichare water-stressed*, which means they havea higher water supply risk. More than half ofthese sites are in Africa, where the UN predictsthat nearly 50% of the population will facewater scarcity by 2025. Water challenges inthese areas will therefore affect not only Diageosbusiness but also our business partners andthe local communities who rely on waterfor their livelihoods.

Our approach to water stewardship

focuses on driving progress against targetsfor water efficiency, water wasted in water-stressed areas and water quality. We also investin infrastructure and sanitation through ourWater of Life programme to provide accessto clean water in local communities,primarily in Africa.

373responsible drinking programmes.

EFFECTIVE PROGRAMMESAND PARTNERSHIPSDiageo supports 373 responsible drinkingprogrammes in 53 countries. These programmesfocus on preventing drink driving, underagedrinking and excessive drinking. We believethat efforts to reduce the misuse of alcohol aremost effective when government, civil society,individuals and families, as well as the industry,work together.

Our Model Cities programme in twoMexican cities (Quertaro and Mexico City)demonstrates the effectiveness of engagingall stakeholders in a municipality, includinglocal retailers, educators, police andgovernment, to promote responsible drinkingthrough education and responsible service.Between 2012 and 2013, evaluation ofthe programme showed importantimprovements in attitudes toward alcohol,reductions in drink driving, and improvementsin age verication where alcohol is sold.

COLLECTIVE ACTIONTO ADDRESS WATER STRESSWe are committed to improving the waterefficiency of our operations, and this yearreduced absolute water withdrawals by9%, improved water efficiency by 2.4% anddecreased water wasted at water-stressedsites by 12%. While we are proud of thisimportant accomplishment, we recognisethat collective action with all our stakeholdersis critical to managing local water suppliessustainably. This is why in Nairobi, Kenya,where three of our 23 water-stressed sites arelocated, Diageo and Kenya Breweries Limited

recently established the Nairobi WaterRoundtable a multi-stakeholder grouptasked with sharing best practice, inuencinggovernment and committing to interventionprojects to protect local watersheds.

12%decrease in water wasted atwater-stressed sites this year. *See page 25 for a map of our water-stressed sites.

Read our S&R Review on pages 42-49.

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Like most businesses, we create wealthdirectly for our local stakeholders throughour daily business operations, includingproviding jobs, sourcing locally, and payinglocal duties. However, creating wealth in a

lasting way requires partnering with othersto address development challenges suchas education and health, and advocatinghigh standards of governance in thecommunities where we operate.

We invest in a variety of programmes thataim to empower our stakeholders, whichrepresent our long-standing commitment

From the moment they join Diageo,we want our employees to feel engaged:aligned with our strategy, connected toour values and motivated to achieve theirpotential. And above all, we want themto be safe. Our Zero Harm philosophy isaimed at eliminating workplace accidentsand we have a target of having fewerthan one lost-time accident per 1,000people by 2015 as a milestonetowards that ambition.

COMMUNITY EMPOWERMENT

OUR PEOPLE

empowering women in our localcommunities. We also support localcharities and disaster relief effortsthrough company contributions aswell as through the Diageo Foundation,

a UK-registered charity.

Maintaining a culture that embracesdiversity from recruitment through tosenior leadership is particularly importantto Diageos people strategy. We havea goal to have 30% of senior managementpositions held by women.

to investing in communities. Our approach notonly seeks to maximise the positive impactDiageo and its business partners can haveon society, it also seeks to strengthen ourvalue chain. In addition to helping to provide

access to water for local communities throughWater of Life, key programmes includepartnerships and training for smallholderfarmers supplying our ingredients; DiageosLearning for Life programmes that provideeducation and vocational training in thehospitality, retail and alcohol industries;and Plan W programmes that focus on

We support our employees through clearpolicies, competitive reward programmes,coaching and development opportunities,and health and wellbeing initiatives. Wecontinually monitor the impact of theseprogrammes on employee engagement,conducting an annual values-based survey,which is now in its 13th year. The surveyallows Diageo at group, market, functionaland team levels, to assess how wellwe are bringing our values to life andengaging employees.

14,000people enrolled in a Learningfor Life programme this year.

45%global reduction in lost-timeaccidents since 2013.

LEVERAGING THE ECONOMIC IMPACTOF THE HOSPITALITY INDUSTRYIn an effort to reduce youth unemployment inScotland, Diageos Learning for Life programmeprovides young unemployed people withcoaching, core employability skills and specialistbartender training. Participants benet fromadvice in areas such as interview preparation,teamwork, and communication helping toboost their life skills and condence in support

of their journey to employment. Theyare also offered ongoing mentoring andassistance to guide them both during thetraining and the job application process.Learning for Life in Scotland is the mostrecent addition to this agship programmethat we run in 30 countries, primarily inLatin America and the Caribbean.

HARVESTING EXCELLENCE INVESTING IN SAFETY IN YPICAWhen we take on a new business we workquickly to introduce our safety standards.Diageo acquired Ypica in 2012, takingon some of Brazils best-known brands and a business that employedapproximately 1,000 people. We appliedour Zero Harm safety philosophy to thebusiness, and identied two particularhotspots for accidents cane harvest andthe handling of returnable glass. Thanksto our Harvest Excellence programme,lost-time accidents fell by more than60% in 2014 compared with 2013.

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23/144

2011 2012 2013 2014

250

300 315

373

2010

n/a

7.5

20102010 2011 2012 2013 2014

7.1 6.9 7.0 6.941

20102010 2011 2012 2013 2014

39 40 41 38

26

20102010 2011 2012 2013 2014

24

33

17

2

14.7

20102010 2011 2012 2013 2014

15.9 16.0 16.0

13.7

2,114

20102010 2011 2012 2013 2014

1,8011,657

1,4521,235

FINANCIAL

FREE CASH FLOW* MILLION

1,235m

DefinitionFree cash flow comprises the net cash flowfrom operating activities aggregated withthe net movements in loans receivableand other investments, and with the netpurchase of property, plant and equipment,and computer software.Why we measureFree cash flow is a key indicator of the financialmanagement of the business and reflects thecash generated by the business to fund

payments to our shareholders and acquisitions.PerformanceLower operating profit, principally reflecting thestrength of sterling and increased restructuringcosts, was the biggest driver of lower free cashflow year on year.

