Diageo focuses on premium local brands and Scotch

By Mike Stones

- Last updated on GMT

Related tags Net sales Johnnie walker Diageo

Premium brands such as Johnnie Walker Blue are slipping down a treat with North American youngsters
Premium brands such as Johnnie Walker Blue are slipping down a treat with North American youngsters
New Diageo boss Ivan Menezes has confirmed the drinks giant’s commitment to premium local brands and Scotch whisky, as the firm released its preliminary results for the full-year ended June 30 2013.

Net sales were up by 5%, driven by the US spirits business and continued double-digit growth in emerging markets. Operating profits rose by 8%, aided by a rise in margin of 0.8%.

“The trend in premium drinks around the world is that they are growing and premiumising,”​ Menezes told BBC Radio 4’s Today​ programme. “People are drinking better and that is good for Diageo and that’s why our margins expand and we have increased our dividends by 9%.”

‘North America engine of growth’

Menezes highlighted the growth potential of both the North American market and emerging markets. “North America is a real engine of growth for us, the demographics are very good,”​ he said. “There is a young population, it is changing, it is multi-cultural and people are drinking better. So, our premium brands – Johnnie Walker Blue and​ Tanqueray No.10 ​[gin] are doing very well. That’s where the market is moving to and that’s very good for us.”

In North America, volume was up by 1%, with net sales up by 5%. In US spirits, product innovation and successful marketing campaigns had resulted in 3% volume growth and 8% net sales growth. The firm had increased the prices of its brands – particularly premium and super premium brands.

Diageo’s innovation pipeline had yielded five of the top 10 new US launches, with Crown Royal Maple the number one US innovation this year, it claimed.

In emerging markets Diageo would continue to focus on local premium brands, said Menezes.

Brazil, India and China

“Our focus in the past few years is we have acquired businesses in Brazil, India and China with local brands but they are all at the premium end. Our strategy is to move people up the ladder. So if you look at Johnny Walker we have crossed ​[sold] 20M cases of Johnny Walker worldwide – it has almost doubled in the last decade.”

City analyst Investec judged the full year results disappointing. The key miss was a poorer than expected performance in Asia Pacific, where the company was hit by weakness in the Korean market, said analyst Martin Deboo. But “chronic weakness”​ in Southern Europe and trouble spots in Brazil and elsewhere were impeding recovery.

It all added up to a difficult debut for Menezes. “New ceo Ivan Menezes has the misfortune to have to make his market debut on the back of a hiatus of sorts,”​ said Deboo.

“We expect him to argue that this is temporary and that Diageo’s growth engines stand ready to rev. But we expect him to be under pressure to clarify exactly what ‘on track to meet medium term guidance’ means in the financial year 2014.”

Investec retained its ‘hold’ advice on Diageo stock.

But Shore Capital took a more optimistic view of the firm’s fortunes yesterday (July 30) – maintaining its ‘buy’ recommendation.

Commenting before the release of the results today, its analyst Phil Carroll noted that the latest results did not reflect a full year under Menezes’ stewardship. But given his input to the board in recent years, his appointment was unlikely to change group strategy in the short to medium term.

In May, former Diageo boss Paul Walsh​ announced his decision to step down after 13 years at the helm of the company. 

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