Comment - The Cognac-Shaped Elephant in Diageo's Room
Diageo's lack of presence in Cognac is a gaping chasm in its Asia-Pacific portfolio, but the drinks group is insistent that it has the tools for growth.
Diageo would like to own a Cognac. For now, though, it must make do without (34% of Hennessy notwithstanding). Both Diageo and analysts knew that last week's company-hosted investment seminar in China would amount to a list of reasons why Johnnie Walker is coping very well on its own in Asia, thank you very much.
There are certainly reasons to be positive about Diageo's business in Asia-Pacific. Its net sales in the region for the nine months to the end of March rose by 9% on the same period of the previous year. Also, Scotch whisky dominates Asia-Pacific's international spirits category and Diageo is by far the largest regional player in Scotch.
Then, one can see the group making decent inroads with local players. Diageo's premium white spirits portfolio will get a major boost if Chinese authorities allow it to take indirect control of local producer Shui Jing Fang. It is also set to gain stronger distribution in Vietnam, where the local economy is motoring, via a stake in Halico.
But, at the group's investor seminar, one could not help but notice Cognac's absence from the main slides.
"In every case, our leading brands are outperforming the category across emerging Asia," said Diageo's president for Asia-Pacific, Gilbert Ghostine. He reeled off a list of categories in which Diageo holds number one positions - Scotch, gin, vodka, stout (Guinness), liqueurs.
He is right, of course, but Diageo is more on the defensive about its position in Asia-Pacific than perhaps it would like to be. While Diageo's nine-month sales in the region rose by 9%, Pernod Ricard's sales in Asia increased by 15%. Cognac was largely the difference.
Diageo is working on the basis - as it must, for now - that a "total beverage alcohol" strategy will pay greater dividends in Asia-Pacific over the long-term. It could well be right. But, in the short term, observers will continue to highlight the group's one obvious weakness.
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