See page 27 for more detail.

FINANCIAL

RETURN ON AVERAGE INVESTED CAPITAL%

13.7%

DefinitionProfit before finance charges and exceptionalitems divided by average invested capital.Invested capital comprises net assets aggregatedwith exceptional restructuring costs and goodwillat the date of transition to IFRS, excluding postemployment liabilities and net borrowings.Why we measureReturn on average invested capital (ROIC) isused by management to assess the returnobtained from the groups asset base. Improving

ROIC builds financial strength to enable Diageoto attain its financial objectives.PerformanceLower operating profit, primarily due to adverseexchange movements, the investment in UnitedSpirits Limited and increased working capital ledto the reduction in ROIC.


FINANCIAL

TOTAL SHAREHOLDER RETURN %

2%

DefinitionPercentage growth in the value of a Diageo share(assuming all dividends and capital distributionsare re-invested).Why we measureAs a public limited company, Diageo has afiduciary responsibility to maximise long termvalue for shareholders. We also monitor ourrelative TSR performance against our peers.PerformanceDiageo recorded a total shareholder return of 2%

as dividends received increased 9% and earningsmoderated in the financial year, given weakereconomies in the emerging markets and somemarket specific challenges.

NON FINANCIAL

ALCOHOL IN SOCIETY**RESPONSIBLE DRINKING PROGRAMMES

373 PROGRAMMES

DefinitionProgrammes run or funded by Diageo that aimto prevent excessive drinking, tackle drink driving,address underage drinking, help retailers ensureresponsible sales or otherwise promote a positiverole for alcohol in society.Why we measureHarm related to alcohol misuse is our mostimportant social issue. Supporting programmesthat promote a positive role for alcohol in society,addresses risks such as: harm to consumers andcommunities; reputational damage; limitationsto our licence to operate; and the loss of trust andrespect from our stakeholders around the world.PerformanceSince 2013, we have increased the number andgeographic scope of programmes we supportby expanding our efforts and partnerships inemerging markets.Note: In 2011, we started actively tra cking our globalperformance for public reporting.


NON FINANCIAL

WATER EFFICIENCY***L/L

6.9L/L

DefinitionRatio of the amount of water required to produceone litre of packaged product.Why we measureWater is the main ingredient in all of Diageosbrands. To sustain our production growth aroundthe world and respond to the growing globaldemand for water, Diageo aims to improve wateruse efficiency and minimise the amount ofwater used at production sites, particularlyin water-stressed areas.PerformanceDiageo used 6.9 litres of water to produce onelitre of packaged product, a 2.4% decrease from2013. While some savings are the result of majorinvestments, most come from operationalimprovements related to equipment,processes, culture and behaviours.


NON FINANCIAL

EMPLOYEE SUPER ENGAGEMENT %

38%

DefinitionA key element of Diageos people strategy isemployee engagement. As part of our annual values-based survey, Diageo measures super-engagement,a more stretching measure than engagement,requiring employees to assign the highest possibleranking to all six of the core engagement questions.

Why we measureWe want to understand what drives highengagement, a key performance enabler. Allfeedback from our annual values survey is carefullyreviewed both qualitatively and quantitatively. Theresults inform leadership development, employeeengagement strategies and ways of working.PerformanceFor a second year running, 92% of employeestook part in the survey. In the 2014 survey38% of all employees were measured as beingsuper-engaged, in a year when employeesexperienced change in the business.


*Looking ahead to 2015, the free cash flow measure will be replaced by an op erating cash conversion measure, to align with the fiscal 2015 Annual Incentive Plan. * *We are moving towards a new metric in future years that will demonstrate the impact of our programmes on awareness, attitudes or behaviour.

***In accordance with Diageos environmental reporting methodologies data for each of the three years in the period ended 30 June 2013 have been restated and total water used excludes irrigation water foragricultural purposes on land under the operational control of the company.

Within KPMGs limited assurance scope. Please see page 140 for further details.

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HOW WE PROTECTOUR BUSINESS: RISK MANAGEMENTAND PRINCIPAL RISKS

Our Performance Ambition calls on us to bebold in execution and to act like owners.Well-managed risk taking lies at the heart ofthis. Great risk management drives bettercommercial decisions, creating a growing,resilient and sustainable business.

Our approachOur risk management framework isstraightforward. We believe that greatrisk management starts with the rightconversations that drive better businessdecisions. We assign clear accountability formanaging our risks in the right way. It is theresponsibility of each market and function tomanage its risks directly, and then to reporton the risks and their management to theExecutive. The Diageo Executive reviews theeffectiveness of risk management throughthe Audit & Risk Committee, and the Boardexercises independent review through theAudit Committee. The Diageo Executiveupdates the groups risk assessment annually,which is reviewed by the Board. Similarly, allmarkets and functions perform annual riskassessments and, at all levels in the business,risks are reviewed throughout the year, with

updates to risks and/or mitigation plansmade as necessary.

Further details about the groups riskmanagement approach are describedin the Report of the Audit Committeeon page 61.

Focus in the year The Diageo Executive and Board consideredthe risks described here as the groups key risksfor this financial year. These range from risksthat are wholly internal in interest (for example,managing raw material commodity prices ina volatile market) to risks that involve Diageosplace in society (for example, addressingthe concerns of governments and otherstakeholders about responsible alcoholpromotion and consumption).

These risks remained the key areasof focus throughout this financial year.

Beyond this set of key group risks, theAudit Committee also receives periodicupdates on emerging or otherwise topicalrisks. For example, during the year, the AuditCommittee received an update on cyber risk,which examined the nature of the risk and itsgrowing significance for all organisations, as

well as the specific risks faced by Diageo andhow we are managing those risks currently.

