What will be Diageo's priorities for the years ahead? - Analysis

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As part of just-drinks' deep-dive into the trends that have driven Diageo's performance over the last five years, Richard Woodard considers the areas that will be priorities for the group in the coming years.

Where will Diageo CEO Ivan Menezes focus his energies in the years ahead?

Where will Diageo CEO Ivan Menezes focus his energies in the years ahead?

Maintaining momentum - The past five years - also the first five years of Ivan Menezes' tenure as Diageo CEO - have seen the company successfully reverse revenue declines and gradually accelerate sales growth. Can this positive movement continue?

So far, the noises from the company are cautiously positive. Updating in the second half of 2018, Menezes said the first two months of fiscal-2019 were in line with expectations - although he warned of some increased volatility and unhelpful foreign currency movements. The latter, coupled with a stronger US dollar, could hit reported sales figures by as much as GBP175m, but Diageo remains on track to repeat fiscal-2018's 5% organic sales increase.

Weathering macroeconomic storms - A number of factors remain outside Diageo's control, but could seriously impact the group's future results - the outcome of the Brexit negotiations, currency volatility, trade disruption brought about by the actions of the Trump administration, and other countries' retaliatory measures.

Menezes has been keen to point out that Brexit is easier for a big company like Diageo to cope with than it is for the many SMEs also affected

A hard border in Ireland would clearly impact a company with 1,200 employees on the island, and which has some 15,000 lorries crossing the border every year - although Menezes has been keen to point out that Brexit is easier for a big company like Diageo to cope with than it is for the many SMEs also affected. This is a theme Menezes maintains when quizzed about other macroeconomic and trade concerns: He is on record saying he "almost doesn't look at" currency variation, preferring to focus on organic numbers, and reckons broader trade concerns are "not a substantial worry".

Like any company, Diageo would prefer to see free, frictionless trade, but the group is clearly confident that it has the scale and diversity to cope with any future challenges in this area.

Cannabis entry? - In line with all beverage companies of any magnitude, Diageo is currently mulling the potential of the nascent cannabis market in Canada and beyond. Bloomberg reports in the second half of 2018 suggested that the company was in talks with at least three cannabis producers in Canada over the potential creation of cannabis-infused beverages, following earlier investments by Constellation Brands and Molson Coors.

Diageo refused to comment on the reports, but it would be a surprise if the company was not seriously considering entering a market with such vast global potential.

Staying slim and trim - The flipside of organic growth and tactical acquisitions is knowing when to sell non-core or underperforming brands, promoting efficiency and freeing up cash for more beneficial investments. Diageo has a strong record here, backed up by the divestment in late-2018 of 19 spirits brands to Sazerac.

The transaction follows Diageo's sale of the Gleneagles hotel in Scotland and the bulk of its wine assets in 2015 - illustrating the fact that corporate sales, like mergers and acquisitions, form an unending cycle.

Reviving vodka - The negative trends surrounding vodka in the US are well-known, with scarcely anyone beyond Tito's managing to find any meaningful growth. The market will remain vital to Smirnoff, but these unhelpful developments will only intensify Diageo's determination to diversify the brand's appeal in geographical terms.

In fact, this has been a work-in-progress for some time, with Smirnoff's sales in Latin America on an upward trajectory over the five years of just-drinks' research - joined in fiscal-2018 by similarly-positive trends in the region for Ketel One and Cîroc.

Diversifying in LatAm - Diageo remains over-reliant on blended Scotch in the key markets of Central and South America, something that has, if anything, intensified with the recent successes of Buchanan's and, in particular, Black & White. But, efforts are continuing to diversify the company's market offer, partly through the vodka brands - as noted above – but also through gin and malt Scotch.

Tanqueray trebled its sales in Brazil and doubled in size in Mexico in the first half of fiscal-2018

LA&C president Alberto Gavazzi has made optimistic noises about growing interest in single malts and gin (the latter off a small base) among Millennial consumers in the region. The figures so far are impressive: Tanqueray trebled its sales in Brazil and doubled in size in Mexico in the first half of fiscal-2018.

Banking on a baijiu bonanza - Diageo has had its moments with the distinctive Chinese white spirit, with Shuijingfang sales falling 78% in fiscal-2014, post-anti-extravagance crackdown, before a dramatic recovery that continues to this day.

Softer economic trends in China might slow growth in fiscal-2019, but the company is clearly convinced of the long-term potential of baijiu, signalling in mid-2018 that it hoped to expand its stake in Sichuan Shuijingfang from 39.71% to 60%, thereby taking majority control of the company.

Doubts persist over the international potential of baijiu but, given the magnitude of the domestic market (rival Kweichow Moutai's market cap now exceeds that of Diageo), that doesn't seem to matter much.

China redux - This five-year period opened at the nadir of the Chinese slump, as the Government's anti-extravagance measures bit deep into high-end baijiu and Scotch. As noted above, baijiu has been recovering strongly for the past few years, to the extent that it is now ahead of where it was before the crackdown, with power to add through geographical expansion.

Now there are signs of revival for Scotch too, with the focus firmly on Johnnie Walker and single malts, led by the Singleton brand.

Highlighting the fact that more than 100 new whisky bars or collectors clubs opened in China in the 12 months to March 2018, Scotch category director Cristina Diezhandino told just-drinks that the company wants to make Scotch the number one international spirits category in the country. As part of its efforts, Diageo brought together more than 500 experts and fans at a Scotch whisky summit in Guangzhou in late-2017.

Nurturing incubator brands - In September 2018, US single malt whisky distillery Westward became the latest business to join Distill Ventures, the Diageo-funded but independently-managed incubator for spirits start-ups. The unspecified investment will help Westward expand production while retaining its independence, joining a roster of companies that have benefited from US$75m of funding from Distill Ventures to date.

In early-2018, Diageo bought Berlin vermouth maker Belsazar, its first acquisition from the Distill Ventures incubator programme

In early-2018, Diageo bought Berlin vermouth maker Belsazar - its first acquisition from Distill Ventures. The move is a sign that the company will look to use Distill Ventures to facilitate its entry into key growth areas such as, in this case, the aperitif occasion in Europe. 

Keep making new news - Product innovation is a notoriously hit-and-miss area of the beverage industry, but it's one that a company the size of Diageo can scarcely afford to ignore, especially when today's restless consumer is so eager for new flavours and experiences.

As such, the company will continue to invest heavily in NPD, as is signalled by its announcement in mid-2018 of GBP6.4m plans to create a new tech hub in Scotland, which will aim to innovate across the group's spirits portfolio, including Johnnie Walker, Smirnoff, Tanqueray and Cîroc.

Tapping into tourism - Whisky tourism is becoming big business on both sides of the Atlantic, and Diageo is making significant investments to exploit the trend.

A new Johnnie Walker visitor attraction in Edinburgh is due to open in time for the brand's bicentenary celebrations in 2020, with enhanced facilities at several distilleries around Scotland, including Caol Ila on Islay and Glenkinchie in the Lowlands. The total investment at all distilleries is GBP150m, not including the regeneration projects at closed distilleries Port Ellen and Brora, which will also include visitor facilities.

Meanwhile, the company's recently-opened Bulleit distillery in Shelbyville, Kentucky, is to receive nearly US$10m to fund interactive educational experiences, Bourbon tastings and new retail space, all due to open in 2019.

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