What’s Happening With Diageo?

Diageo Plc (DGE.L) is a global manufacturer and distributor of premium spirits, beer, and wine products. The company's operations include producing, distilling, brewing, bottling, packaging, distributing, developing and marketing branded alcohol beverages. It markets and sells these products through 200 well-known brands, which are sold in approximately 180 countries. It also produces ready to drink products in the UK, Italy, Africa, Australia, the US, and Canada.

The company classifies its business operations into the following reportable segments: North America, Europe, Russia, and Turkey; Asia Pacific, Africa, Latin America, and the Caribbean. These segments offer products under five categories: Spirits, Beer, Ready to Drink, Other and Wine. These comprise of scotch, vodka, North American whiskey, Indian made foreign liquor (IMFL) whiskey, rum, gin, beer, ready-to-drink products, other alcoholic beverages, and tequila.

Key takeaways from FY18 Annual Report

As per 2018 Annual report, the company witnessed a growth of 4% in global giant brands with, Johnnie Walker up 5%, Guinness up 5%, Baileys up 6%, Tanqueray up 15%, and Captain Morgan up 2%. However, Smirnoff saw a degrowth in organic net sales by 2% with some competitive challenges building up. Even the local stars witnessed a 6% growth while reserve was up 14%. Geographical contribution to the top line as per 2018 Annual report revealed North America accounting for majority of sales followed by Europe & Turkey, Asia Pacific, Africa and Latin America. Earnings per share were driven by organic operating profit growth.

Brexit Impact on Diageo

If the UK fails to replicate the EU’s trade deal with other countries for whiskey and scotch, it might cost millions of pounds to the company, said Dan Mobley, Corporate Relation head at Diageo. He also added that hard borders between Ireland and Northern Ireland could hamper its supply chain and could hurt its supplier(s) as well.

“Company is moving around 18000 trucks every year over the border, so any little delay in the process of those trucks’ movement would be unwelcomed, and it will hurt our supplier(s)”, said Mobley.

Company has suggested the UK and Irish government about technical measures that could reduce chances of any new controls but keeping an open border will be most preferable.

However, Mobley said, “Leaving EU without any trade deal on Irish border would be unwelcomed, but it is not that we can’t manage it.”

This has enabled many market experts believe that the group will be able to manage its performance in 2019 despite the broad level challenges it may face this year with support from its global reach. Thus, the group with its resilient operations can stay on track in the current volatile environment.

Diageo’s Strengths

Widespread Production Facilities

A global structure supports Diageo's markets and shared services program, which helps it in driving efficiency, share best practice and build capability at local level. Diageo has many manufacturing facilities including distilleries, breweries, warehouses, packaging plants, and distribution centres across the globe. The company's strategy of sourcing and producing locally effectively enables it in maintaining a robust supply chain network, which in turn helps the company in reducing imports of products into local market and check the risk in managing large stock-keeping units.

Significant Brand Strength in the Premium Spirits Segment

Diageo is one of the world's leading premium drinks business with a wide collection of international brands. The company classifies its brands as global giants, local stars and leading reserve brands. It also owns two of the top five largest spirits brands in the world, Johnnie Walker and Smirnoff, and 20 of the world’s top 100 spirits brands. Global giants’ brand include Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray, and Guinness brands. Global giants accounted for 41% of the company's net sales.

Over the years, the company has built significant brand strength in premium spirits helping it to achieve a dominant market position. For instance, its Johnnie Walker is the number one scotch whiskey in the world, Smirnoff is the number one vodka in the world; Captain Morgan is the number one brand in the premium rum category in the world; Tanqueray is the number one premium gin in the US; Baileys is the number one liqueur in the world; and Crown Royal is the number one Canadian whiskey in the world. Thus, the brand strength provides revenue sustenance to the company on account of repetitive customer purchases of its brands.

Diageo PLC (DGE:LSE) was trading at a Price of GBX 2,737.50, as at January 29, 2019, around mid-day trading; and has witnessed a 5.5% rise in the last one year. Its return on equity has been in a positive double digit range and the group has benefitted from the reduction in cost of goods on a year on year basis.