ECONOMIC AND POLITICAL CHANGE

RiskChanges, often rapid, to economic, fiscal and/orsocio-political environment.

ImpactSocial unrest, liquidity issues, inflationary pressures,changes to tax systems and/or eroded consumerconfidence, impacting our peoples safety, our assetsecurity, and/or business performance.

How we seek to mitigate Leveraging on the ground market and

country intelligence. Building local preparedness for rapid change

in external environment. Market-sensitive multi-country investment

and capacity expansion strategy. Monitoring and where appropriate, expressing

views on the formulation of laws either directlyor through trade associations or similar bodies.

NON COMPLIANCE WITH LAWS AND REGULATIONS

RiskNon-compliance with local laws or regulations,or material breach of our internal global policiesand standards and/or significant internalcontrol breakdown.

ImpactSevere damage to our corporate reputationand/or significant financial penalty.

How we seek to mitigate Provide periodic training for employees

on our Code of Business Conduct. Provide employees with periodic refresh

training on global policies and standards. Utilise an internal control assurance

programme, with local managementaccountability.

Strong tone from the top, anchoredby our Performance Ambition ofmost trusted and respected.

Relevance to strategy Efficient growth

Consistent value creation

Strong reputation

Fully engaged employees

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PRICE AND SUPPLY OF RAW MATERIALS

RiskMarket and environmental pressures create pricevolatility and insecure supply of raw materials,including water.

ImpactFailure to meet financial targets or productionplans due to unpredictability in input costsand availability.

How we seek to mitigate Leveraging an active risk management

strategy for commodities pricing. Group monitoring of market management

of commodities. Increasing local raw material sourcing to

manage volatile foreign exchange rates andto benefit from more drought tolerant crops(sorghum/cassava).

Developing a robust environmentalmanagement system that aims to secureresources through active water stewardshipand resource efficiency.

CRITICAL INDUSTRY DEVELOPMENTS

RiskFailure to shape or participate in criticalindustry developments.

Impact Consumers move away from our brands. Less efficient business model compared

to key competitors.

How we seek to mitigate Annual strategy conference attended

by Board and Executive Committee. Annual group and market strategic

planning process. Local market strategy reviews by CEO,

CFO and Strategy Director. Focus on building capability at market level.

CITIZENSHIP AND SUSTAINABILITY

RiskFailure to meet the expectations of stakeholdersto make a positive contribution to thesustainability agenda.

Impact Long term damage to our corporate reputation. Less influence shaping the citizenship

and sustainability agenda as it relatesto beverage alcohol.

How we seek to mitigate Sustainability & Responsibility s trategy

that seeks to respond to stakeholderexpectations at global and market level.

Developing new Sustainability &Responsibility targets.

RESPONSIBLE ALCOHOL PROMOTION AND CONSUMPTION

RiskFailure to address the concerns of multiplestakeholders about the promotion andconsumption of alcohol.

Impact One or more governments impose restrictions

on access and/or increase tax and/or duty. Damage to our corporate reputation.

Less influence shaping the citizenshipand sustainability agenda as it relatesto beverage alcohol.

How we seek to mitigate Clear strategy on tackling alcohol misuse, to be

driven by a strengthened organisation design. Focusing on implementation of CEO

Commitments through new singleglobal industry organisation.

TALENT

RiskInability to recruit, retain and develop sufficientsales and marketing talent particularly indeveloping markets.

ImpactFailure to achieve our growth plans.

How we seek to mitigate Significant focus and intervention on movingtalent into key local roles in developing markets.

Strengthening learning and developmentstrategy across the business.

Global Talent Team established focusing onensuring we have the strength of talent pipelineto fill critical leadership roles, supported by abigger focus on succession planning andexternal recruitment.

BUSINESS ACQUISITIONS

RiskFailure to deliver value from acquisitions and/orintegrate them into Diageo effectively, includingfailure to embed Diageos standards of compliancewith laws, internal policies and controls.

Impact Business case for an acquisition is not delivered

resulting in failure to meet financial targets. Market confidence in Diageos ability to

deliver on its s trategy is weakened. Damage to our corporate reputation. Prospects for securing regulatory approval

for other potential business combinationsare harmed.

How we seek to mitigate Board and Executive Committee focused

on delivering value from acquisitions. Include global minimum standards for

control and compliance in post-acquisitionintegration plans.

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1.1

2.4

8

35

The global beverage alcohol market is large and diverse,comprising an estimated six billion equivalent units* ofalcohol and 300 billion of revenue. Across the worldthere are signicant variations in the type of beveragealcohol consumed depending on local incomes,cultures and attitudes.

MARKETDYNAMICS

Split of global total beverage alcohol (TBA)volume (EU)

Split of global total beverage alcohol (TBA)net sales ()

Developed markets Emerging markets

Year ended 31 December 2013Source: Diageo estimates



Per capita consumption (LDA) inequivalent units of alcohol per year (EU)

GDP/Capita k (LDA)





Commercial context The global beverage alcohol market is largeand diverse, comprising an estimated six billionequivalent units* of alcohol and 300 billion ofrevenue. Across the world there are significantvariations in the type of beverage alcoholconsumed depending on local incomes,cultures and attitudes. On average, per capitaconsumption is higher in developed markets at2.4 equivalent units of alcohol per year versus1.1 in emerging markets, which is driven, inpart, by differences in the average level ofdisposable income. The shape of the beveragealcohol market also varies significantly acrossgeographies; some regions, such as Asia,consume more spirits, others such as Africaare more focused on beer.

