Diageo – Raising a Glass to the Reopening
Brian Considine
Junior Research Analyst

A narrative that has been widely discussed since the pandemic-induced market crash and subsequent recovery, is that there have been many “winners” and “losers” of the Covid-19 “stay at home” era. The so-called “winners”, such as online retailers, logistics, and home entertainment, have prospered greatly from global lockdowns as their business models have benefitted from the confinement of consumers to their own homes. The “losers” on the other hand – travel and leisure, hospitality and live entertainment among others – have been significantly hampered by global lockdowns. That said, stocks in these “loser” sectors have started to mount a recovery in recent months as the vaccine rollout lifts hopes of a return to pre-pandemic life.

Diageo, one of the world’s leading beverage alcohol producers with iconic brand names including Johnnie Walker, Guinness and Captain Morgan, finds itself emerging from the pandemic somewhere in the middle of the winners – losers’ spectrum. Global lockdowns and hospitality sector closures worldwide have significantly weighed on the company’s on-trade and travel retail channels. However, the company’s agile business model has allowed it to enjoy significant market share gains in the off-trade channel, as the global consumer ramped up store-bought alcohol purchases in the absence of their favourite bars, restaurants and hotels. Actions taken by Diageo during the course of the pandemic to strengthen its product portfolio and capitalise on long-term consumer trends in the beverage alcohol industry will ensure that it emerges from the pandemic as a long-term structural “winner”.

Diageo has enjoyed solid performance across its regions in the first half of FY21, buoyed in particular by resilient consumer demand in North America. This is the company’s largest and most profitable market, accounting for approximately 40% of total revenue and 55% of operating profit. The company has employed the use of proprietary analytical tools to evaluate consumer sentiment and insights, allowing it to rapidly respond to the increased consumer demand in the off-trade channel. It has also helped highlight categories that have enjoyed significant growth, including tequila, gin, whiskeys, liqueurs, and ready-to-drink. In terms of Diageo’s revenue mix, in FY20, 80% came from Spirits, 13% from Beer, 6% from Ready to Drink, and 1%, from Other.

Diageo has highlighted a number of key areas in which the company sees long-term growth potential and is acting on these accordingly, ensuring that the company emerges from the pandemic-era stronger than ever. The rise in the ‘low and no’ market for low-alcohol and alcohol-free products is an area of increasing opportunity, as the global consumer becomes more health conscious. Diageo has acquired non-alcoholic spirit brand Seedlip, which the group is confident “will be a global drinks giant of the future”. Diageo is not only seeing long-term trend continuation for brand premiumisation but also noting that spirits penetration is growing much quicker than beer and wine. According to the company, spirits penetration through the Covid-19 era has accelerated dramatically, increasing three times quicker than beer and wine over the period.

Diageo continues to expand and premiumise its product portfolio through organic and acquisitive growth to best capture the ever-evolving trends in consumer preferences. There has been a clear focus on premium-plus brands in fast-growing categories such as tequila, gin, and whiskey. Tequila, for example, after the successful acquisitions of global leaders Don Julio and Casamigos, now accounts for 7% of Diageo’s net revenue compared to 1% five years ago. In FY21 to-date, Diageo has acquired Aviation American Gin and Chase Distillery, two fast-growing premium-plus brands that will provide significant growth potential as spirits continue to premiumise.

As the global vaccine rollout gathers momentum, hospitality sectors reopen and international travel gradually returns to pre-pandemic levels, Diageo’s management is confident in a strong recovery for the company’s adversely impacted travel retail and on-trade channels. The expected level of demand from the return of live entertainment events, duty free shopping and all forms of hospitality are further bolstered by the pent-up level of consumer savings around the world, providing significant tailwinds for accelerated growth over the near- to medium-term. Having successfully grown its market share of the off-trade channel over the last fifteen months, management is confident that the return to “normality” over the near term will generate further overall market share gains, as sales rebound particularly in the heavily impacted beer and scotch categories. Diageo’s share price is approximately 24% above pre-pandemic levels and up 18% year-to-date. With its active and disciplined portfolio management approach, coupled with continued investment in marketing and innovation, the global reopening looks set to provide a backdrop to further strong performances and market share gains going forward.

Brian Considine is a Junior Research Analyst with Cantor Fitzgerald Ireland.

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