Premiumisation trend in drinks gathers steam
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.