Our business is increasingly balanced acrossdeveloped and emerging markets and we areable to capture share across a wide variety of

consumer occasions given the geographicbreadth of our participation, our leadingportfolio of brands across categories and price

points, the depth of our consumer insightsand innovation capabilities, combined withthe strength of our route to consumer.Both developed and emerging markets are

important beverage alcohol value pools, withdifferent dynamics. Developed markets arelarge and profitable, but with lower growthrates. Emerging markets, also large, are lessprofitable, with faster growth rates. Givenlower levels of disposable income in emergingmarkets they are more volatile in response tofluctuations in local economies, as we haveseen this year.

Overall, the global beverage alcoholmarket is supported by the strong consumerfundamentals of a growing legal drinkingage (LDA) population and increasing wealth,driving both consumer penetration and

premiumisiation.Developed marketsConsumers in developed markets are veryconscious of what their brand choices sayabout them. Our strong portfolio of brandsacross categories and price points, coupledwith our innovation capability, allows usto evolve our offering to provide whatconsumers are looking for, while the strengthof our distribution networks enables us toget our products to the consumer, allowingus to benefit from these trends. Given the

higher levels of disposable income and theimportance of branding, these are marketswhere consumers are often prepared to paymore for high quality brands with heritage and

provenance. There is also sustained growthin the number of consumers who are able toenjoy our reserve (luxury) port folio of brands.

Emerging marketsIn emerging markets we are seeing significantgrowth in the LDA population groupsclassified as emerging middle class andabove. These consumers represent asignificant opportunity, particularly for ourpremium core brands, as consumption percapita is currently far lower than indeveloped markets. Each country is different,and growth occurs at different price pointsdepending on wealth, and in categories andoccasions which reflect local culture. Accessingthis growth requires an understanding oflocal consumers and the categories, brandsand price points they are seeking. A broaderdistribution platform which makes thesebrands accessible to this set of consumers isa critical enabler. There are also a significant,and growing, number of globally aff luentconsumers in the emerging markets forwhom our reserve (luxury) port folio holdsparticular appeal.

* An equivalent unit is equal to one nine-litre case of spirits;45 litres of wine; 90 litres of beer.

24 DIAGEO ANNUAL REPORT 2014MARKET DYNAMICS


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1 2 3

13

9

4 5 6 78

101112

18

1514

21

1617

2019 2223

Regulatory and broaderstakeholder contextAlcohol is one of the most regulated productsin the world, and beverage alcohol companiesrightly operate in the context of a range ofstakeholder expectations and demands.

At the same time beverage alcoholcompanies, like the rest of the private sector,are increasingly expected to be transparentand demonstrate progress on the wider socialand environmental agenda. Using voluntaryframeworks (such as the Global ReportingInitiative Guidelines, launched in 2000 andupdated this year, the United Nations GlobalCompact principles, established in 2006,and the International Integrated ReportingFramework, published this year) is becominga standard expectation for companies tofollow. Moreover, reporting on these issues isbecoming mandatory in more parts of theworld. For example, the UK Companies Act,the US California Transparency in SupplyChains Act and the US Dodd Frank Act,require public disclosure of human rights andenvironmental issues. This year, the EuropeanCouncil and the European Commission reachedan agreement to require publicly-tradedcompanies with more than 500 employeesto report performance against a number ofsocial and environmental metrics.

This high and growing level of regulationand scrutiny can be an advantage to companieswith good corporate governance and the rightapproach to sustainability and responsibility.

Alcohol policy

While the approaches taken by governmentsto address alcohol misuse vary, Diageo believesthat the most effective alcohol policies areevidence-based, account for drinking patterns,target at-risk groups, treat all forms of alcoholequally, and involve all stakeholders. Theseinclude mandating a minimum legal purchasingage of not less than 18; a maximum bloodalcohol concentration (BAC) level for driversof no more than 0.08mg; and lower BACs fornovice and commercial drivers. Also effectiveare high-visibility enforcement campaigns ofdrink-driving laws and alcohol interlocks 1 forconvicted drink drivers. Diageo advocates

these policies while opposing measures thatare not based on evidence, and are likely tohave unintended consequences. Forexample the use of high taxes to controlconsumption can in some cases pushconsumers to unregulated alcohol markets.

Industry collaborationBeverage alcohol companies have recognised,and stakeholders are expecting, that issuessuch as reducing the harmful use of alcoholshould be addressed through concertedindustry initiatives in collaboration withstakeholders. Diageo is one of 13 globalproducers of beer, wine and spirits to launcha new set of commitments in support of theWHO's Global strategy to reduce the harmfuluse of alcohol. The industry's commitmentsinclude a focus on reducing underagedrinking, strengthening and expandingmarketing codes of practice, providingconsumer information and responsibleproduct innovation, reducing drink driving,and enlisting the support of retailers toreduce harmful drinking.

Unrecorded alcohol The WHO estimates that 25% of alcoholconsumed is unrecorded, which means it is

outside the usual systems of governmentalcontrol: regulation and taxation. Because itis not regulated, little is known about itsproduction, consumption, and relatedoutcomes. What little we do know, suggeststhat some may be contaminated, some toxic,and a risk to public health. Therefore workingwith governments and other stakeholders toimprove data collection in this area is helpfulto all consumers.

Climate change and water security A variety of environmental issues associatedwith climate change, such as extreme weather

events, water scarcity and biodiversity loss,will increasingly affect businesses and how

they operate. For the alcohol industry, waterscarcity is an issue that demands particularattention given that water is a main ingredientin all its products. The World Bank expects waterscarcity to affect 2.8 billion people directlyby 2025. In some countries that have alwaysfaced hydrologic variability, climate changecould increase water scarcity. The map belowshows the specific Diageo sites operating inwater-stressed locations where measures toaddress supply chain risks, contribute tocommunity infrastructure, and work withgovernments and other partners on waterstewardship are particularly important.

