AUS
NZ
UK
CA
USA
IND
Diageo PLC, a prominent player in the Retail sector, has encountered difficulties over the past year, becoming one of the lower performers on the FTSE 100. The company’s traditional focus on premium or 'reserve' brands, such as Johnnie Walker Blue and Don Julio tequila, has been under scrutiny as these high-margin products experience a decline in sales.
Current Sales Trends
Premium brands, which have historically contributed significantly to Diageo (LSE:DGE)’s margins, are seeing reduced sales. RBC Capital Markets reports that the share of sales from high-end reserve brands decreased from 29% in 2023 to 27% in 2024. Analysts anticipate that this trend may continue, potentially impacting both revenue growth and profit margins
Discrepancies in Premiumisation
This decline in premium brand sales contrasts with the 'premiumisation' trend often highlighted by Diageo’s management. CFO Lavanya Chandrashekar noted in July that despite current figures, premiumisation remains a beneficial factor for the spirits sector. She attributed the recent downturn in reserve brand sales to destocking trends in the Americas.
However, RBC suggests that the slowdown in premiumisation has been more gradual than Diageo has acknowledged. Pre-2024 sales may have been inflated due to overstocking by retailers during the post-Covid era. The current difficulty in selling this surplus stock raises questions about the sustainability of the premiumisation trend.
Outlook
Diageo’s shares have seen a notable decline, with a 13% drop year-to-date and a 28% decrease over the past year. This downturn might be linked to the end of the 'affordable luxury' valuation premium. RBC proposes that Diageo should consider a rebranding at the investor relations level to better align expectations with a more conventional staples business model.
Strategic Recommendations
RBC suggests that Diageo could benefit from resetting revenue and profit guidance to repair investor confidence. Adjusting capital investments and reducing maturing inventory could also help stabilize the company's financial outlook. Despite the share price decline, RBC maintains a 'sector perform' rating and has adjusted the 12-month price target to 2,400p from 2,100p.
