Scotch hots up while vodka blows cold for Diageo - Analysis

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"Johnnie's walking," noted CLSA analyst Caroline Levy, following a healthy set of H1 numbers from Diageo yesterday. 

Smirnoffs net sales declined 2% in the six months to the end of December

Smirnoff's net sales declined 2% in the six months to the end of December

The analyst was one of a number to hail the success of the firm's Scotch unit. Meanwhile, Diageo's vodka results received a more frosty reception, as category giant Smirnoff saw sales slip. 

Scotch up

Scotch now represents 27% of Diageo's net sales. In the six months to the end of December, revenues lifted 6%, while volumes increased 4% for the category. In a note to clients, Levy said yesterday's figures "mark a turnaround" for Scotch volumes "from -3% in F16 and -4% in F15". 

Diageo said that category growth had come from North America, Europe, Africa and Latin America and Caribbean - driven by Johnnie Walker and Buchanan's. 

"Importantly, Johnnie Walker volumes grew 4% vs F16 -4% and F15 -6%," added Levy.

At Bernstein, analysts were equally buoyed by the blended Scotch brand's performance. "Johnnie Walker volumes were strong," said Trevor Stirling, "with further improvement in price-mix resulting in sales growth of 6%."

What's more, Levy predicted a bright future for the category, especially in the US. "We believe Scotch could begin to see sustained benefits from the revival in Bourbon/brown spirits," she said.

Vodka down

Elsewhere among Diageo's 'global giants' there was concern for Smirnoff. The company's vodka portfolio saw net sales decline 2%, driven by soft performance in all the regions with the exception of Africa. The company said the downturn was propelled by Smirnoff and Ketel One. 

Digging deeper into Smirnoff's performance, Diageo noted: "In US Spirits, depletions performance improved but net sales were down 5% following price adjustments to improve competitiveness and some negative mix. In Great Britain net sales declined as changes to the commercial footprint led efficiencies including inventory reduction."

There were some positives for the brand, with sales in Africa up 33%, but they weren't enough to offset overall decline.

"Vodka... is still a drag," said Bryan, Garnier & Co's Virginie Roumage, "with Smirnoff back in negative territory".

At Societe Generale, Laurence Whyatt said his firm had "long been bearish" on the brand, adding that the view was "vindicated by yesterday's results". The statement follows his remarks last month around Diageo's latest marketing activity for Smirnoff in the US, which trumpeted the brand's historical connection with the creation of the Moscow Mule. Whyatt called the connection a "tentative historical relationship".

While Johnnie may be walking, Smirnoff appears to be out in the cold.  

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