Value chain partnershipsAlcohol beverage companies contribute to theeconomic development of their communitiesin a variety of ways, whether through directemployment, taxes or community investmentefforts. However, companies can furthercontribute by leveraging the economic impact

of their entire value chain in the way they workwith suppliers and customers and doingso is an increasing expectation of the privatesector by government and internationaldevelopment institutions. One powerfultrend in the food and beverage industry isa focus on local sourcing in markets with anagricultural economy or potential for one.Not only does this help build trust withgovernment and other stakeholders, butwith the use of long term contracts, it canhelp secure supply. At the other end of thevalue chain, strategic partnerships andinvestment to train and support individuals

interested in working in hospitality can buildtrust while strengthening the industry itself.

Diageo sites located in water-stressed areas

Site1 Kumasi, Ghana2 Achimota, Ghana3 Lagos-Ogba, Nigeria4 Uganda IBL (Brewing)5 Uganda IDU (Spirits)6 Nairobi (EABL), Kenya

Site7 Nairobi (Maltings), Kenya8 Nairobi (Glass), Kenya9 Seybrew, Seychelles10 Dar Es Salaam, Tanzania11 Moshi, Tanzania12 Mwanza, Tanzania

Site13 SA Cider, South Africa14 Acacia Vineyard15 Acacia Winery16 Provenance Vineyard17 Provenance Winery18 Lake Ranch Winery

Site19 Chalone Vineyard20 Chalone Winery21 Blossom Hill Winery22 Ypica distillery23 Ypica sugar cane farm1. Interlocks are breathalysers that stop a car from

starting if the drivers blood alcohol level is abovea certain limit.

25DIAGEO ANNUAL REPORT 2014MARKET DYNAMICS


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GROUPFINANCIALREVIEW

Key performance indicators2014

2013(restated)*

Organic net sales growth % 5Organic operating margin improvement basis points 77 78Earnings per share before exceptional items pence 95.5 103.1Free cash flow million 1,235 1,452Return on average invested capital % 13.7 16.0

Other nancial information2014

2013(restated)*

Volume EUm 156.1 164.2Net sales million 10,258 11,303Marketing spend million 1,620 1,769Operating profit before exceptional items million 3,134 3,479Operating profit million 2,707 3,380Reported tax rate % 16.5 16.6Reported tax rate before exceptional items % 18.2 17.4Profit attributable to parent companys shareholders million 2,248 2,452Basic earnings per share pence 89.7 98.0Recommended full year dividend pence 51.70 47.40

Organic growth by regionVolume

%Net sales

%

Marketingspend

%

Operatingprot**

%

North America (1) 3 2 8Western Europe Africa, Eastern Europe and Turkey (5) 1 1 Latin America and Caribbean (1) 2 1 3Asia Pacific (5) (7) (7) (13)Diageo*** (2) (1) 3* Restated following the adoption of IFRS 11 and the amendment to IAS 19.** Before exceptional items*** Includes Corporate. In the year ended 30 June 2014 Corporate reported net sales and net operating charges were

79 million (2013 76 million) and 130 million (2013 151 million) respectively. The reduction in net operatingcharges primarily comprised lower costs in respect of global functions. For the reconciliation of reported toorganic results, see page 50.

This year was tougher than anticipated with mixedregional performance as North America delivered top-linegrowth and signicant margin expansion; Western Europewas stable and performance in emerging markets reectedeconomic weakness and market specic challenges. Despitethis tougher environment we have gained share in a numberof markets, invested for the future, expanded margins andsimplied the organisation.Deirdre Mahlan,Chief Financial Officer

Net sales*Volume Operating prot**

* Excluding corporate net sales. **Before exceptional items and corporate costs.

North America Western Europe

Asia PacicAfrica, Eastern Europe and Turkey Latin America and Caribbean

Net sales, up

0.4%,reecting mixed performance;growth in North America, stability

in Western Europe and weakness inemerging market economies.

Fourth quarter net sales up

0.8%.Positive consumer trends in higher pricedcategories, Diageos reserve brands netsales were up 14% and targeted priceincreases drove

3pptof positive price/mix.

Operating margin improved

0.8ppt.Procurement driven savings, worth 4% oftotal marketing spend, more than offsetthe cost of increased activity, contributing

0.2pptof the total margin improvement.

Eps before exceptionals was down 7.6p to

95.5 penceper share as foreign exchange movementsreduced eps by 10 pence per share.Free cash ow was

1,235 million.Recommended nal dividendof 32.0 pence per share, up

9%.

26 DIAGEO ANNUAL REPO RT 2014GROUP FINANCIAL REVIEW


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16.0%

(1.5)ppt

(0.1)ppt

0.4ppt

(0.5)ppt(0.3)ppt

(0.3)ppt

13.7%

2013Reported(restated)

2014Reported

1,452

(534) (45) 35 70

(58)

315

1,235


2014Reported


2014Reported

11,303

(290)

(797)(235)

277 10,258

Organicmovement

103.1

(13.9)

1.40.7

1.6

(0.2)2.8

95.5


2014Reported

30.78%

(0.51)ppt

(0.10)ppt

0.16ppt

0.71ppt

(0.49)ppt

30.55%


2014Reported

Organicmovement

Organic net sales growth ( million)

(a) See page 28.

Organic volume growth in reserve brands waslargely offset by decline in beer and in scotch inemerging markets. The strong performance ofreserve brands and selective price increases

drove positive price/mix.Organic operating margin improvement

Significant supply chain savings and positiveprice/mix from growth of reserve brands wasoffset by cost inflation and under recovery offixed costs in Africa due to weaker beer volume. The organic increase in operating margin wasprimarily driven by an increased focus on costsand efficiencies across the business and byprocurement savings on marketing spend.

Earnings per share beforeexceptional items (pence)

(a) The groups after tax share of the results of associatesand joint ventures was 252 million for the year ended

30 June 2014 (2013 217 million), of which, Diageos34% equity interest in Mot Hennessy contributed246 million (2013 230 million).

Reduction in eps due to lower operatingprofit was largely as a result of adverseforeign exchange movements. Increasedincome from associates and joint venturesand lower net finance charges partly mitigatedthe impact of reduced operating profit. Thereduction in non-controlling interests is largelydriven by the operating loss that has beenreported by Shuijingfang.

