Stay-at-home drinking lifts spirits at Diageo
Written by Hit Music Radio News on 28/01/2021
Never before has diversification been so important for Diageo.
The spirits giant, purveyor of brands such as Johnnie Walker Scotch whisky, Smirnoff vodka, Tanqueray gin and Captain Morgan rum, had been seen by some investors as a possible corporate casualty of COVID-19.
After all, with pubs, bars and restaurants closed around the world for much of 2020 or subject to restrictions on openings, one of the company’s main routes to market was severely curtailed.
Meanwhile, with air travel severely restricted, duty free shops around the world – a major route to market for the spirits industry – have also suffered a collapse in turnover.
All of which has, indisputably, hurt Diageo.
Half year results announced today, covering the final six months of 2020, revealed that sales of Scotch whisky, which make up just under a quarter of Diageo’s total earnings, were down by 8% during the period while sales of Johnnie Walker, the flagship brand, fell by 12%.
Sales of Smirnoff were down by 3% globally.
And sales of Guinness, the group’s biggest non-spirits brand, were down by 18%.
Despite all of that, Diageo actually grew its sales during the period by 1%, although unfavourable currency movements meant headline reported sales fell by 4.5% to £6.87bn.
Operating profits on an underlying basis were down by just 3% to £2.24bn.
What went right? A number of things.
Firstly, there is Diageo’s position in North America, its biggest and most profitable market.
Here, Diageo makes more of its sales in the off-trade than the on-trade, so its sales suffered less of a hit from bar and nightclub closures than elsewhere.
For every $1 the company makes in bar, club and restaurant sales, it makes $4 in liquor stores and supermarkets.
North American sales were up overall by 12% in the period, a remarkable performance, with US spirits sales up by 15%.
Second, where customers were forced to drink at home rather than in a pub or bar, they have been consuming more of Diageo’s brands.
For example, sales of Ciroc vodka, a brand that had appeared to have lost a bit of momentum in recent years, were up by 16% in the US.
In Europe and Turkey, sales of Bailey’s Irish cream were up by 8% and Captain Morgan rum by 7%.
Ivan Menezes, the chief executive, highlighted today how the ‘cocktail culture’, which has also driven sprits consumption, has flourished during the lockdown.
Thirdly, some of the consumer trends which Diageo has sought to capitalise in during recent years remain intact, despite COVID-19.
They include ‘premiumisation’, the tendency that spirits consumers have to trade up, rather than down.
That benefits Diageo because it owns a number of high-end brands.
To build on that, Diageo has also been repositioning the drinks in its cabinet, or ‘portfolio management’ as it is known.
During recent years it has stepped up marketing in categories such as Canadian whisky and US whiskey and brought out new ranges for established brands such as Gordon’s gin.
Most notably, it has built a presence in tequila, one of the fastest-growing spirits categories.
In 2015, it bought the super-premium Don Julio brand, which it followed in 2017 by agreeing to pay up to $1bn for Casamigos, the tequila brand part-owned by the actor George Clooney.
A lot of people thought that was a mind-boggling sum to pay – but it has paid off.
Tequila now accounts for 7% of Diageo’s overall sales while sales of Casamigos were up by an astonishing 135% during the last six months.
The latest acquisition along these lines recently saw the company pay $610m for Davos Brands, owner of American Aviation gin, which is part owned by the actor Ryan Reynolds.
Fourthly, there is the overall shift in the alcoholic drinks market, which again was unaffected by COVID-19.
This is the gradual way in which spirits are gaining share from both beer and wine.
Since the end of 2014, spirits have increased their share of the global alcoholic drinks market from 33% to 38%, while beer has fallen from 43% to 40% and wine from 22% to 20%.
Again, this is a trend that benefits Diageo.
Nowhere better have all these trends come together than in North America.
Ivan Menezes, the chief executive, told Sky News: “We pivoted very quickly to ensuring our marketing and innovation was imaginative and captured the consumer at home – and Americans are drinking more spirits than wine or beer.
“So we’re taking share from wine and beer and the premiumisation trends are strong.”
Mr Menezes insisted, though, that Diageo was not over-reliant on the on-trade or on duty free sales elsewhere.
He said humans would still want to “socialise, celebrate, go to festivals outside their home” once the pandemic was over and said the company had already seen evidence of this in China, where the on-trade had been strong, as well as in Europe when lockdown restrictions were eased last summer.
He pointed out Diageo is spending $100m on an initiative called ‘Raise The Bar’ to support hospitality venues.
In the meantime, there are other irritants, including the fact that there remain US tariffs on Scotch whisky – imposed by the Trump administration in a row over aircraft subsidies – even though the UK unilaterally lifted retaliatory tariffs of its own on US goods just before Christmas.
The results were markedly better than expected and, along with news of a rise in the dividend, sent shares of Diageo up by more than 7%.
A potential headache in future, though, could be another independence referendum in Scotland, where the company is investing £175m in a “temple to Johnnie Walker” on Edinburgh’s Princes Street, as Mr Menezes put it, as well as bringing back to life two ‘lost’ distilleries at Brora and Port Ellen.
He added: “We’re committed to Scotch and investing – that’s our focus, to keep that business thriving.
“We sell seven bottles of Johnnie Walker a second, we export to 180 countries around the world. That’s our focus.
“I’ll leave the politicians to decide what they want to do with referenda – we are very much focussed on keeping Scotch whisky thriving for generations to come.”
Something to which both sides of the ‘IndyRef’ debate can raise a glass.
© Sky News 2020