Analysis

How slowing H1 growth could shape Diageo's future - analysis

Most popular

Why rum should ignore its past to win today

Heineken’s footprint leaves big shoes to fill

Van Boxmeer leaves behind a more worldly Heineken

Why single malt should ignore its core consumer

just-drinks speaks to Pernod's CEO of EMEA & LatAm

MORE

Analysts have offered a lukewarm reception to Diageo's performance in the last six months of 2019, warning that negative factors such as the coronavirus and an economic slowdown in India could impact the business in 2020.

Johnnie Walkers White Walker tie-up with Game of Thrones contributed to a bumper year-prior for Diageo

Johnnie Walker's 'White Walker' tie-up with Game of Thrones contributed to a bumper year-prior for Diageo

Last week, the UK-headquartered group posted a 4% sales rise in the first half of fiscal-2020. The top-line performance is at the lower end of September forecasts and was impacted by decelerating growth in Asia-Pacific along with declines for flagship Scotch whisky brand Johnnie Walker.

In a subsequent note to clients, Societe Generale analyst Jamie Norman said he expected to see market expectations for the company's sales growth "fall to the bottom of its target range from the top of it just six months ago". Norman added: "We think there is still further to go, despite Diageo's structurally-strong long-term attributes.

"We have been concerned that Diageo might already have seen 'peak Scotch', that its India momentum could slow, that higher A&P was required to sustain momentum in the critical US business, and that cyclical/extraneous risks were inadequately reflected in consensus expectations or the shares' valuation."

At Jefferies, meanwhile, Ed Munday offered a more positive assessment of a "more normalised growth outlook" after three years of strong sales rises, pointing out that Diageo "remains a well-run, diversified company that operates in a favourable industry". However, he highlighted the risk of continued volatility in emerging markets, along with a reduced contribution from innovation compared to fiscal-2019, when Johnnie Walker's tie-up with the Game of Thrones franchise proved highly lucrative.

Furthermore, the coronavirus outbreak in China offered "potential downside risk to guidance", coupled with macroeconomic volatility in India and Latin America, as well as in the Global Travel Retail channel.

On the coronavirus, Bernstein analyst Trevor Stirling estimated that it could have a -80bps impact on organic profit growth, based on the assumption that Diageo's China business could decline by about 50% in January to March, and by about 25% in April to June this year.

Diageo's key weaknesses derive from its operations in Asia, said Laurence Whyatt at Barclays, with travel retail impacted by unrest in Hong Kong and India suffering an economic slowdown - although the premium portfolio grew by 8% in the country, on a tough comparison.

"A number of uncertainties remain in fiscal-2020, the largest of which is likely to be the potential disruption from coronavirus," Whyatt added. "The US tariffs threat has largely passed, particularly for FY20."

He cited more positive trends for the company in the US, including continued growth for the Crown Royal brand as line extensions attract new consumers, and high double-digit gains for Diageo's Tequila roster.

Whyatt added: "Johnnie Walker faced tough comparisons in H1, but with the comparables easing in H2 and increased marketing spend around its 200-year anniversary, it should be able to improve during the year."

"The minute you react to short-term volatility, that's when businesses get into trouble" - just-drinks speaks to Diageo CEO Ivan Menezes


Expert Analysis

Opportunities in the Global Spirits Sector: Analysis of Opportunities Offered by High Growth Economies

Opportunities in the Global Spirits Sector: Analysis of Opportunities Offered by High Growth Economies

This report brings together multiple data sources to provide a comprehensive overview of the global spirits sector as part of our global series. It includes an analysis on global spirits sector with c...

VIEW REPORT

Related Content

"I can see us getting Smirnoff into growth in the US next year" - Interview - Diageo CEO Ivan Meneze...

Diageo CEO Ivan Menezes on the future of gin, the growth of no-alcohol and the plan to kick-start vodka

Diageo CEO Ivan Menezes on the future of gin, the growth of no-alcohol and the plan to kick-start vo...

How will the coronavirus impact the beverage industry? - focus

How will the coronavirus impact the beverage industry? - focus...

What does the future hold for Champagne? - Research in focus

What does the future hold for Champagne? - Research in focus...

Oops! This article is copy protected.

Why can’t I copy the text on this page?

The ability to copy articles is specially reserved for people who are part of a group membership.

How do I become a group member?

To find out how you and your team can copy and share articles and save money as part of a group membership call Sean Clinton on
+44 (0)1527 573 736 or complete this form..



Forgot your password?