Basic eps was 89.7 pence (2013 98.0 pence),with exceptionals reducing eps by 5.8 pence(2013 5.1 pence).

For movements in net finance chargessee below:

million

2013 Reported (restated) 457Net interest charge (51)Post employment charges (26)Venezuela hyperinflation adjustment 9Other finance charges (1)2014 Reported 388

20142013

(restated)

Average monthly netborrowings ( million) 9,174 8,267Effective interest rate (%) 3.8 4.9For the calculation of the effective interest rate, the netinterest charge excludes fair value adjustments to derivativenancial instruments and borrowings. Average monthly netborrowings include the impact of interest rate swaps that areno longer in a hedge relationship but excludes the marketvalue adjustment for cross currency interest rate swaps.

The increase in average net borrowings wasprincipally a result of the acquisition of shares inUSL, completed on 4 July 2013, and the one off

pension contribution to the UK pension plan inthe year ended 30 June 2013 and a 100 million(85 million) contribution to the Irish pensionplans in the year ended 30 June 2014. Despitethe increase in debt, the interest chargedecreased in the year driven by lower interestrates on new debt issues and proportionallyhigher commercial paper balances.

On 2 July 2014 Diageo acquired an additional37.8 million shares in USL for 1,118 million. Thiswill increase average net borrowings in the yearending 30 June 2015.

The positive impact on post employmentcharges is mainly driven by the reduction of

the pension deficit as a result of the one offcontributions mentioned above.

Free cash flow ( million)

(a) Operating prot adjusted for non cash items includingdepreciation and amortisation and excluding thethalidomide charge.

(b) Other movements includes dividends received fromassociates and joint ventures, movements in loansreceivable and other investments, pension contributionsexcluding one off contributions and the payment of53 million in respect of the settlement of Thalidomidelitigation in Australia and New Zealand in the year.

The decrease in free cash flow was primarilydriven by lower operating profit due to theadverse impact of exchange rate movementsand restructuring exceptional charges duringthe year. The reduction attributable to thetermination of the distribution agreementwith Jose Cuervo was largely offset by organicgrowth. The negative working capital movementarose in respect of lower creditors driven byreductions in overhead spend, bonus accrualsand phasing of marketing spend. One offcontributions to pension plans in the yearended 30 June 2014 were lower than last year,resulting in a favourable cash movement.

Return on average invested capital (ROIC) (a)

(a) ROIC calculation excludes exceptional items

Lower operating profit reduced ROIC by1.5ppt primarily due to adverse exchangemovements. Average invested capitalincreased as a result of our acquisition ofshares in USL. The negative movement inworking capital is partly accounted for byincreased maturing inventory.

Reported net sales were adverselyimpacted by foreign exchange, whilesustained performance in North Americaoffset emerging market weakness

Acquisitions and disposals (a) Exchange (a)

Volume Price/mix

Focus on costs and driving efficienciesdelivered 77bps of margin improvement

F13 inorganicmovements

Gross margin

Marketing spend

Other operatingexpenses

F14 inorganicmovements

Eps before exceptionals impacted byadverse foreign exchange

Operating prot Associates and joint ventures (a) Net nance charges

Taxation Non-controlling interests Number of shares

Lower pension contributions and capexpartly offset the impact of reducedoperating prot on cash ow

Operating prot (a) Working capitalmovement

Net capex Net interestand tax

One off pensioncontributions

Other movements (b)

Adverse foreign exchange movements andinvestment in USL led to a reduction in ROIC

Operating prot

Movement intax rate

Exchange

movement oninvested capital Investment in USL

Working capital

Other (includingassociates and joint ventures)

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(a) Exchange The impact of exchange rates movementson reported figures is principally in respectof the Venezuelan bolivar, the US dollar, the Turkish lira and the South African rand.

In March 2014, the Central Bank of Venezuelaopened the Second Ancillary Foreign CurrencyAdministration System (Sicad II) that allowsprivate and public companies to trade foreigncurrency at a higher exchange rate than theofficial exchange rate. As a result, the group hasapplied a consolidation rate of $1 = VEF49.98(1 = VEF85.47) for its Venezuelan operationsfor the year ended 30 June 2014. For the yearended 30 June 2013 a rate of $1 = VEF9 (1 =VEF13.68) was used. The change in the exchangerate for the year ended 30 June 2014 reducednet sales by 358 million, operating profit by229 million, cash and cash equivalents by329 million and net assets by 378 million.

The estimated effect of exchange rate andother movements on profit before exceptionalitems and taxation for the year ended 30 June2014 is set out in the table below.

Gains/(losses)

million

Translation impact (182) Transaction impact (154)Operating profit before

exceptional items (336) Net finance charges

translation impact 12

Mark to market impact ofIAS 39 on interest expense (6) Impact of IAS 21 and IAS 39

on net other finance charges (2)Interest and other finance charges 4Associates translation impact 8Profit before exceptional items

and taxation (324)

2014 2013

Exchange rates Translation 1 = $1.63 $1.57 Transaction 1 = $1.59 $1.57 Translation 1 = 1.20 1.21

Transaction 1 = 1.26 1.18

(b) Acquisitions and disposals The impact of acquisitions and disposalson the reported figures was primarilyattributable to the termination of thedistribution agreement with Jose Cuervo.See page 52 for further details.

(c) Exceptional itemsExceptional operating charges of 427 million(2013 99 million) in the year ended 30 June2014 comprise:

98 million (2013 nil) in respect of theGlobal efficiency programme announcedin January 2014;

35 million (2013 25 million) in respectof the Supply excellence restructuringprogramme;

30 million (2013 44 million) for therestructuring of the groups supplyoperations; and

a brand and tangible asset impairmentcharge of 264 million in respect of ShuiJing Fang (2013 50 million in respectof the Cacique brand) as a result of thedownturn in the baijiu category in Chinadriven by the anti extravagance measures

by the Chinese government. The relateddeferred tax liability of 65 million hasbeen written back to taxation in theincome statement and therefore the netcharge is 199 million. As the group hasa 39.7% controlling interest in SichuanShuijingfang Co., Ltd (Shuijingfang), theimpact of this impairment on the groupsbasic earnings per share is a reduction of3.2 pence.

