Premi­u­mi­sa­tion trend in drinks gath­ers steam

The Star Late Edition - - BR - FRANTS PREIS Frants Preis, CFA is a port­fo­lio man­ager at VEGA As­set Man­age­ment based in Pre­to­ria. Di­a­geo shares are owned on be­half of clients.

DI­A­GEO is a Bri­tish al­co­holic bev­er­age com­pany that fo­cuses on spir­its. Its prin­ci­pal prod­ucts in­clude whisky, vodka, tequila, gin, rum and beer. It is the owner of the John­nie Walker brand, the world’s best-sell­ing pre­mium scotch whisky.

Other brands in­clude Tan­queray, Gor­don’s, Smirnoff, J&B, Bells, Cap­tain Mor­gan, Bai­leys and Guin­ness.

Di­a­geo also owns a 34 per­cent stake in Moët Hen­nessy, the pro­ducer of Moët et Chan­don and Veuve Clic­quot cham­pagne.

The com­pany’s geo­graphic seg­ments in­clude North Amer­ica, Europe, Asia Pa­cific, Turkey, Africa, Latin Amer­ica and the Caribbean.

In de­vel­oped mar­kets, con­sumers are drink­ing less al­co­hol. A pref­er­ence for pre­mium drinks rather than beer and cheaper spir­its has emerged. This trend ar­guably started with the rise of craft beer in the US, fol­lowed by craft gins, and con­sumers are will­ing to pay up for more so­phis­ti­cated prod­ucts.

The premi­u­mi­sa­tion trend in al­co­holic bev­er­ages is gain­ing mo­men­tum and pre­mium spir­its now ac­count for over half the to­tal global spir­its vol­ume, with ul­tra-pre­mium spir­its grow­ing the fastest.

Di­a­geo has long been closely as­so­ci­ated with high-end spir­its and its de­ci­sion to sell most of its value port­fo­lio to smaller ri­val Saz­erac was in­dica­tive of man­age­ment’s be­lief that premi­u­mi­sa­tion is not a fad, but rather a struc­tural long-term trend.

Spir­its are more dis­cre­tionary in na­ture than beer and there is a pos­si­bil­ity that con­sump­tion could de­cline in a lower growth en­vi­ron­ment.

Di­a­geo’s growth pro­file is, how­ever, broad-based across de­vel­oped and emerg­ing mar­kets, a key ad­van­tage rel­a­tive to peers. It has a strong pres­ence in North Amer­ica with a com­pet­i­tive ad­van­tage in its dis­tri­bu­tion net­work. Its largest and most prof­itable mar­ket is the US, where mar­ket share gains due to premi­u­mi­sa­tion should main­tain ro­bust or­ganic sales growth.

The growth prospects for ma­jor emerg­ing economies such as China and In­dia are pos­i­tive.

Wealth and wage lev­els in the two coun­tries are fore­cast to in­crease sig­nif­i­cantly over the next few years, which should ben­e­fit Di­a­geo’s lux­ury brands.

The high qual­ity and di­ver­sity of earn­ings growth, mo­men­tum in the US and im­prov­ing in­no­va­tion ca­pa­bil­i­ties un­der­pin a com­pelling in­vest­ment case.

Di­a­geo re­ported strong in­terim re­sults in Jan­uary.

Price in­creases and pro­duc­tiv­ity im­prove­ments con­tinue to drive profit mar­gin growth.

Scotch whisky ac­counts for 27 per­cent of to­tal sales and rose 10 per­cent year-on-year.

Di­a­geo also scored dou­ble-digit gains in tequila. The com­pany has suc­cess­fully shifted from a dis­tri­bu­tion-led ap­proach to a more con­sumer-cen­tric strategy.

The com­pany is bet­ter lever­ag­ing its scale and re­sources to iden­tify con­sumer trends.

Re­cent in­no­va­tion suc­cesses in­clude brand ex­ten­sions such as Jane Walker whisky, which ap­peals to women and White Walker, in­spired by Game of Thrones.

The com­pany’s premi­u­mi­sa­tion ef­forts and in­creas­ing prof­itabil­ity have jus­ti­fied val­u­a­tion mul­ti­ples that have steadily been in­creas­ing over the past five years.

Its shares have gained 12 per­cent in 2019 and 25 per­cent over the past year. Shares trade at a price of 26 times earn­ings and of­fer in­vestors a div­i­dend yield of 2.3 per­cent.

Di­a­geo is a steady ad­di­tion to longterm in­vest­ment port­fo­lios.

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