INCOME STATEMENT2013

(restated) million

Exchange(a)

million

Acquisitionsand disposals

(b) million

Organicmovement

million2014

million

Sales 15,276 (1,082) (368) 154 13,980Excise duties (3,973) 285 78 (112) (3,722)Net sales 11,303 (797) (290) 42 10,258Cost of sales* (4,389) 243 167 (27) (4,006)Gross profit 6,914 (554) (123) 15 6,252Marketing (1,769) 108 31 10 (1,620)Other operating expenses* (1,666) 110 (8) 66 (1,498)Operating profit before exceptional items 3,479 (336) (100) 91 3,134Exceptional operating items (c) (99) (427)Operating profit 3,380 2,707Non-operating items (c) (83) 140Net finance charges (457) (388)Share of after tax results of associates and joint ventures 217 252Profit before taxation 3,057 2,711 Taxation (507) (447)Profit from continuing operations 2,550 2,264Discontinued operations (c) (83)Profit for the year 2,550 2,181

* Before exceptional operating items.

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In the year ended 30 June 2013 exceptionaloperating items also included a gain of20 million in respect of changes to futurepension increases for the Diageo GuinnessIreland Group Pension Scheme.

Non-operating items in the year ended30 June 2014 comprise a gain of 140 millionfollowing the acquisition of additionalinvestment in United Spirits Limited (USL)which increased the groups investment inUSL from 10.04% to 25.02% on 4 July 2013and triggered a change in accounting fromavailable-for-sale investments to associates.As a result, the difference between the originalcost of the investment and its fair value hasbeen included in the income statement. Inthe year ended 30 June 2013 exceptionalnon-operating items comprised a loss of83 million in respect of the Nuvo disposal.

Discontinued operations in the year ended30 June 2014 represent a charge after taxationof 83 million (2013 nil) in respect of thesettlement of thalidomide litigation in Australiaand New Zealand and anticipated futurepayments to thalidomide organisations.

Cash payments in the year ended 30 June2014 in respect of exceptional restructuringitems and thalidomide were 104 million(2013 61 million) and 59 million (2013 23 million), respectively. An exceptionaloperating charge of approximately 130 millionis expected to be incurred in the year ending30 June 2015 primarily in respect of the Globalefficiency and Supply excellence programmes,while total cash expenditure is expected tobe approximately 200 million.

(d) Dividend The directors recommend a final dividendof 32.0 pence per share, an increase of 9%from the year ended 30 June 2013. The fulldividend will therefore be 51.7 pence pershare, an increase of 9% from the yearended 30 June 2013. Subject to approval byshareholders, the final dividend will be paidon 2 October 2014 to shareholders on theregister on 15 August 2014. Payment to USADR holders will be made on 7 October 2014.A dividend reinvestment plan is available toholders of ordinary shares in respect of the

final dividend and the plan notice date is10 September 2014.

BALANCE SHEET

Movement innet borrowings 2014 million

2013(restated) million

Net borrowings at thebeginning of the year (8,403) (7,573)

Free cash flow (a) 1,235 1,452Acquisition and

sale of businesses (b) (534) (660)Proceeds from issue

of share capital 1 Net purchase of own

shares for shareschemes (c) (113) (11)

Dividends paid to non-controlling interests (88) (100)

Purchase of shares of non-controlling interests (d) (37) (200)

Net (decrease)/increasein bonds and otherborrowings (e) (157) 1,238

Equity dividends paid (1,228) (1,125)

Net (decrease)/increasein cash and cashequivalents (921) 594

Net decrease/(increase)in bonds and otherborrowings 157 (1,238)

Exchange differences (f) 349 (116)Other non-cash items (32) (70)Net borrowings at the

end of the year (8,850) (8,403)

(a) See page 27 for the analysis of free cash flow.(b) Primarily includes cash payments of474 million in respect of the acquisition

of an additional 18.74% investment in USL.On 2 July 2014 the group acquired an additional26% investment in USL for INR 114.5 billion(1,118 million) taking its aggregate investmentto 54.78% (excluding 2.38% of the shares ownedby the USL Benefit Trust on behalf of USL).From 2 July 2014 the group accountsfor USL as a subsidiary with a 43.9%non-controlling interest.In the year ended 30 June 2013 cash paymentsprincipally included 284 million in respectof 100% equity stake in Ypica Bebidas S.A.(Ypica) and 274 million in respect of a10.04% investment in USL.(c) Net purchase of own shares comprisedpurchase of treasury shares for the futuresettlement of obligations under the employeeshare option schemes of 208 million (2013 143 million) less receipts from employees onthe exercise of share options of 95 million(2013 132 million).(d) Primarily comprises the purchase of theremaining 7% (2013 purchase of 40%) equitystake in Sichuan Chengdu ShuijingfangGroup Co., Ltd.

(e) In the year ended 30 June 2014 the groupissued bonds of 1,700 million (1,378 million)and repaid bonds of 1,150 million (983 million)and $804 million (488 million). In the prior yearthe group issued bonds of $3,250 million(2,100 million) and repaid bonds of$1,350 million (869 million).

(f) Primarily arose on US dollar and eurodenominated borrowings offset by adverseexchange rate movement on cash and cashequivalents held in Venezuela.

Movement in equity millionEquity at 30 June 2013 (restated) 8,088Profit for the year 2,181Exchange adjustments (a) (1,133)Net remeasurement of

post employment plans (b) (167)Fair value movements on

available-for-sale investments (c) (85)Dividends to non-controlling

interests (88)Purchase of shares of

non-controlling interests (37)Dividends paid (1,228)Other reserve movements 59Equity at 30 June 2014 7,590

(a) Primarily arose on the US dollar, the euro,the Turkish lira and the Venezuelan bolivardenominated intangible assets, investmentsand borrowings.(b) Mainly driven by the decrease in discountrate assumptions used to calculate the netpost employment liabilities partly offset by

the actual return on the plan assets beinghigher than the discount rate.(c) Comprises the net recycling of thecumulative fair market value adjustmenton the groups investment in USL due to thechange in accounting from available-for-saleinvestment to associate.

Post employment deficit The deficit in respect of post employment plansbefore taxation decreased by 66 million from541 million at 30 June 2013 to 475 millionat 30 June 2014. The decrease was primarilydue to the cash contributions of 288 million

(2013 591 million) made into the postemployment plans, which included a one off100 million (85 million) payment into theIrish pension plans, partially offset by the netremeasurement of post employment plans. Total cash contributions to the groups postemployment plans for the year ending30 June 2015 are expected to beapproximately 185 million.

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Net sales by price points(%)

Value Standard Premium

Super premium Ultra premium

Net sales by categories(%)

Spirits Beer

Wine RTDs

Other

Net sales by markets(%)

US Spirits & Wines DGUSA

Canada Other

NORTHAMERICA

North America accounts forabout a third of our net salesand around 45% of operatingprot and is the largest marketfor premium drinks in theworld. Due to our continuedleadership in innovation,strong route to consumer,positive consumer trends,and increased marketinginvestment in key brands, wecontinue to be well positioned.Our marketsOur North America business comprisesUS Spirits and Wines, Diageo-GuinnessUSA (DGUSA) and Canada.

Route to marketRoute to market in the United States (US)is through the three-tier system and wedistribute our products through more than100 spirits and wines distributors and brokers,and more than 400 beer distributors nationally.We have a unique route to market for ourspirits and wine business in the US, with morethan 3,000 dedicated distributor sales personnelfocused only on Diageo and Mot Hennessyspirits and wine brands. To date, Diageo hasconsolidated its US Spirits and Wines business

into a single state-wide distributor or brokerin 41 states and the District of Columbia,representing more than 80% of the companysUS Spirits and Wines volume. We continueto focus on building capabilities within ourdistributor dedicated sales forces and creatinga more efficient and effective value chain.

Diageo North Americas US Spirits andWines business operates through five divisionsin Open States where we sell to distributorswho then sell to retailers, and through twodivisions in Control States where in mostcases, we sell to the state, which in turn sellsto state or agency stores and on premiseretailers. US Spirits and Wines sells the vastmajority of the Californian and importedwines we own and represent, with theremaining small portion of sales comingfrom winery visitor centres and online sales.

DGUSA sells and markets brands includingGuinness, Smirnoff Ice and Red Stripe. Beerdistribution generally follows the three-tier openstate regulations across the United States.

Canada distributes our collection of spirits,beer and wine brands across all Canadianprovinces, which generally operate througha provincial control system. In 2014, weannounced that we are moving to a brokermodel effective 1 July 2014, appointing asingle broker for Canada with a dedicatedsales force handling our brands in the country.

National brand strategy and strategicaccounts marketing, as well as corporatefunctions are managed at North Americanlevel. In North America, we market a totalbeverage alcohol portfolio. Diageo NorthAmericas strong innovation pipeline andreserve business help fuel growth.

Supply operations

We have 11 bottling, distilling, blendingand maturation sites including operationsin Plainfield, Illinois; Amherstburg, Ontario;Valleyfield, Quebec; Relay, Maryland; Gimli,Manitoba; Tullahoma, Tennessee; and sevenwineries, and wine bottling operations,in California.

Sustainability & ResponsibilityAs part of our commitment to tackling alcoholmisuse, Diageo North America dedicates20% of broadcast advertisement towardsresponsible drinking messages. Operationscontinue to progress against all environmentaltargets; Diageos Gimli, Manitoba plant, wherethe Company distills Crown Royal, is 99%carbon neutral. Our employee-focused culturewon the company the best place to workaccolade from the Human Rights Campaignagain this year, and Diageo was listed asone of Working Mother magazines top100 companies this year.

Key nancials 2013 Reported(restated)* million

Exchange million

Acquisitionsand

disposals million

Organicmovement

million

2014Reported million

Reportedmovement

%

Net sales 3,723 (156) (231) 108 3,444 (7)Marketing spend 581 (27) (24) 10 540 (7)Operating profit beforeexceptional items 1,478 (54) (71) 107 1,460 (1)Exceptional items (35)Operating profit 1,478 1,425 (4)*Restated following the adoption of IFRS 11 and the amendment to IAS 19.

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Net sales by price points(%)

Net sales by categories(%)

Spirits Beer

Wine RTDs

Other Standard Premium

Super premium Ultra premium

WESTERNEUROPE

Diageo is the largestpremium drinks business inWestern Europe. Consumermarketing programmes aredeveloped at a market level todrive consistency, efficiencyand scale across all countries.Countries within Western EuropeWestern Europe is managed as a singlemarket with country teams focusing onsales and customer marketing execution.This market comprises Great Britain, Ireland,Iberia, France, Germany, Benelux, Italy,Nordics, Greece, Switzerland, Austria,Diageo Guinness Continental Europebeer business and European wines.

Route to marketIn Great Britain we sell and market our productsthrough three business units: Diageo GB (spirits,beer and ready to drink); Percy Fox & Co (wines);and Justerini & Brooks Retail (private clientwines). Products are distributed both throughindependent wholesalers and directly toretailers. In the on trade, products are soldthrough major brewers, multiple retail groupsand smaller regional independent brewersand wholesalers.

In both the Republic of Ireland and NorthernIreland, Diageo sells and distributes directlyto both the on trade and the off tradethrough a telesales operation, sales calls tooutlets and third-party logistics providers.

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